Wednesday in Pictures

It is really getting darker around here earlier. I am well aware this happens every year every where, but I still hate it. Oh well, the seasons wait for nobodies preferences.

Notes
A favorite stop of mine is Evil Speculator. Great charts, biting humor, and even sarcasm make for a great mix. Yesterday the main author of the site voiced his concern that the effort involved is overwhelming, and that given this crazy market he is fed up with all the backbiting he gets from the comments section. I would hope he sticks with it, but I can understand the frustration.

While the comments section here is always top notch and interactive, I have seen a drop off in traffic over the past month of about 50%. I write for fun and for my own thinking development, so whether tons of folks read every day or just a few does not make a huge difference to me (though more is better). I would wonder if people have just gotten burned out on this stuff or just walked away from thinking about it in disgust. Chime in in the comments.

Wednesday in Pictures
I am still trying to pull together a cohesive line of thought about many items. Obviously this may take more than a few hours work. Until then, I will present the pictures I think are worth thinking about right now. All should enlarge if clicked. All commentary after the chart is MY OWN and not from the chart author's article.

Consumer Credit Contracts for 7th Straight Month (It has never done this for 8 Months in a row!)

Highly Reflationary!

Rally in the S&P 500 Not so Great in Euros

Notable: In Euros the move in Gold is also much more subdued.

Gold, in Inflation Adjusted Dollars, is Nowhere Near All Time Highs

Bubbles are violent and quick events, not 8 year sustained moves up. If gold is going to be in a bubble, we have not seen the beginning of the blow off top yet.

Treasuries Laugh In The Face Of Dollar Scaremongers

Treasuries say no inflation, hence a stronger dollar (at some point?). This would of course crash the stock market. When might be the most opportune time for the FED to do just that?

A year in the life of BAC stock:

It has been a long strange trip.

I will end the night with an absolute must see chart which breaks down by asset quality where it may be better to put your money; Toilet Paper or the Banking System?:

Brought to you by my good friend Stagflationary Mark of The Illusion of Prosperity. Please note the column "Liquidity Risk?" for a key difference. I may not stop laughing until tomorrow.

Have a good night.

Is the Dollar in Trouble? Does it matter?

Of course I am late home again tonight. Hard to say, but perhaps the pressures of the economy are starting to wear on people. Work has been crazy busy and now that grilling season is over, it takes longer for me to cook dinner! Bear with me as I adjust.

Tip of the Iceberg
It has always long been the position of this blog that in a future time when we finally get some details about the panic of our government during the credit collapse last year we will be as shocked as to the outright lying and fraud that was perpetrated in the name of "systemic risk".

In what is the first (of many we can hope) detailed looks at just what in the world was going on last fall, Andrew Ross Sorkin excerpts his book "Too Big to Fail" in Vanity Fair. There is simply too much content to cover here, but you would be wise to read the whole thing, and then buy the book.

Add to this the clear case of lying done by the Treasury last year about TARP, the health of banks, and the Stress Tests and things get ugly in a hurry.

Remember, it was the great results of the rigged Stress Tests that really ignited the rally. So what if all this confidence was built on a sham? It sounded good at the time, so why bother going back?

Is the Dollar in Trouble? Does it matter?
Today was the first "fireworks" kind of day since the lows set last March. The culprit? Dollar discussion that was all over the place and heated to a boiling point. In one day I read that the dollar is dead, it will be stronger than ever, reserve status is vital, reserve status is no big deal, pricing things in dollars is not needed, and pricing things in dollars makes a big difference. All over the place. Short on time, I really cannot handle all this tonight, so I will do one of those posts I hate where I provide links and maybe a line of thought. I will use this post as a reference to back track all of today's action.

Will a Basket of Currencies Replace the Dollar?
Argues it can be done, and will be over time (variable time frames)

When Reality Meets Fiction
Argues there is NO WAY to replace the dollar, ever.

SDRs and the Endgame for the US Dollar Reserve
Speaks to loss of reserve status and that it is a bad thing.

Ridiculous Hype Over Secret Oil Meetings
Mish say dollar pricing is a non issue. Mish covers plenty today in this area as well.

What about the wild ride in gold (silver too to some extent)? I am not sure. I am getting a bad feeling that gold may be a new target for momentum type players, mainly due to it's chart looking great and, well, momentum!

When I think about gold, yes I am considering a dollar in trouble. To me though, golds main argument is that in an era where many countries have really gone off the deep end in regards to monetary policy and the collapse of debt (denominated in whatever currency you like) a realization may be upon many that perhaps as much as 20% (30%, 40% who knows) of assets are pure fiction when thinking about true "worth". What is a Southern California home worth? A few years ago it could be 1 Million dollars. Today it is about half that. If mortgage rates go up, half that again. If the government gets out of the mortgage business (by choice or by force out) what's that home worth again? Who knows. Who knows what the dollar is really worth. Banks are in real trouble (Goldman upgrade aside) and there is simply plenty of "wealth" that is no such thing out there.

Case in point, from Naked Capitalism today:

Sweden Prepares for Financial Collapse in Latvia and Major Bank Losses at Home
The following is my translation of a much-discussed article that appeared in Swedish daily Svenska Dagbladet at the weekend. This information was being withheld from the public and leaked at an inopportune moment.

Note that the Swedish government has secretly been preparing the banks for financial Armageddon, encouraging Swedbank into a rights issue which arguably was conducted under fraudulent pretenses – very reminiscent of Bank of America’s shareholder vote for the merger with Merrill Lynch. In August, I asked “Why is Swedbank doing a second rights issue?.” Now we know.

This is the kind of thing that topples governments.

More vaporized money.

Consider the action in Treasuries where buyers are accepting all time low rates of return no matter what the condition of the US system:

3-Year Treasury Buyers Shrug Off Dollar Fears
Despite all the dollar-bashing, people were willing to loan the US government money for three years at just 1.445%, which is pretty astounding.

Astounding is a good term to use here.

The rise in gold could be a momentum play. The rise in gold could be an inflation play. The rise in gold could be an anti-financial engineering play. Obviously not all can be correct.

Something has to give. Consider this amazing play by Japan to stop debt default on any and all levels (via Mish who is on fire!):

Japanese Moratorium will Postpone Collection of Principle and Interest on Consumer and Business Loans
The Japanese Minister of Finance has proven that in spades by proposing a debt moratorium to individuals as well as firms. The moratorium would postpone repayment of principal and interest on loans, in an effort to spur more bank lending.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”

There you have it. Its all there in black and white, clear as crystal (thanks Willy Wonka!):


So we need to make more loans while one cannot collect on old loans because the underlying collateral is impaired beyond repair to keep the system going? Sounds like a winning plan indeed!

Have a good night.

Monday Mixed Bag

I arrived home from work a bit late tonight so I will go over a bunch of random items I came across today that were interesting in one way or another.

It Had to Happen
If you live long enough, you may well see everything eventually. It seems it was always a matter of time until this became real:
Animals with Lightsabers
Sample Picture:

Too funny!

Metal Market Manipulation
Now before you think you know which metal this post is about, it is not gold or silver!

Moving on, I caught this story today via Naked Capitalism:

The mystery investor who is turning the tin market on its head
A single investor – thought to be a hedge fund – is sitting on thousands of tonnes of tin in warehouses across London. According to traders almost the entire stocks of tin on the London Metals Exchange (LME) was bought up by a single, mysterious investor, last week.
One fund has warrants for more than 90pc of all physical tin stocks because the market rules dictate that above this threshold, the buyer must lend out the commodity, if asked, at the cash price with no premium.
Industrial buyers are furious that they are paying up to $730 per tonne for immediate delivery more than it would cost them to buy three-month futures contracts, arguing this stranglehold on the market should not be allowed to happen.

This story is very interesting. I have zero understanding of the tin market, but the buyer here is really gambling on higher tin prices and/or that they are not forced out of this position. I will try and keep an eye on this one.

Thoughtful Missives
A trio of top flight writings this evening.

Mish Shedlock pokes fun at those that are afraid deflation may happen, because it is indeed going on right now!
Deflation Threat? What Deflation Threat?
If you missed the authors write up on how the CPI component of rents is from outer space, he recounts it here as well.

I came across this Gregor Macdonald essay via Clusterstock. I am surprised I had not stumbled onto his writings before now:

The Alignment of Asset Reflation and a Collapsed Economy
You can think of the US economy as a kind of defunct amusement park, over which the FED has poured trillions of dollars of syrupy goo. The caramel candy is there for tasting, but it doesn’t turn the machines back on. The ferris wheel is silent. Since WW2, Washington has always been able to call upon Housing and Autos as the two areas to stimulate, to pull the country out of recessions. Of course, we just did that in super-sized fashion 6-7 years ago, to extract ourselves from the last recession. So, it’s kind of sad to see policy makers trying this again. Failed thinkers promote failed playbooks.

Ouch!

Zero Hedge poster George Washington had this nugget of information up today that is well worth a look:
The Largest U.S. Banks Have Repeatedly Gone Bankrupt Due to Wild Speculation, and the Fed Blessed the Speculation and then Helped Cover Up Their Bankruptcies
With a title like that you really should not need prodding to check it out!

Looking for the Next Bubble
Two pictures that summarize my feelings on the US economy:
Clusterstock Chart of the Day

Coupled with this:

I understand the argument that all those excess reserves are not entering the money system. That is of course true. One line of thought is that banks are going to use those reserves to write off losses. That is absurd, no more writedowns are forthcoming from the banks on bad assets.

I think that the banks are looking for a story that will sell. They are always seeking the next bubble, like Sauron was constantly seeking the One Ring. So far we have seen a 50% move up in the stock indices, but this has not really captured the imaginations of the general populace. What we need is a full blown asset bubble that everyone can get into. The FED/Treasury/Banking system would prefer a fast reflation of both real estate bubbles (residential and commercial) as this is what is killing them right now.

For this to happen, you need a good story. 10% unemployment does not help. A stubborn consumer that actually would like to save maybe 3% of their income is a problem indeed.

I look at all the money running loose right now and I am actually shocked it has not caused an issue yet. Yet.

At some point some braniac with a dry erase board is going to come up with an idea to use massive leverage and relaxed lending standards to ignite some kind of boom. As long as it has a believable storyline it surely has all the ammo it needs to get going. Many say that the US does not manufacture anything anymore, but we do. We proudly build bubbles, and have done so since 1987 and exported them across the globe. You are welcome. Please buy our debt while you are at it.

Have a good night.

Sunday Wrap Up

All I can say about today is WOW! I could pretend and try and write a little about things economic, but I am just too excited about the great football games today

Sunday Wrap Up
Gee, which game will I start off with....

New England Patriots 27 Baltimore Ravens 21
This was a playoff game in September. It was obvious that both teams saw this game as a must win. The hitting and execution on both sides was top level. I think this was the most exciting regular season game I have seen in some time.

So how did the Patriots do it? Running the football. A strange blind spot for the Ravens defense is inside run defense. If a team has a good line and executes well running right at the middle linebacker (Ray Lewis) does work. Not great mind you, but it is better than nothing which is what you get running outside against the Ravens.

Much will be made of the two huge "roughing the passer" calls against Baltimore, but the rules are clear. No shots to the head and no diving at the QB's knees. While both calls were on the low end of clear, they were both clear. Phil Simms (Go Morehead State!!) stated that you cannot get into a spot where you are trying to gauge how big a shot to the head is, or how blatant a shot to the knees were.

The Patriots defense is getting better every game. Brandon Meriweather may still lack great coverage skills at Safety, but he hits a ton! This has been missing in New England for 2 years. The final drop on 4th down by the Ravens receiver was a direct result of the hard hitting by the secondary, the receiver was already looking around before he had the ball.

A dramatic, hard fought clash of great teams. The Ravens have nothing to feel bad about, I think they will get better because of this game. While not an upset in real terms, I would call this game "surprising".

New Orleans Saints 24 New York Jets 10
The Saints win against everyone on ESPN's pick for the Superbowl after 3 games. 3 games!

An early onslaught by the New Orleans defense meant an early 17-0 lead. The Saints then went about doing everything they could do to lose the game with turnovers (Reggie Bush needs help), stalled drives, and many 4th and short failures.

Still, their defense never really let the Jets in the game, and late Drew Brees settled down and moved the ball well. If New Orleans can run the ball like they have so far AND they can play pressure defense like they have so far they will be a top level team. A bye week for the Saints, then a game against the NY Giants will answer plenty of questions.

As for the Jets, their defense is for real. I had some doubts, but it is as good as it seems. Their offense is spotty however, and Mark Sanchez looked a bit over his head in a noisy dome. Still, I think they will take away some good lessons from this game.

Randoms on the Rest
A quick thought on the other games:

-The Bengals should just play the last 3 minutes of all their games, it seems there is no reason to play the other 57 minutes!

-Its official, the Colts are starting to scare the hell out of me!

-If there is a more complete team than the NY Giants, I have not seen them so far. It kills me to write that!

-Both the Redskins and the Bucs bore me.

-What is wrong with the Titans? The loss of Albert Haynesworth cannot be the reason for a near total collapse across the board.

-Is it possible for the Raiders to just forfeit a season? Ugly stuff.

-Second place for lost season after 4 weeks, the Buffalo Bills are just flopping right now. The Miami running game is unreal to watch (250 yards on the ground!!!)

-The Broncos are better than I thought. They may have something to say about the AFC West. Will have to watch when they play the Chargers for the first time. What can I say about the Cowboys? Those guys just cannot execute cleanly for any stretch of time. Very frustrating for their talent level to be hampered by their level of play. It HAS to be new coach time. Can Jerry Jones please call John Gruden? He stinks as an announcer and his hard edge will whip that team into shape.

-I like the 49ers in the NFC West. That team is motivated and focused. A great turnaround story and Mike Singletary gets 100% of the credit for the attitude adjustment out in the bay.

-The Steelers need to win tonight. After what I saw from Baltimore, a 2 game deficit may be too much to overcome for the division win. The Chargers are in the same boat with Denver now.

That's about it. A wonderful football Sunday. Chime in on the comments if you are bored.

Have a good night.

NFL Week 4 Preview

I said at the season's start that this year could be the most competitive year in a very long time. So far all the action has backed me up 100%. You just have no idea how things are going to shake out this season. This Sunday's list of huge games should give us some more answers.

NFL Week 4 Preview
Taking a look at the most important games on Sunday and Monday.

Baltimore Ravens At New England Patriots
This is a huge game, though probably more so for the Patriots. Off to a shaky start so far, the Pats had a great second half last week against the Atlanta Falcons.

Tom Brady is clearly not 100%. His is inconsistent, inaccurate, and his timing is bad with most of the receivers. The Patriots had a rough time against the blitz of the NY Jets, and now face the defensive scheme that served as the template! If Wes Welker can play, that should help Brady. Running the ball with Fred Taylor (he knows the Ravens well) would also be advised.

Baltimore has the best defense in the league. I do not use stats, just reality and that is the reality. Add to this a young quarterback in Joe Flacco who is already very good and this team has all the tools to make a Superbowl run.

How will it go? Too many variables to be sure, but I expect a close game either way. My heart yells "Patriots" but I think at this juncture they may be too ineffective on offense to pull this one off.

NY Jets at New Orleans Saints
A fascinating match up on many levels. The Jets use blitzing more than any team in the league so far this year. So far they have been very effective. Sunday will be a real test.

While the Patriots could not shake loose while their wide receivers were in single coverage on the blitz, I would not expect that to be the case in this game. All world receiver Marques Colston is 6'4' and 230 pounds. Cover him with just one small cornerback and I think things will go bad fast.

The Jets have been effective at times on offense, but looking at their numbers they really are not doing anything very well. Luckily for them the Saints defense is still, well the Saints defense, so the Jets can expect to have more success on Sunday.

This game should be clearly decided in the first quarter. Either the Jets blitz scheme will confuse Drew Brees and cause havoc, or the Saints will put up obscene numbers beating the blitz. I don't see any other way for this to unfold. I am thinking the Saints burn the Jets plenty of times to win. Of course every single ESPN analyst has picked New Orleans, so that probably means they will lose by 40 points!

Dallas Cowboys at Denver Broncos
This game is important for both teams to find out just where they are. Is the 3-0 start for the Broncos for real? Are the Cowboys ready to settle down and cut down on poor execution? This game will provide many answers. I give the edge to the Broncos due to the game being at Mile High Stadium, but I think the Cowboys are the more complete team and a win would not shock me.

San Diego Chargers at Pittsburgh Steelers
These two teams might as well be in the same division with how many times they play each other in the regular season and playoffs!

This game has importance for many reasons. As the Chargers and the Steelers seem destined to meet every year in the playoffs, the winner on Sunday will have that edge working for them in a possible rematch.

The Chargers have looked underwhelming thus far, and need a breakout performance against a top flight team.

The Steelers need to get settled into the season after losing two last minute games. It is not panic time, the Steelers still have 2 games against division rival Baltimore to catch back up (the Steelers won all three games against the Ravens last year). I think is is important for the champs to close out a game and get back on track.

I think the Steelers find a way to pull this one out, but they have to beware the deep ball. The Chargers will be going long early and often.

Green Bay Packers at Minnesota Vikings (Monday Night)
This game is the exact scenario why Green Bay would only allow Brett Favre to be moved to an AFC team last year and not his first choice, the Vikings.

I do not think I need to add much here, you know the deal. It is grudge match time.

I like the Vikings at home because you know the crowd is going to be going crazy for this one. Note to Brett Favre: You will win more games on Adrian Petersons legs than your arm, hand off the ball!

There are some other interesting games, but not on the scale of the ones mentioned here. Enjoy the games tomorrow all!

Have a good night.

Friday Foray into Fun

Now that was a long week! It seems at last I am winning the war against my sinus infection, I would say it is "well contained" at this point......

It is going to rain here all day tomorrow so I am sure that will be plenty of fun. Tonight I am going o cover just a couple of small items and then crank up the fun-o-meter because I am wiped out and need a lift. With this Sunday's huge games in the NFL I will do a football preview post tomorrow.

I was Completely Wrong
In the last post I applied my amazing predictive powers to the release of today's NFP data. My exact words were:

Of course after today's numbers the template will have to be changed somewhat, and so the new release tomorrow will read (my prediction):
"Jobs losses of [225,000] surpassed Wall Street estimates for a job loss total of [250,000] adding further evidence that job market pressure is easing after the worst financial crisis since the Great Depression."
You read it here first!

So what happened? I was wrong on both the size of the job losses (-263K!) and the news coverage.

Well, at least I took a shot. My crystal ball works better on any day that is not the first day of the month, and this I forgot. Sorry!

Still, it was amazing to see the media coverage unable to spin this expectations miss in any positive way. I expect much more from our financial press.

While Good for Inflation Expectations, Unemployment Tends to Dampen Spending
I loved this Zero Hedge headline about a David Rosenberg piece:
Rosenberg: "Welcome To The Latest New Paradigm - Jobless Prosperity"
That line is dripping with such heavy sarcasm I find myself getting misty eyed with appreciation.

Back to being serious. The job loss situation is applauded by many economists (at least they have a job) as being very friendly to inflation. No wage increase, no inflation and all that with a bag of chips. This of course allows interest rates to stay at the 0% which allows the US economy to run at all. While this looks great on a dry erase board, it sucks for the millions of people that would really like to have a job. Forget a good one, just a job.

Barry Ritholtz had an excellent chart up (I saw this a few places as well) that shows what may be coming down the line (click for larger view):

The last two recessions, 1990 and 2001, were followed by terrible job growth. I think you, the reader, can see that it will be years until we just get back all the jobs lost during this debacle. Of course people with no job and no money should not stop S&P 1400 in any way. This is the "New Economy" where jobs are optional.

Friday Foray into Fun
I am so ready for this weekend. The wife and I will be visiting a cat breeder to check out a possible addition to the family. I love cats and think I am ready for another one. Somebody has to teach our pug dog some manners!

Look Alikes
Queen Elizabeth I twins?:

and

see more Lolcats and funny pictures
Scary!

Film Clips
A little cinema to perhaps point you towards a rental or whatever it is people do these days (on demand, Netflix, etc).

Back when Eddie Murphy was funny and Nick Nolte was not drunk, they teamed up for the classic film "48 Hours". This fight scene between the two is an excellent example of a boxer vs a brawler. Of course, you have to try and avoid a brawler if he is twice your size! (warning, harsh language!):


In what may be the most moving segment from maybe the best film ever made, enjoy the telephone scene from "It's a Wonderful Life":

Gets me every time.

Rock Blogging
You know, a long time ago I stole music night from The Big Picture blog (he featured Jazz) and lately music night has become a staple across the blogosphere. I think this is great, music can really help your mood and outlook. With that in mind, let's try and get in weekend mode.

In honor of the coming show, Star Wars in Concert, enjoy the music (try to focus on the steadily higher and higher tones as the battle goes on, then clarinet for Vader's death) from the end of "Return of the Jedi":


This one fits under the "over a year" rule! Take a listen to Cheap Trick and their power ballad "The Flame":


The song that is most "embed disabled" has to be Europe's classic "The Final Countdown". I found a copy I am able to place here, no guarantees it stays for long:

Rocks!!!!!!!!!!!!!!!!!!!

Yes, it has been overplayed. Yes, everyone tries to work it into their wedding, anniversary, funeral or whatever. Even after all that, Garth Brooks' ballad "The Dance" may be one of the best country songs of all time:


Last Call, Have Alcohol?

Ok, I have been a little on the easy side this evening. Maybe I am mellowing in my advanced age. But if David Letterman can still chase ladies and have success (got to be kidding!!), surely I can find a rock out tune!

Closing the show with a classic (I am getting old!) metal song. Enjoy the thunder of "Ride the Lightning" by Metallica:


Have a good night.

Forced Intervention

Quite a wild day! If you are of the bearish bent, you giggled all day as data point after data point came in "unexpectedly lower". With expectations as low as they can go, that is some feat. I will have an item tonight on this very topic. I really cannot remember a real down day like today, they seem so long ago.

New poll Question
With so much to cover, I will save the last poll results for another discussion. I would appreciate your participation in a new poll that was on my mind after I read this article (via Clusterstock):
Barely Anybody Clicks On Banner Ads Anymore
Obviously the piece covers the reality that nobody even clicks banner ads. I am interested to know how many (if any at all) banner ads the readers have clicked. Be honest, this is anonymous after all!

Not to be Lost in the Confusion
There was so much news and reactions today that I wanted to spotlight two items I read that I thought were first rate material that demand attention. I know there are plenty of items to cover, but these two writings are too good to let slide.

First up is another winner from Jesse's Cafe Americain:
A Priori versus Empirical Reasoning and Practical Decision Making
This article covers the issue of using one's own prejudice (as it pertains to market expectation) to color data selection. This is of course counter to how a real scientist uses information. This selection will allow you to step back and see if you are indeed using data selectively. It should be required reading for all writers of financial news. Blogs included!

The second selection is no stranger to readers of this blog as Ilargi of The Automatic Earth again amazes with another great introduction section:
The Carcass of Mother Goose
While the entire piece needs your review, here is the summation paragraph to get you hooked:

There once was a time, and it's not even that long ago, when the term "Moral Hazard" had a profound meaning that everybody in finance had respect for. Today, Moral Hazard means nothing anymore. The gutting of the term has become a cornerstone of government policy. And that harks back to something I told you a long time ago: this is not a financial crisis we're in, it's a political crisis, and a full-blown one.

Tomorrow's Headline Today
I mentioned the "beating lowest of the low" expectation game in my opening tonight. I am going to go out on a limb this evening and make a prediction with no waffle, no wiggle, and no excuses if I am wrong.

To set this up, we see this headline from today:
Goldman Raises Estimate of September Job Losses
The article tells us that:

The Goldman economics team, led by Jan Hatzius, said in a note to clients that they expected Friday’s employment report to show a net loss of 250,000 jobs, up from their previous estimate of 200,000.

The new figure is well above economists’ consensus estimate of 175,000, as tracked by Bloomberg News.

So one day before the data is to be released (released to the general public that is, government officials surely have this on hand right now, thus so does Goldman) we have a reasonably large bump up of job loss expectations. We saw this game in full force during the last bank earnings season.

The deal here is the template used by the major news wires for the last 6 months of "green shoot" coverage is a fill in the blank template so the news is standardized across the board. Tomorrow was supposed to go:

"Jobs losses of [165,000] easily surpassed Wall Street estimates for a job loss total of [175,000] adding further evidence that the worst of the recession has passed."

Of course after today's numbers the template will have to be changed somewhat, and so the new release tomorrow will read (my prediction):

"Jobs losses of [225,000] surpassed Wall Street estimates for a job loss total of [250,000] adding further evidence that job market pressure is easing after the worst financial crisis since the Great Depression."

You read it here first!

Forced Intervention
The story since last March has been one of government targeted support for the "free market" in order to save it. We are told the edge of destruction has been avoided, and more than that, a recovery is under way. I will side step for now the details involved in all this, they are secondary to this discussion.

In this fable all is going well enough that the FED will have to begin looking at "exit strategies" and in fact are out of ammo when it comes to MBS purchases and Treasury buys. Cash for Clunkers has come and gone. The housing handout is about over as you need to close on a home by the end of 2009 and those things take time. All that is needed is a self sustaining rebound and it would seem all will be well.

This is not going to happen.

Today's numbers (Car sales, Employment, Manufacturing) all are reflecting already a drop off in activity as even the knowledge of the possible end of government intervention is at hand. The stock market's first real down day in months served notice that the exits will indeed be full when the music stops.

In my mind we are coming to the point where the rubber meets the road. It was this writers expectation that as the fall season went along the data would get worse, and then much worse. Today may have been the opening salvo in this process, or just a one time blip that will resume shortly. Either way the real time reactions are the same.

I have never argued that we are not in deflation right now. Even in the face of unprecedented (in the modern era) government assistance, the economy is still in tatters. Soon the FED will come to understand some side effects of all their intervention:
-The market sees temporary lending facilities as capital pools
-The market sees MBS purchases as an open ended trash dump
-The market sees a weakening dollar as a structural trading platform
And there are many more ingrained intervention effects as well.

Should any of this change, there is going to be a violent market reaction.

The government is going to have to make a decision. Massive expansion of support programs and extension of the same is the bare minimum. Of course they could just let things go to their natural level, as I have argued all along. We would be 6 months closer to real resolution of our structural issues if the government had stayed out of things. Instead we have played a rally game built on implicit help that may or may not be renewed.

In the face of a deflationary collapse and overhaul of US financial engineering, I believe the government will go "all in" and do whatever they think they need to make sure deflation "does not happen here". Think big.

Have a good night.