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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (2107)	3/15/2004 3:07:28 PM
From: gregor_us	Read Replies (3) \| Respond to of 116555

Daily Notes. THE FEDERAL RESERVE If the Federal Reserve believed its bullish prediction for future growth in GDP and Jobs, they would either hike rates soon, or position the market for rate hikes. But the Federal Reserve has practically begged to be understood on this matter, as having no intention at all, to hike rates soon. The Fed is fighting Deflation, as evidenced by zero net job growth in the US, in conjunction with soaring levels of Debt. While the credit markets may move interest rates, up or down quite violently in the next 6 months, the Fed will not—cannot—hike interest rates into the current economic environment. THE INFLATION vs. DEFLATION DEBATE When debates become too polarized a logical fallacy known as a False Dilemma begins to appear. Such is the case with the great Inflation vs. Deflation debate. Both sides now are over-committed, and have stopped listening to data which opposes their view. In my newsletter of 01 March 2004 ( gregor.us ) I attempt to resolve the dispute. Building on the theme, therefore, that we remain in a Deflationary paradigm—inside of which Inflationary pressures are building, and breaking out—I am forecasting that the US economy is likely headed back into Recession here in 2004. The Deflationary forces of over-capacity, wage-deflation, and debt-service are pulling us downward. However, and this is key, the policy response from Washington will be a brand new round of reflationary measures. These measures will further the current distortions and imbalances, which give fright to the Inflation hawks. And yes, these measures will be inflationary. But the paradigm will not change. TEXTBOOK-MEN OF THE WORLD, UNITE Observers from Stephen Roach to the Economist Magazine are now calling for the Federal Reserve to raise interest rates, to fight the coming Inflation. If you recall your Econ. 101 and Paul Samuelson’s classic (heavy) text, Inflation is exclusively a monetary phenomenon—and is guaranteed to occur when the Money Supply is expanded too quickly, or too greatly. The Money Supply has exploded upward since 1995, and we are now seeing commodity price inflation. Therefore, Deflation is not possible because, according to the textbook, Deflation is a contraction of the money supply accompanied by falling prices. According to the textbook. The problem here is that history is littered with the dead bodies of those who shook a Textbook Theory at the Lions of Reality. The explosion upward in the money supply since 1995 has served only to exacerbate production capacity, and debt. Were the Fed to hike Stephen Roach’s recommended, single-shot, 200 basis points--bringing the Fed Funds rate from 1.00% to 3.00%--we would see crashes in the housing, stock and bond markets. Demand for all goods and services would sag. Bankruptcies and loan foreclosures would soar. Losses on outstanding debt would be massive, and would be taken/booked by the lenders. But hey: this would indeed contract the money supply, thus reducing the risk of future inflation. Some choose death by fire. Some by ice. SHORT RATES While the yield on the US Ten Year Treasury has already made a big move down, to 3.75%, I see no reason why 3.00% cannot be broken by mid-Summer, if this economy goes back into Recession. Were that to happen, I conjecture that short rates might rise a touch, as money migrates further out the yield curve. Money Market fund investors might actually see their yields rise back towards 1.00%. And while I don’t expect such an effect to last long, this could be disruptive to short-interest rate plays, as the overall Yield Curve flattens, in a classic portent of economic woe. gregor.us

To: russwinter who wrote (2107)	3/15/2004 9:50:53 PM
From: Jim Willie CB	Read Replies (2) \| Respond to of 116555

Russ, I think you are stretching your arguments I dont have pre-conceived notions they are backed plenty of info (some of it yours) but I divide into materials and finished products at the margin, incomes are dropping as with people finding new jobs to replace old lost jobs net, job counts are also dropping, when you factor in population growth and new workers coming of age you cite pricing power all the time in materials and shipping I agree with you but try clothing, housing merchandise like furniture, shoes, hardware items, on and on and on wherever Asia competes, zero pricing power their price effects are now extending into the service sector and their province is growing all the time yes, WalMart prices might be slowly rising, agreed but only insofaras China is hiking their prices I have stated this along with you China will push up prices with a repeg but also with their own rising material costs they will pass along higher copper and nickel component prices for finished products like tubing and silverware people are borrowing like crazy and no price inflation effects they are purchasing sameold sameold shit consumerist items but they are also purchasing medical and other services using borrowed money like from home equity they are also going on vacations and other splurges with borrowed money the main effect of borrowed money so far is the speculative monster in the financial sector yield carry trade, stocks, trez bonds, corp bonds, mortgage bonds, junk bonds you seem to be caught in aggregate thinking THIS IS A FATAL ERROR AMONG OUR CRACK TEAM OF ECONOMISTS NOW we have two huge leftbrain, rightbrain areas of the economy one subject to price inflation one subject to continued price deflation the only area of scarcity is in materials rationing will not involve higher prices I think we will see legislated fixed prices of necessities I also think we will see controlled lids on critical materials e.g. copper, silver, soybeans USGovt will use CRB futures to keep prices down we will have shortages, but not higher prices soon and before long China will cut back on purchases that has not started yet here is another expectation of mine China will soon ensure their copper supply by purchasing an entire copper mining company, together with its copper mine in Peru or Mexico this will start a new trend among growing Asian nations China will purchase an entire land region with heavy ngas / jim p.s. bananas are exchangeable, try apples or peaches try substituting soybeans

To: russwinter who wrote (2107)	3/15/2004 10:04:17 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 116555

and try not getting stuck into preconceived notions of things, like some of you may have. ROFLMAO Incomes in the current environment are not collapsing, they are stagnant. those of us who are educated on this matter realize stagnation is HIGHLY irregular at this stage in a recovery. in fact unprecedented. this is why the economy is characterized as being on steroids, for your information. I think Wal Mart Skus are really, really up in the air right now. LOL, you also "thought" bond sentiment was bullish. i'd say "penny for your thoughts" but i don't want to overpay. look for people to really be able to sustain rationing, shortages, and even more inflation through their borrowing power. faulty theories always have a catch. for example, the problem with the Dow 36,000 theory was that dividends got double counted (they were supposed to be paid out, but also count as investment toward future earnings growth). in the case of your theory, the catch is you think the consumer's ability to borrow in the face of record debt and the absence of real income growth is infinite.