May 2008

Is the dollar in the initial stages of a hyperinflation? We very strongly doubt it, although we would no longer assert categorically that such an outcome is impossible. Even so, there is only one course of political action we can conceive of that would put the U.S. economy on a hyperinflationary path, and it is not one that we have heard discussed. Indeed, while inflationists have always insisted the Fed would do 'whatever it takes' to avoid deflation, they've always fudged the details. And even when details were forthcoming, the scenarios they described were preposterous ' such as that wage inflation was about to come on full-bore. Does anyone actually believe that United Airlines, Chrysler, Beazer Homes et al. will somehow find a way to pay their employees enough to scrape by in hyperinflationary times? Another crackpot vision of the inflationists has Helicopter Ben dropping $100 dollar bills from whirlybirds. This tableau was metaphorically appealing but implausible, since the only legal and legitimate way to put fresh money into people's hands is to get them to borrow it. And by the way, this is true even of the stimulus checks the IRS recently mailed to taxpayers. It may have seemed as though the money dropped from the sky, but in reality the hundreds of billions of dollars worth of free lunches disbursed by the Treasury Department will increase the federal deficit and therefore the amount for which taxpayers are ultimately on the hook. No Need to Speculate In light of the above, what options does the Fed have to fend off deflation? Actually, we needn't speculate any longer, since, by its recent attempts to arrest the collapse of America's financial system, the central bank showed us exactly what it would ' and will -- do. Recall that the Fed did

The brazenly fraudulent economic data the U.S. government puts out each month would have us believe that inflation and unemployment are both pretty tame right now. Would that it were true! In reality, 'underemployment' is rampant, and, according to John Williams, a speaker at the recent meeting in New York of the Committee for Monetary Research and Education (CMRE), consumer inflation would be running at closer to 12 percent than the currently alleged 4 percent if it were calculated using the 1980s formula. Instead, we now get 'seasonally adjusted' unemployment figures, and a 'core' inflation rate, ex-food and -energy, that are about as believable as 1930s Kremlin data intended to validate Stalin's Five Year Plan. Productivity Hoax By egregiously manipulating the inflation number each month, the government has produced another statistical fiction ' i.e. 'productivity growth' -- a number used by "Easy Al" Greenspan to persuade us that the economy was on the right track during his tenure. If this were true, though, and Americans were indeed as wealthy and productive as the Fed chairman always liked to tell us we were, then why are there so many working wives? And why, even with all those wives working, do Americans have no savings? Oh, that's right: Our savings, and most of our wealth, are vested in the homes that we live in (but which are mostly owned by mortgage lenders -- the same homes that, on average, lost 15 percent of their value in the last year). Regarding inflation, it doesn't take a genius to figure out that the monthly CPI number is bogus. Anyone who has been to the grocery store or the gas station, or who has sent a check to a college bursar, or had a prescription filled, knows that consumer prices have been rising very steeply

Wall Street may have succeeded in ignoring atrocious Q1 earnings these past few weeks, but it would appear that skyrocketing oil prices are another matter. News that U.S. reserves fell unexpectedly last week pushed crude to new record highs and stocks into their worst two-day decline since February. The usual bunch of analysts seem to think it's all about supply and demand, but maybe the global energy market simply smells major weakness ahead for the dollar? If so, and the Dollar Index were to break the supposed Maginot Line of support at 70, banging out new post-World War II lows, there's no telling how high crude could go. We've identified a precise target for the July contract in Thursday's touts that's about as bullish as our technical runes will permit. Although the number is close to Goldman's recent estimate of $140, because our target is a precise Hidden Pivot, even slight progress above it would be warning of significantly higher prices to come. (Click on chart to enlarge) We doubt the already fragile global economy could survive much higher prices, but because the rally is technical rather than fundamental, $200 a barrel cannot be ruled out. We can't recall anything as big as the energy markets ever getting short-squeezed, but the 1970s oil embargo proved that it is possible for a single entity ' at the time, OPEC ' to corner the market. Odds of this occurring have probably increased since then, since no one supplier, even Saudi Arabia, can pump enough extra oil at the margin to satisfy a spike in demand, much less a wilding spree caused by global speculation. Bubble Must Pop But when the bubble final pops, and it will, it's unlikely to be bullish for stocks, since the collapse will cause hundreds of billions, it not

Murphy's Law at exceptional strength has delayed my return to Denver by a day, but I'd rather spend a few moments tonight talking about all the things that went right. There was the CMRE dinner, for one, since it gave me an opportunity to hear what the best and brightest bears are saying these days -- Jim Grant, John Williams, Alex McDougall and Bill Laggner in particular. Two of those speakers are predicting hyperinflation, and although their arguments were moderately compelling, I will attempt to explain here later this week why I think they will be wrong. I still see deflation as the true threat to the economy, and although I no longer believe that hyperinflation is impossible, the catastrophic damage it would cause to savers and savings institutions, including U.S. and global bond markets, makes it a very unlikely policy choice. I will also tackle the seeming mystery of why unemployment is not skyrocketing even though the economy is falling apart. The answer is pretty simple, and I think persuasive, and I've already given you a hint when I used the word 'under-employment' here a couple of days ago. This is a problem that is still statistically invisible but anecdotally mountainous, as I hope you will agree. I spent the last two days of my trip meeting with one of my two trading partners, John Boutiette, a Boston native who's got enough PC monitors on his desk to blow out all of the lights in Watertown if one of his surge protectors should fail. We spent most of Monday comparing notes on some of the technical tools we use to trade futures contracts, but it was the Red Sox game that evening that made the day memorable. I'd never been to a game at Fenway before, and I came to this one feeling less than fond toward the

Is the end of the housing bust in sight? A prominent money manager known for his maverick views thinks so, but not without reservations. Charles Peabody, of Portales Partners, was one of the presenters at the meeting we attended in New York last week of the Committee for Monetary Research and Education. He says that 'Four Horsemen' have been working hard to pull the economy out of the mire of a housing/credit bust. The horsemen are the Federal Reserve Board, Congress, the SEC and/or FASB, and the Treasury Department. Three of the horsemen have fully materialized, he says, and it is only a matter of time before the fourth, Treasury, succeeds at the crucial objective of stabilizing the dollar. Once this has been achieved, says Peabody, several positive things will happen: 1) the housing market will stabilize (albeit at depressed levels); 2 we will pull ourselves out of the recession; 3) widening spreads in fixed-income markets will reverse; and 4) a rally in financial stocks will develop. For Peabody's bullish scenario to play out, housing prices must first find a bottom. He says this is imminent because housing affordability is slowly shifting in favor of buyers. We think this is where his bullish argument fails, though, for two reasons. First of all, even though real estate prices have been falling for more than 20 months, that doesn't necessarily make homes more affordable. In fact, lending standards have tightened so dramatically as to all but negate the would-be stimulus of lower prices. Whereas buyers could once take possession of homes without a downpayment or verification of income, now, to qualify for a mortgage loan, they must meet far more stringent income guidelines and come up with a downpayment of at least 20%. These new hurdles are formidable and have probably more

I promised to report on some of the Big Ideas that came out of the CMRE meeting, and this I shall do in the days ahead. Some speakers featured at the semi-annual event, including John Williams, Bill Laggner and Alex McDougall, shifted my thinking a bit on the deflation/hyperinflation question, and although I remain convinced that deflation will ultimately devastate the economy, I can now at least imagine how a hyperinflation might occur. No one that I am aware of has fleshed out this point, and the inflationists' main argument -- that the Fed 'will do whatever it takes' to keep a deflation from occurring -- has never satisfied me. I also intend to share with you an insight I had concerning unemployment, and how the relatively tame statistics the government has been feeding us belie an economically ruinous trend, already well under way, that might be characterized as rampaging underemployment. But more immediately, let me relate to you the eye-opening discussion I had with a Washington D.C. lobbyist who attended the dinner. Based on conversations he's had with behind-the-scenes players in the Democratic Party, he believes Al Gore has a good chance of becoming the Democratic nominee. This is a possibility that had not occurred to me, but the more I've thought about it, the more plausible it seems. The lobbyist, who spoke with me on the condition that his identity not be revealed, is a well-known figure on Capitol Hill. He said that some of the shakers and movers in the Democratic Party are strongly convinced that, at this point, Gore would be more electable than either Clinton or Obama. This is hardly a stretch, since it should be clear to any observer that the all-but-endless series of primaries has damaged both candidates while leaving their GOP opponent,

I'm in New York for the annual spring meeting of the CMRE, the Committee for Monetary Reform and Education. This group attracts men and women from the investment community who share your editor's disdain for fiat money and other falsehoods promoted by Big Government. Here's the line-up of speakers at tonight's dinner: James Grant, 'Grant's Interest Rate Observer', the man who has brought financial reporting to a high art. In politics, James recently praised Grover Cleveland as president. (We agree and if your knowledge is incomplete regarding Cleveland, check the Mackinac Institute for the article by Lawrence Reed,* fellow supporter of sound money.) Charles Peabody of Portales Partners, reports on the world's banks and economies. In January, Charles had this provocative coverage, 'Is China the Next Disease? We think so!' His list of what a collapse in Chinese markets could produce for US financial companies is not to be missed. Can the bubble burst before the Olympics? Walter J. 'John' Williams prepares Shadow Government Statistics, an extraordinary service for sound analysis that he started when a client asked for his assistance as he could not depend on Department of Commerce GDP figures. Williams found the government figures faulty. His corrections lasted until� GNP methodological changes eventually made the underlying data worthless. His outlook is a deteriorating but still inflationary recession. Stanley Sporkin, known for his uncompromising work as a lawyer and a judge, he distinguished himself as a legal critic. Sporkin was SEC Chief of Enforcement during the Carter Administration. President Reagan appointed him to the U.S. District Court for the District of Columbia. He retired as a federal judge in January 2000. Rogue Wave Economics If you'd like to know more about the CMRE, click here. I was a speaker at this annual event myself, during the 1990-91 recession.

Let me say it once more: Microsoft is history. Yeah, I know, companies with $50 billion in the bank don't just die overnight. But Microsoft will go to its reward nonetheless, a victim of technological Alzheimer's and changing times. Diminished capacity has been taking a heavy toll on the software maker for the last decade, as should be apparent to anyone who uses a Windows-based computer regularly, and somewhere down the road lies decrepitude and, finally, death. It's only a matter of time. Speaking as someone who uses a PC 10-12 hours a day, this is something that I feel strongly in my gut. And although probably not one person in a hundred would agree with me, I am convinced nonetheless that the Redmond behemoth's slide toward oblivion will be complete within six to eight years. It could even happen sooner if some upstart finds a way to offer reasonably good equivalents for Excel, Outlook and PowerPoint as Web-based applications. As many PC users who have had to put up with the gratuitously conceived Vista operating would agree, if it weren't for Microsoft's Office suite, the company would have died long ago. Will it be Google that administers the coup de grace? Possibly. But if so, it will not be any time soon. The firm currently offers a Web-based spread sheet and a decent e-mail client, but unfortunately the applications are not yet sufficiently robust to supplant Excel and Outlook. How about Apple? Well, we can only hope Steve Jobs has chambered a round for the kill shot. Like Alzheimer's But let's not harp on the reasons why Microsoft merely deserves to die, since we've done that before. We won't even discuss Microsoft's failed, desperate bid to acquire Yahoo, which itself has been flailing around, like Microsoft unable to invent

Yesterday's headline implied that it might be time for bears to take a vacation, but perhaps the mental health of bulls too might benefit if they 'go away in May.' Seasonality will favor longer lapses of tedium on the nation's bourses in the months ahead, but on Wall Street that is surely no remedy for hypertension. Quite the opposite, in fact, since prolonged stretches of sideways price action are almost as stressful as the number one killer of money managers, bear markets. Below is a chartist's version of atrial fibrillation at work, straining the heart and arteries of anyone so foolish as to be trading the E-Mini S&P yesterday: (Click to enlarge) For our part we just watched, having lucked out overnight with a target that caught the bottom in June Crude within 12 cents. Here's the advice for oil traders that went out to Rick's Picks subscribers Monday evening, when quotes for Texas tea were hovering just below $124 : 'There are some bullish targets near 131 given here earlier, but we'll put them aside for now, since the futures look primed for a fall to at least 123.22, or to 122.25 if any lower. Either can be bottom-fished with a stop-loss as tight as you can abide.' The actual intraday low occurred at 123.10, so a 15-cent stop-loss would have survived our advice. The subsequent rally proved quite robust, hitting 124.19 about three hours later in the dead of night. But it took a nimble hand, iron nerves and quick reflexes to convert the recommendation into lucre, as one chat-room denizen appears to have done, since the June contract dropped like a brick after the rally apexed. Even so, the original low where we'd gotten in held, producing a second rally to 126.02. But by then, anyone in