"Happy days are here again," Inflation!

The Black Swan Dive

With all the big numbers getting thrown around these days its easy to loose context which is why I like this video. So how do we prevent this from happening again? Check out the ten principles of a black swan free world. I wonder how much more cash the feds have to print before inflation returns and runs away. Given the scope of it already, its sorta surprising that assets are still deflating.

Coiled Commodities (DBC)

Commodities as a whole are poised to make a large move soon as the recent range has narrowed substantially. The daily Bollinger Bands, a series of higher lows since December and 50 dma all seem to be converging on $20. It seems to me that a large retracement of the 2008 decline may be in order after support has shown up in the low $19s. Commodities could also break lower but I'd be more scared of a false breakdown than missing the decline. It just seems to me that now would be an appororiate time for the dollar to weaken against tangible assets (commodities) with all the money being printed in Washington. We shall see...

The Inconvenient Debt

Sunday Morning Cartoons: Duck Tales on Inflation

More on that here.

Update on the Horror Show

Last weekend I mentioned that this week's economic data was likely to read like a horror show. Well, how did things turn out? Here is a brief summary of the data points this week:

Track One is falling home sales:
"Purchases of new homes in the U.S. fell more than forecast in January as lending restrictions and plummeting prices kept buyers away.

Sales dropped 2.8 percent to an annual pace of 588,000, the fewest since February 1995, from a 605,000 rate the prior month, the Commerce Department said today in Washington. The median price slumped a record 15.1 percent from a year earlier." -source

S&P Case-Shiller Home Prices Show 9.1% yoy decline for December

Track Two is inflation:
"On Tuesday the government announced the Producer Price Index rose 1.0% in January, while core inflation, stripping out food and energy costs, rose 0.4%. The PPI measures inflation pressures before products reach the consumer...

"It was a lot worse than expected," said David Wyss, chief economist at Standard and Poor's, "and it shows the problems the Fed has with fighting inflation while also fighting recession." To keep the economy from slowing too much, the Federal Reserve has been cutting interest rates, but in doing so it risks creating a monetary environment conducive to inflation." -source

Track Three is a manufacturing slowdown:
"Orders for U.S. durable goods fell more than forecast in January as a slowing economy prompted companies to reduce spending...

Companies have put investment plans on hold as consumers rein in spending in the face of the biggest housing slump in a quarter century and near-record fuel costs. Federal Reserve Chairman Ben S. Bernanke, testifying before Congress today, may reiterate that policy makers are ready to keep lowering rates in a bid to avert a recession...

Other factory surveys in recent weeks have shown weakness. The Fed Bank of Philadelphia's index of business activity for February fell to the lowest level in seven years, while a New York Fed survey showed manufacturing in the region contracted for the first time in almost three years." -source

Track Four is flagging economic growth and job losses:
"The U.S. economy expanded less than forecast in the fourth quarter as domestic spending declined and exports prevented an overall contraction.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington.

"The first quarter will be ugly,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. "The strength of exports is what would keep us out of a recession if we don't go into one.'' ...

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast. The level was the second-highest since a surge in claims in the aftermath of Hurricane Katrina in 2005.

"We have absolutely no momentum going into the first quarter,'' said Josh Shapiro, chief U.S. economist in New York at Maria Fiorini Ramirez Inc. "Things are looking pretty grim for the economy. If we're not in a recession already, we're very close.'' -source

Track Five is the consumer spending drop:
"Consumer spending in the U.S. rose more than forecast in January, reflecting a jump in prices that is eroding Americans' buying power.

The 0.4 percent rise in spending followed a 0.3 percent gain in December, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months.

After adjusting for the increase in prices, spending stalled for a second month, raising concern the biggest part of the economy is faltering as fuel costs rise, property values fall and banks restrict lending. Federal Reserve Chairman Ben S. Bernanke this week signaled the central bank is prepared to again lower the benchmark interest rate to revive growth." -source

And how about that ABK "bailout": Never materialized, or as they say on CNBC it "hit a snag."

You can't make this stuff up folks, things are getting ugly out there.

Gold continues to make new all time highs...

Inflation, what inflation? Shame on the federal reserve.

The Royal Bank of Australia raises rates.

And the Chinese have "foot in mouth disease".

The Royal Bank of Australia just raised rates and all three of the C$, the Euro, and the AUS$ got on an escalator. If the ECB does the same on Thursday? Oh boy...

I'm not 100% certain that the ECB will raise rates, because the make up of the ECB isn't quite the same as that of the Australian or Canadian banks. Many of the members of the ECB don't even speak the same language, never mind subscribe to similar conservative fiscal policy. So we'll have to wait and see.

Still, the US dollar could become deeply unpopular but that would depend on some things that aren't very predictable. Like, how patient are the members of the Saudi royal family? Did you know they are the biggest shareholders in Citigroup? That investment hasn't been doing well and if you've been reading the Minyanville you'll understand that the Citigroup as such is in a fight for it's life at the moment.

Another unpredictable area are the Chinese. They hold over One Trillion in USD and if they were to engage in a hissy-fit over their suddenly lower buying power. the USD could become "deeply unpopular" overnight and it fact it did.

"Market players showed muted reaction to comments by a senior Chinese political figure who said that China should diversity (sic) its $1.43 trillion stockpile of foreign exchange by buying more strong currencies such as the euro."

That was from last night and that "senior Chinese political figure" might as well have yelled "fire" in the crowded theater. He apparently quickly retracted that statement as the exchange markets reacted. I'm watching the continuation of the market now, in Europe. So far, EURUSD has reached 1.47, in heavy trading.

In order to fight this, the FOMC would have to raise rates and kill the US economy for good. If the Fed doesn't fight this, the dollar will be comatose for a long time to come. Talk about a rock and a hard place.

(disclosure: I own FXECM, FXE 143 calls, expiring Mar08)

IBD Inflation

The top story in the Investor's Business Daily (IBD) weekend newspaper should have been about inflation because they hiked their cover price by 25% in the last week. I got the paper last weekend for $2.00 but today, just one week later at the same store, it cost me $2.50. Wtf? I can't really blame them since fuel and lumber prices are skyrocketing with all the other commodities, but still, thats a big jump. Indigo has noticed similar increased costs over in Germany.

Distribution

There are a few things that I wanted to post about this weekend and rather than do one long post it seems to make more sense to break it up. First, everyone is talking about how the market did a "re-enactment" of the 1987 crash on Friday (on the 20th anniversary Oct 19th 2007). The media is very good at making excuses, but the reason the market tanked really had alot more to do with disappointing earnings from major industrial companies like CAT (my feelings have not changed), MMM and HON rather than some superstitious traders. We actually had the cfo of CAT say the US is "near to, or even in a recession" led by an "ongoing recession in housing." Oh and thats not to mention oil at new record highs (priced in US dollars) and then theres crashing bank stocks. Well here's a look at the Dow Jones ETF (DIA):


For months now there has been significant distribution in the DIA with record volume days and no forward progress. The market has made higher highs but always on lower volume followed by much higher volume selling (and no net progress since late May). In the IBD method this type of action is very important to investment decisions and they track the number of recent distribution days as the "M" in the CANSLIM investing system. According to IBD:

"One way to spot that trend is to pay close attention to distribution days — days when the market is down more than 0.2% on higher volume than the previous session.

When the market piles up four or five of these over a few weeks, chances are that the market may reverse lower."

You can find their current count in the weekend issue paper and currently they show "4 for Nasdaq and S&P 500, 3 for the Dow." In other words we are getting there, and if you take into account the significant distribution that occurred in February and August then it certainly gives need for caution.

The DIA chart above shows that we smashed through support at $136, the 50 dma and lower Bollinger band to close down 2.8% Friday. Certainly, the action was intensified by options expiration and it is very rare for a trend to be sustained outside of the Bollinger bands. I suspect we will stabilize Monday but the Dow Jones is looking really toppy here, and why shouldn't we top?

Sure, US stocks are worth more as the dollar drops but it ain't dropping fast enough to make up for a recession. And inflation really is bad, by the way. From Wikipedia some of the negative effects include:

"

• Increasing uncertainty may discourage investment and saving.
• Redistribution
  • It will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation.
  • Similarly it will redistribute wealth from those who lend a fixed amount of money to those who borrow. For example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax.
• International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.
• Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)
• Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.
• Relative Price Distortions: Firms do not generally synchronize adjustment in prices. If there is higher inflation, firms that do not adjust their prices will have much lower prices relative to firms that do adjust them. This will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods.
• Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.
• Bracket Creep (also called fiscal drag) is related to the inflation tax. By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. Commonly income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars. Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.

"
On the other hand, tech stocks remain strong and for good reason it seems. GOOG posted blowout earnings last week with other tech bellwethers reporting strong growth. The Nasdaq 100 tracking ETF QQQQ looks much better than the DIA but also shows clear signs of distribution. The QQQQ could fall quite a bit further before it started to look toppy like the DIA, heres a 2 year weekly chart:


More later.