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.
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.
 | |  | |  | |  |
© 2010 realefinancemedia.corp - all rights reserved
Inflation Makes
Economy Look
Better; Stocks Soar
on the News
Daryl Montgomery
09/01/2010
Economy Look
Better; Stocks Soar
on the News
Daryl Montgomery
09/01/2010
Despite a number of economic reports at the beginning of the month indicating
continued problems, stocks rallied strongly on September 1st. The Nikkei was up over 1%
and the major European markets were up between 1% and 2%. The U.S. markets were
up over 2% in morning trade.
U.S. stock futures were up strongly in the pre-market and not even an incredibly weak
ADP employment report indicating a loss of private sector jobs in August could derail
the rally. In a rare moment of candor, even news service coverage found the rally
odd. One article stated, "The sharp jump in U.S. stock futures is surprising given the
domestic economic reports due out later in the morning. Often investors don't make
big bets ... heading into key economic reports, particularly in recent weeks as data
has consistently showed growth is slowing." And this was before the ADP report
indicated that job losses in the U.S. are accelerating again after three challenging
years and despite trillions of dollars of government stimulus spending.
What supposedly started the global stock rise was 'good' news on China's
manufacturing index (PMI). The official government number was 51.7 in August versus
51.2 in July. While that may seem OK, albeit rather mediocre, the details indicate big
trouble on the horizon. One component of the report was disproportionately
responsible for the index not falling below 50 and indicating contraction. That
component was the Input Price Index, which rose from 50.4 in July to 60.5 in August.
Isn't that an inflation indicator? Doesn't that mean that input prices went up around
20% in only one month? Couldn't this possibly indicate that China is on the verge of
experiencing major inflation and this is masking a big drop in manufacturing activity
there? Then the U.S. PMI was released at 10:30AM and it unexpectedly rose. Of all its
components, the highest number was Prices, also an inflation indicator.
In the U.S., the market was also pleased that home prices were rising. This news
however was more laughable than ominous. According to Case-Shiller, U.S. houses
prices in select cities were up 4.4% in the second quarter. The entire time period
included the $8,000 home-buyer tax credit. According to other sources, an increase of
$8,000 in the median average U.S. home price would be about 4.4%. So what
happened was the government gave homebuyers $8,000 and they then spent an
average of $8,000 more to buy the same home they would have without the tax
credit. This obviously didn't make real estate any more affordable, all it did was create
the illusion that this was the case. It wasn't just naive and gullible homebuyers that fell
for this scam either. One prominent mainstream economist commented on the data,
"Even with concerns about near term developments, we recognize that the housing
market is in better shape than this time last year." Home sellers of course got an extra
$8,000 courtesy of the U.S. taxpayer (if you check your bank account and notice
$8,000 missing, this is where the money went).
So how is it possible that stocks are having a massive rally on the above news items?
The state of the economy is not the short-term reason stocks rally or sell off. Stocks rally
on liquidity. And it is obvious that central banks are injecting huge amounts of liquidity
into the global financial system at the moment. The liquidity free lunch doesn't last for
a long time however. It has to be paid for periodically with withdrawals of liquidity to
prevent a huge inflation spike. This causes lots of volatility with stocks experiencing big
price rises followed by sharp drops. We saw a lot of this in the second half of 2008
when the market went up and down like a yo-yo on crack cocaine. While this resulted
in an eventual market collapse two-years ago, this is not likely to deter the Fed from
continuing to play the same dangerous game again until the November 2nd election.
Investors should brace themselves for a rocky market during the next two months.
Daryl Montgomery
continued problems, stocks rallied strongly on September 1st. The Nikkei was up over 1%
and the major European markets were up between 1% and 2%. The U.S. markets were
up over 2% in morning trade.
U.S. stock futures were up strongly in the pre-market and not even an incredibly weak
ADP employment report indicating a loss of private sector jobs in August could derail
the rally. In a rare moment of candor, even news service coverage found the rally
odd. One article stated, "The sharp jump in U.S. stock futures is surprising given the
domestic economic reports due out later in the morning. Often investors don't make
big bets ... heading into key economic reports, particularly in recent weeks as data
has consistently showed growth is slowing." And this was before the ADP report
indicated that job losses in the U.S. are accelerating again after three challenging
years and despite trillions of dollars of government stimulus spending.
What supposedly started the global stock rise was 'good' news on China's
manufacturing index (PMI). The official government number was 51.7 in August versus
51.2 in July. While that may seem OK, albeit rather mediocre, the details indicate big
trouble on the horizon. One component of the report was disproportionately
responsible for the index not falling below 50 and indicating contraction. That
component was the Input Price Index, which rose from 50.4 in July to 60.5 in August.
Isn't that an inflation indicator? Doesn't that mean that input prices went up around
20% in only one month? Couldn't this possibly indicate that China is on the verge of
experiencing major inflation and this is masking a big drop in manufacturing activity
there? Then the U.S. PMI was released at 10:30AM and it unexpectedly rose. Of all its
components, the highest number was Prices, also an inflation indicator.
In the U.S., the market was also pleased that home prices were rising. This news
however was more laughable than ominous. According to Case-Shiller, U.S. houses
prices in select cities were up 4.4% in the second quarter. The entire time period
included the $8,000 home-buyer tax credit. According to other sources, an increase of
$8,000 in the median average U.S. home price would be about 4.4%. So what
happened was the government gave homebuyers $8,000 and they then spent an
average of $8,000 more to buy the same home they would have without the tax
credit. This obviously didn't make real estate any more affordable, all it did was create
the illusion that this was the case. It wasn't just naive and gullible homebuyers that fell
for this scam either. One prominent mainstream economist commented on the data,
"Even with concerns about near term developments, we recognize that the housing
market is in better shape than this time last year." Home sellers of course got an extra
$8,000 courtesy of the U.S. taxpayer (if you check your bank account and notice
$8,000 missing, this is where the money went).
So how is it possible that stocks are having a massive rally on the above news items?
The state of the economy is not the short-term reason stocks rally or sell off. Stocks rally
on liquidity. And it is obvious that central banks are injecting huge amounts of liquidity
into the global financial system at the moment. The liquidity free lunch doesn't last for
a long time however. It has to be paid for periodically with withdrawals of liquidity to
prevent a huge inflation spike. This causes lots of volatility with stocks experiencing big
price rises followed by sharp drops. We saw a lot of this in the second half of 2008
when the market went up and down like a yo-yo on crack cocaine. While this resulted
in an eventual market collapse two-years ago, this is not likely to deter the Fed from
continuing to play the same dangerous game again until the November 2nd election.
Investors should brace themselves for a rocky market during the next two months.
Daryl Montgomery
Real e Finance
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