'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.

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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:

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.

Inflation Trade Picks Up

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:

Spot gold traded as high as $1099 yesterday. Gold is the most sensitive of inflation assets and it keeps hitting new all time highs. Spot gold was at $1092.90, up $7.60 at the 5:15PM close in New York. Silver closed at $17.46 up 23 cents. Nymex oil closed up at $80.40 at the end of pit trading. Interest rates rallied sharply with the 10-year and 30-year treasuries reaching 3.55% and 4.43% respectively. The trade-weighted U.S dollar sank, slicing through key support and falling almost a full percent (a big move for a currency). The major stock indices went nowhere, closing flat after giving up all their gains in the last hour with the exception of the small-cap Russell 2000, which closed down 1.3%. Big rallies in inflation-sensitive assets and stocks going nowhere - it's the same story as what happened in the U.S. markets in the high inflation 1970s.

Only the incredibly dull and oblivious could miss the inflation message of the markets. People who live in Washington, D.C. and are involved with the U.S. government in economic policy positions are the most likely to be in this category. The Federal Reserve rarely disappoints. The FOMC (Federal Open Market Committee) concluded its two day meeting yesterday and added the following sentence to their post-meeting statement: "With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time." The committee also expected there wasn't going to be a subprime crisis and that recession could be avoided months after the recession had already begun (apparently nobody had told them).

When I read this sentence, I immediately pictured someone painting themselves into a corner. The committee is going to have to do some explaining early next year when the inflation numbers start picking up. This statement also indicates the committee members complete ignorance of inflation history. Resource slack is a frequent accompaniment of hyperinflation. Our contemporary example of this is Zimbabwe where unemployment reached 94% and inflation reached the sextillion percent level. In Weimar Germany in the early 1920s, unemployment reached 24% and rose along with the inflation, which reached the trillion percent level.

As we have gone over many times at the New York Investing meetup meetings, the inflation trade consists of the precious metals gold and silver and their mining stocks, energy (oil, natural gas, coal, nuclear and alternative) and their stocks and agricultural commodities. Shorting bonds, which is the same as being long on interest rates is also part of the inflation trade as is getting out of the U.S. dollar and into stronger currencies such as the Australian dollar. Some of these assets will be much stronger or much weaker than the others at different points in time and investment money needs to be shifted accordingly. It will probably takes years before the average investor fully adjusts their investing strategies to the inflation trade assets. In all likelihood, the very last people to do so will be the FOMC members.

NEXT: 'Recovery' Leads to Double-Digit Unemployment

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 Rockets Higher

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.

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In a bull market there is always a higher price down the road for those who wait for it. Gold amply demonstrated this concept by hitting a new all time high yesterday (and again this morning). Tuesday's move was sudden and vertical and it took place even though the U.S. dollar was rallying strongly and stocks were selling off. While investors constantly worry about sharp sell offs, they don't usually consider that sharp rallies are also possible for bullish assets. While gold led the way up, silver and then the miners started tagging along shortly thereafter. Eventually all of the inflation trade assets followed. Look for this pattern to repeat.

At the 5:15PM end of New York trading, spot gold closed at $1085.30 yesterday, up almost $25. This took out resistance around the $1070 level. Gold was in a trading range between approximately $1050 and $1070 for awhile before testing its $1025 breakout point. Spot gold has gotten as high as $1094.30 early this morning. This is important implied resistance at $1120. Spot silver closed yesterday at $17.20 up 73 cents. It was up almost a dollar at one point. The 200% leveraged gold ETF DGP was up 4.7% and the 200% silver ETF AGQ was up 10.4% yesterday. Some mining stocks did even better. Novagold (NG) was up 13.2% and Hecla (HL) was up 18%. The U.S. trade-weighted dollar, after rallying strongly in the morning, lost its momentum and essentially closed flat.

What seems to have caused yesterday's gold burst is a story of karma worthy of a Hindi movie. As reported in this blog early Tuesday morning, India bought 200 tonnes of IMF gold. The sale took place during a two-week period that ended on October 30th. This news was generally available in the evening New York time on Monday. Nevertheless, more the one U.S. media outlet reported that India would be or was buying 200 tonnes of gold during the trading day on Tuesday. Gold which had been meandering in price suddenly started moving straight up on the intraday charts blowing out the shorts along the way. The karmic element comes into the story if you know India's past with the IMF. In 1991, during a financial crisis, India had to borrow money from the IMF and was forced to ship its gold reserves to London as collateral. Now they are buying the IMF's gold! Will a future time come, when a Western country has to borrow money from India and in turn be forced to ship their gold to New Delhi?

The movements of gold and the U.S. dollar in the last few days are significant for another reason as well. Since the Credit Crisis began the dollar has rallied before Fed meetings, during the meeting and at least into the day after the meeting. Gold has sold off in response. Things have changed noticeably this time. The Fed met yesterday and is meeting today. The dollar had the usual pre-arranged rally before the meeting and gold was weak, but then things went screwy. Gold suddenly shot to news highs on a big rally and the dollar rally faded as the meeting began. The dollar is already selling off strongly today before the meeting has even ended. Perhaps gold is just too strong and the dollar is just too weak for this manipulaton game to go on any longer.

NEXT: Inflation Trade Picks 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.

Markets Roller Coaster Ride Powered by Media Hype

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:

Yesterday, stocks in the U.S. went on an a roller coaster ride that saw a steady significant move up, followed by an almost vertical descent (which included a 30 point drop in the Dow in just one minute), then a gradual climb back up into a positive close. The European Central Bank seems to have continued interfering in the currency markets (in one way or the other) by supporting the euro behind the scenes and this is what caused the intraday drop in the stocks. One asset though managed to stay in positive territory and gain technical strength yesterday - gold. More hairpin turns and sharp up and down moves should be expected for awhile. The mainstream media seems intent on publishing stories that will keep the volatility going.

Spot gold closed at $1060.60 (up $14.60) at the 5:15PM end of Globex trading yesterday. It broke through the $1050 resistance level and stayed above it all day. Gold traded as high as $1064.00. It then got as high as $1066 overnight on news that the IMF sold 200 metric tons of its gold to India (the price of course dropped the moment New York trading opened). The IMF board voted to sell 403.3 metric tons of its 3,217 tonne gold holdings on Sept 18th after telling the market multiple times over two years (each time driving the price of gold down) that it was going to do this. It was widely believed China would buy the entire amount of the IMF gold for sale using this as an opportunity to get rid of some of its massive dollar reserves. China stupidly didn't do this however. It might buy the remaining 200 tonnes of IMF gold or any number of Gulf oil states could. In general, gold is leaving the central banks for Europe and moving to the central banks of Asia.

Gold went up yesterday in U.S. trading because of inflation concerns. The ISM Manufacturing report for October came in at 55.7, up from 52.6 in September (above 50 indicates expansion). The strongest of the 10 components of the report? - Prices Paid, which is an inflation indicator. This number came in at 65.0, up from 63. 5. It was the highest number in the September report as well. While inflation was the biggest news in this report, I saw no mainstream media article that even mentioned it, let alone headlined it. Instead stories like "Dollar Falls After Strong Factory Data" appeared and claimed the dollar was going down because of heightened risk appetite, the current fantasy the media has spun to take investor's attention away from inflation. This article did hint at inflation though in the 18th paragraph (most people don't read to the end of articles), when it mentioned that a flood of liquidity from central banks might have something to do with the way the market is reacting.

Media coverage reached even lower levels this morning. The glaring headline, "U.S. Stock Futures Drop Sharply", could be found many places online. When I clicked on a major financial website's version, an article with a different headline appeared, " U.S. Stock Futures Off Lows ....". People who didn't click wouldn't know the news had changed though. Traders frequently only see headlines. What was the 'sharp drop' in futures? The Dow was down 61 points, the S&P 500 down 7 points and Nasdaq down 7 points - completely ordinary meaningless moves.

There is risk for stocks today because the euro had a sharp drop overnight after the Australian central bank raised rates by a quarter of a point to 3.5%. Australia was the first central bank to start raising rates last month, which is one reason the Australian dollar is so strong. This move should be more threatening to the U.S. dollar than the euro however, but the trade-weighted dollar is rallying on the euro sell off. Ironically, this could damage U.S. stocks the most because if you check you will see their best correlation has been to movements in the euro since last March (the euro represents over 50% of the trade-weighted dollar). Gold seems to have been hardly impacted by the currency move at all. Traditionally gold and the euro should be moving together and the stock currency relationship should be more tangential.

As if the first two days of the week aren't exciting enough, the end of the week will see the U.S. monthly employment report. I would also like to remind everyone that this is the beginning of the month and the first four days of trading should be positive. At the moment it's hard to say if the bears or bulls will win out. It is easier to predict a lot of volatility, which is a classic sign of a top.

NEXT: Gold Rockets Higher

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.

Bank Banruptcy Bonanza

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:

CIT filed for bankruptcy in New York on Sunday. This is the fourth biggest bankruptcy in U.S. history, just behind number three General Motors (Lehman Brothers was number one). The CIT bankruptcy filing followed nine bank failures on Friday, which coincidentally involved the 4th largest bank failure this year. The FDIC Insurance fund which pays off depositors of failed banks is itself bankrupt. CIT itself is a bank holding company and became one last year in order to TARP funds. It will not be countered as a failed bank since it is expected to come out of bankruptcy.

The amount of money the government put into CIT was a small $2.3 billion (compared to $45 billion put directly into Citibank). CIT was not deemed too big to fail. It has actually been on the verge of collapse for several months now and almost went under in July. Lots of parties have been holding it up, including Goldman Sachs, with temporary measures since then - and for good reason. CIT is the largest loan provider for small and medium sized business in the U.S and 300,000 retail outlets are at least partially dependent on it for their merchandise. Imagine the impact on the holiday shopping season (goods are already at the stores by this point) if CIT had failed in the summer? The U.S. economy would have taken a major hit since retailing is its largest industry.

The federal government's indifference to CIT puts the lie to Bernanke, Paulson and Geithner's claims that the TARP government bailout money was to restore lending and support the economy. The biggest U.S. lender to small and medium size businesses has been allowed to fail. Before the failure, its was drastically cutting its loans to try and stay afloat. CIT lent $11.3 billion in the first half of 2008, but only $4.4 billion in the first half of 2009. While this was taking place the large banks, who got copious amounts of TARP money to increase lending, were cutting consumer credit sharply. So the U.S. has moved toward an economy where only big businesses and the rich are supplied with adequate credit (a third-world model). There is no way an actual economic recovery can take place given this situation.

Of course the government will probably come up with a plan for the CIT post-bankruptcy. I imagine a Cash Loans for Clunker Businesses program where huge amounts of money are lent to insolvent subprime businesses that don't have a chance of every making any money (businesses with Washington connections will be at the top of the list and get 99% of the funding). Bernanke is probably starting up the printing presses right now to pay for it. Just as a reminder, Bernanke claims he and the other central bankers 'saved' the financial system last year and he has been heralded by Obama for preventing another depression. With 115 bank failures this year and counting, a major financial company bankruptcy, and an insolvent FDIC bank insurance fund, the financial system isn't looking so 'saved' lately. Well, at least we've got the stock market, which just had its best seven month performance since 1933 . Hey, wasn't that during the Great Depression?

NEXT: Markets Roller Coaster Ride Powered by Media Hype

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 Long and the Short of It

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:

In the short term the market can trade on fantasy, it the long term it always trades on reality. So we can state that at some point in the future, the current U.S. stock rally based on economic 'recovery' will eventually fade. It probably will not happen all at once, but in succession with small cap stocks turning down first and big caps last. The Russell 2000 chart looks awful, while the Dow Jones chart looks OK. There seems to be little if anything left to push stock prices higher. Short-term interest rates are already around zero and have been at that level since last December. The Feds only option to push stocks higher after a drop is to buy government bills, notes and bonds in the market with newly printed money. The Fed is supposed to stop its quantitative easing program for treasuries today however (this decision can be reversed in a heartbeat). The employment report next Friday is the next big test for stocks.

The stock market rally yesterday didn't evenly undo the damage from Wednesday. The Russell 2000 was up 2.5%, less than its 3.5% drop the day before, while the Dow was up 2.1%, more than its previous 1.2% drop. Nasdaq was the laggard, rising only 1.8%, also less than its 2.7% drop on Wednesday. The S&P did better, going up 2.3% after falling 2.0%. Spot gold rose as high as $1049.10 (there is resistance at $1050) after bouncing off support at $1025 the day before. Silver rose to $16.69. The dollar fell and closed at 75.94, below the key 76.00 level. Bonds had a significant sell off, with the 10-year treasury interest rate rising to 3.50% and the 30-year rising to 4.35%. For people who want to short long-term treasuries (the same as going long on interest rates), there is a leveraged 200% ETF, TBT and a leveraged 300% ETF, TMV. These are very aggressive trades.

News was out overnight on inflation and employment in the Eurozone. Year over year CPI is down 0.1%. While there is much hand wringing about deflation and this being caused by a weak economy, this is not what is actually keeping prices flat. Just as falling currencies are inflationary, rising currencies are deflationary. The euro has rallied from the 1.25 to the U.S. dollar range in early March to a high of 1.5020 on Oct 23rd. Since all commodities are priced in U.S. dollars, this has kept their costs from rising as much in Eurozone countries as they have in the U.S. This factor was even mentioned in news coverage in relationship to oil prices. When inflation is defined as a currency losing its value, everything else falls into falls into place. Mainstream economists rarely use this definition however - and their economic predictions are almost always wrong.

The current party line in the mainstream media on inflation is that it is going to happen, but not for three or four years, basically at some distant time in the future (so no one should be worrying about it). Admitting that inflation is going to be a problem at any point is actually a big switch in the tone of coverage. Deflation was the key theme in the news for most of the last two years. Inflation is going to start picking up by the CPI report for December. Why? Because oil prices are the key swing factor. Oil fell as low as $33 last December and gasoline was below $2 a gallon in the U.S. Oil closed yesterday at $79.87 and gasoline prices are closer to $3 a gallon. Oil's price this December is going to a lot higher than last year's and that is going raise the CPI number. While this is totally predictable, the mainstream financial media seems incapable of seeing what is coming. Even though they can't see the obvious that will take place 3-months ahead, they will quote predictions for 3-years from now. My impression is that most financial reporters haven't the slightest idea what is going on in the markets, but then again I don't like getting my investing advice from English majors. Anyone who gets their financial information from the mainstream media is doing just that.

NEXT: Bank Banruptcy Bonanza

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.

Mark to Model GDP

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:

The 3rd quarter U.S. GDP figures were out this morning and they came in slightly above expectations. GDP was supposedly up 3.5%. Almost half of this, 1.7%, was accounted for by increases in auto production. This in turn can be traced to the Cash for Clunkers program and government spending. Overall spending on durable goods was up 22.3%. Housing investment was up even more at 23.4%, also thanks to government tax breaks and FHA mortgage insurance backing loans that a subprime lender wouldn't have touched at the height of the housing bubble. Federal government spending was up 7.9%. On the flip side, business investment fell, net exports fell and inventories fell. In other words, any part of the economy not manipulated by government spending is still declining. Even though they went down, inventories still added 0.9% to GDP growth, because they didn't go down as much as they did previously (no that doesn't make any sense to anyone except a government statistician).

An economy that is only robust because of government spending is essentially dead in the water. This is the same picture as Japan in the 1990s and first decade of the 2000s. The headlines this morning trumpeted that the U.S. is out of recession. Those headlines were common in Japan during the last two decades as well. The U.S. can only avoid this fate by coming up with one Cash for Clunkheads program after another. After all why have only a trillion dollar yearly budget deficit when you can have a two trillion dollar yearly budget deficit? Just as a reference, the Dow Jones Industrial Average was at 2753 the day the Nikkei peaked at just under 40,000 at the end of 1989. Both averages are around 10,000 at the moment.

How long the stock market continues to buy the current U.S. econo-fantasy remains to be seen. There is serious technical damage in the stock charts. The Russell 2000 (small cap stocks) has made a confirmed double top as of yesterday. The usual sell off scenario is small caps go down first, the Nasdaq next and the big cap Dow the last. This pattern was writ large in yesterdays action. The Russell 2000 dropped 3.5%, the Nasdaq 2.7%, the S&P 500 2.0% and the Dow 1.2%. Of the indices, only the Dow has held above its 50-day average. We have seen this picture before in July by the way. The market was significantly technically damaged, but managed to rise from the ashes and rally for the following few months. Things may not be so rosy this time. If there is a rally on low volume that fails to get the indices to a new high, the current rally is likely over and a good shorting opportunity is presenting itself.

There are two assets that have experienced no change in their technical pictures - the U.S. dollar and gold. The dollar is just as bearish as it has been for months and gold is just as bullish. Even with its recent small rally the dollar didn't even go up enough to reach its 50-day moving average. It's 50-day moving average is trading well below its 200-day moving average in an extremely bearish pattern. The gold chart is almost the mirror image of the dollar's chart. It is trading above its 50-day moving average, which in turn is well above its 200-day moving average in a very bullish pattern. Spot gold bounced off its breakout point of $1025 yesterday (a normal action which takes place about 50% of the time) and has traded as high as $1040.40 this morning. Spot silver has also tested its breakout level at $16 and has stayed in its $16 to $18 trading range. So far, so good.

NEXT: The Long and the Short of It

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.