Email From Birgitta Jonsdottir, Member of Iceland's Parliament; Mish Audio With Eric King on Inflation, Unions, Jobs, Greece, Spain, and Iceland

In response to Iceland Rejects IceSave; Does No Mean No? I am very pleased to have received an email from Birgitta Jonsdottir, a member of Iceland's Parliament.

Birgitta Writes:

Thank you all for helping getting out the other side about the situation in Iceland.
Your response is creating an unexpected wave of people starting their own "no campaigns" around the western world.

It is time the peoples from around the world put an end to the insanity played by the financial world at their cost.

All my best
Birgitta

Thank you Birgitta!

Thanks also to On The Edge With Max Keiser.

No Beans

Now if only I could get my own legislative representatives to answer emails. Melissa Bean, my representative from Illinois, has not returned any of a half dozen emails or phone calls about numerous issues.

Yet across the ocean, I can get a personal response from a member of Iceland's parliament.

Mike Breseman, a neighbor and former village president where I live said the same thing to me yesterday: no emails returned from Bean and outright arrogance from her staff on the phone.

His son Calvin, aged 13, emailed 20 congressional representatives about Cap-And-Trade and received zero responses.

Yet across the ocean, one can communicate with members of Iceland's parliament.

Melissa Bean is supposedly a "Blue Dog" fiscal conservative, yet she voted for various bailouts and the preposterous Cap-And-Trade legislation. What's up with that?

Who knows? She won't answer emails.

With thanks to Birgitta who says "Your response is creating an unexpected wave of people starting their own "no campaigns" ...

It's time to say "No Beans"

I cannot confirm this, but rumor has it that South Carolina Senator Jim DeMint or at least his staff is reading my blog. Maybe I should move to South Carolina or Iceland.

Interview With Eric King

I am pleased once again to be back on King World News with Eric King.

Mike “Mish” Shedlock is so well known for his daily writings on his financial blog. As an example, multi-billionaire Hugo Salinas Price quoted from Mish’s blog in his last interview on King World News.

In this interview Mish discusses the economy, the realities facing struggling Americans, unions, the pension shortfalls, cities & counties as well as states eventually declaring bankruptcy, the nascent recovery, forced restructuring and much more.

Eric King is a great interviewer. I invite anyone interested in a discussion on inflation, deflation, unions, pensions, and the problems in Greece, Spain, Iceland, and elsewhere to tune in.

The opening dialog just happens to be on Iceland and political arrogance. It was recorded in advance of the emails from Iceland and the discussion with my neighbor.

To play the audio please look for and click on the MP3 icon (not on the left, but in the King World News link)

Thanks Eric.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Gerald Celente Predicts "Crash of 2010"

Inquiring minds are watching an interview with Gerald Celente who warns about the pending crash of 2010.



Celente: "The crash of 2010 is going to happen as we are forecasting. All the stimulus money from around the world is drying up and what are they going to do for an encore?

We need a productive capacity. You can't print your way out of this. So whether it's China, India, the UK, Japan, at some point the stimulus game runs out and the crash happens.

The Federal Reserve or anybody else in the United States Congress isn't going to stop it from happening. They have Katrina quality rescue skills."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Chicago Fed National Activity Index Slows

Inquiring minds are reading the Chicago Fed National Activity Report for February 2010.

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.64 in February, down from –0.04 in January.

Three of the four broad categories of indicators that make up the index deteriorated, and only the sales, orders, and inventories category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.39 in February from –0.13 in January, but for the second consecutive month, it was higher than at any point since December 2007.

February’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.



Most of the weakness in the index continued to stem from the consumption and housing category. This category’s contribution to the index was –0.45 in February, down slightly from –0.44 in January. Housing starts decreased to 575,000 annualized units in February from 611,000 in January.

Employment-related indicators also made a negative contribution to the index, contributing –0.16 to the index in February compared with –0.02 in January. Payroll employment declined by 36,000 in February after decreasing by 26,000 in January, and average weekly hours worked in manufacturing declined to 40.3 in February from 40.7 in the previous month.

The sales, orders, and inventories category made a positive contribution to the index for the sixth consecutive month. This category contributed +0.05 in February, up from +0.02 in January.

Thirty-four of the 85 individual indicators made positive contributions to the index in February, while 51 made negative contributions. Forty indicators improved from February to January, while 45 indicators deteriorated. Of the indicators that improved, 20 made negative contributions.

What is the National Activity Index?

The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

What do the numbers mean?

When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above –0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained ncreasing inflation has begun.

The recession may be over but it will not take much to move the index towards a double-dip signal.

Expect weakness with spurts of activity driven by census hiring artifacts, inventory rebuilding, and waning stimulus effects.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

China Not As Simple As Krugman Thinks; The Coming Trade War With China

Economist Stephen Roach wants to take a baseball bat to Paul Krugman for his accusations that China is a currency manipulator.



John Mauldin also took Krugman to task on March 20 in The Threat To Muddle Through.

If the Chinese allowed the renminbi to rise, would that make the USA better off? That is the contention of a cabal of critics from Senators to Nobel laureates. Paul Krugman wants to see a 25% tariff on Chinese goods. Today we examine that idea, and look at the real problems that we face. If only it were so easy. The numbers just don’t add up. The fault, dear Brutus…

What Krugman argues is that we should pay more for Chinese goods, so that we will buy less of their goods. As if we wouldn’t buy the same goods from Vietnam or Brazil or Pakistan, if those goods were cheaper than Chinese goods. For the life of me, I can’t see how substituting goods from foreign countries other than China helps our trade deficit.

Are we going to start targeting the currencies of every nation that runs a surplus with us? What about Europe? And Great Britain? Their currencies are dropping against the dollar, in the case of England rather precipitously. Are they pursuing mercantilist policies, Senator Schumer [in reference to his recent scandalous press conference]? What happens when the euro goes to parity against the dollar (and it will!) because the Europeans are having trouble getting their act together? Are we going to demand they force the euro to rise? Tell the ECB to raise rates and shove the whole euro area into an even worse recession?

Do you think Japanese businessmen believe the yen is too strong, and we should make the dollar stronger against the yen? What are we going to do in three years when the yen is at 150 on its way to 300 because Japan is getting ready to hit the wall, due to their massive government deficits? Accuse the Japanese of mercantilism and try and force them to revalue the yen?

Maybe Canada should put a 25% tariff on US goods, because their dollar has risen by almost 40% against ours in the last few years. That would teach us a lesson. It would also destroy trade and a very good relationship.

It is a dicey damn world we live in. We are coming to the end of the debt super cycle, as I have written elsewhere in this letter. It is a very perilous time. Things are going to be hard enough. We have a huge problem with deleveraging and controlling our fiscal deficits, not just in the US but in the entire developed world. Starting trade wars is the absolutely worst possible thing to do. For the US to even suggest that such a policy is reasonable is the worst possible kind of message. Where are the adults in the administration?

They are not the only one who disagrees with Krugman. I did so on March 17 in Pressure Increasing on China to Revalue Yuan; What Can Go Wrong?

Looking At Half The Equation

Krugman conveniently ignores one side of the equation.

A sinking dollar is good for exports, however, given China's regulatory policies as noted in Business Sours on China, it's not at all clear exports to China would rise by much. Indeed, I suspect that China's regulatory restrictions are a far bigger impediment to trade than currency fluctuations.

Furthermore, one cannot (or at least should not) ignore what would happen to the price of imports. A falling currency is not a free lunch.

While I agree with Krugman that China would not dump US Treasuries, the idea that the U.S. has China over a Barrel is preposterous. Mutual deadly embrace with unbalanced winners and losers is more like it.

Shock Effect

Let's consider the global shock effect of a sudden large revaluation of the Renmimbi. The key is the RMB does not float. To get a 40% rise in valuation, China must buy or sell unlimited amounts of RMB against the dollar to maintain the desired price. That might mean a huge hike in Chinese interest rates to make holding the RMB attractive.

In turn, sharp interest rate hikes would likely cause a huge slowdown in China, decreasing China's demand for imports. This is yet another factor that Krugman and those crying "currency manipulator" miss.

And should the US impose a revaluation via tariffs, I would like to point out a little thing called Smoot-Hawley.

By the way, I am all in favor of a huge slowdown in China. I think China is on an unsustainable course, and the sooner and harder China slows the better for everyone in the long run.

However, the consequences of such a slowdown would be huge on the commodity exporters like Canada and Australia. Moreover, a slowdown in trade would slow global consumption.

I happen to think those are necessary adjustments along with more debt writeoffs, but believers in free lunches and Keynesian claptrap sure won't see it that way.

Hopefully this gives you a bit more of an idea as to just what might go wrong with all these simplistic "the Yuan is 40% undervalued - so label China a currency manipulator" ideas floating around.

Not As Simple As Krugman Thinks

Color me skeptical when 99% of economists think Renminbi (RMB) would soar if China floated the currency. Since when have 99% of economists ever been correct?

Baseball bats aside, China is not as simple as Krugman makes it out to be. Michael Pettis agrees as well.

Please consider How will an RMB revaluation affect China, the US, and the world?

Although Premier Wen noted again in his speech Sunday that China is “worried” about the value of its US dollar reserves, perhaps as a warning that China would counteract any US trade move by selling off USG bonds, Krugman doesn’t seem especially worried about this threat.

He may be right. Aside from the fact that it is not clear how China can dump Treasury bonds, he claims that it would only help the Fed in its quantitative easing, and would probably do far more damage to Europe (since China would presumably have to buy euros) than to the US.

The latter point is almost certainly correct. China’s selling dollars and buying something else would allow the US to get even more bang for its protectionist buck, probably at poor Europe’s expense. I would also add that the main long-term impact of dumping USG bonds might be no more than to cause a liquidation of Chinese assets at very low prices, and an equivalent transfer of wealth from China to the US (or to others likely at some point to buy cheap dollar assets).

My Comment: On that score Krugman, Pettis, and I agreed. China is not about to dump US treasuries.

Where I disagree with Krugman is with his claim that the chance of triggering a trade war is small. ...

The logic behind a prediction of trade war is almost unchallengeable, and the two countries are simply the two most visible in a world in which trade tensions must inexorably rise. Just ask the Germans and their European partners. Trade relationships will continue to get much worse, largely because the cost of trade war for high-deficit countries is so much lower than for high-surplus countries, and there seems to be no real attempt on either side to tone down aggressive actions or rhetoric. We seem to be caught in a downward spiral, and the longer it goes on the harder it is for anyone not to participate.

My Comment: On that score I sided, in advance with Pettis.

To return to the People’s Daily article, I think many in China have argued that a revaluation of the RMB may have a significant effect on China’s trade surplus without having an equivalent effect on the US trade deficit. The same would be true of tariffs on Chinese goods. In either case, say many in Beijing, China loses, but the US doesn’t gain, so why is the US so determined to force this outcome?

I think this claim is probably correct. An RMB revaluation in itself might not have as big an impact on the US deficit as many think.

My Comment: Again I sided in advance with Pettis.

By the way if China is forced to revalue the currency too quickly, it will have to enact countervailing policies — lower interest rates, suppress wages, increase credit and subsidies — to protect the economy from falling apart, and these will exacerbate other imbalances that may be even worse than the currency misalignment.

My Comment: Once again I sided with Pettis.

Will a decline in China’s trade surplus cause the US trade deficit to decline?

Not necessarily. Beijing has pointed out many times that a contraction in the Chinese trade surplus does not necessarily mean an equivalent contraction in the US trade deficit. All it requires is an equivalent contraction in the rest of the world’s net trade deficit. This could easily happen with an improvement in the trade balances of Vietnam, Mexico, Korea or anyone else, enough fully to absorb the reduction in China’s trade surplus. In that case, the US trade balance does not improve, and the US gets none of the employment benefit of the RMB revaluation. China will simply import fewer jobs from abroad and some other countries will import more, or export fewer, jobs.

Remember that if the RMB revalues, this is the same as if all the currencies of the rest of the world depreciate. This will cause a shift in the rest of the world so that households will see a small reduction in their real income, and non-Chinese producers in the tradable goods sector will see a small increase in their competitiveness vis a vis the rest of the world (largely because Chinese producers becomes less competitive). This will reduce non-Chinese consumption and increase non-Chinese production, and the distribution of these changes among different countries, including the US, will depend on a vast array of factors.

Of course the cynic in me says getting a global solution will prove impossible. Each country that benefits in the short term from stonewalling on any aspect of the complex adjustment process will do so. So I guess that just leaves trade war. This is the year of the Tiger, after all.

Michael Pettis is the only person I know who writes posts as long as I do. This exacerbates my problems in commenting on them. Rest assured there is much more in the article to read. So do yourself a favor and read it.

When it comes to choosing sides, I would rather find myself on the side of Pettis than Krugman. In this case, I landed solidly with Pettis, Stephen Roach, and John Mauldin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Investors Chase Risk in Junk Bonds at Fastest Pace Ever

Inquiring minds are reading Junk Bonds Selling at Briskest Pace Since 2007.

Companies are selling high-yield, high-risk bonds at the fastest pace since credit markets seized up in 2007 amid signs the economic recovery is gaining momentum.

Renault SA, the second-largest French automaker, Pittsburgh-based U.S. Steel Corp. and other speculative-grade borrowers issued $24.2 billion of high-yield notes in March through last week, putting this month on course to be the busiest since June 2007, according to data compiled by Bloomberg. Sales are up from $16.2 billion in all of February.

“Investors are much more sanguine about risk than they were just a few months ago and are taking on more to get a higher yield,” said Paul Owens, a credit analyst at Liontrust Investment Services Ltd. in London, which had the equivalent of $1.8 billion under management as of Dec. 30. “Companies have reported decent results,” bolstering bond sales, he said.

Issuance of non-investment grade bonds is running at the highest since companies sold $34 billion of the debt in June 2007, after slowing last month amid concern that sovereign budget deficits would stifle growth. The securities are rated lower than BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service.

Investors are pouring cash into junk-bond funds at the fastest pace on record as corporate defaults decline, according to EPFR Global.

A Return To Normal?

The Bloomberg article said this is a sign markets are returning to normal.

Really?

Was chasing risk in summer of 2007 normal?
How well did it work out?

Let's not confuse the willingness of the greater fool to finance global junk at the highest rate ever with "normal". Instead I would advise focusing on corporate real estate, credit card defaults, and especially housing starts. The latter typically leads normal recoveries.

Music Still Playing

But hey, everyone likes a party. Let's party like it was summer of 2007 again.

I have the perfect quote to match. It's from July 2007 - Quotes of the Day / Top Call

Chuck Prince: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

The Music Stopped for Chuck Prince On November 2, 2007 when his last dance was a two-step out the door.

Rest assured things will "get complicated" again. I just wish I could tell you when.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Inflation Issuance Hits Record $200 Billion; Predictably Wrong Hyperinflation Calls; Ducks in a Row

Concerns about global inflation are once again picking up. Please consider the Financial Times article Inflation-linked issuance to hit record $200bn

A record $200bn issuance of new inflation-linked bonds from the US, Europe and the UK is forecast this year as governments seek to finance ballooning budget deficits.

Investors have become increasingly worried about the dangers of rising prices in the longer term, boosting demand for inflation-linked bonds. This follows the actions of central banks, which have pumped vast amounts of money into the financial system in the past year.

Investor appetite has also been boosted because so-called linkers are seen as a safe and stable asset class, attractive to investors who remain worried about the economic outlook.

The market has performed well in the past year. US Treasury inflation protected securities (Tips), the best-performing index-linked bonds last year, gave a total return of more than 10 per cent, according to Bank of America Merrill Lynch indices.

Barclays forecast that the US Treasury will issue $80-85bn of Tips this year and as much as $125bn in 2011.

China To Determine Dollar’s Fate?

Still others are concerned that China holds key to dollar’s fate

In July of 1997, when the Bank of Thailand was forced to devalue the baht, few analysts anticipated that the move would lead to contagion affecting other countries in south-east Asia and that it would eventually spread to Korea and Taiwan.

Within six weeks of the baht’s devaluation, the Indonesian rupiah was in freefall, going from 2,300 to the dollar to well over 10,000. The computer systems of some Japanese banks crashed as they were not programmed to handle a move from four digits to five.

Fast forward a few years to the current economic situation, and the question is whether the US dollar will suffer a similar fate to the rupiah.

The week of March 8, the US dollar had its worst week since January, suggesting to economists at JPMorgan that the end of the dollar rally may well have arrived. Until now, one reason the dollar has held up well is that so many countries tie their currency to the dollar, most notably China. In April, the US Treasury will have to tell Congress whether China has been manipulating its currency against the backdrop of an increasingly strident debate between the two countries.

China may also slow its purchases of US Treasuries.

Most officials take the view that China would be cutting its own throat if it were to sell Treasuries, or even reduce its purchases significantly. But countries, like individual investors, are not always rational. ... If China decided after all that it would be damaging its own coffers less than the US, the dollar could be in for a period of much greater weakness.

Implosion Prediction Madness

Articles like the above are easy to demolish. Yet, because they are so commonplace, they also offer evidence that economic pundits have no idea what is going on or how things even work.

For example, let's flashback to Aug 14 2009 when Jim Sinclair announced 85 days to go! for the dollar to crash in The Motivation Behind The Countdown.

China as spokesman for the BRICs has publicly stated their desire for the institutions of a Super Sovereign Currency. This is not an intended as an immediate substitute for the dollar as a reserve currency but rather an alternative in new commitments.

It is my understanding that the BRIC countries, not China alone, have given the US until early November to deliver.

As a result of the above I see 81 days left for the US dollar.

I commented on the above prediction a couple weeks later in Countdown To Dollar Implosion Madness

Predictably Wrong

Maybe something happens in November, maybe not, but this dollar implosion countdown based on unnamed sources regarding impossible to believe demands and a trade chart interpreted ass backwards is more than just a bit silly. Yet, every day someone asks me about it, thus this reply.

The thing about these kind of predictions is how predictably wrong they have all been.

Based on interpretations of the Commitment of Traders Reports (COT) we have see a couple countdowns to running out of gold and or silver on COMEX by various people. Those never happened. We have seen "gold to the moon" hyperinflation calls based on backwardation. Those never happened, either.

There is also a bunch of hype going around right now about bank holidays and a devaluation of the dollar vs. all major currencies coming up this Autumn. The across the board dollar devaluation idea is potty because the US dollar floats. There is nothing to devalue it to. And even if there was, Europe and Japan do not want stronger currencies and would not go along. For that matter the US would not want to do it either fearing a market crash. Yet, the theories persist.

If something does happen in November, it will not be because some blogger knows something. It will be happenstance.

But for those counting, it's about 70 days. I can hardly wait.

A quick check of my calendar shows that November 2009 has come and gone. So has December 2009, January 2010, and February 2010. March 2010 will soon be gone as well.

Sinclair posted the following chart with this comment:

"I find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar."




Simple Math

The US runs a trade deficit with China. That means China will accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.

China runs a surplus and buys US Treasuries. When the US deficit slows, China's buying of treasuries slows.

On March 11, in US 30-Year Treasury Bond Direct Bidders See Value, Step Up To The Plate And Buy I cautioned that falling demand from indirect bidders (foreign buyers such as China, Japan) was not a sign of weakness.

A Very Good Auction

In contrast to what many think about treasuries ready to blow up because of falling foreign demand, I repeat what I have been saying all along: US demand will pick up.

That aside, it is also important to point out that indirect bidding is related to trade deficits. When the trade deficit is high and rising, foreign buyers step up treasury buying as a purely mathematical function of parking inflows, although there is nothing that forces the buyers to go that far out on the yield curve.

Renewed Deflation

On the March 11 Auction, indirect bidders fell to 23.9% yet yields were lower than expected. This shows US demand is more than adequate.

Hmmm. What is it the bond market sees that the equity market doesn't? Why have yields been consistently contained on the upside?

I will tell you in two words "renewed deflation".

Surprise Agreement With Paul Krugman

On two recent occasions I have been in agreement with Paul Krugman, once on the U.S dollar, and once on inflation.

Paul Krugman - March 20, 2010:America Is Not Indonesia

Urk. The FT publishes yet another dire warnings about the dollar piece — as news, not opinion! — comparing the US dollar to the Indonesian rupiah before the 1997-8 Asian crisis: ....

I shouldn’t have to explain this. There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

Did the author of this article talk to anyone who has studied past currency crises? Obviously not.

Of course the dollar could crash for other reasons. However, there is certainly no credible case at the moment no matter how hard people try to fabricate stories.

Paul Krugman - March 18, 2010: Stagflation Versus Hyperinflation

I’m a bit late to this, but Mike Kinsley has an odd piece in the Atlantic in which he confesses himself terrified about future inflation, even though there’s no hint of that problem in the real world. He’s not alone: there are a lot of voices predicting imminent hyperinflation in 2009, make that 2010 (and yes, I am keeping a record). ...

Kinsley seems to be confusing the logic of the natural rate argument, which says that expected inflation gets built into price-setting, so you need an accelerating inflation rate to keep unemployment below the NAIRU, with the very different logic of hyperinflation, which is about people fleeing money.

Meanwhile, for those predicting hyperinflation, my question would be: what is it about the United States now that looks different to you from Japan in say, 2000? Big budget deficits and high debt? Check. Huge expansion in the monetary base? Check. And yet Japan’s GDP deflator has fallen 9 percent since 2000.

I believe Krugman is correct on these issues, but horribly wrong on his views on China.

Moreover, I disagree with Krugman most of the time, especially his Keynesian cures that I believe will wreck the economy.

That said, I am a proud member of the shrinking group of people not on Krugman's hyperinflation list. Indeed, I was calling for the US to follow the footsteps of Japan long before it became somewhat fashionable to do so.

Inflation? Where Is It?

Want another opinion?

Please consider Inflation? Where?

Please click on the above link to see a stunning set of charts that Dave Rosenberg put together. The charts show that talk of strong inflation of any kind is complete silliness, let alone hyperinflation.

Here are my comments on Rosenberg's charts.

Bear in mind, I do not believe that prices constitute inflation or deflation. Rather I stick to my viewpoint that inflation is a net expansion of money supply and credit, with credit marked to market.

That last part "credit marked to market" is crucial. There is no doubt credit is collapsing. However, as a result of the Fed's heroic efforts that have kept zombie banks and zombie corporations alive, the mark to market valuation of credit (debt on the books of banks) has risen.

I cannot prove that because the Fed and the Financial Accounting Standards Board (FASB)have postponed mark-to-market accounting. However, I am willing to admit there has been inflation since March 2009 on the basis of how financial stock are reacting.

At some point however, the stock market will start reacting to actual fundamentals, and at some point investors will stop believing nonsense about the nascent recovery. At that point liquidity will turn, marked to market valuations of debt will again nose-dive, and stocks will take a nasty turn with it.

In the meantime, those who continually tell me that price is what matters need to look at 14 out of 18 charts and tell me they signal deflation or impending deflation, because by their measure they do.

Mr. Bond — Shaken, Not Stirred

Please consider the following commentary from the March 18 Breakfast With Dave.

Chart 5 shows the net speculative short position in the long bond — from the latest Commitment of Traders report (each contract is $100,000 face value). The net short position as of last week was 107,382 contracts, the high end of the range.



So, perhaps this explains why bonds refuse to sell off — anyone who can sell them already has. What is truly striking is that even though Treasuries were among the best performing asset classes of the past decade, the noncommercial accounts spent 80% of that time being short the bond market. Yikes!

As an aside, the net speculative position (futures and options) on the S&P 500 is now long 205,000 contracts.

Seasonal Jobs Will Revert To Mean

Here is one more chart to ponder.

I expect reversion to the mean in unemployment based on a chart I posted in BLS Seasonal Adjustments Gone Haywire; 11% Unemployment Coming by May?

Unadjusted Unemployment Minus Seasonally Adjusted Unemployment



click on chart for sharper image

Ducks In A Row

• Speculators are betting massively against treasuries
  
• Speculators are betting massively on equities.
• Mutual fund cash levels are at or near record lows.
  
• The Fed is starting to withdraw stimulus and wind down its lending facilities.
• Congress is reluctant to increase fiscal stimulus.
  
• On the jobs front, meaningless census hiring will likely get all the economists all excited about the nascent recovery. Yet the census jobs are temporary and will be gone by July.
• The above chart suggests a seasonal reversion to the mean in unemployment just in time for the mid-term elections. Those elections are guaranteed to bring about a much more conservative Congress.

The ducks are all in a row now for an economic downturn. Expect economists to be surprised. Don't you be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Inflation? Where?

Inquiring minds are taking a good hard look at a series of charts posted by Dave Rosenberg in Friday's Breakfast with Dave

Consumer Inflation


Restaurants



Home Improvements



Apparel



Movies



Telecom



Books and Newspapers



Grocery Stores



Autos



Electronics



Personal Care Pharma



Dave Rosenberg writes ...

There is much more underlying deflation pressure today — core at 1.3% with the CRB having run up more than 40% since February 2004 really tells you something about Corporate America’s ability to pass on cost increases and deliver top-line growth.

Moreover, it looks like the trend in core inflation is going to head even lower because the three-month pace is close to 0% and the six-month trend is down to 0.814% (to the third decimal) which took out the June 2003 nearby low of 0.939%. The last time the six-month trend was this low was back in August 1965, but the difference being that CAPU rates were closer to 90% and the jobless rate was around 4% back then, so there was far less spare capacity in the labour and product markets. Deflation remains the primary trend. The only question for investors is when the equity market figures out that this is not conducive to pro-growth pro-risk strategies.

Rosenberg posted 18 charts representing various prices. Prices above zero and rising are hospital services, delivery services, drug pricing, and airlines.

One has to wonder how much of the hospital and drug pricing is manipulation to get health care passed. Regardless, the score is 14-4.

Bear in mind, I do not believe that prices constitute inflation or deflation. Rather I stick to my viewpoint that inflation is a net expansion of money supply and credit, with credit marked to market.

That last part "credit marked to market" is crucial. There is no doubt credit is collapsing. However, as a result of the Fed's heroic efforts that have kept zombie banks and zombie corporations alive, the mark to market valuation of credit (debt on the books of banks) has risen.

I cannot prove that because the Fed and the Financial Accounting Standards Board (FASB)have postponed mark-to-market accounting. However, I am willing to admit there has been inflation since March 2009 on the basis of how financial stock are reacting.

At some point however, the stock market will start reacting to actual fundamentals, and at some point investors will stop believing nonsense about the nascent recovery. At that point liquidity will turn, marked to market valuations of debt will again nose-dive, and stocks will take a nasty turn with it.

In the meantime, those who continually tell me that price is what matters need to look at 14 out of 18 charts and tell me they signal deflation or impending deflation, because by their measure they do.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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