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1st Indian:   Looming Inflation?

Maybe you think it's crazy to worry about inflation when the consumer price index is rising at a modest 1.5% year over year. That's a valid point. It's also true that many of the items that make up inflation in our daily lives are climbing fast.  Raw food commodity indexes, for example, have hit all-time highs. And the broader CRB Commodity Index, including food, energy and industrial commodities, has run up 32% the past 12 months.

As anyone who owns a car or truck knows, oil prices have jumped 29% in the past year to more than $108 a barrel. This has pushed gasoline prices over $3.70 a gallon nationally, twice what they were when President Obama entered office.  As for that weak CPI, there are good reasons to question the government's benign official readings. Bill Simon is one of them. When the CEO of Wal-Mart's U.S. arm talks, we listen. And last week he told consumers to get ready for a burst of "serious" inflation.

John Williams, of the useful and iconoclastic Shadow Government Statistics website, measures prices the old-fashioned way. He employs the methodology used before 1992, when Labor Department changes started producing milder readings.  By his measure, inflation is close to 10%, tracking price increases for commodities, energy, food, precious metals and health care, among other items.

Investors Business Daily, outlines the culprits:

• The $2 trillion in money created by the Fed under "quantitative easing" since 2008,  unprecedented liquidity.• The $5.5 trillion in new debt added by our government in just three years — nearly a 60% rise.• The Environmental Protection Agency's move to regulate all stationary producers of carbon dioxide.• The surge in regulation at all levels of government, which has added to small-business uncertainty.• The record 29% jump in federal spending in the past three years, which has crowded out business investment.• Spending on TARP and "stimulus," which could total nearly $2 trillion when all is said and done.

2nd Indian:   End of QE?

Bloomberg notes that policy makers are signaling an abrupt end to $600 billion in Treasury purchases, rather than a gradual end to bond market intervention. It is not unreasonable to expect that the end of QE2 will allow the world’s reserve currency to breathe, and perhaps find its footing. And that is likely to have EXTREMELY serious consequences for Equities, Bonds, Oil Gold and AG commodities.

To bring the program to a full stop in June, "they must be confident that the economy is strong enough to endure higher long-term interest rates, albeit an exit from the most expansive monetary policy in Fed history", said Dan Greenhaus at Miller Tabak & Co. LLC in New York.  Meanwhile, Atlanta Fed President Dennis Lockhart told reporters in mid March that a tapered approach is not necessary.

Dian Chu, of Econmatters observes:

There is a camp in Wall Street that still believes that QE3 is a distinct possibility, and they have invested accordingly. These investors would be in for a rude awakening if QE2 was cut short – think in terms of Silver investors who bought at the top of the market thinking silver was destined for $50 an ounce.

Another camp in Wall Street believes that QE2 will continue through to its scheduled June conclusion without any hiccups along the way. This is the more moderate camp who have parked capital in Gold, Silver and Oil, who didn`t buy at the top of the market, but had planned to close out positions once QE2 ended in June.  This camp would also be caught off guard if the current asset buying program ended ahead of schedule – this group would include hedge funds, pension funds and money managers who are overly weighted in commodity oriented funds currently, and would start reducing their exposure to reflect the changing monetary policy.

Now, there’s also the third Wall Street camp that already knew that QE3 was a non starter, and QE2 would probably finish according to schedule, but wanted to front-run the selling by positioning themselves for the inevitable asset realignment by being in position in late April (after April options expiration for example).  Well, this group of investors would also be caught flat-footed and would have to speed up their timetable by getting into position immediately. This would means getting out of any commodity related positions ASAP, and then entering additional short positions, buying puts, and going long the US Dollar.

3rd Indian:   USD?

Standards & Poor’s rating agency downgraded Portugal and Greece’s debt rating following similar moves by Moody’s Investors Services and Fitch Rating Agency, while adding that further downgrades is expected if debt conditions in Europe fails to improve.  The USD should find support from these measures.

Inside Futures view:

The EUR/USD pair snapped a three-day rise on lower confidence reports from the Euro-Zone, on debt woes that continue to stalk investors in Europe. Furthermore, the U.S. economy released its ADP report that estimated that U.S. companies added nearly 200.0 thousand jobs in March, coming ahead of the infamous jobs report on Friday.  Debt problems in Europe had significant spillover on the continent where further instability is expected, according to a paper published by the International Monetary Fund (IMF).

Action Forex view:

The greenback gained some traction midweek as hawkish rhetoric from Fed members Lacker and Kocherlakota led market participants to begin pricing in Fed policy normalization. Broad based USD strength followed suit as the apparent shift in Fed policy direction lifted expectations for tighter relative rate differentials between the U.S. and other economies. The greenback looked set to extend gains into the weekly close as U.S. labor data printed on the positive side - U.S. March NFP rose more than expected (+216k vs. consensus +190k) and the unemployment rate declined to 8.8%. EUR/USD plunged to lows near 1.4060 following the spate of positive U.S. data surprises.

Trader Dan's view:

If the Fed starts sounding hawkish in an attempt to keep the Dollar from collapsing through a major chart support level near 75 on the USDX, they cannot prevent the long bond from breaking down technically and thus commence a rise in long term interest rates which will bury what might be any signs of life in the comatose housing market.

4th Indian:   Consumer Consumption?

75% of Us Are Getting Poorer

"A Two-Tier Recovery that consists of the haves and have-nots!” At least that is the view of this economy by economist Gary Shiller. The real median income per household fell 5% between 1999 and 2009. And to many people, the hit seems worse than that. According to Bloomberg, during the recession, which officially ran from December 2007 to June 2009, the median family’s net worth fell 23.2% from $125,000 to $96,000. For those who lost their jobs in the recession but are now fully employed. 36% have suffered 20% or greater income declines. Per the National Employment Law Project, lower-wage industries accounted for just 23 percent of job losses, but fully 49 percent of recent job growth.

Warren Brussee’s take on the subject:

Besides all that, rising gas and food prices hit those in the have-not category far harder than those in the upper tier because of the larger percentage of income going to transportation and food.  So, is the wealthiest getting wealthier a problem? Is there a connection between extreme wealth inequality and economic crises? Economics professors Saez (UC Berkeley) and Piketty (Paris School of Economics) show that the percentage of wealth held by the richest 1% of Americans peaked in 1928 and 2007 – right before each crash. And, the percentage of wealth held by the richest 1% has grown even more since 2007! Per an April 30, 2010 article in the WSJ, the top 1% held 35.6% of all national wealth by the end of 2009.

How can an extreme disparity of wealth destroy an economy? Reich and Kocieniewski have some thoughts on this. First, the rich spend a smaller percentage of additional wealth than those with little wealth, slowing the economy. Second, the middle class having stagnant or falling wages build more and more debt as they try to keep up their standard of living. Third, some of the excessive wealth held by the prosperous few goes into speculative investments, building bubbles which eventually break. And fourth, the wealthy can now buy politicians, basically tainting and killing free capitalism.

5th Indian:   Housing Market?

Not only are our real wages and jobs hurting, so is our major asset: our homes. Again, from Shiller, “The massive overhang of excess house inventories…suggests another 20% fall in prices….. With that further drop in prices, we estimate that about 40% of mortgages will be under water, up from 23% in the fourth quarter 2010. At that point, few will be able to get above water by repaying their mortgage principals.”

Per the Associated Press, buyers of new homes plunged in February to the fewest on records dating back nearly half a century. It’s the third straight monthly decline. The median price of a new home dropped to $202,100, the lowest since December 2003. New home prices are now 30 percent higher than of those being resold, which does not bode well for the recovery of new home construction.

The National Association of Realtors say sales of previously occupied homes fell to a seasonally adjusted annual rate of 4.88 million. That’s down 9.6 percent from 5.4 million in January. The median sales price fell 5.2 percent to $156,100, the lowest level since April 2002. Sales of homes at risk of foreclosure rose to 39 percent of all sales in February.

More from Brussee on housing:

The housing recovery just got another kick in the pants. Per SmartMoney, first-time homebuyers, who accounted for 40% of home sales, are now down to 29% and falling. First-time buyers confront a steady accumulation of rising fees, costs, and rates. This month, fees on most new mortgages will rise by up to 0.50%. In April, fees on small-down-payment mortgages, a first-time buyer favorite, will spike. Meanwhile, more lenders are requiring larger down payments, and new proposals call for mortgages to become more expensive and limited in size. Insurance fees on government-insured mortgages that require just 3.5% down have doubled in seven months. Of course, all of this is in response to the losses banks have taken on past mortgages. All of this will just slow housing sales even more and housing will continue to drop in price.

6th Indian:   Geo-Political Tusnami?

Very recent dramatic events in Japan and the Middle East/North Africa region just make the scenario of a consolidation in global recovery and a return to a more widespread preference for risky assets more uncertain, Credit Agricole Corporate & Investment Bank said Sunday in its latest Economics Quarterly report. Uncertainty could last longer than expected with an obvious implications for oil prices, which would stay higher for longer than initially expected. The ratio of oil expenses to global GDP above 4 percent (the world is around this level currently) has historically been a sign of economic hardship. Geopolitical risk has become the latest threat to global growth and is continuing to spread, raising the specter of rising inflation and receding growth. The safe-haven bid for gold has returned in force as tensions intensify in the Middle East and North Africa. Markets are beginning to price a shift of contagion from North Africa to some of the Gulf economies, principally Bahrain. With the MENA region a significant crude-oil producer, energy prices are likely to remain elevated for longer.

Thomas Ricks outlines a Libyan worst case scenario, 13 steps to ME disaster:

1. We arm the “rebels”2. Find this is both not enough and Qaddafi's forces overrun, confiscate,and use arms against rebels and coalition air forces3. We try air assault against Qaddafi's ground forces4. Find this is insufficient and leads to excessive collateral damage5. We try to convince coalition to place boots on the ground6. Notably France and other members reject land invasion7. NATO can't gain consensus to modify Resolution 19738. United States bites the bullet, air assaults known Qaddafi military bases, andlands troops in Libya9. Muslim nations raise unified cry that U.S. interest is Libyan oil andQaddafi becomes a hero with broad-based Islamic support, notably Iran10.We pull troops from Afghanistan (not a bad thing, just not soon enough) for Libyan engagements      11. Pakistani ISI and TTP move with impunity across the FATA and beginretaking Afghanistan (sounds like May 2002 ­- summer 2003)12. Meanwhile Qaddafi's forces melt into southern Libyan desert leaving uswith a broken country #1 (courts won't allow confiscated billions to beused by "coalition" for Libyan rebuilding), a latent desert threat, andAfghan as broken country #213. Iran sees this as opportunity to "Balkanize" Iraq and pressesnegotiations with Syria, Turkey, the Kingdom, and Jordan to carve out pieces of Iraq.

7th Indian:  Japan Earthquake Aftermath?

Aaron Marvel informs us; that the world’s largest mobile phone maker, Nokia, has announced that factory closures resulting from the Japanese earthquake and tsunami will disrupt the supply of certain of its products. Nokia’s rival, Sony Ericsson, has previously reported supply chain problems. Problems have been evident elsewhere.

Three days ago, Volvo reported that it holds only ten days’ stock of Japanese-built climate and navigation control systems, and faces a halt to production. In Marion, Arkansas, the Hino Motors plant which makes rear axles for Toyota vehicles is struggling to stay open because of a shortage of gears and other components. Last week, General Motors revealed that it will close the 923 employee plant at Shreveport, La. where GMC Canyon and Chevrolet Colorado vehicles are assembled because of a lack of Japanese-made parts.

A great deal of the equipment employed in the manufacture of semiconductors is made entirely or mainly in Japan. Approximately 90 percent of the BT resin incorporated in cellphones and laptop computers as well as 60 percent of all the silicon wafers in the world originates in Japan. Companies such as Hewlett Packard and Apple could find themselves confronting severe difficulties if disruption in Japan lasts longer. The carbon fiber used in the manufacture of golf clubs and the wings of the new Boeing 787 Dreamliner comes mostly from Japan: the three top producers account for 70% of the global market.

It is humbling to consider how many auto plants outside of North America would be impacted by a shortage of U.S.-supplied parts. One of the few examples of critical U.S. manufacture is that of Intel computer chips.

8th Indian:   EU Sovereign Debt Crisis?

A study which was published on IMF website said that the debt crisis “has been the theater of sovereign credit-rating downgrades, widening of sovereign bond and credit default swap spreads, and pressures on stock markets,” adding that “Interestingly, financial markets throughout the euro area have been under pressure although credit-rating actions were concentrated in few countries such as Greece, Iceland, Ireland, Portugal and Spain”.

The Economist’s take:

It is a measure of European politicians’ capacity for self-delusion that Angela Merkel, Germany’s chancellor, called the euro-zone summit on March 24th-25th a “big step forward” in solving the region’s debt crisis. Something between a fudge and a failure would be more accurate. The leaders fell short on almost every task they set themselves. They agreed on a “permanent” rescue mechanism to be introduced in 2013, but couldn’t fund it properly, because Mrs Merkel refused to put up money her finance minister had pledged. The Brussels gathering did little to help Greece, Ireland and Portugal, the zone’s most troubled economies. Their situation is getting worse—and Europe’s leaders bear much of the blame.

9th Indian:   U.S. Debt?

From the sharp pencil of Tyler Durden:

From the relentless shock and awe happening abroad every single day, we briefly turn our attention to the total financial chaos domestically. Following the settlement of $67.6 billion in debt from last week's auctions, the Treasury managed to raise its dangerously low cash to a level that will give Tim Geithner pocket change for another week, or $99.5 billion. Alas, the cash buffer came at a price: total debt increased from $14.166 trillion to $14.238 trillion. As a reminder, the debt ceiling is $14.294 trillion, so on a pure basis there is a $56 billion buffer or less than one's week's worth of auctions. However since the debt actually subject to the limit is $52 billion less, there still is $109 billion in constitutional capacity. Add to that the $45 billion in SFP run offs over the next two week and Treasury has $150 billion or so in spending money left. As the deficit in the month of March is expected by Zero Hedge to be around $90 billion due to the deferred tax refund payments, we believe the money will last the US a month and a half, although once again depending on the daily burn rate, it may come much sooner as there is no book debt settlement until the week after next.

10th Indian:   Fiscal Constraints?

To date, some 44 states and the District of Columbia are projecting budget shortfalls for fiscal year 2012, which begins July 1, 2011 in most states. These come on top of the large shortfalls that states closed in fiscal years 2009 through 2011. States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs.

Center of Budget and Policy priorities observes:

As states across the country consider their budget proposals for the coming year, they continue to face a daunting fiscal challenge. The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. State tax collections, adjusted for inflation, are now 11 percent below pre-recession levels, while the need for state-funded services has not declined. As a result, even after making very deep spending cuts over the last several years, states continue to face large budget gaps.

Will 10 determined Indians chase the Stampeding Buffaloes over a cliff?

1929 had major corporations earning huge profits while manufacturing wages remained stagnant; burdensome debt payments by consumers, an overleveraged, overheated stock market, and wealth concentrated in the hands of the few priviledged & connected.  In 1937 the government grew very concerned that the debt was no longer sustainable, and thus took away stimulus with nothing to take its place. Both periods brought on a depression.  Look out Slopers!  Inflation is starting to build.  QE3 is looking uncertain.  Stimulus money ends in a few months.  States are slashing jobs and expenses just as fast as they can. Congress is likely to dramatically reduce fiscal spending, leaving a hugh void with nothing to replace it.  Unemployment will rise again due to the looming massive layoffs of public service sectors.

Compiled by BDI (French Idiot Savant)