Why You Must Invest for Inflation From Now On

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Fed made history today by announcing an open-ended money printing policy — a policy heretofore unseen outside of history's hyperinflation havens. The news conference that followed the announcement revealed a central bank acting out of extreme desperation.

While the Fed is doing another round of quantitative easing, QE3 is not the same as QE2. The previous QE involved the purchase of U.S. Treasuries. This time around, the Fed is buying MBSs (mortgage-backed securities). In QE1, various types of securities were bought. The previous QEs also had specific limits to the amount of money that was going to be printed whereas QE3 doesn't. QE3 is supposed to be ongoing until somewhat after the economy and employment situation have been improving for a while. How long that will be is anybody's guess.

Despite several questions in the press conference that followed the announcement, Bernanke made only vague statements about how the Fed would determine when enough money printing was enough. The purchase of mortgage-backed securities is likely to continue for some time because doing so is supposed to reduce unemployment. How that will work is not clear other than perhaps reducing unemployment in the construction industry. The Fed's actions should lower already historically low mortgage rates and Bernanke specifically stated more than once that getting the price of homes up was one of his major goals (he seems to have forgotten that the global financial collapse in 2008 was the result of the collapse of the housing bubble).

Anticipating the obvious objections, Bernanke tried to head off the major criticisms of the Fed's new plan at the beginning of his news conference. While he admitted that the Fed's action hurt savers and would make it difficult to prepare for retirement, he said that if you don't  have a job you wouldn't have any money to save anyway. So, apparently the large majority of people who have a job should risk having their retirement unfunded in order to pursue Bernanke's high risk policies that have been tried for the last five years, but haven't worked. I wouldn't have been surprised if a couple of retired people were brought up to the podium and Bernanke kicked them a few times to emphasize his point.

Bernanke also denied that the new round of money printing will cause inflation. The basis of his argument was that the members of the FOMC aren't prediction inflation in their projections, so obviously it's not going to happen (these are the same people that failed to foresee the subprime crisis coming). Also Bernanke claimed inflation has been around 2% for years, so there is no problem. Even a casual perusal of commodity prices since 2009 shows increases of 100%, 150%, 200% and sometimes more however. It is true the government isn't reporting inflation, but that isn't the same as it doesn't exist. The head of the Weimar German central bank also claimed inflation wasn't a problem as he printed more and more money. Eventually, inflation reached 300 million percent.

One of the real eye-openers of the Bernanke news conference was his admitting the impotency of the Fed and monetary policy. Over and over again Bernanke stated that the Fed's actions were, "not a panacea". He said that, "We [the Fed] can't solve the problems by ourselves". He also emphasized that the Fed's, "tools are not so powerful that they can solve the problem". If the chances of success are so limited, why is the Fed taking a course of action that could have serious negative consequences for the American people?

In addition to his desire to reinflate the housing bubble, Bernanke was also proud that when the Fed speaks, economic forecasters change their numbers and that, "markets respond to [the Fed's] guidance".  This was a blatant admission that the Fed purposely manipulates the stock and bond markets and financial news. Obviously, this destruction of free market mechanisms is not something that he considers shameful, even though this represents a major power grab on the part of the Fed.

Bernanke was much more coy however when the question of whether or not the Fed's money printing decision was base on political considerations. One reporter mentioned that Romney was not planning on reappointing Bernanke and asked if the policy shift was an attempt to help reelect President Obama. Bernanke denied this of course, his voice almost breaking when he stammered out, "our decisions are based entirely on the state of the economy." I must admit that I am personally surprised that the Fed did this before the election because this question is only going to be the beginning and the Fed has now made itself an ongoing issue in the presidential campaign. I didn't think Bernanke was so foolish to take this risk, but obviously I overestimated his political awareness.

Earlier this month, ECB head Mario Draghi promised unlimited bond buying. This is different from what the Fed is doing because those purchases are supposed to be sterilized (new liquidity put in is neutralized by liquidity being removed). Many people however believe that the ECB will have to engage in money printing despite its claims. Added to the Fed, this means inflation investments will have a bid under them for some time to come.  Investors should be looking at gold and silver, energy and agriculture. Ironically, shorting Treasury bonds also look like a good bet now as well, since the Fed is not buying them as part of its QE program (Operation Twist though will be going on to the end of 2012 however and this acts to lower interest rates around the 7 to 10-year maturity level so be careful). Keep buying as long as the Fed keeps printing.


Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Volcker Says U.S. Mired in Recession and Inflation is Coming

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.   

In a talk given to a small audience at the American Museum of Finance on Wednesday evening, former Federal Reserve Chair Paul Volcker stated that there was an ongoing recession in the U.S. and that we will be seeing inflation in the future because of the actions of the Fed and Treasury during the 2008 Credit Crisis.

While most of Volcker's talk centered on the current crisis in Europe, he frequently made connections to what was going on in the EU to what has taken place in the United States. His remarks about the U.S. being mired in an ongoing recession were in response to a question on whether an infrastructure bank would be a good idea. As part of his answer he stated, "We're not going to end the recession in the next month or the next year. It's going to take several years before the recession is over." The U.S. government claims that the last recession ended in June 2009and has repeatedly said that the U.S. has not fallen back into recession even though unemployment and consumer confidence have continually remained at recession levels.

When discussing the bailouts during the Credit Crisis,  Volcker remarked "people said that there will be inflation... that's true over time." Volcker was critical of pro-inflation policies. He said that "the problem with inflation is that it looks so enticing, but the historical record doesn't verify that it is." He continued, "We would be very foolish if we deliberately went out and created inflation." The Federal Reserve under Ben Bernanke has kept Fed Funds rates around zero percent for three years now, which means real interest rates have been negative. Negative interest rates are highly inflationary as is money printing. The Fed has expanded its balance sheet — one of the many ways it prints money — by over $2 trillion dollars since September 2008.

Volcker described the 2008 Credit Crisis as a "regulatory failure", but added "the Fed is only one regulator". He went on to state that "the Federal Reserve took a lot of extraordinary measures" to handle events back then and "the Fed and the Treasury did not necessarily follow the letter of the law" in attempting to control the damage to the financial system. Volcker further laid part of the blame for the Credit Crisis to proprietary trading by banks and said he was "not in favor of banks being speculative entities being supported by the U.S. government".

Paul Volcker was Chairman of the Federal Reserve from August 1979 to August 1987 and is widely credited with bringing down the high inflation of the 1970s by raising interest rates. More recently he headed the President's Economic Recovery Advisory Board, which he left in February.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21 

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Should Stocks be Rallying on Hopes of QE3?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.  


Stocks have rallied significantly since August 10th on the hopes that the Federal Reserve will engage in a third round of quantitative easing (QE) -- a form of money printing. While QE1 and QE2 were successful in juicing stock prices, this is not what the Fed is supposed to be doing.

The Fed's current mandate was established by the U.S. Congress in 1977 in the Federal Reserve Reform Act. This legislation requires the Fed to establish a monetary policy that "promotes maximum employment, stable prices and moderate long-term interest rates". Manipulating stock prices is not supposed to be on the Fed's agenda. Quantitative Easing was unknown in 1977 and was therefore not specifically addressed by Congress.

If anything,the Fed has significantly overshot in its goal to keep long-term rates moderate. The Fed Funds rate has been kept at around zero percent since December 2008. The Fed has stated it will maintain this rate until 2013. The interest rate on the 10-year treasury fell below 2.00% at one point this August -- a record low. Two-year rates fell below 0.20%, also record lows and well below the bottom rate during the Credit Crisis. Low interest rates indicate an economy in recession and not deflation as is commonly claimed in the mainstream press. Maintaining interest rates at a low level for too long is inflationary however.

The Fed announced its first quantitative easing program in November 2008 (according to an analysis of its balance sheet, it was begun somewhat earlier). The second round ended this June. How has the employment situation changed during the two rounds of QE?  When QE1 started in November 2008, the official U.S. unemployment rate was 6.8%. When it ended in June 2011, it was 9.2%. The high was 10.1% in October 2009. The post-World War II average has been 5.7% and unemployment has fallen to the 3% range when the economy is strong. With respect to employment, quantitative easing seems to have been a failure.

So what about price stability, the Fed's other mandate? While the inflationary effects of quantitative easing are most evident in commodity prices, the typical American consumer has seen them in gasoline, food and clothing prices. The average price of gasoline was as low as $1.60 a gallon when the Fed started QE1 and it almost reached $4.00 a gallon during QE2. A number of commodities, including cotton and copper, hit all-time record-high prices during QE2. Gold, the ultimate measure of inflation,rose to one new price high after another. Silver went from under $10 an ounce to over $48 an ounce. Quantitative easing obviously hasn't led to price stability. In fact, it has resulted in much higher prices and is therefore counterproductive to the Fed's goal of limiting inflation.

There is no question that quantitative easing has helped the stock market and resulted in higher stock prices. This is not exactly a secret however and all Wall Street traders are well aware of it. They will therefore push stock prices higher if they think more quantitative easing is on the way and much of any rally that results will occur before it even takes place. Quantitative easing is also no panacea for stock prices. It doesn't insulate the market from external shocks. While it doesn't make crashes more likely, it will make them worse when they occur. A default on Greek, Spanish or Italian debt and any number of other crises will have greater impact than they would have ordinarily because the market has been pumped up to artificially high levels. The market has also become dependent on quantitative easing and has not been able to rally since late 2008 without it. Almost as soon as it stops, the market drops and those drops will become more serious after each succeeding round.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

ZIRP Failed in Japan, So They're Doing It Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

The Fed's Minimum Price Stability, Maximum Unemployment Policy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Fed says it's worried about deflation and high unemployment. So in order to tackle these two problems it's going to do more of the same things that lead to them.

In its post meeting statement yesterday, the FOMC said that inflation is 'somewhat below' levels consistent with its congressional mandate for stable prices.  Since the official inflation rate is positive, this indicates that under no circumstance should prices actually remain stable in the U.S. It also means that prices have to increase by more than the amount they are rising now. This of course leads to long-term dollar devaluation and indeed the dollar has lost 96% of its value since the Fed has been in business. They obviously can't wait to lop off the remaining 4%. Having a worthless currency is obviously a good thing as far as the Fed is concerned (you might disagree when you have to pay $5,000 for a loaf of bread). Inflation-sensitive gold hit its fifth record high in as many days on the news and was pushing $1300 an ounce this morning.

It order to tackle the non-existent deflation problem, the Fed intimated that more quantitative easing - also known as money printing - is on the way. There is no case in financial history when excess money printing hasn't eventually led to higher consumer inflation and it has frequently led to hyperinflation. The Fed has already done a lot of 'printing' and the ever increasing price of gold is showing the dollar losing value right in front of our eyes. However, the see no inflation, hear no inflation, and speak no inflation Fed ignores the gold market. Instead they are looking at ever dropping interest rates - the two-year treasury hit another record low after the meeting. Falling interest rates are being caused by all the new money they are manufacturing because bonds are being bought with some of it and this drives their price up and rates down. Using some form of inverted, twisted thinking, they view a market reaction caused by excess money printing as a sign of deflation.

The Fed first lowered its Funds rate to zero in 2008. With help from the U.S. treasury, they have engaged in an expansionary money creating policy since then as well. Unemployment is now much higher than when they started these moves and is stuck around the 10% range if you believe the official numbers (if not, it's much higher). After the worst recession since the 1930s, the economy is stuck in neutral, if you believe the official numbers (if not, we have already entered another recession). So the Fed's solution is to ratchet up the same policies that have failed over and over again and they claim somehow they will work now. It is far more likely the Fed's actions will nstead lead to minimum price stability and maximum unemployment.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Weekly Claims and Trade Deficit Not as Good as Reported

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Stocks reacted enthusiastically to the weekly unemployment claims for the week ending September 3rd and to the improvement in the U.S. trade deficit during July. As usual, the mainstream media hyped up the headline number, but 'forgot' to report some important details.

Weekly claims falling the week before or during a major holiday is a hardly unusual and has nothing to do with an improving employment picture. The 451,000 number reported for the week before Labor Day was the lowest number since the week that contained the July 4th holiday. The problem is not that unemployment offices are closed, but the bureaucrats that tabulate the statistics can't work faster to produce the numbers in a timely fashion. In this report, apparently 9 states didn't have their numbers ready, so two of them estimated their numbers and the BLS estimated the numbers for the other seven. This information doesn't appear to have been included in the intitial press release from the BLS. Some bloggers caught on to it though and Bank of America sent out a note later about what had happened.  Stocks in both the U.S. and overseas rallied on the BLS release showing an improving jobs situation based on incomplete data.

The market was also excited about the trade deficit decreasing in July. While no trade deficit is definitely a good thing (something that hasn't occurred in the U.S. since the 1970s), this is not necessarily true for a lower trade deficit. If the trade deficit is decreasing because of surging exports, that is indeed a positive. If it is decreasing because of a big decline in imports, this can indicate business and consumers are spending less because of poor economic conditions. Falling imports accounted for most of the July decrease. Of the increase in exports, capital goods accounted for 82%. This is surprising considering the July durable goods report showed a significant decline in production of capital goods in the U.S. If exports are surging for capital goods, why is production falling?  There seems to be some contradiction here.

The stock market shouldn't have been happy with either of these government reports. Without the positive spin the mainstream media gave them, it probably wouldn't have been. The truth is that weekly unemployment claims have been continually at recession levels for over two years now and there is no evidence yet of their improvement (even a one week drop below the 400,000 recession level, quite possible before the election on November 2nd, wouldn't mean employment is on an upswing). As for the trade deficit, it was cut in half during the Credit Crisis because the economy was collapsing. An improving trade deficit can actually be sending a negative message. Investors need to know the details and the historical context of any given economic report before they can react appropriately to it. Lots of luck in getting that from the mainstream media.


Disclosure: No positions.

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.

Some Recovery, Half a Million More Unemployed Last Week

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


After more than a year of economic 'recovery', the Department of Labor reported weekly unemployment claims rose to 500,000 last week. Any number at 400,000 or higher indicates recession. The last time weekly claims were below that number was the week of July 17, 2007 - more than three years ago.

The unemployment problem has two components - not enough hiring in the private sector and too many job losses for people who have jobs. The lack of hiring can be seen in the monthly non-farm payrolls report and the too much firing shows up in the weekly unemployment claims. Not all U.S. workers are eligible to collect unemployment however so the weekly claims numbers understate the actual number of people who lost their job. Even with the understatement, unemployment looks bad enough as is.

The number of former workers collecting extended benefits rose to 4,753,456 in the week ending July 31st (the most recent data). This was up 260,105 or over 5% from the previous week. A year earlier in 2009, only 2,961,457 were in this category, which includes people unemployed for over 26 weeks. So the number of people who are long-term unemployed and have not yet exhausted their benefits has risen over 60% in the last year -a year when economic recovery was supposedly taking place.

Since November 2009, the weekly jobless claims have mostly been in the 450,000 to 500,000 range. There is no noticeable trend of improvement. This is amazing, not just because of trillions in deficit spending that the government told us would make the economy better, but over the long-term (and three years is the long-term) this number should automatically drift down. Companies have to have a certain minimal amount of employees to run their operations. As time goes on, the number of people that can be terminated drops significantly and so should weekly unemployment claims. This drop in claims wouldn't mean the economy is getting better, although the mainstream media would blast headlines claiming that was happening, it would mean that there aren't a lot of people left to fire. At this point in the cycle, since claims aren't dropping, business activity has to be continually declining to maintain the same high unemployment numbers. That's the definition of a recession, not a recovery.

Investors should not be surprised if the weekly unemployment claims numbers start looking better soon and for the next couple of months. The U.S. employment situation is a major embarassment for the administation and there is an important election in November. This week, the president is making appearances in  five states to make the case that it was worth borrowing trillions of dollars for stimulus spending and doing so has put America 'back on the road to recovery'. The last nine months of weekly unemployment claims certainly aren't supporting this view. With a statistical adjustment here and there though, the numbers could suddenly look a whole lot better, even if the economy isn't improving at all.

Disclosure: No positions.

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.

Bernanke Admits Major Policy Failures; Stocks Soar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


What's wrong with this picture? In his bi-annual testimony before congress yesterday, Fed Chair Ben Bernanke admitted that after more than a year and a half of zero interest rates and $3 trillion in federal deficit spending since 2008, the best case scenario for the U.S. economy is slow growth and high unemployment. The S&P 500 is up 2.5% so far this morning on this 'good' news.

Bernanke's congressional testimony included the following statements (emphasis added by me):

"Most [FOMC] participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw [at the June Fed meeting] the risks to growth as weighted to the downside."

"financial conditions--though much improved since the depth of the financial crisis--have become less supportive of economic growth in recent months."

"many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight. With credit demand weak and with banks writing down problem credits, bank loans outstanding have continued to contract."

"After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009."

The market dropped as Bernanke delivered his testimony yesterday afternoon - and he was blamed for bringing it down. The Dow closed more than 109 points lower. The Dow was then up more than 117 points right after the open today and the Nasdaq gapped up over 26 points. The mainstream media reported bullish news out of Europe and good corporate earnings instantly turned market psychology around. One major news service stated, "earnings Thursday showed that if the economy is slowing, many companies are not being affected too much by the downturn". In other words corporate profits have decoupled from the state of the economy. While this may sound completely idiotic, it may not be as absurd as it initially appears to be.

If the federal government has spent $3 trillion of borrowed and printed money in the last two years, that money has to have gone somewhere. Either direct or indirect government purchases could be responsible for the current batch of good corporate earnings, although sales to the economically strong economies in East and South Asian are behind better performance for many U.S. companies that do most of their business overseas. So the private sector of the U.S. economy can be dead in the water, but corporate earnings can be good because the government has become such a large component of the economy (as is the case in socialist states).

While corporate earnings are up and cash levels are at record highs, the money doesn't seem to be flowing into the general economy. Despite the supposedly great state of corporate America, there are few announcements of major business expansions, nor is hiring picking up. The usual evidence of a robust corporate sector is simply not there. Weekly jobless claims in fact rose 37,000 to 464,000 this week. While 'seasonal adjustments' were cited behind the big increase, weekly claims have been at recessionary (if not depressionary) levels for two years now. Apparently there are negative seasonal factors in winter, spring, summer, and fall.

The alternative explanation for today's big stock market rally, despite major gloomy news, is the not so invisible hand of government manipulation. Bernanke made it clear early on that he was more than willing to interfere in the markets. When the Fed began its rate lowering campaign in August 2007, it did so one hour before monthly futures expired and this created a huge rally that wiped out the profits of the shorts (and gave a huge gift to the parties that were on the other side of the trade - the big Wall Street banks perhaps?). More recently, the Fed created a huge global liquidity facility on May 9th, after the Flash Crash, and markets soared - at least for awhile. Since there are major elections in the fall, investors should assume that powers that be will not want a crashing stock market and the announcement of a new recession. It will be interesting to see how they try to cover this up.

Disclosure: No positions.

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.

Bernanke Testimony Indicates Fed Still in Denial

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Fed Chair Ben Bernanke testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

Disclosure: None

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.

Stocks Experience Irrational Exuberance on Employment Report

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


U.S. stocks rallied strongly on Friday because of the February employment report. In what could only be described as the latest episode of the emperor has no clothes or more appropriately the emperor's people have no jobs, the Dow Jones was up 122 points (1.2%), the S&P 500 up 16 points (1.4%), the Nasdaq up 34 points (1.5%) and the small-cap Russell 2000 up 14 points (2.1%). Oil rallied close to 2% and gold was flat on the day. Bonds sold off. One major media outlet after another trumpeted the reported loss of 36,000 jobs as good news in their Friday and weekend coverage, as did the politicos in Washington. Wall Street was jubilant.

The media clearly wants to tell the story of a recovering economy and will be doing so even if there isn't any evidence to back that viewpoint up. The story of course is coming directly from the U.S. government during a congressional election year. The government writes detailed press releases for each economic report and in those it presents the rosiest scenario possible. It is not going to go out of its way to point out any bad news, but spins the story to make our political leaders look good. Analyzing the numerous detailed and at times poorly laid out charts in the economic reports is a time consuming and difficult process, but is the only way to find out what is really going on.  For those who are interested, the next time there is a major economic news release, look at the time stamp (the moment of publication) on the articles from the major news services. I have seen time stamps of 8:30AM for a news release that took place at 8:30AM. This is merely a reprint of the government's best of all possible worlds press release. This is the only news that most media outlets report.

Looking at the details and footnotes of February's employment report painted an ugly picture of the U.S. job situation. In addition to the 1.2 million census workers that seem to have been placed in the Business and Professional Services category over the last several months, instead of the Government category where they belong, the seasonal adjustments were substantial and made the headline numbers much better than the real numbers. The actual unemployment rate (known as U-3 in the report) was 10.4%, but this became the reported 9.7% through the magic of adjustment. The unemployment rate that takes into account forced part timers and some discouraged workers (known as U-6 in the report) was actually 17.9%, but this became a still whopping 16.8% for seasonal reasons. Does this sound like good news?

For those who want to see the numbers themselves, Table A-15 (yes, there are a lot of tables) of the February Non-Farm Payrolls report can be found at: http://www.bls.gov/news.release/empsit.t15.htm.

The snowstorms in the East during February were specifically used to imply that the employment numbers were actually much better than they appeared. The BLS in its press release said it couldn't calculate their impact (as if it has never snowed in the United States previously). The spin coming from Wall Street was that there must have been huge job losses, which could have taken place in construction, and this meant the 36,000 job loss number would have been a gain otherwise. This is completely implausible. It could only have happened if there were a lot of workers that were going to be working during that time (there weren't, construction employment has fallen severely over the last two years) and couldn't because of the weather and that the numbers didn't already account for this problem through seasonal adjustments (they did). Furthermore, snow removal is frequently done by temporarily employed workers and this would have added substantially to the employment numbers, not subtracted from them. Moreover, it is unlikely anyone fell off the employment rolls as far as the government was concerned because of the snowstorms. Any regular worker who got paid for at least one-hour during the two-week survey period was considered to be employed.

Job losses in the U.S. have been a regular occurrence for the last couple of years. The only exception recently was in November 2009, when the numbers became positive because of after the fact adjustments. While job losses are bad, small job gains are also bad. The U.S. needs to create up to 200,000 additional jobs each year to employ people entering the labor force. Things will really have turned around when that happen and the jobs are from private industry and not the government. Wall Street's reaction to the February employment report indicates more than snow was being shoveled recently.

Disclosure: None

NEXT: Watch What China Does and Not What It Says

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.

Census Hiring Used to Manipulate U.S. Employment Numbers

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


According to the Financial Times, the U.S. is hiring 1.2 million census workers for the 2010 national head count that starts in April - twice as many as were needed for the 2000 census. While census workers are government employees, they do not appear to be showing up under the government category in the monthly non-farm payrolls employment report (hiring began by March 2009). The Bureau of Labor Statistics appears to be counting these temporary jobs in the Business and Professional Services category. As a consequence, the employment numbers make the U.S. economy look much better than it really is.

The March employment report indicates that the U.S. lost 36,000 jobs in February and the unemployment rate was 9.7% if certain discouraged and forced part-time workers are not counted (unemployment would be 16.8% if they were included in the numbers). Any job loss indicates an extremely weak economy, but so does a small job gain. Since new workers are always entering the labor force, the total number of jobs available needs to continually increase, by as much as 200,000 a month by some estimates, in order to maintain employment stability. A lesser number should lead to a higher unemployment rate. Nevertheless, unemployment held steady in February and actually dropped significantly in January when 26,000 jobs were lost. Interesting, to say the least. Apparently two plus two doesn't always equal four.

Examination of the detailed numbers within the monthly employment reports reveals that the lower rate of job losses in the last several months can be attributed to the hiring of large numbers of temporary workers in the Business and Professional Services category. In February, a net 47,500 such workers were hired, in January it was a net 50,200 and in December 2009 a net 49,700.  The numbers are remarkably even and that makes them look like part of some planned operation.  A footnote indicates that these temp workers include hiring in 'other' industries not shown separately. At the same time, government jobs supposedly decreased by 18,000 in February and decreased by 26,000 in December 2009. If the 1.2 million census workers were being included in the government employment figures, this would indicate massive lay offs have been taking place elsewhere in the government. Surprisingly, it doesn't seem that any such lay offs occurred. So where are the census workers in the U.S. employment reports?

Everyone knows that increases in government jobs don't indicate a recovering economy. It is also common practice for businesses to hire temporary workers in the early stages of a recovery and then permanent workers later on. If the federal government's statistical operatives placed temporary census workers in the Business and Professional employment category, it would certainly make the U.S. employment picture look much better than it really is. Regardless of where the census workers are being hidden in the statistics, their jobs are temporary and should completely disappear by the fall. U.S unemployment will increase by 1.2 million when that happens. It's not clear where the U.S. will get the jobs to make up for the loss.

Disclosure: None

NEXT: Stocks Experience Irrational Exuberance on Employment 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.

New York State Comptroller's Wall Street Bonus Update

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


I attended the February 23rd press conference given by New York State Comptroller Thomas DiNapoli where he announced Wall Street bonuses tallied at least $20.3 billion in 2009 and industry profits could exceed $55 billion for the year - nearly three times the previous record. While a blogger or two from a major political website is occasionally included in such events, this may have been the first time a blogger for an investing/economics site was invited.

The Wall Street bonuses revealed by the comptroller were literally that - compensation paid to employees working in New York City. All of these firms are international in scope so payments made to employees working elsewhere, and these could be considerable, were not included in the totals. Moreover, the bonus numbers were based on cash payments or recognized deferred compensation, options that were cashed in during 2009 for instance. Stock options granted, but still outstanding are not part of the numbers.

The comptroller's office noted that many Wall Street firms delayed cash bonus payments and increased stock and other forms of deferred compensation in 2009. Many top executives received no cash bonuses last year, but got stock options instead. This made the bonus amount for 2009 to appear to grow less than it actually did, keeping the apparent increase to only 17%. Wall Street executives received larger salaries as well as part of their compensation.

In 2008, Wall Street firms lost $42.6 billion and granted at least $17 billion in bonuses according to the comptroller's figures. Never in history has incompetence proved to be so lucrative. If you screwed up at work and almost drove your company out of business would you get a big cash reward for doing so? Yet, the perpetrators of the biggest financial collapse in history were richly rewarded for their efforts. How is this possible and where did the money come from?  Government bailouts are the answer to both questions. Wall Street got money from the Federal Reserve and the U.S. Treasury and then funneled that money into its executive's pockets. The government in turn got that money from your bank account. The other question that needs to be answered is how did Wall Street triple its profits from the previous high in 2007 when U.S. unemployment reached 10% and the GDP was negative in 2009?

The New York State Comptroller is the sole trustee for a $128 billion pension fund. New York State, along with the other major state and city pension funds, is responsible for a huge amount of market investment. While Wall Street knows about what goes on in the nation's comptroller's offices, most of the activity remains unknown and unseen by the investing public.  Investors have a right to know what is going on with public money. Including bloggers, who are the people's press after all, in the news flow is a major step in the right direction. Comptroller DiNapoli deserves credit for opening the process.

Disclosure: No positions.

NEXT: U.S Economy Continues to Deteriorate Despite 'Recovery'

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.

U.S. Employment Numbers Indicate More Stimulus Ahead

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The December 2009 Nonfarm Payroll report (released January 8th) indicated that the U.S. added jobs for the first time since the recession began two years ago. This didn't take place in December however. Payrolls last month fell 85,000 with most of the damage coming from drops in construction and manufacturing. Revisions for past months made by the BLS indicate that the U.S. added 4000 jobs in November, instead of the 11,000 loss initially reported. At the same time that 15,000 extra jobs appeared in the November totals, 16,000 were subtracted from the October totals. Certainly, some would think this was suspicious.

While the BLS (Bureau of Labor Statistics) may be playing tricks with the numbers to make the U.S. employment situation look better, it is still quite obvious that the overall picture is pretty dismal. The best spin they could put on the recent news was that the drop in the numbers in the fourth quarter of 2009 was much less than in the devastating first quarter. This 'we are still falling off a cliff, but at a slower rate' message shouldn't reassure anyone. While it is true that there are less layoffs now than there were a year ago, the numbers literally couldn't have gotten much worse. Looking inside recent U.S. employment reports, it can be seen that large numbers of temporary workers added to payrolls have prevented the job loss numbers from being lower than they would have been otherwise. Another 47,000 temp workers were added in December. People have also been leaving the labor force in large enough numbers to keep the top line unemployment rate at only 10.0%. According to the BLS another 661,000 people supposedly exited the U.S. labor force between November and December 2009. While people who aren't in the labor force obviously don't have jobs, they are not considered unemployed.

There were only three industries that added employees in December. Professional and Business Services added 50,000 employees, but this seems to be mostly temporary workers. Education added 13,000 jobs. Health Care added 22,000 jobs and has been the one perennial bright spot in U.S. employment since the recession began. It has added jobs every month in the last two years. A vibrant health care sector can't be the cornerstone of a healthy economy however. The goods producing sectors are needed for this and they are still hemorrhaging jobs. Another 53,000 jobs were lost in construction and 27,000 in manufacturing in December. The loss of construction jobs is not surprising since other statistical reports indicate that U.S. real estate activity is weak. Reports on Durable Goods and the ISM Manufacturing index though indicate U.S. manufacturing has been doing well for many months. There seems to be a disconnect there.

Unemployment is perhaps the most sticky of political issues and something that politicians watch closely. Their automatic reaction is to spend more money to tackle the problem. First they borrow it, and when the credit lines run out, they print it. The U.S. is already well along in this scenario. Investors can also expect a continuation of the Fed's zero interest rate policy until there are real improvements in the employment numbers. It is estimated that it will take the creation of 200,000 jobs a month to lower the U.S. unemployment rate. December's report indicates that this won't be taking place in the near-term future.

Disclosure: Not applicable.

NEXT: Sun Shines on Solar Stocks in Early 2010 Trading

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 Three Big Economic Lies of 2009

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Investors have trouble making money in the markets because the information they receive from the government is not a reliable accounting of what is actually going on. The mainstream media then repeats this information, no matter how absurd it is, without critical commentary or analysis. While financial media reporting has been filled with misinformation this year, there are three major ongoing themes in 2009 that investors especially need to realize don't hold up under scrutiny. These are: The economy is in recovery; Unemployment is a lagging indicator; and Inflation is not a problem. Let's examine why each one of them is not true.

1. The U.S. economy is in recovery.

This is based on the U.S. GDP going up in the third quarter (by 2.8%) and the contention that a reported increase in GDP indicates the end of a recession. This would be the case if the numbers were reliable - they are not - and they didn't turn positive as the result of government stimulus programs - which they did.

There have been a number of changes in how U.S. GDP has been calculated in the last three decades. These changes have caused better numbers to be reported. Consequently, it is now almost impossible for U.S. GDP to be negative. The original numbers published for 2008, indicated an economy doing well, not one that was in the worst recession since the 1930s. After an extensive revision of GDP numbers in mid-2009, the much reduced GPD number for 2008 was still positive - a theoretical impossibility - and absolute proof that the U.S. GDP numbers are unreliable and should not be believed.

Even with the extensive manipulation of the GDP figures, if you removed the impact of government stimulus programs for autos and housing and other forms of government spending, there still wouldn't have been a positive number in the third quarter. This game has been played before in Japan. Government spending brought the country out of recession in 1993, 1997,1998,1999, 2001, 2004 and 2009. Did they have a septuple dip recession? No, they have had one long two-decade recession masked by government stimulus programs - the modern version of a depression when Keynesian economic policies are pursued. The Japanese learned that an economy that does well solely due to government stimulus is not an economy in recovery. The U.S. should pay attention to this lesson. So far, it hasn't.

For a fuller discussion of the recent U.S. GDP numbers, please see my blog post: Mark to Model GDP at http://nyinvestingmeetup.blogspot.com/2009/10/mark-to-model-gdp.html.

2. Employment is a lagging indicator.

It would actually be more correct to state that GDP is a leading indicator of economic recovery (if things go right that is). The lag of employment to GPD only became very noticeable during the minor recessions in the early 1990s and 2000s and was a result of statistical 'adjustments' that made GDP look better so that it gave premature readings of economic improvement. In the major recessions in 1973-1975 and the double dip recession in 1981-1982, unemployment bottomed the quarter that GDP turned positive. It did not do so in the third quarter of this year. If unemployment was a lagging indicator, the lag should be much greater after major recessions than it is after less serious recessions. This is not the case and is a major contradiction to this viewpoint. What has actually happened is that statistical 'adjustments' made by the U.S. government to improve unemployment calculations have lagged the 'adjustments' made to improve the GDP numbers.

For my blog post on the latest U.S. unemployment figures please see: http://nyinvestingmeetup.blogspot.com/2009/12/us-employment-figures-dont-add-up.html.

3. Inflation is not a problem:

This oft repeated mantra from the Federal Reserve will prove in the future to be the biggest lie of all. Their argument that low capacity utilization prevents inflation is not true based on historical analysis. Nor are there any cases in the past when governments have 'printed' large excess quantities of money as the Fed is doing now and inflation didn't follow. The Fed's own figures also indicate that massive future inflation is possible. The Adjusted Monetary Base, a measure of future inflation potential, has gone up more in the last year than it has in the entire preceding 50 years. The rise of the Adjusted Monetary Base in the 1970s, when U.S. inflation reached 15% on a monthly basis at it height, is a mere blip compared to the current vertical rise.

The Fed has hinted that it will be able to take care of any potential inflation problem. This is the same Fed that didn't realize sub-prime loans were a problem almost up to the moment they started to bring down the financial system and the same Fed that was claiming in the spring of 2008 that it thought it could prevent the U.S. from sinking into a recession. Unfortunately, the recession had begun months before. The Fed was unaware of it however. The Fed will also be unaware that inflation is a problem right up to the point where every dog in the street knows about it.

For a thorough debunking of the inflation news, please see my blog post:
http://nyinvestingmeetup.blogspot.com/2009/12/why-inflation-is-and-will-be-problem.html.

Lack of honest government statements to the public about the economy is nothing new. Governments almost always try to hide the bad news. More than once in history, manipulation of the economic numbers has evolved into outright fabrication. It is also common for the mainstream economic community to support the government's view with fanciful obfuscations. When things have gotten to this point, the situation is already very bad and likely to get much worse. As usual, things will not be different this time. They never are.

NEXT: Why Interest Rates Will Rise in 2010

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.

Our Current Economic Illusions

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

When reading economic statistics, you should see if they are consistent (they rarely are) and make sense based on real world observations (lately they don't). On Thursday, December 3rd the U.S. productivity numbers were released, as were same store sales and weekly unemployment claims. The story these three pieces of data are telling are quite different, which means at least one and possibly two of them are not correct.

Productivity in the U.S. is supposedly up astronomically. It rose by 8.1% last quarter and this is after being revised down from being up 9.5%! The recent downward revision of third quarter GDP from 3.5% to 2.8% meant the productivity numbers would be lower as well. Productivity is essentially the amount of GDP produced per worker. Since employment is falling in the U.S. and GDP is supposedly rising (the two moving in opposite directions is illogical) productivity has to go up. According to the government, it is going up a huge amount. Is there any major new technological advance or innovation accounting for this? None, that anyone knows about. Economists claim that productivity has gotten better because the least productive workers have been fired. While this might give the numbers a percentage or so boost, it wouldn't give them an 8% boost. The alternative explanation is that GDP is being grossly overstated by the U.S. government. There is substantial documentation that this has indeed been the case for the last three decades.

Same store sales is not a government report and the November numbers clearly show an economy in trouble. Sales were down 0.3% year over year. While this may not seem so bad initially, it is when you consider sales were down 7.7% last November, which was the height of the Credit Crisis meltdown. They are even lower now. Analysts (who are almost always wrong) originally forecast a 5% to 8% increase for this November. Consumer spending accounts for 72% of U.S. economic activity and is still obviously in bad shape. Yet, the government tells us that GDP is growing nicely. There seems to be a contradiction there.

If you read the mainstream media coverage of the weekly jobless claims you would have seen that the U.S. employment situation is getting better because there were only 457,000 new claims during the week of Thanksgiving. Of course, you might consider that few employers would lay off workers right before a major holiday and that state unemployment offices were closed because of the holiday, so this would obvioulsy lower claims. The BLS (Bureau of Labor Statistics) states that they make some 'adjustments' for this though. Claims at even the 400,000 level indicate significant recession and they need to drop to the 300,000 level to indicate a healthy economy (you will see much higher numbers cited in most mainstream media reporting). Continuing claims are still rising and have hit 5.5 million. This number doesn't include an additional 4.5 million on extended umemployment benefits. A large percentage of the American work force is not eligible to collect unemployment as is, so the numbers are even worse than they appear. While there are those who claim that unemployment is a lagging indicator, statistics from the past don't support this notion. The real lagging indicator seems to be the truth about what is really going on in the economy.

NEXT: U.S. Employment Figures Don't Add Up

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.

Gold Rumbles as Dollar Crumbles

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

If the U.S. dollar chart was a person, it would be a stroke victim. The trade-weighted dollar has been falling since March and can't seem to rise for more than a few days before falling down again. The dollar's latest rally (triumphed by the American mainstream media) in the second half of October took it from 75 to just below 77 where it bounced down from its rapidly declining 50-day moving average. After a major gap down on Monday, instead of rallying strongly to fill the gap, the dollar remained comatose. It broke the 75 level decisively this morning trading as low as 74.77. This is another 18-month low. Comments by Fed officials on Tuesday led to the latest round of selling.

In contrast to the dollar chart, the gold chart looks like someone training for the Olympics. Gold hit another all time record high this morning. Spot gold traded as high as $1117.60 and spot silver as high as $17.71 so far. Technically speaking gold is in a textbook perfect breakout from a solid 18-month base, which is over 300 points deep. A technician would expect the rally to be at least the depth of the base. In a bullish market, double the depth is quite possible. Since the breakout took place at $1025, this would take gold to the $1300 or $1600 level. Gold is in a seasonally strong period until next March, so the rally should last until around then before a significant pause would be needed.

Gold is rising on the flood of liquidity that is being pumped into the global financial system. The same flood of liquidity is drowning the U.S. dollar. A number of Federal Reserve officials made comments Tuesday about U.S. employment likely continuing for a long time and the need for the Fed to maintain super low interest rates. In an eye popping comment, the Dallas Fed president acknowledged that the easy money was damaging the dollar, but he was unconcerned as long as the decline was orderly. So as long as the U.S dollar collapses slowly instead of suddenly, everything is fine. This is the wisdom from the people in charge folks.

The economic geniuses at the Fed are not worried about inflation, as is also the case across the pond in the other quantitative easing powerhouse, the Bank of England. There is no case in history where significant excess money creation didn't lead to inflation, but why be bothered by historical fact. How excessive the money creation is this time is indicated by a gauge kept by Morgan Stanley which measures the amount of cash circulating in the global economy as a percent of total economic activity. It is at a record high by far. Of course, you don't need complex money measures to determine if there is inflation. Gold has been the inflation thermometer throughout the ages and it indicates quite clearly that inflation is heating up.

Disclosure: Long gold, silver. No positions in the U.S. dollar.

NEXT: Action Speaks Louder than Words for U.S. Dollar

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.

'Recovery' Leads to Double Digit Unemployment

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

Just as the mainstream media has lulled the public into thinking we were on a one-way trip to economic happy land, today's U.S Employment Report throws cold water on the whole enterprise. The headline unemployment number came in at 10.2%. October was the first month in 26 years that U.S. unemployment has exceeded 10%. The alternative government unemployment figure, which includes discouraged workers and people who are forced to work part-time, rose to 17.5%. People, such as John Williams from ShadowStats, who adjust the government figures for more realistic numbers, generally add about 3% to that number to get the actual unemployment rate.

There was very little good news in the report. October was the 22nd month in a row that U.S. employment fell. There were large job losses in manufacturing, construction and retail. Retail losing jobs at the beginning of the big holiday selling season tells you just how bad things are. The average workweek is at a record low. The percentage of workers unemployed for over 6 months is at a record high. The labor force participation rate fell and the unemployment rate would have been even higher than 10.2% if this hadn't happened. The good news was that the numbers in August and September were slightly better than originally reported and that temp agencies added 34,000 jobs.

As usual mainstream economists underestimated how bad the report would be. Expectations were for a drop of 150,000 jobs and an unemployment rate of 10.0%. The 190,000 job loss reported is from the payroll survey by the way - and that is the one that is always reported by the media (and the one that shows that the employment situation is better of course). There is a separate household survey (which is a random sample, unlike the payroll survey) and that indicated a loss of 589,000 jobs in October. The government did state that total U.S. unemployment rose by that amount to 15.7 million.

The market reaction to the report was that stock futures, oil and gold dropped (gold had been as high as $1098 in early morning trading). In the long-term, this only means more money pumping, money printing, and dollar pimping by the Federal Reserve. This can only be bullish for gold and the rest of the inflation trade. There is no way that it is politically tenable for the Fed to raise interest rates until the employment picture improves. It is going to be in an increasingly uncomfortable position next year when inflation starts rising, yet unemployment remains high.

NEXT: Market Keeps Going as Stimulus Keeps Flowing

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.

Desperation Time for the Dollar

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:

The U.S. dollar gapped down this morning to 75.90, falling below the critical support level of 76.00 (for the second time). It quickly shot up to just above 76. Gold and silver were up nicely overnight with gold reaching $1059.60, another all time high. Silver traded as high as $17.86. Both dropped sharply when futures trading began in New York on COMEX. The not so invisible hand of the U.S. Treasury is evident in both precious metal and dollar trading this morning. The bill for the money printing free lunch may be coming due sooner than U.S. officials thought.

Rumors are that central banks in smaller Asian countries are buying dollars in a desperate attempt to keep their currencies from rising and damaging their export businesses. Central bank buying of a currency indicates downward market pressure has gotten out of hand. The tipping point may have come when Australia raised its interest rates a few days ago. A carry trade already existed for the U.S. dollar and the Australian central bank action may have opened the floodgates. A carry trade is when traders borrow money in a lower interest rate currency and use that money to buy a higher interest rate currency. Money is made on the interest rate spread. So traders borrow in dollars at short-term rates around zero and buy Australian dollar denominated short-term debt at 3.25%. The carry trade can become a bubble feed back mechanism that causes the low interest rate currency to continually spiral downward and the high interest rate currency to spiral upward. With the exception of Japan, almost every country in the world has higher interest rates than the U.S.

Any central bank intervention will only pause this problem however, it won't solve it. The only viable solution is for the U.S. to stop printing money and raise interest rates substantially. If a real economic recovery is taking place in the American economy that is actually what would be happening. If the U.S. government is lying about the recovery, interest rates will not be raised for some time. The latest statements from the Federal Reserves is that its low interest rate policy will be maintained for quite awhile... and for good reason. Australia can raise interest rates because its commodity-based economy is actually getting better. Australian unemployment is 5.7% and falling compared to the U.S. rate of 9.8% (17% in the alternate figure the government publishes) and rising. You should ask yourself, "how come unemployment goes down when the Australian economy recovers, but not when the U.S. economy 'recovers'?"

The lie was further put to the U.S. 'recovery' claims by the Consumer Credit statistics yesterday. U.S. consumer credit fell by $12 billion in August, after a $19 billion drop (revised downward) in July. This represents an annual decline of 5.9% and 9.1% respectively. Approximately three-quarters of the drop was accounted for by lower revolving debt (credit cards). So U.S. consumers have a lot less credit than they used to. At the same time, less consumers are working, the average weekly hours worked reached a record low in the September Employment Report and the savings rate is up. Nevertheless, I am fairly sure that when the third quarter GDP comes out, consumer spending will have risen during the quarter ... even though based on the previous information, this is impossible. The mainstream media will not question this statistical inconsistency at all. The market however might, by continuing to dump U.S. dollars.

The reserve currency status of the dollar has saved the U.S from decades of financial profligacy so far. It won't last forever. Small countries just collapse when they do what the U.S. is doing. Latvia is the latest example (Iceland was the first). An attempt by the government to fund its debt there earlier this week was the ultimate example of a failed bond auction. There were no bidders! Too bad they can't just print the money and buy their bonds the way the U.S. does.

NEXT: Fed Hits Dollar Panic Button

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.