Friday Lite

This will be the last post for at least a few days - we will soon begin a weeklong tour of the Southwest not returning until late next week.

Merry Christmas, Happy Holidays, Seasons Greetings, Happy Hanukkah, Happy New Year, Happy Kwanzaa, and a belated Happy Winter Solstice.

Should the spirit strike and an internet connection be accommodating, something may appear here between now and the big announcement next week - we'll see.

Big announcement?

One Week to Go

The much-talked-about Guess the Year-End Price of Oil and Gold contest comes to a dramatic conclusion next week. Late in the day on Friday, December 29th, the final data will be collected and tabulated, then collated, cross-checked, and verified, all with the goal of determining a winner to this closely watched competition that, surprisingly, has garnered little attention from the mainstream financial media.

As you'll recall, the nearest combined guesses for the closing price of gold (spot bid) and oil (February WTI crude contract) will be the lucky winner of a free one-year subscription to Iacono Research, where the model portfolio looks set to end the year with an increase somewhere in the mid-20 percent range.
The blue circle above has moved only slightly from last week and contains the same guesses - dlp, WT, Anup, AK, dotditdot, and CR. Anup is closest, followed by WT. A winner will be announced either late next Friday or early Saturday.

Economic Lipstick on Paulson's Pig

A harsh (but probably accurate) commentary by James K Galbraith about last week's trip to China by Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke:

Paulson's China policy is easily understood. In the United States government the Treasury represents the interests of Wall Street... And what Wall Street wants from China is what Wall Street always wants: the freedom to speculate (excuse me, invest) in currency, corporate stocks and bonds, and real estate. Wall Street loves risk, uncertainty and volatility. The Chinese don't. This is a conflict. It is not in any sense a complicated question.

Paulson made a power play, based on a threat: open up or we'll shoot. More precisely, it was a power play based on a bluff. Since the bluff was transparent, the Chinese called it. And when they did, the US side folded. The Chinese then completed the hand by giving back a few symbolic concessions, so that Paulson's team would not have to admit to the obvious fact, that the trip had accomplished nothing at all.

For Paulson, a business negotiator, it was pretty much routine stuff: sometimes you win and sometimes you don't. But Bernanke is an economist. Despite his high public position, he is at heart an academic. In other words, he has standards, and a certain amount of professional dignity to maintain.

And last week he had the sorry job of putting economic lipstick on Paulson's pig. More than that: Bernanke had to argue that it was in China's economic interests to go along with Paulson's plan. Worst of all, he had to talk past the Chinese officials, who somehow seemed to feel that they have a better understanding of their own interests. It must have been dreadfully embarrassing.

Galbraith's new book is Unbearable Cost: Bush, Greenspan and the Economics of Empire. It has long been the view here that, when the history books are written, George W. Bush and Alan Greenspan (not necessarily in that order) will be the two figures from this era deemed to have had the most impact.

Meanwhile, Nearby in Thailand ...

Who knows what to make of the Thai government's moves in the last week. This report puts the blame squarely on the guys with rifles and the guys with pencil protectors, or is it visors and green desk lamps?

Soldiers and economists: the last people you want running a country. Thailand's abandonment of capital controls, only a day after they were imposed, was utterly inept. It undermines the country's government, which came to power in a coup d'etat last September. The supposed justification for that coup was government corruption and incompetence. The alternative, however, appears to be even worse.

Recall that problems with the Thai Baht were the genesis of the 1997 East Asian Financial Crisis - something about "once bitten, twice shy" perhaps.

Housing Deflation Search Update

There has been little change to the "housing deflation" search statistics since they were originally published in the summer - an update confirms the continuation of the trend.

August results: 875 for Google, 251 for Yahoo!, and 339 for MSN Search.
October results: 951 for Google, 247 for Yahoo!, and 360 for MSN Search.
Today's results: 889 for Google, 285 for Yahoo! and 304 for MSN Search.

It's still early (not for housing deflation, but for the use of the term.)

Housing Affordability Deflation Update

While the phrase "housing deflation" doesn't seem to be catching on in the mainstream media, based on the combination of this survey (.pdf) of housing affordability and the reigning in of non-traditional mortgage products, it probably will soon.


Of course, in some parts of California the "affordability index" has been modified to include non-traditional mortgage products - that pushed the numbers back into double-digits. The figures above must be based on the old lending standards where you actually had to pay the money back.

Russia and their Oil

What's Russia up to these days? Vladimir Putin seems intent on some sort of retribution for the late 1980s when low oil and gold prices turned the Russian economy into rubble (or, the ruble into rubble). According to this story another Western energy company knows when they can't win.

OAO Gazprom agreed to buy 50 percent plus one share of Royal Dutch Shell Plc's Sakhalin-2 oil and gas project for $7.45 billion, handing President Vladimir Putin another victory in his drive to control Russia's energy industry.

Shell, Mitsui Co. and Mitsubishi Corp. will each sell half of their stakes in the project to Moscow-based Gazprom, Shell and Gazprom said in a joint statement today. Hague-based Shell and its partners have invested $12 billion in the venture, which will be the first to produce liquefied natural gas in Russia.

"You are never going to have majority control under this regime in Russia," said Tim Harris, chief investment strategist for Europe, the Middle East and Africa at J.P. Morgan Private Bank in London, which manages $346 billion. "That's a fact of life," he said. "The resource opportunity in Russia is vast. The risk is political."

It's always about the oil.

Inflation and those Two Guys at the Federal Reserve

It just goes on and on and on - those two guys at the Fed who just keep talking and talking about what they think should be done about inflation. In this report Dallas Fed President Richard "ninth inning" Fisher talks about determination and resolve.

Dallas Federal Reserve President Richard Fisher on Tuesday said no one should question the determination of the U.S. central bank to keep inflation under wraps.

"I personally have no doubt, no doubt whatsoever, about the resolve, first of myself, but of any member of the (Federal Open Market) Committee to be not tolerant of inflation, should it move in the wrong direction," he told reporters.

Not to be outdone, later in the week, Jeffrey Lacker of the Richmond Fed said:

The past year has been disappointing on this score as well.
...
Many forecasters have been saying core inflation will moderate in the near term, and this certainly would be desirable. But such a moderation is not yet evident, despite the two most recent CPI reports. For example, the three-month average rate of change in the core PCE price index has been oscillating between 1.8 percent and 2.9 percent since last year's hurricanes, and stands at 2.7 percent as of October. In view of this recent record, it would take several months worth of data to provide statistically convincing evidence of a moderation in inflation. In the meantime, the risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk.

It's not like the Fed is powerless to slow down the creation of money - how could anyone realistically think that inflation would be two or three percent when the money supply is growing at ten percent? And credit creation? Does anybody know how to control that anymore, that is, if anyone ever wanted to?

Hamburger Inflation in Indonesia

The two guys at the Fed ought to have a look at hamburgers in Jakarta if they want to see what inflation can do to lunch budgets. This story explains:

The $110 hamburger offered by the Four Seasons is made of Kobe beef with foie gras, Portobello mushrooms and Korean pears -- served with french fries, of course.

They're not exactly selling like hotcakes yet, but the hotel says it has sold 20 of the 1.0 million rupiah ($110.1) hamburgers since they were launched this month. "One burger has 225 grams of Kobe beef. It is so expensive because the flavor is really different," said Erwan Ruswandi, the chief of the restaurant offering the gourmet burger.

"The calves in Kobe get special treatment ... they drink beer mixed with milk, vitamins and eat pesticide-free grass. We add foie gras and also some Korean pears. We import all the materials, and they are high quality so it is so expensive."

The minimum wage in most parts the country of 220 million is as low as around $40 a month.

Based on the lunch menu prices around here in recent months, that $110 hamburger may be available in the U.S. sooner than you might think.