Yesterday, markets were closed in both the US and Britain. Still, here at the Daily Reckoning’s mobile command post, we continued our lonely vigil. What are we waiting for? What are we watching for?
Ah, dear reader...just a little dignity, a little grace, a little courage and beauty. That’s all we ask. Can we find it on Wall Street? In Washington? In politics or economics? We hope so, because that’s all we have to work with here at the Daily Reckoning.
Oil went up yesterday. Asian markets fell - with Japan taking its biggest hit in 6 weeks. And the dollar fell. Speculators are beginning to bet that the Fed will cut rates for an 8th time; that’s the world on the street. As we predicted, the first 7 cuts have done wonders for the prices of oil, gold and commodities...but little for the real economy. Oil has gone up 60% in 6 months...putting big pressure on US household budgets. Now, instead of taking the hint - that it’s time to go in the other direction, by raising rates to head off rising prices - speculators think Ben Bernanke will continue battling deflation with further rate cuts. Maybe, maybe not...but our guess is that it doesn’t matter. Even if the Fed raises rates, it is unlikely to raise them enough to block the consumer price inflation already in the pipeline.
In economic theory, the supply of money is the key to prices. Prices should remain more or less stable when the supply of money increases at the same rate as the supply of goods and services. But in the last 15 years, the US money supply increased about twice as fast as GDP. The surprising thing was that prices didn’t rise. That was the period known as the Great Moderation. Food prices only increased at a 2.5% annual rate...even though money supply, MZM, was going up at nearly 9%.
We have given our opinion as to why consumer prices did not go up. We guessed, too, that those trends that labored so hard to hold them down have now walked off the job. Prices now seem to be adjusting to a higher money supply, with food up 4% last year, officially. Unofficially and anecdotally, consumer prices are rising at about 10% per year.
But while consumer prices were stable during that 15 year period...asset prices frequently went into bubble territory. And now, we await the Final Bubble, dear reader...about which we will have more to say later in the week.
In the meantime, the winner of the Enron Prize, and former head man at the Fed, Alan Greenspan, is in the news this morning. The Financial Times reports that he believes "there still greater than 50% probability of recession."
Warren Buffett, on the other hand, says recession is already a fact of life. And he says it will be "deeper and longer that people expect."
The old timer’s definition of a recession was ‘when your neighbor loses his job.’ When you lose your own job, it’s a depression. How many people have lost their jobs in this downturn? Well, for the answer to that question we look to the same people who give us the official inflation numbers - the apparatchiks at the U.S. Labor Department. Therein, of course, hangs a tale...and we will let Dana Samuelson of Danagold tell it:
" The average person judges a recession mainly on employment. If jobs are available, then the economy is holding up. If jobs are scarce, the economy is poor. By that standard, the economy is really struggling, with payrolls down in each of the first four months of the year. But the headline figures, again, don’t reflect the lived reality of Americans. At 5.0% in April, down from 5.1% in March, the current BLS unemployment rate is relatively low by historical standards. Yet the number of jobless Americans of prime working age, that is, men aged 24 to 54, is historically high at 13.1%. Most of these people don't qualify as unemployed but they are nonetheless out of work.
"Why don’t these would-be workers show up in the headline statistics? Mainly because the government's definition of the unemployed includes only people who do not have a job, have actively looked for work in the four weeks preceding the survey, and are currently available for work. But it excludes the self-employed, 1099 workers who can't get enough contracts, those working part-time or on commission only, and the under-employed (like real estate agents waiting tables or mortgage brokers bagging groceries). It also doesn't count those who've given up looking for work altogether—a category known as "discouraged workers," defined as persons not currently looking for work specifically because they believe there aren't any jobs available for them. Some analysts say this particular group of jobless Americans—who believe their prospects for finding a job are getting ever dimmer, yet who don't figure in the computation of the unemployment rate—represent the nation's dire job situation. According to John Williams' Shadow Government Statistics , the primary source for unbiased economic data, if adjusted for "discouraged workers," the actual unemployment figure for April rose to 13.1%, up from 13.0% in March. Now that's recessionary!"
Real inflation at 10%? Real unemployment at 13%? Maybe. But we have not quite seen the fall off in consumer spending that these numbers suggest...
...stay tuned.
More thoughts...
*** Since we have so little market news to report to you, we will take our quest for truth and beauty to other areas: global warming and the children of Israel for example. Both are touchy issues. In Europe, if you say you are skeptical of global warming, they look at you like a lion at a Christian. In America, you can say almost any nasty thing you want against Arabs...but if you are planning to run for public office, don’t dare to criticize Israel.
We begin by telling a story. A Jewish colleague told us yesterday.
"You really have to be careful to maintain good relations with your neighbors. That’s something my family discovered in WWII. My father was just a little boy in Paris when the war broke out...and then the French surrendered. You know, France was divided in two...there was the zone occupied by the Nazis and there was the unoccupied zone to the South. Since they were Jewish, they figured they’d sneak across the line and once they got to the unoccupied zone, they would just keep a low profile, not mention to anyone that they were Jews, and they would be safe. But my father was only a kid. And when they put him in the local school, in the little town they were staying in, the first thing he did was tell everyone that he was a Jew. So everyone knew why they were there. And then, when the Germans took over all of France anyone in the village could have denounced them and get them sent to a concentration camp. But no one did."
This recalled another story. A disagreeable French woman, then in her ‘70s, once told us that during the war she had been the directress of a boarding school for little children. It was a catholic boarding school. But it was wartime and a few of the children were Jewish, sent there by their parents in the hopes that they would be safe.
"When the Germans came to Lyon, they came around to the school. They demanded that we send out the Jewish children. The truth is, I don’t like Jews. But I disliked the Nazis even more. I had already changed the school’s records so the Jewish names didn’t show up anywhere. So, I told the lieutenant that we only had catholic children. And I showed him the list. If he had wanted to pursue the matter, he probably would have found the Jewish kids and then them and me to the camps. But maybe he didn’t really want to find them...you never knew; it was a strange time."
Well, times are always strange, we guess. And we find our little bits of courage and grace here and there...in odd places...and generally in the shadows. In the harsh light of the public eye, these civilized little acts of kindness and courage wilt like wildflowers...or get run over by a campaign bus.
When a presidential candidate discovers that a former friend or supporter has become a liability, for example, he is "thrown under the bus." Jeremiah Wright has the tire tracks to prove it - since he was thrown under the bus of the Obama campaign. The Obama group also sacrificed Robert Malley, an advisor on the Middle East, after it was revealed that he had met with Hamas officials. As every American knows, the Hamas fellows are bad hombres, and anyone who meets with them is no friend of Israel. Since being a friend of Israel, like wearing a flag on the lapel, is a requirement for America’s top office, Obama had to push Malley off the team and then run him over with the bus.
Zbigniew Brzezinski, former national security advisor, said he thought the Jewish lobby has become too powerful and is showing a "McCarthyite tendency...by slandering, vilifying, demonizing. They very promptly wheel out anti-Semitism..."
So far, Mr. Brzezinski hasn’t been dropped under the bus, but he should probably check his ticket.
Over on the McCain bus, another man of faith has been tossed beneath the treads. The Rev. John Hagee has views worthy of a man with great faith. According to Gideon Rachman’s Blog in the FT, he believes the European Union is headed by the Antichrist. In his mind, the EU is a prelude to Apocalypse. And who are we to say he is wrong? There’s no mention of it in the EU charter, but who knows what they’re up to?
If Mr. Hagee had stopped there, he probably would have been alright, since most Americans agree that there is something ungodly about Europe. But he also says that the Jews were murdered in WWII for a good reason - to drive them to Israel. It’s all part of God’s plan, he says; God made Hitler so the Jews would move to Israel, so the Apocalypse would come, followed by the second coming. How he knows God’s plans in such detail, we can’t imagine, but that’s the beauty of faith; you can believe anything you want...until you put it to the test.
Rev. Hagee is a McCain supporter. But McCain is no longer a Hagee supporter; the reverend had to go "under the bus."
Under the bus, too, is where skepticism regarding global warming is going. George W. Bush fairly recently got on board, agreeing that the earth’s climate is changing and the humans are to blame for it. And now all three candidates not only favor doing something about it - all endorse the idea of "cap and trade" as a palliative measure.
Here too, faith conquers wit. No one really knows what direction the earth’s mean temperature is going...or why. There are only hypotheses.
"But if you really want to know what it’s like to be a 16th-century heretic, try saying you’re a bit skeptical about man-made global warming," writes Harry Mount in the Daily Telegraph.
In the middle ages, the Catholic church made money by offering sinners a way to buy their way out of Hell - with an indulgence. In today’s secular world, you will have to buy your way out of the sin of using too much fossil fuel, by buying "carbon rights."
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