G-20 Meeting's Deficit Goals Are Meaningless

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 G-20 met this weekend and set a goal that member countries should cut their deficits in half by 2013. The agreement also calls for G-20 countries to start reducing their deficit to GDP ratio by 2016. Even with such easy to reach targets, success is by no means guaranteed.

For some reason the G-20 recently woke up and realized countries can't continue to forever spend a lot more than their income from tax receipts. Some of them have been doing just this for many decades at this point. The statement released from the meeting said, "Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt."  So at least ten years after the horse has left the corral, the G-20 now wants to close the gait.... but not all the way.

The original proposal for cutting deficits in half was changed from would to should because Japan, the U.S. and India objected. No one actually seems to think that Japan will be able to accomplish this goal. Japan is the most indebted major country on earth with its debt to GDP ratio reaching over 200% this year. Interestingly, the long-term budget projections of the Obama administration are for a deficit of $778 billion for 2013, which would be less than half of the $1.6 trillion projected budget deficit for 2010. The 2013 figure is still almost double the biggest deficit prior to the Credit Crisis however. It also assumes robust GDP growth and minimal inflation during the next few years. Another recession or rising inflation could easily move the U.S. deficit numbers back to well above a trillion dollars. 

European markets were up on the news today and the U.S. market is rallying slightly as well in morning trade. It should be clear to the markets that world leaders are not really serious about reducing government spending. Although, the markets might be worried that even small spending reductions could turn the global economy back down and risk another recession - assuming the first recession actually ended that is.

Disclosure: None

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.

Financial Non-Reform Won't Save the Market

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.


Two years after the global financial meltdown, details of the so-called Financial Reform bill meant to reign in the excesses and abuses of Wall Street have finally been worked out. Former SEC chair Arthur Levitt described the bill as having been "bled dry of every meaningful protection for investors". As the senate was fiddling around with its usual back room deals and sweetheart arrangements for the special interests, evidence of further deterioration of the U.S. economy and global financial system mounted.

U.S. GDP for the first quarter was revised downward again today. Official figures now have it 2.7% and the reason cited for the drop was less consumer spending than originally thought. Before the Credit Crisis, consumer purchases were responsible for 72% of the economy. Because of high unemployment consumers have less income and they also have less access to credit because banks have reduced lending. Where consumers are getting the money from to increase their spending by any amount is a mystery apparently known only to statisticians who calculate the GDP. Moreover todays downward move of the GDP looks like it is a precursor to much bigger drops that will be taking place later this year. Leading indicators from the ECRI, which predicts the economy six months in advance, have turned negative.

While U.S. GDP is slowly crumbling, problems with the global financial system continue. French sovereign debt has come under pressure today. Credit default swaps for Greek debt now indicate Greece is the second most likely country in the world to default - only quasi-communist Venezuela is considered to have worse finances. Greece has a very small economy though and yet problems there have managed to rattle world markets. Investors should ponder the impact of a default in larger Spain or even much larger Italy.

Problems in Europe have caused capital to flow into the U.S. dollar and treasuries, a common response when the financial system is stressed. Interest rates on two-year treasuries just fell to 0.63%, only a tinge above their all-time low of 0.60% at the height of the Credit Crisis. Is the market telling us that the current eurozone crisis is just as bad as the 2008 global meltdown?

After peaking in late April, the U.S. stock market has been declining for the last two months. Both the S&P 500 and Dow are on course for giving a bear market signal next week. The stock market itself is a leading indicator and should be turning down around six months before the economy does. The Financial non-Reform legislation just passed by congress is not going to help. It would not have prevented the Credit Crisis meltdown, nor will it prevent the next meltdown. Investors need to realize that the possibility of another 2008 exists and it could even happen later this year.

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 Weaken With the Economy

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 are in sell off mode this morning with all major indices trading below their 200-day moving averages. If current trends continue, the Dow and S&P 500 will give a bear market trading signal next week.

Problems in Europe continue to be a drag on the markets. The prices of Greek debt credit default swaps (CDSs), a type of bond insurance, are rising rapidly again. Experts say they are now indicating a 57% chance of default. Meanwhile, strikes are planned throughout France because the government is trying to raise the retirement age to 62. Investors should assume that EU attempts to reduce the socialist gravy train will be fought tooth and nail by the populace everywhere on the continent. Good news came out of Australia however. Prime minister Kevin Rudd was forced out because of his unpopular 40% super-tax on the mining industry (a key part of the Australian economy).  Australia doesn't have the debt problems that exist in the U.S. and Europe.

In the U.S., the economic numbers continue to be less than impressive. After the disastrous New Homes Sales report yesterday indicated a 33% drop in sales in just one month, the Durable Goods report showed a 1.1% decline in May. Weekly claims fell to 457,000, still well within recession levels, and this got some positive commentary from the cheerleading section of the press. The stock market didn't seem impressed however. While weekly claims have been much better this year than the depression levels they were at early in 2009, they have yet to indicate that the U.S. has recovered from the recession that began in December 2007.

The technical picture for stocks turned south again this Wednesday with the Dow and S&P 500 falling and closing below their 200-day moving averages. The tech heavy Nasdaq dropped below its 200-day yesterday, but managed to close just above it. It looks like it will close below it today. The small cap Russell 2000 is trading below its 200-day today for the first time since earlier this month. The 50-day moving averages for all the indices are still above their respective 200-days in a typical bull market pattern. The 50-days are all falling however and in the case of the Dow and S&P 500, it looks they will be crossing below their 200-days next week. This is a classic bear market signal.  Investors should be watching this carefully.

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.

Fed Statement Not so Bullish This Month

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 U.S. Fed ended its two-day meeting today and left its zero interest rate policy in place. While this was unsurprising, the statement the Fed issued provides investors with some insight into its current thinking on the economy. It was much less bullish today than in April, but still contained a lot of spin and denial. 

In past articles on March 17th and April 29th, I have discussed how the Fed has waited two to three years after the end of a post war era recession before raising rates and that this would be happening again.  That would mean the earliest Fed rate rise would take place around July 2011. Nevertheless, at that time many economists at the biggest U.S. bond dealers were predicting that a rate rise was likely at the Fed meeting this June. Since then, an article by the Federal Reserve Bank of San Francisco has appeared that suggested that the Fed should possibly wait until 2012 before raising rates (a three year period after the end of the recession). After reading that, the highly paid economists at the too big to fail institutions changed their tune and now almost all of them are predicting that the Fed won't raise rates until next year or even 2012. Your taxes were used for government bailout money to pay the salaries of many of these 'can't think for themselves' economists.

Almost all of these same economists are also parroting the Federal Reserve mantra that there can't be inflation while resource slack exists in the economy. One chief economist for a major bank recently stated, "inflation will hardly be a threat in an economy where massive labor-market slack is suppressing wages". Was he discussing the U.S. where unemployment is around 10% or Zimbabwe where it reached 94%? Of course, everyone would say it must be the U.S. because Zimbabwe had the second worse hyperinflation in world history. Truly massive resource slack always accompanies hyperinflation, but don't expect to get facts like that from the typical mainstream economist. They're paid to provide views that help their institutions make money, not to give the public the facts.

In its April meeting, buffoonish Ben and his stalwart crew of fed governors broke out the cigars to congratulate themselves on the great state of the U.S. economy.  The Fed statement released after the meeting was filled with glowing statements about the economy such as: "economic activity has continued to strengthen and the labor market is beginning to improve", "growth in household spending has picked up recently", "business spending on equipment and software has risen significantly", and "financial market conditions remain supportive of economic growth". There was one fly in the ointment however, " bank lending continues to contract". The Fed didn't seem too concerned. After all that only impacts the real economy, small and medium size businesses, and the guy on Main Street. Lack of lending can also cause recessions however. The Fed has apparently woken up to this unpleasant annoyance recently and behind the scenes reports indicate that it has been studying what to do in case the U.S. economy takes a second nosedive.

The Fed statement from the June meeting wasn't quite as optimistic after a number of recent economic releases indicated a weakening U.S. economy. Before the meeting ended today, it was revealed that new homes sales plunged 33% to record low level in May. The May employment report was unimpressive and indicated most new jobs were temporary and coming from the Census. Despite the obvious economic deterioration taking place, the Fed said in today's statement, "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually".

The Fed continued to maintain that household spending was increasing, but admitted that it was constrained by high unemployment, lower housing wealth and tight credit (that certainly sounds like something that's going to be taking off in the near future). The Fed also stated that investment in commercial real estate continues to be weak and that "employers remain reluctant to hire". It acknowledged that "housing starts remain at a depressed level" (it would be hard to argue that something that was at the lowest point ever was anything but). The Fed further stated that financial conditions had become less supportive of economic growth and then blamed the Europeans. Moreover it reiterated once again that "bank lending has continued to contract in recent months". The Fed then ended its statement still upbeat about the future.  Maybe they just don't think recession is such a bad thing after all.

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.

More Evidence for a Double Dip Recession

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 U.S. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

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.

EU and UK: Raise Taxes and Cut Stimulus

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.


Europeans seem bent on acting like lemmings to the sea and jumping off an economic cliff. Not only are the eurozone and UK raising taxes and cutting spending, they want the rest of the world to follow their lead and will try to get this to happen at the next G-20 meeting in late June.

Why anyone would want to follow European countries on economic matters is a real puzzle. The EU's recent handling of the Greek debt crisis will be recorded by history as one of the major episodes of government ineptness of our time (and there is really stiff competition in that category).  Instead of dealing with the problem immediately and decisively by instituting dollarization and removing Greece from the currency union, EU leadership let the matter fester until it blew up. They then tackled the problem with an approximately one trillion-dollar bailout. The EU approach to economic problems seems to be: Why institute a simple cheap solution when an expensive difficult one is available? It's enough to make one ponder if EU policy meetings resemble a multi-lingual idiot's convention.

Over the weekend German Chancellor Angela Merkel stated that she was going to push for a swift exit from fiscal stimulus programs and a focus on debt reduction at the next G-20 meeting. It was German foot dragging on the Greek debt crisis that caused the euro to lose 20% of its value in six months. With a record of success like that, of course the rest of the world should be eager to copy Germany's economic policy ideas. Earlier in June, Merkel's cabinet unveiled substantial budget cuts and tax hikes. France did the same thing recently as have other eurozone countries. Merkel is also spearheading the drive for an international financial transaction tax with the money being used for future bailouts. The possibility that there shouldn't be government bailouts of financial institutions or that the financial institutions that might be bailed out should pay the tax themselves and not their customers seems to have eluded Merkel. Of course, financial centers like London and New York would shoulder a disproportionate amount of the burden, so it is the ultimate socialist solution - get the other guy to pay. Perhaps Merkel isn't as economically challenged as seems to be the case.

Conditions don't appear to be much better in the UK, although we won't find out until Tuesday, June 21st when an emergency budget will be announced by the Conservative-Liberal coalition government. The UK is part of the EU, but not part of the eurozone so it is not obliged to follow the 3% budget deficit to GDP limit imposed there (not that the eurozone countries themselves follow this rule). Like their fellow EU members, suddenly the Brits woke up and realized they had massive deficits (they should have been reading the papers, it's been reported there on a regular basis). Large spending cuts and tax increases are on the table. Even then, the UK's budget deficit could reach 10.5% of GDP in the 2010-11 fiscal year (still less the U.S. number for 2010). It is thought the VAT (value added tax) will be raised from 17.5% to 20.0%. There have been rumors that the capital gains tax rate will be raised from 18% to 40%. If this occurs, money will flow out of British markets at a prodigious rate.

If what's going on in Europe sounds familiar to Americans, it should. These were essentially the economic policies of the failed Carter administration in the late 1970s. During that era, the U.S. economy was chronically weak and the stock market went nowhere. This economic program instituted today could have far worse consequences. The global economy was severely damaged by the Credit Crisis and is still in a very fragile state. It is likely to go into a tailspin.  The predictable follow up will be a return to spending. This scenario happened during the Great Depression after Franklin Roosevelt tried to balance the budget after the 1936 election and the U.S. economy and stock market tanked. If elected officials today are determined to repeat the mistakes of the past, investors should take note and act accordingly.  
 
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.

Quadruple Witching Tops Off Weekly Trading

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.


Friday was a quarterly quadruple witching day with stock options, options on futures, single stock futures and index futures all expiring. While volatilty frequently takes place on expiration days, this one was uneventful. Expirations can move markets starting days before however, with prices tending to move in the opposite direction of their recent trends during the week of expiration.

The week of June 14th was bullish for U.S. stocks, the euro, oil and gold. The euro gained 2.7% on an oversold rebound. Gold hit a record high, with GLD closing up 2.5% on the week. There was little difference though between gold's performance and that of the major U.S. stock indices. The Dow rose 2.3% on the week, the S&P 500 2.4%, the tech heavy Nasdaq 3.0% and the small cap Russell 2000 3.2%. Oil was a much bigger winner than gold, gaining 5.2% from last Friday's close. The one notable loser was economically sensitive copper, which dropped 1.5% in the last five days.

The euro, stocks, gold, oil and copper have very different technical pictures. On the daily charts, the euro looks very bearish, with its simple 50-day moving average well below its 200-day. The euro is moving up because of 'regression toward the mean'. It went down too far in too short a period of time, so it is trying to return to a trendline. The trade-weighted U.S. dollar has a mirror image picture. It has gone up too far, too fast and is coming down for that reason. Many oil ETFs/ETNs, including OIL also have their 50-day trading below their 200-day, but it is not nearly as pronounced as is the case for the euro.

U.S. stock indices are still in a bullish pattern with their 50-days above their 200-days, but the 50-days have been fallen particularly for the Dow and the S&P 500. The Russell 2000 is in the best shape of the indices. All of the indices are trading above their 200-days, but below their 50-days. The Dow and S&P 500 spent 18 days in a row below their 200-days in the last month though. Stocks can be characterized as clinging to a bullish pattern. In contrast, Gold is unquestionably bullish, trading above both its 200-day and 50-day and its 50-day is well above its 200-day. Next week could be critical for whether or not gold's rally continues based on patterns forming in its technical indicators.

Copper is changing from a bullish to bearish trading pattern. It's 50-day is touching its 200-day and will fall below it on Monday. This is a classic bear signal. Since copper trades with the economy, its behavior is supporting the possibility of a global slowdown and a double-dip recession in the United. Investors should watch copper closely. If it continues its bearish trading pattern, assume a recession could show up as early as this fall.

 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.