Big Inflation

Here's an article on inflation -- not deflation -- on Seeking Alpha.

Calling the Bottom (psych!)

I earlier pointed out that Sonders of Schwab could have called the bottom, but didn't. The market has now lost all the recent gains and is negative for the year and appear to be going lower yet. How could that be, if the major funds have all delevered and sold to meet losses? Shouldn't there be nowhere else to put money besides equities? Well, that's because a) this is a credit crisis like none other, b) other investors are hoping for Obama's stimulus package to bring the same magic to the economy that his team brought to the campaign, and c) we are in the midst of an economic correction without historical parallel.

With that, who in their right mind would call a bottom at this time? No one can possibly know.

Who Knows The Economy?

The real question is not who knows or understands the economy. The question is who understands the fall, and who understands the way through the trough, and then who knows the way up again. Any given economic or market genius may only know one part of the cycle. For example, check this out if you want to see someone who understands what brought us down, but has lately shown little comprehension of the trough or the way through it.

Or, think of Krugman railing against tax breaks. Please tell me, Mr. Nobel, how does a stimulus alone make up for the coming wage deflation? It doesn't. The only way to get people to simultaneously delever and consume is to put more money in their pockets.

I just got around to reading The World Is Curved. I am curious to see what Smick sees about the next phase.

Sonders Calling a Bottom?

Schwab's Sonders has a great article/analysis available.

I think if it weren't for the economic chaos, she'd be calling a market bottom based on some of the facts: hedge funds deleveraged, hedge funds' and mutual funds' redemptions having peaked, etc. No one in their right minds (yeah, I'm calling you out, Professor Siegel!) would think that there is a quick V-shaped turnaround coming, though.

Maybe we're at the bottom, I don't know. I suspect we're bottom-ish, but there's just too much uncertainty remaining. Obama's stimulus, the effect of four more years of mortgage resets coming, inflation/deflation, corporate solvency in the coming two quarters, etc. Oh, and did I mention that at some point the War Bubble in the DC metro area is bound to pop? That's a good thing on balance, of course. Peace is always preferable to war. But, economically, it's one more detriment looming.

I've got a prediction: We've already begun a Depression. We won't know it for another year, though. In thinking of the business cycle, it is impossible to compare Bush's America to Hoover's America. It's like comparing a Hummer to a Model T. If you take a step downward from a Hummer, you're still driving a Jeep or a Nissan Xterra. Retreat from a Model T and you're hoofing it. So, if you're looking for GD2, you have to think in today's terms.

Spitzer on Slate

Oh how I wish he had kept his ego health in line:

http://www.slate.com/id/2207920/

To add to his ideas for transformative stimulus projects, I would mention that WalMart is ready to roll out a nationwide network of nongas stations. Would it be so bad if WalMart saved our country? I could live with that.

Thanks Slate and FP!

Slate and Foreign Policy are now under the same umbrella. Here's five economists noting all the reasons why we still have a long way to go before economic recovery ensues:

http://www.foreignpolicy.com/story/cms.php?story_id=4590

I couldn't be more thrilled to see such a perspicuous collection of notes, thoughts, and analyses. Look at the names, too: Roubini, Shiller, Smick, Roach, and Baker. Big brains.

The one thing lacking from the analysis is the possible ameliorating effect of Obama's stimulus plan. I don't fault the economists, though, because there is no way to predict how an inchoate rescue plan will operate. I hope in ten months' time these same analysts will be singing the praises of Obama's proper application of Keynesian stimulus. Somehow, though, I think we're in for a rough ride with an uncounted number of stimulus projects being marred by graft and waste.

Of particular note is the emphasis on an inflation bomb (Baker), weak commodities (Roach), and the overwhelming absence of a valuble asset in the marketplace right now. It's as though for fear of a bubble emerging, nothing is worthy buying. That is a crisis of confidence. Only time will restore fundamentals to the world economy and restore reasonable prices to assets and goods.

Globalism Update

As I mentioned in an earlier post, globalism itself will come under fire. Here's the first stirrings, albeit from a source that is presumbably very pro-globalism:

http://www.foreignpolicy.com/story/cms.php?story_id=4592

Here's Roach's statement statement on globalism:

A second megaforce at work is globalization—the cross-border linkages that
during the past decade have increasingly taken the form of trade flows, capital
flows, information flows, and labor flows. The credit crisis itself is
essentially a powerful cross-product contagion—a virus that began with subprime
mortgages but then quickly spread to asset-backed commercial paper,
mortgage-backed and auction-rate securities, and other instruments throughout
the credit markets. But because financial engineers were so adept at
distributing the complex products they created, there is a critical cross-border
dimension to this crisis as well. Little wonder this is the worst financial
crisis in 75 years.

In a conversation with my wife, I posited that failure to recycle is not that big of a deal because eventually some economic event will transpire that incentivize raiding landfills for reusable materials. Such an event could be triggered if we see any notable combination of protectionism and scarcity wrought by war and strife.

Please note that the image appearing above is an illustration done by Nenad Jakesvic for Foreign Policy Magazine. Link: http://www.foreignpolicy.com/story/cms.php?story_id=4595

Pearlstein Gets It Wrong

Through most of the financial meltdown Steven Pearlstein showed perspicacity. He ended the year with a dud, though, suggesting that pay cuts may be desirable across the board -- not just for auto workers.

I have several problems with the argument. First, let me up front: We Will See Wage Deflation. This will come in the form of wage stagnation (which amounts to wage deflation in the face of some inflation, which we will probably see again in a month or three), or in the more social-psychologically detrimental form of the recently unemployed failing to find work that pays in the ball park of the their former positions. Boo hoo for the buy side derivatives geniuses, right? But they comprise only a small part of the picture. You have to consider all the realtors, construction workers, contractors, furniture sales people, mortgage analysts, financial planners, landscapers, et al. I saw that Talbots in my mall is hiring (even though the chain is shuttering other stores). To go from realtor -- and the life you led with that level of income -- to folding clothes in the mall is a huge step back. And think of all the people scrambling for what little comparable work remains in the sectors creamed by the meltdown.

Wage deflation by fiat or by some widespread voluntary measure will not help anything. In the industries not directly affected by the meltdown, it will not ensure solvency of the company. Rather, it would create greater insolvency in the financial world as the wage-deflated workforce fails to make its collective payments on mortgages, car loans, and student debt.

Further, using biglaw as a model is ludicrous. These are the same overachieving, overeducated, overselfesteemed types of people that created the overblown derivatives market. Comparing biglaw to workers in the broader economy is like comparing a Kardashian with Rodney King in a competition for Biggest Media Whore. The Kardashians are everywhere. I know this even though I have never seen any show that features one of them. That tells you how desperate they are to get attention. They have my attention and I don't even know who they are or what they have done to be famous. Did they cure cancer or something?

On the other side of life, Rodney King was assaulted by the powers that be and was thrust in to the limelight only because someone caught his beating on tape. Biglaw attorneys will do anything to make huge paychecks, annual bonuses, and solidify their standing for one day becoming partner. They would even sacrifice using their immense talent for serving the public. Conversely, "regular" workers are trying to keep afloat and make sure they can live a life of comfort. The powers that be -- the real powers on Wall Street and its lobbyist fifth column -- have mobbed the workers and beat them into the ground. In the coming months, all of this will be caught on tape and given to us in the nightly news.

I wonder if Pearlstein isn't suffering from the same regulatory capture epidemic that has infected the Fed and the other bank regulators.

What annoys me the most about Pearlstein's column is that he gets it exactly backwards. What we need is across the board pay raises. The stock market is so battered, many analysts are looking at solvency rather than profitability. The simple truth of the matter is that most major corporations are either still profitable, or have sufficient cash reserves to carry them through for a couple years.

Why can't these corporations show some patriotism -- after all, they benefit in millions and billions of ways from the American system and culture -- by doing a private-side stimulus package? Give everyone a 10% pay raise this year, corporate America. Not only will you bring people's wages up to historical standards (relative to inflation), but you will save the system as a whole because people can spend half of the pay raise on reducing leverage and the other half on buying stuff. Yes, consumerism would return again, and companies would remain solvent, and the Obamas wouldn't have to stack another trillion of debt onto my son's shoulders. Then, once everything gets bullish again, you can go back to shafting your employees. Problem solved.

My god, I am so irate the more I think about this.