Wednesday, May 30, 2007

Conflicting Data From Financial Institutions Regarding Our Future

This article by Kabir Chibber and John Glover at Bloomberg tell a tale of two scenarios.

One the one hand, we learn that major banks around the world are hiring "distressed-debt bankers" to handle an expected credit crunch.

[Thanks to for the image.]

'"People have been forecasting a meltdown in credit in the next 12 to 18 months,'' said Michael Gibbons, head of the special situations desk at Paris-based BNP Paribas.'

It is true that credit and risk products are at a scary untested record volume.

Others say:

'"When the turn does come, it will be unlike anything we have ever seen before,'' said Iain Burnett, 43, managing director of Morgan Stanley's special situations unit in London. "The scale of it could be considerable because of the size of some of these leveraged deals...."'

'"It's like a hangover, people will wake up and say, 'what have I done?''' said Michael Weinstock, who helps manage $3 billion of distressed debt at private equity firm Quadrangle Group LLC in New York.... "Record-high levels of financing now mean record levels of defaults in the future. There's every reason to believe we're near a market top.'''

'"The risk in all of this is that the higher we fly, the further we could fall as and when the market turns,'' said Paul Watters, S&P's London-based director of debt recovery ratings. "Many borrowers are tacitly acknowledging the growing vulnerability.'''

Then you get this piece of wisdom from the same Mr. Gibbons cited above:

"We tend to crash when we least expect it, rather than when we forecast it.''

So with all of these gloomy forecasts, that puts us back to square one.

But one thing that seems certain: The market is jittery. You have the central bankers and optimists putting up a front of confidence ("soft landing" talk), the bulls trying to wishful-think more loose credit into the system, and the "permabears" like me (as AIER likes to call us) predicting a flight from the dollar, preceded (or not) by a reinflationary or stagflationary episode a la 1970's, or perhaps even by a falsely non-inflationary or -deflationary 1920's.

Item: Small green valley above Salt Lake City, population 5400. At 2.58 people per household (Source), that's about 2093 households. There are almost 200 living units for sale. That's 10%. In one condominium complex of 150 units, 50 are for sale -- plus the ones the developer is refusing to list because he has too many and it makes him look bad. That's over 30%. You draw the conclusion.

If the debt situation our bankers fear comes to pass, this show will be a lively one.

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Friday, May 25, 2007

Health Care: The Fatal Flaw is Us

I recently hurt my wrists.

To make a painful story short, I knew I needed an X-ray, but you cannot walk into a lab and request one; you must first pay a doctor for his autograph.

Five minutes of the good Doc's time and a prescription for the lab: $125, negotiated cash price (NCP). (I had insurance, but I also have a $10,000 [sic] deductible, for two people.)

X-rays: $54 NCP

Visit to an orthopedist, 15 minutes: $229.60 NCP
One wrist cast, 5 minutes: $161.60 NCP (A fiberglass elastic taping that I could almost have put on myself.)

[Thanks to for the image. This fellow's is blue; mine is green.]

Out of curiosity, I wanted to see if my insurance negotiated price for these treatments would have gotten me a better deal, so I asked them. They refused to answer, giving the excuse that they cannot determine the price before the treatment has been billed and sent in for consideration.

Here's what I wrote back in anger:

"What the heck is the big secret? We both know that those prices have been negotiated. How do you ever expect prices to go down if you won't allow us to shop for the best deal? I hold you, your employer, and the medical providers personally responsible for colluding against your own customers to maintain the outrageous state of medical care pricing in this country."

But of course once the steam had cleared, I realized that I am probably the only insured who has ever asked that question.

The real problem with health care is that we're all sleeping at the wheel. No one cares: Not the patients, not the employers who pay for coverage, and not the insurers who pay the bills -- but mostly we, the patients. The doctors, insurers and employers are all passing the cost through to us, and we stand there to be shorn like the sheep that we are.

It is we who are accepting the reduction in our take-home pay corresponding to the increase in premiums.

I hate us sometimes.

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Wednesday, May 23, 2007

The Fed Is Desperate to Mop Up the Mortgage Mess Before Reality Hits the News

Just read this letter from the Federal Reserve's main office to all Fed-supervised banks. It states, in sum, that the loan departments would do well to work out repayment difficulties rather than impose foreclosure.

"We don't want to look bad, right?" [Paraphrased]

[Thanks to for the image.]

"The agencies will not penalize financial institutions that pursue reasonable workout arrangements with borrowers who have encountered financial problems." [Actual quote]

But of course they won't.... Oh, I see. Does that mean that they would penalize those that don't want to bite this particular bullet?

The carrot for good behavior is "favorable Community Reinvestment Act (CRA) consideration" whatever goodies that consists of.

Looks like the Fed is scrambling to avoid the increase of evidence of foreclosures in the statistics.

"Wonder why they're so nervous," she asked, tongue in cheek. (For her answer, see the last post, among others.)

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Tuesday, May 22, 2007

How a High-School Dropout Made Millions in Sub-Prime Real Estate Lending

If ever the banking police needed an excuse to regulate the mortgage industry to death, Quick Loan Funding is it.

This Oange County Register article describes the amazing run of Daniel Sadek.

Read his story. It's an eye-opener. He went from Lebanese wartime high school dropout to real estate mogul multimillionaire to debtor in just a few years.

I respect his gumption. He grasped the American brass ring on the first try. The only problems were twofold: the ring was an exceptionally low-hanging fruit at the time, and he's incompetent, or immoral, or both.

[Thanks to for the image.]

But that's what happens when an inflationary bubble works its way through the market system. Incompetence and immorality are rewarded. Money seems to be growing on trees -- indeed, money is growing on trees. Every Tom, Sadek, and Harriette can find easy dough to roll in with little or no effort or expertise.

After the Dot-com fiasco the mountains of cash still in the system turned to mortgage securities, encouraged by three things: (1) the Federal Reserve's lowering of rates in 2001, not for its direct effect on interest rates but for its signaling of more loose-cash times ahead; (2) the government-sanctioned mortgage-qualifying looseness of the GSEs (government sponsored entities like Freddie Mac and Fannie Mae et al.); and (3) the normal evolution of the securitization business. ("Securitization" is the packaging and marketing of various debt instruments like mortgage MBOs [mortgage backed obligations] that is now being done outside -- or at least at arm's length from -- the banking industry per se, thereby avoiding regulatory supervision to date. This is likely to change within the next five years, in my opinion, because without limitation of these products' use as credit collateral, the global economy is going to be in deep doo-doo very soon.)

This shift of excess monetary wherewithal was no surprise to anyone. Securitized bonds look like a good secure deal. Foreign central banks, global dollar investors and pensions alike moved billions into that market. In fact, there was so much cash available that credit became cheap for lack of takers, and vultures like Sadek (bless his innocent little heart) were allowed to go on a feeding frenzy.

Who is to blame? Not the vultures. Vultures are just acting like they are supposed to, i.e. like birds of prey. The real culprits are:

(1) Former and present US Congresses for enacting legislation to create and preserve market-maiming monsters like Freddie and Fannie.

(2) The governments of the US and of the other industrialized nations who participated in the decoupling of the dollar, the British pound, the European currencies, the Japanese yen, etc. from the price of gold back in the 1970s.

(3) The Federal Reserve and the central bankers of a number of foreign nations on several fronts:

- For devaluing our 1900 dollar from $1 to $.06 or less through ineffective efforts to "push the economy string" by inflating the currency, the latest episode being between 2001 and 2004; for devaluing the Japanese yen, most recently since the 1990s; for quasi-illegally supressing the revaluation of their currency by pegging the Chinese yuan and other nations' currencies to the dollar;

- For being fully aware, as the well-trained economists that they are, of the easing monetary effects securitization would have on money and credit, and for failing to do anything to set reserve standards for this wildcat bank-industry-clone that is presently threatening global economic equilibrium (the central bankers have now seen the dangers and are desperately trying to correct their mistake behind closed doors with the participation of the BIS [the Bank for International Settlements] before the messy situation hits the fan);

- For knowingly playing a chauvinistic international inflating game, pitting national policy against that of their respective trading partners in an attempt to favor their own industries and profit from currency imbalances come hell or high water (all countries are guilty of this, but most egregiously the Japanese, the Chinese, and even the buck-stops-here US. We should be making an effort to be the standard bearer of monetary policy instead of the tallest-dwarf bully on the block who gets his kicks watching the weaker sidekicks flounder around.)

I wonder if Sadek will end up like that Thai real estate "tycoon" we all saw on 60 Minutes -- you remember, the guy who took us on a tour of his semi--finished but abandoned gazillionaire's golf paradise. These days he's hawking hamburgers from his bicycle in the streets of Bangkok -- probably where both he and Sadek should have been all along.

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Saturday, May 19, 2007

Inflation: Let's Get Our Definitions Straight

The G8 is worried that the recent rise in oil prices will exacerbate inflation.

"The level of prices [of energy] contributes to inflation in the world, pushing a number of central banks to raise their interest rates...." (Source: article in French.)

It's true that central banks are concerned about the effect of global oil prices on the CPIs of the world, which is strange. Either they are disingenuous, or they are forgetting the definition of inflation.

[Thanks to for the image.]

The definition according to Webster's:

"... a) an increase in the amount of money and credit in relation to the supply of goods and services b) an increase in the general price level, resulting from this, specif., an excessive or persistent increase, causing a decline in purchasing power."

(I didn't even have to go to Gwartney & Stroup for that one.)

In other words, inflation is related to money and credit supply, not to a change in price of any particular good. To maintain otherwise is putting the carriage before the horse -- either that, or our G8 central bankers are inadvertently or purposefully using a mistaken definition of the word.

Why they would do that is anyone's guess. I suspect that it's due to their misplaced hubris. For a century now, they have tried to convince us of their usefulness when in fact, the evidence points in the opposite direction. It is due to their intervention that the 1900 dollar is now worth $.06 or less.

Now they have convinced the marketplace that they can, have, and will control "inflation;" and that's why they're nervous. The world misunderstands the meaning of inflation to mean any price increases, even though the central bankers have all taken economics and know that this is not true. For whatever reason (lack of respect for the common man?), they have neglected to explain the difference between a rise in price caused by short supply and one caused by too much money and credit; and this situation has played to their advantage, up to a point.

The tables are now turning, and it's too late to reverse their game plan.

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Thursday, May 17, 2007

The Mortgage Bust: Is Wall Street the Problem?

Brian Louis over at Bloomberg tells us:

"Ohio Attorney General Marc Dann said on May 15 that he wants to sue Wall Street firms because their bond sales enabled consumers to get mortgages they couldn't afford." (Source.)

Mr. Dann is trying to find a scapegoat, when what he needs is a culprit. Wall Street is just doing what Wall Street does. It smells money and finds something to buy with it.

What Mr. Dann needs to research is the source of that housing bubble money. And by the way, now that the housing market has been capped off by higher rates and repressed by a snooping regulatory government, that money has already found a new avenue of distribution. It is now feeding into banking operations like leveraged buy-outs and mergers and acquisitions, where it is doing just as much damage as it did to real estate.

Perhaps all of this cash is really nothing more than Bernanke's global "savings glut;" but what the world seems not to be wanting to see are the forces of monetary expansion that have been at work since 2000 and even earlier.

The US began arbitrarily augmenting the stock of purchasing media in 2001 and only partially slowed it down a year ago. Japan has been doing it since their stock market crash in the 1990's and hasn't slowed down a bit -- indeed the contrary. China is still stockpiling dollars to prevent disequilibrium in their own economy and to keep their own currency from falling, and in spite of US and world pressure they have only slightly modified their attitude.

These are the major players that Mr. Dann should accuse. Why? Because all of this excess credit and monetary expansion in the global economy must alight somewhere. Where? Well, all over, but mainly here of course, in the land of the tallest dwarf.

What damage does this do? It blows bubbles in all the economic sectors where it touches down. Since the 1990's, it started with the dot com. Then picking itself up after the 2000 burst, it moved like a a hurricane through real estate. Now that that market can't take anymore, the hot air has now overflowed into corporate finance to see what mischief it can create over there.

Can this go on indefinitely? Well, I'll have to say maybe; but this will depend on our staying power as the tallest dwarf. We have very few competitors, and we are still the most free economic market in the world, so we may get lucky. Then again, other alternatives exist, most notably things outside the dwarf community's currencies. One of these is gold, an age-old monetary safe haven in times of trouble.

What will be the ultimate effect on us? For as long as the availability of excess liquidity has not been eliminated from the system, it will reinforce our addiction to foreign sources of capital, to the pleasures and pains of excess consumption, and to the absence of the need for domestic saving. Too much of a good thing can be fatal. Look at good things like wine, food, credit -- why, even water in excess can kill you.

In economics, the bingeing spirit turns us all into speculators, i.e. unwary creatures living like La Fontaine's proverbial grasshopper. (Read the translated and original La Fontaine fable called "La Cigale et la Fourmi" here. The translation for "cigale" is actually "cicada," but for some reason the English version of the fable prefers to give the grasshopper the bad reputation.)

Cigale et la fourmi - Cicada or grasshopper and the ant
[Thanks to and to Ivan Lammerant for this illustration.]

So Mr. Dann, and all you attorneys-general who are looking for a scapegoat: Leave a John Doe in your lawsuit for the US Fed and for some of the other central bankers of this world who have unnecessarily and dangerously pumped up the global economy with liquidity that we all drink up and celebrate with no regard for tomorrow. (Oh, now I've mixed metaphors. You can't drink bubbles. Maybe I should say we're hyperventilating. Too much oxygen can kill you, too.)

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Wednesday, May 16, 2007

Inflation or Simply A Case of Tight Supply?

Prices are rising. Oil hasn't come back down. Gasoline is at an all time high, and now it's starting to affect food.

California seems to be the first hit, with an annual rise of 5.7% of food prices. (Source.)

[Thanks to and the Energy Information Administration in DC for this reminder of the good old days back in 2002, with $1.35/gallon gas.]

The LA Times cites the Bureau of Labor Statistics's Patrick Jackman:

"We are going to see grocery store prices show one of the most rapid increases in the last 15 years or so," he said.

The article continues: "The real problem, according to food manufacturers and supermarket executives, is the run up in fuel prices and the cost of grain, which has soared as an ever-growing amount of corn is diverted to make ethanol to mix with gasoline.... Swanson said corn was the culprit for his estimate that food inflation will reach the 4% to 4.5% range this year, the highest since 1990. That's because corn is the building block for much of the American food supply. It is what dairy cows eat to make milk and hens consume to lay eggs. It fattens cattle, hogs and chickens before slaughter — depending on the animal it takes 2.5 pounds to 6 pounds of feed corn to produce a pound of meat. Corn syrup is the third-largest ingredient in Heinz ketchup and is the sweetener that goes into soda pop and hundreds of other food items. Corn also is the building block of the 7 billion gallons of ethanol made in the U.S. this year, a figure that is on its way to 14 billion gallons by 2011, according to estimates by Iowa State University.... As farmers discover just how golden corn has become, they are replanting fields formerly devoted to wheat, soy and other foods with corn, driving up the price of even more food commodities. Soy is up 28% to $7.41 a bushel from May 2006, DTN said."

Okay, so it's all tight oil's fault.... But wait a minute. What about the housing boom? Is that oil's fault?

"Oh no," some economists will reply, "the housing boom was created by revolutionary technological advances in the mortgage financing markets."

Hm. Don't know if I agree, but.... Okay, what about the booming prices for raw materials? All of them have skyrocketed.

"That's easy. That's because of the new global markets like China and India. Increased demand, that's all."

I say what about the fall in the exchange value of the dollar?

"The world thinks the US housing market will cause our economy to slow down, but the dollar will soon rise back up when they see things aren't so bad."

Maybe; maybe not. Then I say:

"What about today's huge corporate profits? Rampant corporate loans, and mergers and acquisitions? Why are they so high? And the financial sector? Why are they raking it in like never before? And if they're making so much money and there's so much global demand, why aren't corporations hiring like crazy, increasing salaries, and reinvesting in greater production? Could it be because they fear this is a monetary bubble and not an ordinary demand/supply scenario?"

Here, we get a silence. And I say to myself, "Because it is a monetary bubble."

Now, you the wage earner may say, "But when you come down to it, who cares? Prices are going up, and my salary isn't. What does it matter what is causing this to happen? I feel poorer already, and there's not a thing I can do about it."

True; for you it doesn't matter. But for the Federal Reserve, the fellows who are in charge of our monetary system and who are not supposed to create bubbles, this is a very crucial question. If the price increases are caused by normal economic factors like a limitation in the supply of oil, for example, then the Fed is not mishandling the money supply, inflation is under control, and the punctual price increases are a natural phenomenon that will take care of itself as energy producers respond to the increased profits by discovering and developing new avenues of energy production to their fullest potential. Then, once the new products are on the market, energy prices will decline, and so will those of products dependent upon energy and energy's raw materials.

Furthermore, because in that case the rise in prices would not be caused by a rise in general demand (which would be caused by a rise in your salary, and hence in your purchasing power, and hence in general demand for all kinds of things), but rather by a limitation of oil supply, the general price level would remain largely unaffected. Only those products involving petroleum raw materials and transportation would be touched. (As an aside, it would be interesting to do a study of which products' pricing does not contain some petroleum or transportation costs.)

However, if the Federal Reserve has been creating too much money supply, all prices will eventually rise and they will stay high on a permanent basis. This spells bad news for all of us, and our purchasing power in general will decline, our salaries will not keep pace until the very end of the process, those on a fixed income will be impoverished, savers will be punished, debtors will be rewarded, businesses will lose faith in their central bank, and GDP will underperform -- all conditions the Fed is supposed to prevent.

So if this rise in prices seems finally to be affecting more and more of the ordinary things we buy, how can we tell whether the driving dynamics are normal supply/demand or an inflationary bubble of the money supply?

I say this:

Maybe we can't; but if the Fed has recently been blowing hard and if the phenomenon swells like a bubble, if it rises like a bubble, and -- most importantly -- if it pops like a bubble: -- we'll know what it was, but only through hindsight.

Punchline PS: That's why the Fed and other central banks, if they don't want to take the blame for any damage done, should get out of the money supply management business.

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Tuesday, May 15, 2007

To Raise or Not to Raise: That is the Question

This article by Thomas Kee over at Seeking Alpha raises some commentary in my brain.

[Thanks to Laurence Olivier and for the image.]

He suggests that the Fed should raise rates now before wages start to rise, in sum nipping any core inflationary trend in the bud.

He notes, as I have also here recently, that the inflation figures are rising fast. In fact, today for the month of April the compounded annual seasonally adjusted rate has gone up two points from 4.7 to 6.7%. It will probably modulate, but these figures are alarming.

He wisely points out that even non-core prices, although more volatile, at some point become important to the pocket books of the citizenry; that these non-core prices, even though they may be subject to geopolitical concerns, can also sometimes be reacting to the same inflationary money-supply factors as core prices; and if this is the case, any sustained non-core inflationary price increases will at some point spill over into core prices. And he assumes they will. I agree, given the symptoms around us of a global bubble economy.

I would like to point out several things:

1. If the increases in non-core prices are due to geopolitical concerns, the increases should be ignored. At some point, things will readjust, or alternatives will be found. The Fed doesn't need to take any action whatsoever. In fact, any action merely adds another uncertainty to the game play.

2. If the increases are due to inflationary concerns, the cause for the increases should indeed be eliminated; but this should only happen when the economy can take it, and now is not the time. Today's tight labor market is putting pressure on salaries, which is actually a good thing, because it means that finally, the poor salaried worker is going to get the pay raise that he needs to cover the increase in prices. Let him get his pay raise. Don't raise rates now before he gets it, because you will just make a bad situation (higher prices) worse (diminishing real wages.) The poor guy is in the caboose of the inflationary train. Let him get up over the hill. Let him be compensated in just measure. Of course, non-core prices will rise; but this is just the natural denouement of the inflationary situation that already exists. Let it play out. And then, of course, most importantly, the Fed should in future refrain from instigating any measures whatsoever that inflate prices again, adding insult to injury. These measures are counterproductive. They distort the market pricing mechanism, destroy our dollar, and exacerbate economic inequality -- the very things the Fed is supposed to control.

3. At this point, assuming either (1) or (2), we are at a critical juncture in the business cycle, i.e. we are about to enter a contraction. (See my previous post.) The coming contraction, combined with high non-core prices, will be sufficient to control expansion. If the Fed tightens now, it will turn the contraction into a recession. To do so now will just deprive our poor worker of the raise he deserves and enrich the speculators whose profession it is to ride the roller coaster of business cycles. For these fellows, the wilder the ride the more they love the thrill, even if only a few reap the rewards (the lottery principle.)

So I disagree with Mr. Kee. The Fed should leave the rates where they are. (And of course they should definitely not lower rates, which they are also capable of doing at the slightest sign of business contraction, unfortunately.) At some point in the future, when the business cycle bottoms out naturally and when the economy starts to climb back up again, only at that point should the Fed adjust the rate so that it can remain permanent -- 5.5, 5.7, or whatever it is.

Then the Fed should put themselves on the back burner, only coming into action when there is a need for some reassurance -- and by action, I mean clearing house, short-term punctual self-eliminating measures, and jawboning. We don't need any more pumping up of the money supply, whether it be through interest rates or through purchases of treasuries.

Let the system handle the money supply. Put a few basic rules in place, i.e. reserve requirements, banking standards -- every banker knows what they are. (The gold standard would be nice, but I'm not living in a dream world.)

Central banks of the world, leave us alone. Stop playing roulette with the standard of living of the salaried worker, the small to medium business entrepreneur, and the emerging economies. You are killing us little by little, driving us towards government intervention and the death of the American experiment and of the US leadership role in the world.

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Monday, May 14, 2007

Exports are Up: Will It Now Be A Fiat Currency Race to the Bottom?

An article today in the New York Times by Jeremy W. Peters tells us that the days of the current account deficit may start to recede in our memories pretty soon, because the falling US dollar has made American products and services more appealing to foreign purchasers.

extreme mountain biking
[Thanks to for the photo.]

The tone of the article suggests that a weak dollar may actually be a good thing, as contrasted to the "old days" when a strong currency was a sign of a country's economic health. As he says:

"Rather than hurting many American companies, a weak dollar is actually providing a strong lift. The exchange rate difference stokes profits from earnings generated abroad...."

'“The old notion that if the dollar’s bad, corporate profits have to go down is no longer correct,” said Howard Silverblatt, a senior analyst at Standard & Poor’s. “There’s a lot of growth going on in the rest of the world, and companies have to be there if they want to participate. There’s a lot to be sold.”'

'“What is clear is that even if the U.S. economy slows down, the rest of the world appears to be able to grow,” he said. “If you are able to sell to those parts of the world successfully, then you’re not tied down to one central bank, one economy.”'

So the message seems to be: Let's get that dollar down so we can become competitive.

But wait just a second. Aren't we forgetting something?

There is only this phrase -- "And there is always the risk that the dollar could suddenly plunge and set off a global economic crisis" -- to remind us that a stable value of a unit of currency might be important, that in fact global economic chaos could result from a lack of it, especially when it comes to the US dollar.

The other minor detail we are forgetting is that there are millions of innocent citizens, and even whole countries, who are depending upon a strong dollar. My heart goes out to all those on a fixed income, and all the emerging economies who have put a lot of their nest eggs into dollars and dollar instruments -- China, Japan, the Arabian oil countries, to name a few.

Now, I know that these countries should have known better and/or shouldn't have tried to prop up exports by manipulating their own currencies. In fact, we could say they started this whole game, except that the US has been doing it for almost 100 years. But that doesn't change the fact that you above-mentioned victims of inflation and devaluation, innocent or not so innocent, are collectively the sacrificial lambs in this story.

You are the ones who will have to put up with the disappearance of your savings and a reduced standard of living, perhaps even the collapse of your economy, so that companies like Caterpillar, General Motors, Ernst & Young, et al. can bring in the big profits from their cheaper exports. You are the ones who will have to put up with a 3 to 5% yearly increase in prices, i.e. with a 3 to 5% decrease in your purchasing power.

While the large economies of the world are racing each other to see who can devalue their currencies the fastest while keeping their respective populations from noticing the excessive inflation it takes to get there, you victims will have no voice in the matter. As my Dad used to say, "Prepare yourselves, little sheep, to be shorn."

I have said this before: The notion that a country can inflate their currency indefinitely and maintain a "low" (is today's 5% really low?) CPI at the same time is a crock full. At some point, some country somewhere is going to start a run for gold. At that point, the major economies' central bankers will have to either fess up or try to find a way to explain how their currency ended up with the losers in the trash compactor.

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My Thoughts Exactly on Gold

I don't usually find myself at a loss for words, but I couldn't have said these thoughts better, so I'm just going to link to this summation of the gold situation from the South African journal, Business Day and authored by Alan Demby.

Nope. No matter how hard I try, I just have nothing to add. Surprising for this bloggiator.

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Sunday, May 13, 2007

Three-Month Annualized Inflation at 4.7%

Tuesday we get an update of the inflation outlook.

[Click on graph for a larger version. Thanks to the Bureau of Labor Statistics for the image. (Source.)]

And yeah, I know, "core" inflation is only just above 2%. Who cares? Enough of this "core" stuff. Inflation is inflation, damn it. I pay for gas every day. I pay for food every day.

I don't understand where the collective conscience of our professional economists has gone. Our thought processes are completely incapacitated by mainstream rhetoric. Every day, we read or hear that the Western World has conquered inflation. Well, I say the professionals are either lying or their naive.

Does anybody realize that official annualized 3-month CPI inflation is now officially at 4.7%? Rounded up, that's 5%. (Source.) When was the last time we had annual 5% inflation? Around 1990. What did the Fed have to do? They retracted money supply. And we had a "hangover," i.e. a recession -- only normal when you've been inflating the money to hell over the past years. The same thing is happening again, and the Fed will have to retract AGAIN -- either that, or watch the dollar disappear into thin air.

At the same time, we have a slow-down in economic production. Anyone ever heard the term "STAGFLATION" before? Know when we last had a major episode? The 1970's. My memories of those days are as vivid as the memories of 1929-35 were for my father. (See here for some quotes about the 1970's.) For those of you who don't remember or who weren't around, the financial loss was greater than the 1929-30's.

Now, either I'm way off the mark and the next ten years will be more of the same, or I'm right and we're headed for some interesting times. I cannot believe we will not see a serious global correction within the next few years. What form it will take, I have no idea.

What has happened to the economists' conscience? Do our academicians all have blinders on?

And don't ask me to break out the stats. As far as the data are concerned, I guess I'll have to come out of the closet and say I'm an Austrian. (For those who don't know what I'm talking about, I'm referring to a school of economics that keeps statistics in its proper cage, i.e. that does not try to theorize through the use of computer models, mathematical constructs, and graphs of figures, each of which can mean what the utilizer wants them to mean. It is the school of Friedrich Von Hayek and Ludwig Von Mises, a school which has come in and out of fashion about three times since they lived and died. Presently, they're out, and this is a great tragedy.)

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Wednesday, May 09, 2007

The Art of Saying Nothing

The FOMC (Federal Open Market Committee, the group of economists and ex-bankers who think they control the US economy and employment) issued its periodic statement today.

[Thanks to for the photo. Like the FOMC, this fellow gets to talk out of both sides of his mouth.]

All market operatives were 99% sure the Fed would not change the target interest rate from its present 5.25%, and they were right.

But what readers were really interested in is the language surrounding that announcement. Would the Committee continue to maintain their "hawkish anti-inflationary stance?" Or would they hint at a possible future loosening of the monetary faucet?

What we got was a still-life study in the nature of "Neutral." They have painted out of this statement any phrase, word or punctuation that might give a clue as to what they intend to do in the future.

They might as well have written:

"As you all know, there's nothing in the data to force us to touch the interests rates. And all you people who are looking for an excuse to blow off some steam, don't bother yourselves attempting to read anything into the wording of this statement because you'll just be wasting your time."

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Tuesday, May 08, 2007

Minneapolis First in Foreclosures - Isolated Incident, or Recession in the Works?

Seeking Alpha points to an article in the Star Tribune about the amazing number of foreclosures in North Minneapolis.

Most impressive is the chart with the red dots, showing how the delinquencies are distributed throughout the county.

Is this just a hot spot of bad sub-prime mortgage lending? Or is it the first in a long string of falling dominoes?

No one really knows, of course. Some say the markets have already taken into account the pretty poor outlook for the housing market. Some say that the dollar's slow demise will help the manufacturing sector and keep the country out of deep recession.

crystal ball
[Thanks to for the image.]

I have no particularly unique crystal ball like Alan Greenspan thinks he does, but my favorite and the only truly scientific economic research institution that I know of is now predicting that business cycle conditions point towards a likely recession.

The institution in question is the American Institute for Economic Research. I like these people. Their news can sometimes be tepid (what truly non-partisan organization issues earth-shattering statements every few days like the IPCC? [Intergovernmental Panel on Climate Change]) But when it's time to rumble, they rumble loud and clear.

Here's an excerpt:

"The yellow caution lights of recent months have now turned red. Conditions have continued to deteriorate: both the percent of leaders expanding and their cyclical score are now at levels that preceded prior recessions. A contraction of general business activity is more probable than continued expansion.

"Last month we were hesitant to assert that recession was imminent because one of our key indexes, the cyclical score, had not weakened sufficiently to confirm the signal from the percentage of leaders expanding. However, new and revised data now indicate that the cyclical score has been considerably weaker and for a longer time than previously thought, confirming the recessionary signals given since January by the percent of leaders expanding. The weakness among our primary leading indicators of business-cycle conditions continues to spread and a recession now appears imminent.

"Very few forecasters share our view. Aside from a few Wall Street 'permabears,' business economists and forecasters seldom, if ever, predict a recession. As many have put it, such pronouncements are 'bad for business.' This is, of course, a disservice to themselves, their employers, and their clients. We, on the other hand, are completely independent and committed to giving our readers our analysis of business-cycle changes, and the evidence behind our conclusions, for better or worse."

[Source: Research Reports, April 23, 2007, AIER, Great Barrington, MA 01230]

Bravo. Keep up the good work. Predicting 24 of the 21 most recent recessions sounds like a good batting average to me.

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Monday, May 07, 2007

Guess Which Country This Telephone Bill Comes From?

Here's a fun game. The following is an excerpt from a telephone bill. How many of you can figure out what country it comes from, judging by the billing details? Remember, I might have translated it from a different language.

Telephone service - [Amt.]
Extra add-on services - [Etc.]
Service taxes and surcharges:
Excise tax
City tax
Government regulators tax
Emergency fund tax
Temporary surcharge for the government regulators tax
Government communications fund
"High Cost" fund - B
Poor families compensation fund surcharge
"High Cost" fund - B Rate Adjustment
Poor families emergency fund
"High Cost" fund - A
Federal government fee
Outside service area taxes and surcharges:
Excise tax
City tax
Emergency fund tax
Temporary surcharge for the government regulators tax
Government communications fund
"High Cost" fund - B
Poor families compensation fund surcharge
"High Cost" fund - B Rate Adjustment
Poor families emergency fund
"High Cost" fund - A
Long distance charges
Long distance carrier fee
Taxes and fees:

City tax

No, this is not from socialist France, or communist China, or state-run Venezuela.

This is from good old California, U.S. of A.

Good grief. And speaking of taxes, look at this page from The Tax Foundation.

[Thanks to The Tax Foundation for this graph. Click on the image for a larger version.]

You will note that, contrary to what the public might have thought about Bush's tax cuts, Tax Freedom Day is pretty much at an all-time "high" at April 30, 2007. (The all-time high was May 5 in 2000.)

The moments of greatest tax freedom within the last 25 years were in 1984, and again in 2003, both at April 18, 2007.

April 30, why, that's a full one-third of your life. Double-good grief.

Someone has to create a political party that will run on smaller government, lower taxes, and isolationism. I believe they would have a FIELD DAY.

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France's Hope - France's Fear

Sarkozy has won this presidential election. As we all feared, a little less than half of the country is undergoing a mix of feelings ranging from disappointment to outright hatred.

So far, 730 cars have been burned and 592 people have been arrested in what everyone was expecting: An outburst of rage from the urban underprivileged who identify Sarkozy's announced anti-illegal immigration policy with Hitler's "ethnic cleansing."

Keep in mind that France has to put up with hundreds of burned vehicles even on a good day like New Year's Eve, so it is no surprise that this time the reaction has been a little more violent than usual. (Source: La Liberation.)

[Thanks to for the photo, not from the scene.]

This is the kind of pressure Sarkozy will face over the next five years. France's dangerous illegal immigration problem, its economic woes, and its excessively-well-girded workers' unions will be part of the more than a little inertia he must overcome. This is no benign "change of party direction."

Segolene Royal, his Socialist rival, already announced in a pre-election last-ditch effort that a Sarkozy win would plunge the nation into violence. We all knew she was right; but to cede to this kind of pressure would be to imitate Spain's about-face after the Madrid train bombings. It would be a cowardly response to blackmail.

Hopefully, France will not be so easily intimidated, and Sarkozy will have a chance to attempt to bring France up out of its present Fantasyland Socialism into the 21st Century.

Now, if only America doesn't cross them going the other way.

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Thursday, May 03, 2007

A 100-Kg Gold Coin? (Sic)

Yup, you read right, the Canadians have come out with the first 100-kg gold coin, with a face value of $1 million.

[Thanks to for the photo.]

Here's the punch line: They've already got five buyers, at between $2.5 and $3 million each.


Who said this wasn't a time of funny money?

Read more and see the photo.

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Global Warming Mania: Cartoon of the Day

This is really getting ridiculous. Now, the UN and other hysterics want to blame cows for global warming.

[Click on the cartoon for a larger version.]

Think I'm kidding? Here's a couple of quotes:

"Meanwhile, another U.N. report says livestock - especially cows - create nearly one-fifth of greenhouse gasses." (Source)

"Professor David Beever, an expert on nutrition with feed producer Richard Keenan and Co., said that grazing has been found to be one of the main reasons, which contributes towards the formation of methane in cows." (Source)

Good grief.

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Tuesday, May 01, 2007

Market to the Fed: Read My Lips

So the Fed, according to all the evidence, is very attuned to "market expectations," placing much weight thereon in their determination of Federal Reserve policy. (See my previous post citing Fed Governor Mishkin on the subject: "I believe that inflation expectations will play a primary role in determining the course of inflation.")

Well, it looks like the market has heard Mr. Mishkin loud and clear. The Fed doesn't have to go very far to read market sentiment (read "wishing thinking"), because the market has decided to let their sentiments be known. In a recent article at Bloomberg by Daniel Kruger, we learn that:

"Federal Reserve Chairman Ben S. Bernanke's assertion that interest rates may need to increase to curb inflation is wrong. That's what Goldman Sachs Group Inc., Merrill Lynch & Co. and UBS AG are saying. While Bernanke warned last month that the odds of worsening inflation have increased, chief economists at the three firms say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. Their chief economists say the Fed will cut its target for overnight loans between banks at least three times this year."

That's pretty specific. Three rate cuts between now to December are what the market is expecting.

We'll just have to wait to see if the Fed is listening or whether the Governors will decide to prove to the marketplace that they're not just windmills.


[Thanks to for the photo.]

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