Fun For Now

“According to the Dow Theory, when the Dow Transports begin to lag the Industrials, it is a significant event. This divergence signals that not all of the market agrees that the future is full of blue skies and sunshine.

“In May 1999, both the Industrials and the Transports made new highs. But from that point forward, the Transports declined and continued declining, even while the Industrials rallied to a new high in January 2000.

“Back then, almost no one trusted the ‘sell’ signals issuing from the Dow Theory. Instead, almost everyone talked about how the ‘New Economy’ was impervious to things like the business cycle, an inverted yield curve, and – especially – an antiquated stock-trading theory based on the Industrials and the Transports. I mean, how 20th century could you get?!”

Mike Shedlock and Brian McAuley,
October 10, 2007

Read the rest of today’s guest essay here:

Fun For Now

And now over to Short Fuse, reporting from Baltimore…


Views from the Fuse:

The minutes from last month’s infamous FOMC meeting were released yesterday…and here’s a snippet:

“Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside.”

In other words, “‘The subprime mess is bigger than we expected. And we’re scared it’s going to bugger the economy at large,'” writes Addison from the helm of The 5 Min. Forecast.

“Bernanke and crew go on to say: ‘The impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action.’

“Or, if they were speaking in English: ‘What’s more, it ain’t over yet. So we’re going to make money cheap again. Maybe that will get us out of the woods.'”

Here at the DR HQ in Baltimore, the weather has been unseasonably warm for October – actually hitting 90 degrees a couple times in the past week.

“Back in August, during the stock market gyrations caused by the subprime mortgage meltdown, some wags referred to experiencing ‘October in August,'” writes Byron King.

“The reference was to the stock market corrections that often come in midfall arriving in late summer. Now, from the perspective of weather, if not of climate, we are experiencing ‘August in October.’ But then again, the weather predictions are for cooler temperatures to arrive soon, and even some rain in the near term. And despite the warm air masses that presently hover over half of our continent, winter will arrive eventually.”

Indeed, the season for high energy bills is upon us…and those who use heating oil (which is derived from crude oil) will be feeling the pinch. Crude is up $20 from where it was in November of last year, and homeowners are going to take notice when they receive their electricity bill.

The AP reports:

“The average total heating oil bill for the winter months is projected to rise by 28 percent from a year ago, to $1,834, the energy assistance group said Monday, a day before the government releases its official winter energy forecast.”

Those who heat their homes with natural gas will see an increase of around 6 percent. This is because of ample natural gas supplies, according to the American Gas Association.

Interestingly, Chris Mayer points out that the ethanol boom is supporting the consumption of natural gas (and in turn, his Capital & Crisis natural gas holdings).

“Some say, somewhat tongue in cheek, but with a good measure of truth, that the ethanol craze is the best thing that ever happened to the natural gas industry. That’s because the overwhelming majority of ethanol facilities burn natural gas to produce ethanol.”

As far as the current situation is concerned…we think it could go either way.

What we are watching is a final, desperate push by Late, Degenerate, (Socialized) Capitalism…

Yesterday, the Dow hit a new all-time high. Everything with a price on it seemed to go up – oil over $80 again…and gold went up $4.60.

This sounds like good news – at least to the people who want another big round of bull market prices. The flation with an “in” in front of it is beating the flation preceded by a “de.” It means the dollar is going down. And when the dollar goes down, it buys fewer stocks, less oil…and less food.

Food prices are rising fast. They’re moving up at a 12% rate in the United States. In China, they’re soaring at an 18% rate. The Chinese are poorer than Americans. So food is a bigger part of family expenses. According to the people who figure out the inflation rate in China, food is 37% of the total.

This puts the official inflation rate in China at 6.5%…alarmingly high. Naturally, the government is swinging into action and is almost sure to make the situation worse.

In the United States, meanwhile, people spend less of their income on food…so the inflation rate is less responsive to increases in the price of milk and wheat – both rising at spectacular rates. What’s more, the feds take major cost items – notably food and energy – out of their ‘core rate’ calculations, on the grounds that…well…the rate will look a lot better without things that are moving up fast.

“In the first eight months of 2007, the consumer price index – the main gauge of inflation – rose at a 3.7 percent annual rate,” writes Daniel Gross. “That’s more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI – including food and energy – has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

“Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting), while sipping on a Starbucks Frappuccino (whose price has risen twice since last October).”

But we are not writing today to gripe about inflation. No, dear reader, that would be too easy. Instead, we’re aiming to make sense out of the Big Picture.

Inflation is picking up – everything is going up except house prices. And the Fed is prepared to make darned sure prices KEEP rising. That is the message delivered so eloquently by the Fed’s Open Market Committee last month when it lowered the fed funds rate by 50 basis points. The real question is: will it work? Can they keep the “in” in front of flation? Most people think so; that’s why they are buying stocks. They think Ben Bernanke has cleared the way to another big boost in stock prices. They think the sub-prime credit problem is now ‘contained.’ They think consumer price inflation is under control; the Fed chairman said so!

It could go either way, in our opinion. There might be another big burst of “in” flation in asset prices – thanks to Fed policies. The Dow could go to 15,000…or to 20,000, for that matter. Then again, the price of a copy of the Wall Street Journal could go to $10.

Or, maybe not.

Since the early ’70s, the practice of American financial authorities has been to try to keep the pot boiling by stimulating consumer demand. Trouble was, the economy really hasn’t been doing very well. After ’79, hourly wages didn’t increase in real, inflation-adjusted terms. So in order for consumers to continue to spend, they had to borrow.

In the 1960s, it was government borrowing that led the way. Then, in the ’80s, borrowing was largely privatized. In effect, consumer spending was subsidized by low lending rates; as a consequence, households more than doubled their debt/capita.

Consumption, as a percentage of GDP, rose to more than 70%. In the present expansion – since 2002 – consumer spending and house building have contributed 90% to 100% of GDP gains. Thanks to more consumer spending, while holding down labor costs, business profits have been decent.

Of course, the whole thing is unhealthy and unstable – in an economic sense. When people go deeper into debt, it feels good – it is as if they were getting something for nothing. But when they have to pay off the debt, it doesn’t feel so good. Then, they are giving up something…and getting nothing for it.

But the goal of late, degenerate managed-capitalism is to make it feel good for as long as possible…while disguising the pain. The costs – inflation, the fall of the dollar – are socialized, spread out among people who don’t deserve them…and mostly don’t understand what is going on. It won’t be the debtors who pay their bills, in other words…instead, it will be consumers and wage earners. Central banks will bail out speculators and big banks, while also trying to make sure that the currency of record keeps going down. This will be good for those who borrowed and bad for those who saved. It will also be bad for anyone who has to buy gas or breakfast…or earn his money in dollars. That is, it will be bad for almost everyone.

Yesterday was San Ernesto’s big day. Ernesto “Che” Guevara Lynch was shot by Bolivian soldiers 40 years ago yesterday, in La Higuera. Now, in the town where Che was gunned down, Ernesto has become a saint.

“We have masses for him…we pray to him…he performs miracles for us,” says Susana Osinaga. “He was like Christ.”

We’re not making this up. La Nacion reports that a woman named Ligia Moron says she saw Che’s body laid out on the ninth of October, after he was shot. That image was forever “drawn in my soul,” she says, adding:

“He gave his life for an ideal, fighting for us, here, just as Christ has given his life for us.”

Ha…ha…ha…San Ernesto!

The poor soldiers who captured Che have suffered. People look at them as though they had crucified Christ. One was shot in the back…one was lynched. Another fell out of a moving car and died.

Mike Tyson has Che embroidered on his body…so does soccer star Maradona. Here in Buenos Aires, a street demonstration marked the occasion. Yes, San Ernesto has become the patron saint of half-wits all over the world.

What’s wrong with the Argentines? Lord Byron thought he could trace the problem in the whole Hispanic world back to Cervantes. His character, Don Quixote, the Man of the Mancha, gave Spaniards such a heightened sensitivity to ridicule, said Byron, that ever thereafter they refused to take any initiative, for fear of making fools of themselves.

Now, in all of Latin American there is a general attitude of “defeatism, pessimism and self criticism,” says Gabriela, our Spanish teacher. “If you hear someone saying bad things about a Frenchman, he must be English. If you say bad things about a German, you must be French. But if you say bad things about an Argentine, you must be an Argentine.”

“We never do anything right in this country…that’s what people say,” she went on. “And whenever someone proposes to do anything new, everyone tells him it will never work.

“Of course, it wasn’t always that way. Back in the days of Peron, Argentines were very proud…very positive…very sure of themselves – even arrogant. In fact, most people in Latin America still think the Argentines are arrogant. And maybe we are. But we are fiercely self-critical.

“I think what happened was that Peron was a disaster…and he was followed by other disasters. There were the generals…the war in the Malvinas (Falklands)…inflation…the crisis of 2002…debt defaults. In the ’30s, Argentina was one of the richest countries in the world. In fact, I think it was number 8. Now, it is a mess. “

Until tomorrow,

Bill Bonner,
The Daily Reckoning