The Non-Stimulating Economic Stimulus Plan

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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President Obama was defending his economic stimulus plan over the weekend in a radio address and in an op-ed piece in the Washington Post. He rejected calls for a new stimulus package. In a really eye popping statement in the Post, Obama stated that his stimulus program "was not expected to return the economy to full health, but to provide a boost that would stop the free fall." Now, that's a real ambitious goal! Left unanswered was, what is being done that is expected to return the economy to full health?

The Obama stimulus plan has a number of components and it is questionable how economically stimulating most of them will be as is. The first phase of $288 billion in tax cuts has mostly been implemented. The result? The U.S. savings rate went up significantly. Those people who didn't save their tax cut money, paid down their personal debt. The money didn't go into the economy. So much for that part of the stimulus plan. Tax cuts for stimulating the economy are more of a Republican idea though. Why they were the cornerstone of a 'change you can believe in' Democratic economic program is a good question.

Other components of the $787 billion stimulus include major increases in Medicaid spending, about $48 billion in highway and bridge construction and billions more to boost energy efficiency, shore up state budgets, and increase educational spending. How increasing Medicaid spending boosts the economy is beyond me. This type of spending is a drag on the economy. Bailing out state governments (the plan is not exactly doing a good job on that one so far based on what is happening in California) also is not going to stimulate the economy. It indeed might keep the economy out of free fall however. As for the alternative energy component of the plan, this is something with long term economic potential, not short term. The Democrats recent attempts to keep energy prices low by having the CFTC manipulate the market are going to undermine this part of the stimulus program because alternative energy will be too relatively expensive to be economically viable. The one component of the plan that would both stimulate the economy in the short term and long term is the money for fixing the U.S. transportation infrastructure. This accounts for only 6% of the plan's spending.

There is also no reason to think that the plan should be having any effect by now anyway. Only $60.4 billion of the non-tax component has been spent so far. As reported in the Wall Street Journal this weekend, the White House isn't changing its goal of spending 70% of the stimulus funds by September 2010 (yes that is 2010, not 2009). And people are wondering why the stimulus plan doesn't seem to be effective so far. I think I have the solution! Money spent next year can't possibly stimulate the economy this year. While this may seem obvious to anyone who isn't in a coma, it seems to have alluded the political establishment in Washington.

We are now in the 20th month of the current recession, which makes it a post World War II record breaker for the U.S. The previous longest recession was 16 months. Based on monthly statistics there is no evidence that the decline is going to stop any time soon. When the negative numbers turn positive is when recovery is taking place, not when they become less negative. Despite this Obama stated in his weekend messages that "unemployment tends to recover more slowly than other measures of economic activity", implying that recovery is taking place overall. This is not happening, things are only get worse at a slower rate. Of course, this is like saying we are sinking into a depression slowly instead of quickly. According to his Washington Post article, this seems to have been Obama's goal. With success like this, who needs failure?

NEXT: Government Sachs - Earnings and Market Manipulation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

It's Amateur Night at the U.S. Treasury

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Markets hate uncertainty and the U.S. Treasury delivered it in spades yesterday. Several days ago, the Obabma administration floated the idea of a good bank/bad bank policy, where the U.S. government would buy up most of the toxic assets on bank balance sheets in order to get them out of the system. This was essentially the original concept for TARP before Paulson turned it into a direct corporate welfare program for Wall Street. The Street of course loved the idea of more bailout money to clean up their mistakes. In the long awaited for announcement by Treasury Secretary Geithner (who formerly ran the New York Fed and who is an admitted tax cheat) on Tuesday, suddenly a whole new approach was announced. The market, not liking surprises, had an almost crash level drop.

Media coverage blamed the stock sell off on the government's new plan - and for once I agree with the media. A number of articles had comments describing Treasury's new plan as 'muddled' and 'short on details', both of which are accurate descriptions. Essentially, the centerpiece of the plan is that the government will team up with the private sector to buy up to $1 trillion in toxic assets from financial firms (the big-money private sector buyers will get their purchases underwritten by the government, in what seems to be a riskless investment). A separate lending program would be expanded to as much as $1 trillion from $200 billion for consumers and businesses. Add up all the money involved (and it won't be enough by the way) to the $800 billion plus Stimulus Plan passed yesterday and the U.S. government is allocating between $2 to $3 trillion in new expenditures. Just think inflation and devaluation of the dollar.

Having read the speech that Geithner gave yesterday, I would say there is little hope that the current administration's economic team will be any more effective than the previous administration's. Geithner himself has been part of creating the current economic mess that we are in and sees the solution as pursuing the same failed financial policies that have lead to it. One of his comments that were particularly outrageous was that the Credit Crisis we are now in is only obvious in hindsight and could not have been predicted (even though probably hundreds of government throughout history have engaged in similar economic policies with similar results). At another point, Geithner stated that historically 40% of loans have been securitized (bundled into bonds and then sold and traded) and this needs to be continued. Where this 40% figure came from is beyond me, although of course it depends on the definition of 'historically' (Geithner's historical perspective may extend to only the beginning of last week based on these two comments). Securitization is what has led to our current problems, so of course we should continue to take the poison that is killing us. Not surprisingly, Wall Street makes a lot of its money from securitization.

While there is a lot of uncertainty in the government's handling of the Credit Crisis, there are some things which an investor can have great confidence in. The continued creation of money out of thin air to get the U.S. economy out of the economic pit it has fallen into is going to create a lot of inflation and a dollar that isn't worth the paper it's printed on. While the government's actions may fail for their intended purpose, they will be successful in creating this even bigger economic problem down the road.

NEXT: Market Doesn't Believe Retail Sales Report

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Slippery Slope of Media Oil Coverage

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Most investors have trouble making money in the market because they pay too much attention to the mass media. The financial press is mostly a gigantic PR outlet for Wall Street and whatever bill of goods it is trying to sell the public at the moment. Wall Streeters are of course usually doing just the opposite of the what the media is telling you to do with your investments. This is how they make their money. While Wall Street can mislead through the press, hiding its true intentions is difficult in the charts, which is why everyone should understand at least basic technical analysis.

I am looking closely at oil at the moment. If you relied on the press you wouldn't be paying any attention at all. I have read all sorts of arguments lately about why oil can't go up this year. These include such fantastic claims as a new political stability in Iraq, Iran and Nigeria (yeahh, that can happen), although they usually center around a claim that oil can't rally until the economy improves. This argument in turn relies on the basic economic principle that prices don't rise if demand is falling (certainly happening because of the crashing global economy) and supply stays the same. There is somewhat less than a zero chance that supply will stay the same however. When oil prices drop, production gets cut practically everywhere. OPEC's announced plans for another round of major cuts at its March meeting are just the tip of the iceberg. My sources in Texas tell me oil production is being shut down all over the state. I read the other day, that the tar sands in Alberta need oil to sell in the low 40's to break even. How long will production continue if oil falls and stays below that price? In fact, much of the oil that came online in the last few years is expensive oil that will no longer be produced if oil prices remain low. Given this set of circumstances, oil supply could easily fall below demand and the price of oil would then rise, not go down as all the 'pundits' claim.

The press is also giving a lot of coverage of the Stimulus Plan and whether or not it will be passed. Passage is presumed to be good for oil because the stimulus plan will revive the economy. It will certainly have some positive impact, since it is difficult for a government spending program not to (the TARP is one of those rare exceptions). The media is wasting a lot of ink on whether or not the Stimulus Plan will be passed. This is another absurdity. There is zero chance that it won't be. The vote of the typical member of the U.S. Congress is more available for sale than a crack-addicted street whore. Sure the price is more expensive and usually has to be paid in taxpayer funded giveaways, but no one in Washington cares about that.

Investors should keep in mind that by the time some change in the market is getting a lot of press coverage, it is usually well advanced. When the average person starts to be concerned, Wall Streeters have long ago taken their positions and are probably getting ready to close them out (the old 'buy on the rumor and sell on the news' saw that has been around the Street forever). Markets also don't go straight down or up forever either. Even if a long-term trend is well in place, significant reversals are likely along the way. You can make a lot of money in those reversals, but not if you pay attention to the mainstream media.

NEXT: It's Amateur Night at the U.S. Treasury

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

China Bails Out Asia - at Least for Today

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Finance ministers and central bankers from the Group of 20 (nineteen of the world's largest economies, plus the European Union) met in Brazil on Sunday and called for increased government spending to bolster the sagging global economy. The multi trillion dollar bailouts, massive liquidity injections, and sharp rate cuts in the last two months apparently haven't done the trick. To do its part, China promptly announced a $586 billion stimulus plan consisting of spending, subsidies, loser credit, and tax cuts. Unlike the rate cuts in Britain and the ECB last week, when the markets crashed the day they were announced, Asian markets rallied strongly on the news.

Not surprisingly, the Shanghai composite was up the most with a 7.3% gain. It is still down about two-thirds from its high last October, after rising in one of the most spectacular bubbles in history (bubble markets usually need somewhere between an 80% to 98% drop before they can stabilize). The Nikkei rose 5.8% on the news, after having hit a new low in its 18 year drop only recently. Intraday, the Nikkei has had approximately an 83% drop so far from its bubble high in 1990 to its current low. What the final number will be and when it will take place is anybody's guess. The Sensex in India, another bubble market, rose 5.8% as well. The dollar rallied against the Yen and natural resource stocks (inflation indicators) seemed to be the major beneficiaries of China's announcement. BHP Billiton, the world's biggest mining company was up 13%.

As the rally moved along with the sun to Europe, the enthusiasm dampened somewhat. Major European markets are up less than 3% as of this writing. U.S. pre-market futures indicate an even smaller rally here. Of course the Dow already rallied 2.8% on Friday, but this was after a two-day post election drop of around 10% (half of what would be necessary to create a bear market). The news of Circuit City's bankruptcy and AIG's third government bailout, with the total now up to $150 billion, will weigh on the U.S. market if rationality prevails - a dubious presumption at best.

In case there was any doubt previously, the economic policy makers for all the world's large economies are pursuing and will continue to pursue extreme inflationary policies. In many cases, this is being done to try to reinflate collapsing bubbles. There is no short-term likelihood of success in this endeavor. They will be successful however in igniting an inflation bubble. Although this is completely predictable, expect great surprise - and denial - when inflation starts to get out of control.

NEXT: Auto-Asphyxiation - GM, Ford Gasp for Bailout

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.