Oil and gold contest update #6

There are four entries in the "Guess the Year-End Price of Oil and Gold" contest around which the combined oil and gold price has moved in the seven weeks since early last month - SC (partially obscured below), IIO, bBdaBeerman, and lowercase cp.
For everyone else, this may have been quite a dull affair, but for these four individuals, this must have provided at least a little excitement - especially for SC who is once again in the lead with about ten days to go.

Lowercase cp has been pushed out of the top five with VP ($95/$825) now in third place and Vespucian ($90/$825) in fifth - if crude oil holds steady and the yellow metal pushes upward just a bit in the week ahead, one of these two will likely win.

For a complete list of entries and other fascinating details about this contest, see this post from October and this one from September.

Crude oil finished the week at just over $93 per barrel and gold ended at almost $812 per ounce, far above the average guesses of $83 and $772, respectively, from three months ago, but with only about four more days of relatively thin trading to go, anything could happen.

There will be one more update next Friday afternoon and then a winner will be announced on New Years Eve.

The winner will receive a free one year subscription to Iacono Research where things have turned around rather dramatically in just the last day or two and another year of 20+ percent gains now seems within reach.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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What the heck, another gold post

Here at this blog during most of late-2006 and early-2007, whenever the subject would turn to the price of gold, the price of gold would turn down - sometimes way down.

After the events of last summer that no longer seems to happen anymore, so there is little reason to think that these few items at this little blog will affect the strong upward move in the gold price that is currently underway today.

Then again, you never know.

A pennant, a wedge, a flag, a hedge, a triangle ... whatever

In case you haven't noticed what has been happening to the POG (price of gold) over the last few months, have a look at the pattern that has been traced out in the upper right hand corner of the chart below.
Technical soothsayers have at least one name for this pattern, or maybe even a list of names that describe it, though it's not clear if any of the above names are on that list.

What's important about this pattern is that it can't continue unless daily changes to the POG eventually move into the fractions of a cent range, which would appear to be very unlikely.

What happens when the current pattern stops?

Well, then the POG either goes much higher or much lower and, given this morning's markets, the former is more likely. Other possibilities are that the POG goes just a little higher or a little lower, a new pattern emerges, or no new pattern emerges.

Another dumb gold article

A link to this article was sent to me last weekend and had the original mail or thank you note been located, a hat tip would have been provided here (if it was you who sent it and you are now reading this, please send mail or leave a comment and I'll be happy to give you proper credit).

Anyway, it's another reminder that not having any formal investment training has been a veritable godsend for me since being unencumbered by conventional wisdom can really help boost your returns.

Despite its unique properties, gold has not been a good investment. Over the past 200 years, its returns have barely kept up with inflation.
...
Treasury inflation-protected securities may turn out to be the key challenger to gold's store-of-value supremacy status in the future. Aside from being issued by the U.S. Treasury and therefore backed by the full faith of the U.S. government, they also protect investors from inflation - one of gold's most-valued qualities. TIPS' principal is tied to the CPI: The principal value increases with inflation and falls with deflation. When the security matures, the original or adjusted principal is repaid, whichever is greater.
...
Any cash flow-generating asset, like a stock or a bond, can be valued on the future cash flows that it is expected to generate. Predicting gold prices is extremely difficult because gold is not a cash-generating asset. In fact, it is important to note that gold actually has a negative yield. Gold is a cash-consuming asset; its safekeeping and transportation cost money. TIPS, as well as any bonds and dividend-paying stocks, have a positive yield; they pay investors for holding them.

Gold has either been money or paper money has been fixed to gold for most of the last 200 years which should help explain why its price hasn't gone up during most of that time (neither did inflation). And if you believe what the government tells you about inflation, then you should certainly buy their "inflation protected" treasuries - good luck with staying ahead of rising prices in the real world.

The "no-yield" and "cost to carry" issues are tough ones for most investors to grapple with after a 20-year bull market in stocks, but another year or two of 20+ percent gains in the POG will probably cure that.

Netherlands, you're making it too easy

The World Gold Council released new reserve statistics earlier in the week. The last time this was reviewed here, the chart below was prepared to show how the streetTRACKS Gold Shares ETF (NYSE:GLD) would be moving up in the rankings if it were eligible for inclusion.
Just a few days ago, it was learned that the Netherlands has been selling bullion in recent months and they are now down to just 624.5 tonnes, while the gold ETF has added a little and now stands at just over 617 tonnes.

It's almost like you're giving up, Netherlands.

France and Switzerland are also a bit lighter in December than they were in September, by 36 tonnes and 76 tonnes, respectively.

Does anyone really believe that 600.0 figure for China - round numbers like that look awfully suspicious. You'd think that they've got to be exchanging at least a few of their U.S. dollars for something a little more tangible.

Full Disclosure: Long GLD at time of writing.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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The worst ex-hurricane inflation since 1991

There's been a note laying around here for a few days now about putting up a long-term chart for the U.S. consumer price index in order to put last months' 4.3 percent year-over-year inflation rate into proper historical perspective. Well, here it is:
Excluding the hurricane effected data of late-2005, you have to go all the way back to 1991 to find an annual inflation rate higher than what was seen last month.

Some big numbers will be rolling out of the year-over-year calculation in the months ahead, as shown circled in red below, but most analysts are not looking for a big decline in the months ahead unless oil plunges to $55 like it did a year ago.
There's a slightly different dynamic now that a much weaker dollar has worked its way through the global financial system.

For example, apparel prices rose 0.8 percent from October to November, the biggest monthly increase in ten years. This category has been dominated by imports in the last decade and, during that time, has shown consistently declining prices which have helped to offset soaring costs for domestic services like health care and college tuition.

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Interest rates are rising (in China)

Bloomberg reports on China's latest move to quell rising inflation - the central bank just raised interest rates for the sixth time this year to a nine-year high of 7.47 percent for the benchmark one-year lending rate.

Consumer prices rose 6.9 percent in November, property prices climbed at the fastest pace in two years and the main stock index has more than doubled in 2007. Higher borrowing costs and 10 increases in banks' reserve requirements have failed to stem the gains, underscoring concern the economy may overheat.

"Inflation expectations are rising and the central bank really needs aggressive action to cool them," said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. "They will get even more aggressive from now on."
The central bank said it wants to curb inflation and overheating and implement the "tightened" monetary policy announced this month. China had already raised the proportion of deposits that lenders must set aside as reserves by the most in four years, effective Dec. 25, and ordered banks to cool lending this quarter.

Today's rate increase "won't be enough" as inflation cuts real returns on deposits, said Huang Yiping, chief Asia economist of Citigroup Inc. in Hong Kong.

Consumer prices jumped in November on fuel and food costs. Households' concern about inflation is at the highest level since a survey began in 1999, the central bank said today.

They might have better luck with inflation if they would stop printing up so damned much of the local currency to exchange for U.S. Dollars.

Of course, that would cause their currency to strengthen considerably and they know what happened to Japan almost 20 years ago.

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Jobless claims are rising

If there's one thing that Fed Chief Ben Bernanke doesn't need right now it's real weakness in the labor market. Unfortunately, another hefty increase in jobless claims earlier today adds to the recent (and ominous) trend as shown in the chart below from Econoday.The four-week moving average has risen to 343,000, up 4,250 from last week, and is now at its highest level in two years. Like a lot of other statistics that are making two-year highs, this one too will not likely fall back in line as it did following Hurricane Katrina in 2005.

Evidence is mounting for a rather bleak period of economic reports early in 2008 - slowing growth, high inflation, and now perhaps a much weaker job market - just as we begin an election year.

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The other shoe is dropping

Geez, all sorts of bad things start happening when asset prices stop rising. Here in California, the Gubernator just declared some sort of "financial emergency" so that, after the first of the year, they can take back money that they've already promised to school districts and county agencies due to dwindling tax receipts .

Tax receipts are dwindling primarily because of dwindling property values as a result of the dwindling rate of homeownership here in the Golden State due, in part, to the soaring rate of foreclosures.

Along with some state tax receipts, some state pension funds aren't looking so rosy these days. In today's New York Times, a story about a new Pew Research report on state pension funds points to trouble ahead for some gubment workers.

Almost half of the states have been underfunding their retirement plans for public workers and may have to choose in the years ahead between their pension obligations and other public programs, according to a comprehensive study to be released to the public on Wednesday.

All together, the 50 states have promised to pay some $2.7 trillion in pension and retiree health benefits over the next 30 years, according to the Pew Center on the States, which spent more than a year studying the issue.
While some states are managing their costs reasonably well, the center found that others, like New Jersey and West Virginia, have made serious mistakes and are now cutting education and health programs as they struggle with costs incurred decades ago.

Surprise! New Jersey is at the bottom of the list. There will likely be even more unrest there as state retirees and their neighbors bicker over state taxes.

A while ago, when my wife and I first started thinking about quitting the rat race, we were envious of those who retired from public service jobs relatively early and then pulled down a very large percentage of their last year's salary as retirement income.

The more you think about it though, with cost of living adjustments based on the government's inflation statistics and other inevitable cost cutting measures that state governments are going to have to take, it might be better to have a lump sum when you quit your day job, with which you can purchase a big pile of dumb 'ol gold and silver coins, selling a few here or there, as needed, in retirement.

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Almost childlike in his idealism

The hits keep-a-comin' for former Fed Chairman Alan Greenspan. In today's installment at Bloomberg (hat tip CB), Jonathan Weil turns back the clock to 1963 when the Ayn Rand devotee was formulating his view of the world.

Ironically, this view of things might have described the current condition much better had he not been head of the world's most important central bank for 18 years.

Greenspan's '63 Essay Foretold Subprime Inaction: Jonathan Weil
Why did Alan Greenspan fail to act while the roots of the subprime-mortgage crisis spread? Here's one possible explanation: The Ayn Rand disciple held fast to his unwavering laissez-faire beliefs.

Yesterday's New York Times carried a front-page article chronicling the many warnings the former Federal Reserve chairman received about aggressive subprime lenders luring unsuspecting customers into crazy mortgages they never could afford. "Where was Washington?" the newspaper asked. And where was Alan?
...
I believe the best answer can be found in an August 1963 article called "The Assault on Integrity" that Greenspan, then 37, wrote for Rand's monthly journal, "The Objectivist." Judging by how he rebuffed Gramlich and others, it looks like he followed his old instincts as the subprime mess festered.

Agent of Consumers
"Protection of the consumer against 'dishonest and unscrupulous business practices' has become a cardinal ingredient of welfare statism," Greenspan began his essay, which Rand included in her 1967 book, "Capitalism: The Unknown Ideal."

"Left to their own devices, it is alleged, businessmen would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. Thus, it is argued, the Pure Food and Drug Administration, the Securities and Exchange Commission, and the numerous building regulatory agencies are indispensible if the consumer is to be protected from the 'greed' of the businessman.

"But it is precisely the 'greed' of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.

"What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product."
...
"Protection of the consumer by regulation is thus illusory," he said. "Rather than isolating the consumer from the dishonest businessman, it is gradually destroying the only reliable protection the consumer has: competition for reputation.

"While the consumer is thus endangered, the major victim of 'protective' regulation is the producer: the businessman."

The largely unregulated subprime-lending industry, of course, didn't turn out this way. Countless mortgage brokers and lenders didn't care about their reputations. Wall Street banks, which packaged and pitched the loans as AAA securities, didn't care about theirs either. There were quick killings to be had.

Four decades later, Greenspan's argument seems almost childlike in its idealism. Yet, judging by his inaction, it looks like he never stopped believing.

Once again, had he not been Fed Chairman for almost two decades, helping to transform the world's greatest economy into a country full of leveraged speculators, willing to take risks with borrowed money that they wouldn't have dreamed of years earlier, his 1963 views might be a lot more relevant today.

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Foreclosures up 68 percent, down 10 percent

There are some confusing headlines about foreclosures today. This AP report shows foreclosure filings in the U.S. up 68 percent last month, while BusinessWeek says they're down 10 percent. Rick Sharga of RealityTrac explains that both are correct.

Click to play in a new window

This is yet another example of how statistics can be deceiving (for another example have a look at this report on new home prices). Anyone considering a home purchase today should understand that the ten percent drop from October to November is much less significant than the 68 percent increase from November 2006 to November of 2007.

Month-to-month data is almost always useless due to its volatility - if you get a few months of consistent data in a row, that might constitute a meaningful trend, but otherwise it is mostly noise.

So, in this case, if your real estate agent calls you and tells you that foreclosures have peaked and that you need to buy now, well, just tell them to "bugger off".

A total of 201,950 foreclosure filings were reported in November as compared to 120,334 a year ago - this trend is not your friend if you are looking for stabilization in the housing market.

Once again, Nevada, Florida and Ohio lead the nation in highest foreclosure filing rates while California claims the highest number of foreclosure filings - the number of foreclosures in the Golden State has more than doubled in the last year to 39,992 last month.

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The Clinton Housing Bubble

Everyone's been talking about it on the last post, so, here it is - uncut and with only a couple (mostly unnecessary) areas with emphasis added, just in case the title didn't make it clear enough who is now being blamed for TMTGM.

The Clinton Housing Bubble
By VERNON L. SMITH

The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.

But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity -- doubling down with other people's money -- at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Once again, try as we might and in spite of our political rhetoric, we have failed to help the poor in applauding government action intended to help ourselves.

The consumption binge is now over, and there is more than enough blame and souring loans to spread around. Congress, if its members can stop squabbling, wants desperately to sanctify it all with actions sure to launch at some future date the grandmother of all housing and mortgage-market bubbles. This august body has long forgotten that it set the stage for housing bubbles by creating those implicitly taxpayer-backed agencies, Fannie Mae and Freddie Mac, as housing lenders of last resort.

Financial market innovators who invented securitization as a mechanism for creating a liquid national market for mortgages are now criticized for having caused an "agency problem." This is jargon for management not having good incentives to provide investors with "truth in packaging" of the underlying economic risk. But what does truth matter at the height of a bubble? These critics would solve the agency problem with more government regulation. Excuse me, but does not the political process have the biggest agency problem of all?

The Federal Reserve, with a default-risk tiger by the tail, feels handcuffed by its accountability and responsibility for avoiding a cascade of defaults in the highest quality obligations, as well as the bad investments seeking an asymmetric tax-free profit. Shades of Long Term Capital, the Savings and Loan crisis, and heyday of the myth of Portfolio Insurance -- historical cases of borrowing short to lend for what may turn out to be longer than expected. They are all conditioned on the existence of liquidity for sellers that can dry up with frightening speed.

Consequently we have the "independent" Fed being driven by market forces to accommodate the long-evident and glaringly least-defensible features of the housing/mortgage markets. Moreover, the moment the Fed abandoned its stance against inflation, the dollar, gold, oil and commodity prices signaled inflation, and now two months later consumer prices have confirmed the signal.

More daring than the action to exempt real estate from the capital gains tax -- and in lasting service to the poor -- would have been actions allowing capital gains on all assets to go tax free, provided that the capital was reinvested -- i.e., not consumed, and yes, good citizens, housing counts as consumption.

Unlike the latest housing bubble, the stock market "excesses" of the 1990s financed thousands of new ventures, some of which found innovative ways to manage the proliferation of new technologies. The result: astonishing, long-term increases in productivity still evident in the most recent quarter.

Adam Smith in his "The Theory of Moral Sentiments" (1759) saw the subtle truth that consumption by the rich has little effect on the welfare of the poor. That's because the income of the rich is largely invested in the tools and knowledge of production, which provide future long-term value for everyone: "The rich only select from the heap what is most precious and agreeable . . . though they mean only their own conveniency . . . [and] . . . the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements."

Expenditures on housing construction are not "improvements" yielding increased productivity and future new wealth to be divided with the poor. They are more akin to satisfying government-subsidized vanity.

Mr. Smith, a professor of law and economics at George Mason University, is the 2002 Nobel Laureate in economics.

It kind of rambles a bit after the title and the first two paragraphs.

Also, it's hard to argue against the wisdom of Adam Smith. To wit, "What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?" - Adam Smith, 1763.

Obviously, Mr. Smith (Vernon, not Adam) will not make it onto the select list of TMTGM-approved economists.

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Still a long way to go down

It would be a miracle to see only a ten percent decline in Southern California real estate prices after rising by hundreds of percent over a period of about ten years - that's where things stand right now according to the most recent report by DataQuick.
Last year at this time, the median price for a home in the Southland was $485,000 and now it's $435,000. That still sounds like a lot of money - especially if you have to come up with a five or ten percent downpayment, borrow the rest, and then pay that money back with interest out of your income.

Have you seen what the median Southern California home looks like?

It hardly seems worth the effort these days as you can no longer plan on the value going up. How likely is it that these curves are going to pop back up over the zero axis anytime soon?
Marshall "almost all if not all of those gains are here to stay" Prentice, President of DataQuick, had these comments:

Some might point to the October-to-November increase as evidence sales have bottomed out, but we’ll need to see a sustained trend. We also saw November sales rise a bit back in the troubled market of 1994, well before it hit bottom. It’s worth noting, though, that sales financed with conforming loans have increased each month since September, and last month we saw signs that the jumbo loan problem, while unresolved, wasn’t worsening.

Yes, it's worth noting, but that's about all - there's still a long way to go down.

And don't forget that sales volume will bottom long before prices do - don't let anyone fool you into thinking that because sales finally make a bottom, probably sometime next year, that prices will begin rising again.

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Do you like internet surveys?

Vote as many times as you'd like - I'm just giving this survey tool a whirl.

Free Website Poll

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Bair: "It's clear the Fed should have acted earlier"

Today's scathing page one NY Times piece "Fed Shrugged as Subprime Crisis Spread" points a finger directly at former Federal Reserve Chairman Alan Greenspan for the current credit and housing market mess. They have a nice chronology of all the warning signs.
The entire report is well worth reading - kind of like a stroll down memory lane. My favorite part was:

Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that “no bubble exists.” Mr. Greenspan predicted several times — incorrectly, it turned out — that housing declines would be local but almost certainly not nationwide.

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Housing permits drop to 14-year lows

The Commerce Department reported(.pdf) that housing starts were down 3.7 percent in November and permits for new construction fell 1.5 percent to new 14-year lows, once again dashing any hope that the most recent up-tick in housing starts was the beginning of a bottom for homebuilders.
You'd think that things can't get any worse from here, but there is still a huge overhang of unsold homes, lenders are justifiably more cautious these days, and who wants to buy one of those unsold homes when all you hear about is foreclosures and falling prices?

Yesterday's Housing Market Index from the National Association of Homebuilders remained at all-time lows for the third consecutive month. David Seiders, cheif economist for the trade group noted, "The momentum in the housing market still is downward. Housing starts, given the inventory overhang, probably won't turn up until maybe the third quarter of next year.''

Adding to the growing evidence that you can work at Harvard and still be a moron, Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies commented "The fundamental problem with housing is oversupply.''

No, the fundamental problem is that a speculative bubble just burst and now everyone is thinking rationally again - home prices are still too high, potential buyers realized home prices are still too high, lenders are now interested in the borrower actually paying back the home loan, and investors don't want to go near securitized debt.

Could someone aside from Robert Shiller and about a thousand people with blogs say this just once?

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Have you seen M3 lately?

Surely, bankers have more important things to worry about than what the reconstructed M3 money supply looks like, but anytime any money statistic starts closing in on 20 percent, someone somewhere in the government ought to be scratching their head.
Recall that this data series was discontinued by the Federal Reserve almost two years ago and the reason given at the time was that it cost too much to maintain and provided no useful information.

Apparently the expense is not prohibitive for NowAndFutures, where this data series continues to be tracked, and whether or not this information is useful, well, if you work at the nation's central bank, usefulness is apparently very subjective.

Ain't the internet great?

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Bush says US economy is safe and sound

Well, some of you might have been worried there, with housing prices plunging, credit markets reeling, and energy prices soaring, but the commander in chief has pronounced the U.S. economy "safe and sound".

Apparently, President Bush has a pretty simple approach to maintaining its safety and soundness - cut taxes if you can, hold them level if you can't cut them, and never, ever raise taxes.

Everything else pretty much takes care of itself.

President Bush on Monday tried to reassure an edgy public that the economy is "pretty good" despite the dreary mix of a failing housing market, a national credit crunch and surging energy costs.
"There's definitely some storm clouds and concerns, but the underpinning is good," Bush said at a Rotary Club meeting, an informal setting chosen to show the president engaged with local communities. "We'll work our way through this period."
...
"The Congress cannot take economic vitality for granted," Bush said. "There are some positive things Congress can do to make sure that the economy continues to grow and people are working and realizing dreams, and there's some negative things they can do. And the most negative thing the Congress can do in the face of some economic uncertainty is to raise taxes on the American people."

Democratic leaders responded that Bush is in denial.

"What world is President Bush living in to be so out of touch with the economic realities families and markets are facing?" said Democratic Sen. Charles Schumer of New York, chairman of Congress' Joint Economic Committee.

No matter what the debate over economic indicators, many people are enduring financial stress and struggling to pay the mortgage. Alan Greenspan, the respected former chairman of the Federal Reserve, has agreed with other experts who see prospects for a recession at about 50-50.

Oh Dear!

The economy appears to be taking center stage as an election issue and Alan Greenspan looks ready and willing to do the play-by-play all throughout 2008, calling out updated odds of a recession about every other week.

This should be fun.

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A vicious cycle of overspending

Down in the bowels of the lead story in today's Wall Street Journal is the tale of the Oropezas, formerly of Calle Canon Road in Corona, California, where it seems the housing bust is now about equal in magnitude to the housing boom a couple years ago.
What is fascinating about the details provided below is that there must be literally hundreds of thousands or millions of people all across the country who have similar stories to tell about how a "vicious cycle of refinancing" has now done them in.

The Oropezas arrived at Calle Canon Road in 2004. Corona appealed to them because of its quality of life and regional cachet. "It was labeled as the new Orange County," Mrs. Oropeza says. Public records show they paid $557,000 for a four-bedroom house and took out a $500,000 mortgage. Her husband is an area manager for an auto-parts retailer and she is a purchasing manager for a firm that sells dietary supplements.

As property values skyrocketed, they refinanced three times, most recently in late 2006, for $835,000, Mr. Oropeza says.

The couple say they used some of the money they pulled out of the house for home improvement, such as a backyard waterfall. But Mr. Oropeza says the bulk was used to pay off credit-card arrears. "We were in a vicious cycle of refinancing our home to get out of debt," he says. "We banked on selling the house, but that's where we failed."
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The couple stopped making their Corona mortgage payments in June, triggering a notice of default 90 days later and starting the countdown to foreclosure. The family is now living in Texas.
...
"We're sad because there goes our credit, and because people think we are a bunch of flakes who walked away from the house and tried to make money," Mrs. Oropeza says. The property's for-sale listing has expired. "We have zero expectation that we can sell this house," she says. After the government-brokered mortgage plan was announced, Mr. Oropeza says he called the toll-free helpline and left a message, though he doubts he will qualify to get his Corona house back.

Mr. Oropeza actually thought he was getting out of debt by refinancing - that only works if you can unload the inflated asset, against which new money was borrowed, to an even bigger fool.

Alas, there was no bigger fool to be found.

What, in the minds of the Oropezas, was a vicious cycle of refinancing debt was in fact just a vicious cycle of overspending - this confusion is all too common these days.

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The Fed doesn't even have a post

In today's column, Caroline Baum at Bloomberg notes rising inflation and soaring money supply growth around the world (wondering about the connection between the two) and how this is all going to work out for the world's central bankers.

After noting the "two pillars" of European Central Bank policy - economic analysis and monetary analysis - where asset prices are at least noted, attention is turned to the Federal Reserve.

Across the pond, the Fed is in an unenviable position as well. It doesn't have two pillars; it doesn't even have a post. What it has is a dual mandate (maximum employment and price stability), an implicit inflation target of 1 percent to 2 percent on a price index for consumer purchases excluding food and energy, and some bad inflation news.

Friday the U.S. Labor Department reported that the CPI rose 4.3 percent in November from a year earlier and 2.3 percent excluding food and energy. In a tacit acknowledgment that energy prices have gone one way (up) for seven of the last eight years and food prices haven't fallen on an annual basis in at least 40, the Fed is now releasing quarterly forecasts for overall and core inflation.

If prices continue to rise, don't be surprised if the Federal Reserve begins monthly forecasts and then weekly forecasts. You'll know we're really in trouble when inflation forecasts are updated daily.

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From the sublime to the ridiculous

Wow! Talk about moral hazards. Is it possible there could be a bigger moral hazard than Alan Greenspan's proposed solution to the housing crisis?
"Cash from the government", presumably deposited directly into the bank accounts of homeowners who are about to lose their homes, is the former Fed Chairman's solution to the current foreclosure crisis. He added, "Cash is available and we should use that in as large amounts as is necessary to solve the problems".

[You might think I'm starting to just make this stuff up but I'm not.]

The Maestro was on ABC's This Week with George Stephanopolus earlier today and weighed in a variety of subjects, none of which involved any culpability on his part for the mess that is the current U.S. economy and global financial system.

Greenspan ran the central bank for more than 18 years and, in response to the bursting of the stock market bubble, he succeeded in inflating a housing bubble just before he was forced to retire.

The delayed effects of these policies will see the U.S. economy run into the ground sometime next year.

He has been criticized by some for keeping interest rates too low for too long after the 2001 recession and now most analysts agree that leaving an 80-year old to run the largest economy in the world was just a bad idea.

ooo

This week's cartoon from The Economist:

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