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Thursday, March 31, 2011

Serious Inflation

Another Update: Because it's good reading and provides a way to think about what is really happening in Japan. The economic problems for Japan are three: financing massive reconstruction in the quake/tsunami areas, dealing with the Daiichi meltdown, and MOST SIGNIFICANTLY, raising power output so that production activity can ramp up. Asking industries to cut net power consumption by 25% over the summer is a recipe for economic troubles. It's also a recipe for economic troubles around the world in 2011.

: (Because I forgot:) Initial claims remain right in the same range. The four-week moving average crept up a few thousand, but the movement is not significant. We are under the 400K level. Over the next few weeks I expect a minor shift upward. If that doesn't occur, it will be a good sign.

Wal-Mart CEO. Believe it. I am waiting for the rail figures tomorrow before saying too much more. Since I pointed out last year that there was inflation in the pipeline, circumstances have only conspired to make it worse.

I do believe that in the end this will kill more people more people than the Fukushima Daiichi reactor problems ever will. People talk about radiation being a silent killer. BS. The whole world monitors it. While this ain't good, it is nothing compared to what could happen to lives in the US if we cannot get our heads screwed on straight and start coping with reality. Unfortunately the actual coping part will require cooperation by politicians, and that seems far in the future.

I think it was Who Struck John who commented last year that it would take several more election cycles before we could get politicians who were willing to start addressing the problems. Do we have two more election cycles to spare? I am not sure.

PS: A lot of Japanese news coverage yesterday had to do not with nukes but Chinese naval plans.

While CEO's, financial guys, and Walmart can see inflation in the pipeline, the Fed, Congress, and the administrations seem oblivious.

That is why I seriously doubt Bernancke will be able to throttle back the inflation he and Congress have created. It took Volcker a long time and a lot of pain to get inflation under control.
To be fair about it, there are now a bunch of different sources.

But the ECB is going to raise rates, and this will have an impact on Treasury operations. It already really is.

Just look at 2011 treasury rates

Relative to the beginning of the year, you see the one month way down (parking). Just go down the intervals until you hit the 2-5 zone. On the three year we were oscillating around a 102 basis point level for most of January. I usually take the Jan mid point (14th-16th) as my start but I adjust for volatility. My starting points for this year were:
2-Yr: 60 bps
3-Yr: 100 bps
5-Yr: 199 bps

Yesterday we were:
2-Yr: 80 bps
3-Yr: 128 bps
5-Yr: 221 bps

Because we are borrowing so much money short-term I worry about these shifts. The more you lend short, the worse the rate risk.

The situation in Europe is real, and it's very iffy. They will have to change strategy on the default countries pretty quickly. So there is ample reason to assume that short rates in the US will remain reasonably low for a while.

The Japanese issues are intensely real.

But sooner or later, the cards will be thrown on the table. At that point, US fiscal and trade imbalances will become extremely important.
Possibly related: I think Donald Trump is dead-serious about running for president. What's more, he has a reasonably good shot at winning. He's running as "that guy who says out loud what everybody is thinking". That's not very traditional, but maybe it's what we need?
The last thing we need is Trump for President.
Talk about the last days of the Roman Empire.
Since the entire political establishment is a joke, I'm trying to keep an open mind about precisely which brand of humor ends up running things.
I can see his campaign motto now in huge flaming letters.

I'm Donald Trump. I believe in screwing big banks, not catering to them. Vote for me.

He MIGHT have a chance of winning if he tried that tactic.
Yes, I did say that it would take at least two more election cycles. My thinking was that 2016 would be the first realistic possibility of getting a critical mass of politicians willing to face facts.

Trump for President? Seriously?? How many of his ventures have declared bankruptcy??? Might as well put a sign on Ellis Island "Foreclosure sale - everything must go!!!!"

Why anyone ever lends that joker money anymore is beyond me.
M_O_M, precisely. That slogan, or something like it. He's the no-nonsense candidate. The two keys to 2012 are the old "Reagan Democrats" and Hispanics. Obama has to both hang on to the Hispanics, and keep the blue-collar white turnout depressed in order to win. By being his blunt self, Trump could get the Reagan Democrats to turn out without turning off Hispanics. That might be enough to win, and I don't currently see another Republican that could do that. I see Republicans (and Democrats) I would prefer over Trump, but that's not the same thing.

Trump is quite low on my list of celebrities I would like to have a beer with, but I have to admit he always does his homework and he doesn't play to lose. If he's seriously running, it's because he sees an opening.
John - I personally do not want to see Trump be a candidate, but even half-seriously, if you accept the fact (as an increasingly large number of voters do) that we are bankrupt given our current strategies, then the real task is managing that bankruptcy and the related defaults well.

I hate to say it, but one of Trump's selling points might be that he has a tremendous amount of practice declaring BK and coming out sorta rich.

Is his experience actually applicable? I don't think so. He's expert at handing his losses to someone else and keeping his profits close to his own breast. In that respect, it's really like running the erstwhile president of WaMu.

But compared to the BS we are now being fed, I can envision the horrifying possibility that a disgusted electorate might go for it.
I don't think that anyone wants to see the same group of repubs run that ran in the last election. People want something else. I surely don't want to see Romney go at it again.
MOM, now that's a horrifying thought: that Trump might emerge as the electable alternative. "Don't wait to BK in five years, do it now!"

H.P. Lovecraft and Stephen King aren't in the same league as you.
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