Inflationary Signals in More Places

While savers continue to receive, incredibly, shrinking interest rates on money market-type deposits, the money-printing that Dr. Bernanke has been pouring down the gullet of a thirsty Street has been working its usual magic. A case in point is seen in the accompanying graph of a Markit index that relates to commercial mortgage-backed securities. (Click on image to enlarge. Click on AA.4 on the linked Markit web page for this specific index, or click on any other index for a similar price-time display.)

It would appear from this and other charts available on the Markit site that commercial real estate prices, or at least prices of securitized mortgage pools, have joined gold and silver in strong uptrends, or, in the case of CRE, in the reversal of a strong downtrend. Relativistically it's sort of the same thing.

The increase in the money supply over the past few years is working its way gradually through the economy. Wages and employment are reacting slowly, given all the malinvestment that occurred in the U. S. Thus what I suggested in my Fire and Ice post of January 2009 might happen is happening. Here is a quote from that post:

. . . we must consider the possibility of a mixed inflation-deflation. Houses and municipal bonds, which you may own, can continue down in price and the cost of a haircut or cereal, which you purchase can go up. You can lose both ways.

Fire and ice.

The fire of price increases is becoming apparent in the food stores of America. There is nothing more fundamental than food and water (still mostly free) to staying alive, so of course there is no justification for excluding it from measures of living costs. And since so much food Americans eat is processed, the prices we pay for food have relatively little to do with so-called "volatile" costs of the underlying foodstuff. Increases in food prices have everything to do with packaging and transportation costs, lack of "deflation" in total compensation including taxes and benefits, and profit margins.

This blog repeatedly pointed to the "deflation" talk in the media the past months as a deliberate diversion (to use a favorite word of the President) to hide the money-printing that was going to ensue once again. How the 2-10 year Treasury complex keeps trending down in yield is incomprehensible if yields were responding to a free market or unless the "market" knows that something is going to blow, such as BofA pulling a Bear or Lehman. In which case gold is to the moon (and probably Treasuries as well), with the dollar probably moving in an opposite direction.

Once again, the broad stock averages continue in their downtrend compared to gold. Within the stock market, though, divergences in relative value have continued to appear and allow certain stocks to represent good value, it being understood that the flood of "money" that the Fed has created is so large that arguably no important financial asset is truly "good value".

Copyright (C) Long Lake LLC 2010

A Bull Market for the Taliban in Afghanistan and the Secular Financial Bear Market in America

The Afghanistan Non-Governmental Safety Office (ANSO)has issued its Q2 report. The findings are horrifying from an American perspective. You can forget the idea that NATO is on the verge of victory, in my opinion, from the chart on page 7. This is a bull market chart--in Taliban attacks. The Taliban initiated 160 attacks in June 2006, as I read the chart. This was up to 1319 in June of this year. (This is a PDF and thus I cannot copy the picture.) It is an open question who has had a better 4 years: Apple Inc. or the Afghan Taliban. Here is a quote from the Strategic Assessment (page 1):

The counterinsurgency approach shows few signs of weakening the opposition. . . It also shows few signs of protecting the population with a 23% rise in civilian casualties (p.9) and widespread assassination of civilian Government workers. We do not support the COIN perspective that this constitutes "things getting worse before they get better" but rather see it as being consistent with the five year trend of things just getting worse (p.7).

The 'key terrain' operation in Marjah has yet to deliver security for the people, provide safe return for the displaced or establish credibility for its boxed Government, as a result Helmand is now the most violent province in the country (p.8). The delayed operation in Kandahar (p.2)promises dire consequences for the civilian population with little to no impact on AOG (Armed Opposition Group) capacity. There, as elsewhere, the application of unsupported COIN theories has only succeeded in dragging civilian development agencies in to the firing line (p.3).

Reminiscent of the 1963 South Vietnamese 'Self Defence Corps', Local Defense Initiatives are falling prey to all the same vices with active ones being murdered; smart ones partnering with AOG to exploit the population and Government supplies (Kunduz/Takhar); bold ones just being the AOG (Parwan) and timid ones keeping the staus quo (Wardak). . . The "Village Stability Program" . . . is perhaps the most disturbing development of the year not least because it is so opaque with no single institution having an overview, let alone control, of all activities under this rubric.

This blog has consistently compared the Afghan "surge" to the Johnson 1965 post-election escalation in Vietnam. Now the NGOs are drawing the same parallel.

Meanwhile, the war is a steady drain in resources that are desperately needed at home in America. These resources include human, financial and even emotional/spiritual. We are in a 1984-type scenario. We've always been at war with Eastasia. Or so it seems.

The depth of the public's disappointment with the Obama administration is evident in its willingness to reconsider supporting a Republican Party it turned its back on in the 2006 and 2008 elections, and which has done little to reform itself.

For cyclical and demographic reasons, the Johnson-Nixon-Carter period of rising inflation, rising interest rates, American loss of international prestige coincided with high and rising interest rates. As a result, both stocks and bonds ended up severely undervalued through most of the 1970s and the first part of the 1980s.

The opposite situation has supervened. This is an "ice" scenario unlike the "fire" of Vietnam and that followed the riotous and assassination-prone '60s. That Afghanistan is not on the nightly news (there being no draft and no embedded reporters) is consistent with this perspective. Ultra-low interest rates and too much "money" looking for a home is also of a piece with this sort of mirror image to that last secular bear market.

Perhaps, just as the withdrawal of Americans in humiliation and total defeat from Saigon just ahead of the advancing North Vietnamese forces allowed the country to heal, some finality in Pak-ghanistan will do the same.

For the nonce, the basic and almost primitive nature of gold as money reminds me of the primitive conditions in Afghanistan. Both gold and the Afghans are immutable; they just are what they are, and appear immune to the blandishments that the modern world offers. Both the Afghan resistance and gold have had a good decade. In contrast, except for the rare exception (AAPL), the fancy-Dan stuff out of Big Finance has laid a great big egg over the past decade.

The burden is on the U. S./NATO hawks in Afghanistan and the bulls on Wall Street to prove themselves. As they say on the Street and in the villages in Kandahar, the trend is your friend (until it is not).

Right now, these bodies in motion are staying in motion, and the directions of each are not good for the United States.

Copyright (C) Long Lake LLC 2010