More stagflation news on $1,000 gold and weak spending

More signs the recession is here

consumer retail spending contracted, by six-tenths of a percent, in February. Economists (the dismal pseudo-science?) had been reportedly expecting a 0.2 percent increase:

“This is a downward spiral consistent with a recession,” said Kurt Karl, chief economist at Swiss RE in New York.

Gold – more signs we have real inflation problems

Gold has punctured the psychological $1,000/ounce barrier. And we know what happened when oil busted $100/bbl. It collected its breath, then speculators started bidding it up even higher.

If Big Ben Bernanke (The Worst Fed Head Since Greenspan™) is serious about a 3/4 point Fed rate cut next week, I certainly wouldn’t be surprised to see oil at $120 if not $125. Ditto for $1,100 gold, maybe even $1,200.

Result? The Dow was cratering in early trading.

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Another day and Ben Bernanke smokes more crack

Federal Reserve chair Ben Bernanke today told Congress the nation isn’t “anywhere near” the dangerous stagflation situation of the 1970s.:

“I don’t anticipate stagflation,” Bernanke told the Senate Banking Committee. “I don’t think we're anywhere near the situation that prevailed in the 1970s.”

Oh, really? Well, Big Ben, let me help you read the tea leaves.

Some people are worried the credit crunch that has followed upon the collapse of the housing bubble, and related credit alphabet soup “instruments,” could also affect commercial real estate.

Oil futures closed today at $102/bbl.

The dollar hit another new low against the euro, which broke the $1.53 mark.

So, credit is continuing to tighten up while inflation is continuing to loosen up. And, you’re not worried about stagflation.

Time to trademark your nickname: Worst Fed Head Since Greenspan™, because you’ll keep it after somebody else replaces you, unless that person is really clueless.

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The Fed is making like Japan

And that’s definitely not a good think, says Jim Jubak.

Why not?

He warns the recent Fed panicky rate cuts could give us a 1990s Japan-style prolonged economic slump. It’s worth an extended quote:

Ben Bernanke's Federal Reserve increasingly looks like it's headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan's crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan's three biggest metropolitan areas climbed 44 percent. Prices went up 12 percent more in 1988 and then 22 percent in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country's Federal Reserve, had lowered the discount rate — the rate it charges other banks — to a post-World War II low of 2.5 percent from 5 percent in 1984-87. In those same years, the money supply grew by better than 10 percent a year.

It all sounds familiar, doesn’t it? And, that’s not all that sounds familiar More below the fold:


Here is more on the parallels with 1990s Japan:

As happened in the U.S. real-estate boom, lending standards in Japan collapsed. At the height of the boom, banks regularly made loans for more than 100 percent of property values. To keep real-estate loans off their books, banks lent through nonbank entities that made the actual loans.

Regulatory oversight took a vacation, too. Japan’s Ministry of Finance allowed companies to include the profits from real-estate speculation in reported earnings. By 1987, Japanese companies made half of their profits from speculative investments in real estate -- and the stock market.

Jubak then describes how big financial agencies, like Mitsubishi Bank, first “floated,” then bought up, insolvent creditors and junior fiscal partners.

That, too, sounds quite familiar, as in Bank of America buying Countrywide just a couple of weeks ago.

Beyond that, Jubak says here’s why Fed head Ben Bernanke isn’t handling the U.S. situation correctly:

By giving banks the hope they can dodge rather than bite the bullet, the Federal Reserve has created the possibility that what would have been a very painful but short lesson for the banks could turn into a long-term drag on the financial markets and the economy.

If banks lend less because they’re spending so much time watching their past mistakes that they shudder at the idea of adding loans to their balance sheets, if nobody trusts the prices for distressed assets, so big parts of the financial markets remain frozen in place, if consumers and corporations with decent credit can’t get new loans to fix bad ones or to expand production or consumption, then the economy will run slower than its potential. And if the Japanese experience is any indication, it will run slower for a very long time.

Shorter Jubak: By making himself too much a hostage to Wall Street, especially the short-term Street, Bernanke is probably doing more damage than good to the longer-term Street.

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The economic proof is NOT in the Chinese pudding, but the fear is in Bernanke

For months now, Wall Street bulls have been saying any “slack” or “slips” in the U.S. economy could easily be picked up by China. Or India. Well, Monday’s Asian stock market tanking put paid to that theory. Jim Jubak provides analytical details:

The death of this belief in "global decoupling" is likely to have three effects:

• It will shift the harshest bear market action from the U.S. to overseas markets, as overseas investors discover that their economies are slowing, too.
• It raises the odds of a "bear market rally" in the not-too-distant future. Such a rally would leave the bear market intact and end in another painful market downturn.
• And though the death of this myth is essential to finding the bottom in the current bear market, the final end of the bear still depends on a recovery in the U.S. financial and housing sectors, which now looks unlikely until early 2009.

The danger of slowing economic growth is a months-old story to U.S. investors — one reason that the major U.S. market indexes are currently flirting with the 20% loss that defines a bear market. But it's something new for investors in overseas markets, many of whom thought that those economies would be immune to a U.S. recession.

Plus, as Jubak points out, Europeans, like Americans, are familiar with the ideas of stock markets and their vagaries. In China, especially, this is a novel concept; you’ll note that on Monday, the Chinese (and Indian) markets sank far more than the U.S. market on Tuesday (helped, albeit, by the Fed rate cut).

Meanwhile, expect the post-recession recovery to be weak. Says who? Jim Jubak?

No, Ben Bernanke. Now you know just how much panic, and gloom, was behind that rate cut.

Plus side? And, yes, there is one. At least we’re not getting Greenspan bullshit. Now, if Bernanke only can prove to have a pair of Paul Volcker cojones, we’ll be OK in the longer term.

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Bernanke a Street suck-up just like Greenspan

Jim Jubak points out that Big Ben, like the Greenspan God before him, is simply trying to shuffle one market catastrophe down the road to the next one. You thought balloon-note home mortgages were bad; that’s nothing compared to the balloon notes the Fed has floated Wall Street for more than a decade, starting with Countrywide’s crack-up, through the dot-com bust and on to today, Jubak says:

Over the last 20 years, first under Alan Greenspan and then Ben Bernanke, the Federal Reserve has taught Wall Street to expect a reward for bad behavior.

* Build a hedge fund on a mathematical model and a prayer, as Long-Term Capital Management did — borrowing $129 billion on just $4.7 billion in assets — and the Federal Reserve will organize a bailout.

* Bid dot-com stocks to the sky — as Wall Street analysts did with ever-higher target prices on Amazon.com (AMZN, news, msgs) and others — and the Federal Reserve will cut interest rates to 1% and keep them there.

* Put the money from that rescue to work to build skyscrapers of structured debt — until a collapse in the market for mortgages turns even low-risk AAA-rated debt spiraling to junk bond prices — and the Federal Reserve will cut interest rates.

Bernanke's Fed first cut rates in a panic by a half a percentage point in September, but the latest cut — a quarter-point on Oct. 31 — was in direct response to Wall Street.

Jon Markman says the Fed is, in essence, trying to delay a recession until after the November 2008 presidential election.
The old Fram oil filter commercial said, “You can pay me a little bit now, or a whole lot later.” Well, the next president’s going to have to do a lot of paying, and that’s another reason why I don’t get Democratic candidates not talking more about the economy. One of them could be having to lead a pretty big clean-up.

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National average house price to drop this year

And, possibly, for the next two years.

I would change that “possibly” to “probably.” And, more and more people are predicting a recession of some sort, even if they refuse to use the “r” word.

While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

“For most people, this is not a disaster,” said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. “But it’s enough to cause them to pull back.”

Combine the fact that much of consumer spending this decade has been credit-based, and the primary source for that spending has been home equity loans, and it’s pretty easy to understand how a recession could be just around the corner.

The only question is, how bad of one?

Plus, how mentally equipped is the Fed to deal with this? After all, our current fearless Fed flack, Ben Bernanke, when a Bush advisor in 2005, said:

“Strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis.”

Guess what, you credit-inflating junior Greenspan sack of shit? We do now!

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