Interesting Lists

1. America's Best Bang-For-The-Buck Cities: Omaha, Little Rock, Jackson, Des Moines, Augusta.

2. Top Words, Phrases and Names for 2009: a) Twitter, H1NI, Obama; b) King of Pop, Obama-mania, Climate Change; c) Barack Obama, Michael Jackson, Mobama. For previous years, go here.

An In-Depth Look At the SPYs

I'm going to spend this week taking an in-depth look at the three major indexes. Let's start with the SPYs

This is a fifteen year chart in weekly increments. Notice the following.

-- We're clearly in the middle of a multi-year double top. The first top occurred in 2000 and the second top occurred in 2007.

-- Notice that prices are at roughly at the 38.2% Fibonacci retracement level for the rally that started in late 2002/early 2003.

Above is an in-depth look at the Fibonacci levels from the previous examples. Also notice the double top that occurred in this rally with the two tops occurring in the second half of 2007

On the above 6 year chart, notice the following.

-- The rally that started in mid-2003/early 2004 had two channel lines.

-- The market has broken through both channel lines.

-- The market is currently at an early 2006 price level.

On the six month chart notice the following:

-- Prices were in a clear down, up, down pattern.

-- Notice that prices have formed two bear market flags since the first of the year.

On the SMA chart, notice the following:

-- the 20, 50, and 200 day SMA are all moving lower

-- Prices and the 10, 20 and 50 day SMA are pretty bunched up right now. All are within 3 points of each other.

Conclusion: There is a great deal of support in the 126/127 area. The market has hit those levels twice and bounced back. Because of the two bottoms in that area the market could be forming a double bottom. But that has to be considered against the economic/fundamental backdrop. While the market can be a leading indicator, I don't think we've had enough pain for the market to be rebounding in anticipation of a recovery just yet.

When It Rains in Cuba: Leaky Roofs, No Umbrellas

One might think that in a tropical country life is organized taking the climate into account, and that along with our light clothing we always have umbrellas and raincoats at hand. Not so. Leaking roofs are common, especially in the construction of the last fifty years; homes, offices, schools and hospitals, and even stores suffer repeated losses because of them. Collapses, now typical in the urban landscape, are not the result of bombardments of imperialism, rather they are caused by the difficulty of acquiring waterproof construction materials.

In foreign films we often see scenes of crowds in the rain. We are impressed by the image of a cloud of umbrellas that extends the length of a street or the full width of the stands in a stadium. We inevitably compare these scenes with the typical appearance of our streets during a cloudburst: nylon bags used as protection, trying to cover one’s head with the newspaper Granma or a piece of cardboard; older people waiting under the balconies or huddled together at a bus stop.

These are days to ask ourselves when we will have a raincoat – one without holes that fits – let alone what seems to be a pipe dream for so many, when the city will not collapse because of a simple shower that falls in the tropics.

~Yoani Sanchez

The Greatest Scientific Scandal of Our Age

Here's a good summary of why Climategate is the greatest scientific scandal of our generation:

There are three threads in particular in the leaked documents which have sent a shock wave through informed observers across the world.

Perhaps the most obvious, as lucidly put together by Willis Eschenbach (see McIntyre's blog Climate Audit and Anthony Watt's blog Watts Up With That ), is the highly disturbing series of emails which show how Dr Jones and his colleagues have for years been discussing the devious tactics whereby they could avoid releasing their data to outsiders under freedom of information laws. They have come up with every possible excuse for concealing the background data on which their findings and temperature records were based. Most incriminating of all are the emails in which scientists are advised to delete large chunks of data, which, when this is done after receipt of a freedom of information request, is a criminal offence. But the question which inevitably arises from this systematic refusal to release their data is – what is it that these scientists seem so anxious to hide?

2. The second and most shocking revelation of the leaked documents is how they show the scientists trying to manipulate data through their tortuous computer programs, always to point in only the one desired direction – to lower past temperatures and to "adjust" recent temperatures upwards, in order to convey the impression of an accelerated warming. What is tragically evident is the picture of the CRU scientists hopelessly at sea with the complex computer programs they had devised to contort their data in the approved direction, more than once expressing their own desperation at how difficult it was to get the desired results. This comes up so often that it becomes the most disturbing single element of the entire story.

The third shocking revelation of these documents is the ruthless way in which these academics have been determined to silence any expert questioning of the findings they have arrived at by such dubious methods – not just by refusing to disclose their basic data but by discrediting and freezing out any scientific journal which dares to publish their critics' work. It seems they are prepared to stop at nothing to stifle scientific debate in this way, not least by ensuring that no dissenting research should find its way into the pages of IPCC reports.

Conclusion: Our hopelessly compromised scientific establishment cannot be allowed to get away with a whitewash of what has become the greatest scientific scandal of our age.

~Christopher Booker, author of "The Real Global Warming Disaster: Is the Obsession with 'Climate Change' Turning Out to be the Most Costly Scientific Blunder in History?" writing in
The Telegraph

Thanks to Warren Meyer at Coyote Blog.

First 2-Month Restaurant Index Gain (%) in 3 Years

The outlook for the restaurant industry improved somewhat in October, as the National Restaurant Association's comprehensive index of restaurant activity registered its first gain in three months. The Association's Restaurant Performance Index (RPI) a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry stood at 98.0 in October, up 0.5% from its September level (see top chart above). However, the RPI still remained below 100 for the 24th consecutive month, which signifies contraction in the index of key industry indicators. Although restaurant operators continue to report soft samestore sales and customer traffic levels, they are somewhat more optimistic about improving conditions in the months ahead.

MP: Although not reported by the NRA, the bottom chart above shows the percentage change in the RPI from the same month in the previous year. Following negative year-to-year growth in 23 out of 24 months from September of 2007 through August 2009, there have been positive increases in September and October of this year, marking the first back-to-back monthly increases since the summer of 2006. Further, the October-to-October gain of 0.93% is the single largest monthly gain since a 1.3% increase in September 2006, more than three years ago.

Is the U.S. Bond Market On Dope?

Now, I've never been an advocate of the so-called "efficient market hypothesis" and have in fact argued against it. But I am still amazed at how irrationally low the inflation expectations of the U.S bond market is. Although the current year over year inflation is relatively low and one of the primary arguments for a short-term increase in inflation -the previously assumed surge in unit labor costs- was revised away yesterday, there is still good reasons to believe that inflation will accelerate in the short-term despite the economic slowdown. And there is no reason to believe Ben "Helicopter" Bernanke will be less inflationary than Greenspan över the coming years. Some people must have confused "Black Hawk" with inflation hawk. And during Greenspan, the average inflation rate was 3%. So, how could there be a mere 2.30% spread between the regular 10-year note and the 10-year TIPS?

While no one can know the future for sure, and so it is possible that inflation will be 2.3% or lower per year during the coming decade . But that would require that Bernanke would pursue a significantly less inflationary policy than Greenspan, which seems highly unlikely. With the massive debt overhang of the U.S. economy, it seems in fact a lot more likely that the Fed will try to inflate more to bail out the heavily indebted households.

With the real yield being a mere 2.21%, I wouldn't recommend anyone to buy the TIPS. But it is certainly a lot better deal than the regular government securities.

Finally Angela Merkel Does Something Right

Germany raises its pension age. A necessary step in the right direction, considering Germany's rapidly ageing population. But considering how fast Germany is ageing, it will not be enough, and more cuts will be needed.

Ytterligare en spik i SR-Kristian Åströms kista

Med anledning av att tyska statistikmyndigheter nu meddelar att sysselsättningstillväxten i Tyskland fortsätter med allt högre fart och arbetslösheten går ned trots ett ökat arbetskraftsdeltagande, så kan jag inte låta bli att påpeka hur detta ytterligare förlöjligar Kristian Åströms förvirrade SR-artikel.

Nej, jag säger inte att de tyska erfarenheterna bevisar någonting, särskilt då som det sker i ljuset av en allmän europeisk konjunkturuppgång. Att hög a-kassa, allt annat lika, höjer arbetslösheten finns det ju goda teoretiska skäl att tro på, och det är på dem jag grundar min uppfattning. Men den där clownen Åström påstod ju att de tyska erfarenheterna skulle på något sätt motbevisa det eftersom det inte skulle ha blivit några nya jobb. Nu ser vi dock hur han till och med utifrån sin egen missvisande "metodologi" blir avfärdad.

The Sucker Rally

I am too busy now to produce a detailed analysis of the latest U.S. economic data. Suffice to say that all of them except the Chicago PMI, but inluding the Beige book, durable goods orders, corporate profits, new and existing home sales, construction spending, consumer confidence, personal income and spending and jobless claim support my prediction that this quarter will experience negative real growth at least on a terms of trade adjusted basis and probably on a volume basis too.

Meanwhile, I recommend Nouriel Roubini's interesting analysis of the stock rally of the last few days, which he calls "a sucker rally".

Online Black Friday Spending Up By 11% vs. 2008

ComScore, a leader in measuring the digital world, today reported holiday season retail e-commerce spending for the first 27 days of the November – December 2009 holiday season. For the holiday season-to-date, $10.57 billion has been spent online, marking a 3-percent increase versus the corresponding days last year. Black Friday (November 27) saw $595 million in online sales, making it the second heaviest online spending day to date in 2009 and representing an 11-percent increase versus Black Friday 2008.

European Inflation Getting Worse

The inflation problem is getting worse and worse in the euro area. This is illustrated first of all by the fact that M3 growth accelerated from an already high 11.3% in September to a new all time high of 12.3% in October.

Moreover, consumer price inflation rose from 2.6% in October to 3.0% in November, according to Eurostat's preliminary "flash" estimate.

Yet despite this surge in both monetary and price inflation, the ECB betrays its legal obligation to hold M3 growth at 4.5% and consumer price inflation below 2% by failing to raise interest rates and by offering "emergency loans" to failed investors.

Meanwhile, monetary crank Sarkozy tries a light version of Mugabe's inflation fighting tactic of government price controls, by pressuring retailers -using unspecified threats- to cut prices. This tactic failed miserably for Mugabe and is likely to fail for Sarkozy as well. In order to obtain lower prices you must rein in money supply growth and/or pass supply-boosting spending- and tax cuts.

Bush Praises Estonian Tax Policy-While Being Silent On Spending Policy

I see via Greg Mankiw that Bush have praised Estonia's tax policy. Ironically though, he mainly praised it for being simple rather than the fact that it is low. That is ironic because Bush have during his presidency lowered current taxation, while some of the cuts (such as the child tax credit) have if anything made it more complicated.

And more importantly, Bush leaves out the fact that the key to Estonia's success is that its tax cuts have been accompanied by spending cuts. According to statistics Estonia's database, government consumption fell from 19.9% of GDP in 2000 to 17.4% in 2005. And during 2006 the downward trend have continued. In America by contrast, government spending have risen during Bush.

This is important, because as Mankiw have pointed out before, tax cuts will only raise growth if they are matched by spending cuts.

Unexpectedly Bullish U.S. GDP Report

The revised third quarter U.S. GDP report was a lot stronger than the first one. And here I am not primarily refering to the increase in the headline number from 1.6% to 2.2%.

What was most surprising was the fact that corporate profits rose. Not just compared to last year's Katrina-depressed levels but also compared to the previous quarter. I had expected , just like for example Paul Kasriel of Northern Trust, that they would fall.

The reason we were wrong, were however not faulty analysis, but faulty preliminary data. The preliminary data underestimated GDP growth and even more so national income growth, while greatly overestimating compensation of labor, which were downwardly revised by more than $100 billion. Had the government's initial data on GDP and compensation of labor been unchanged, corporate profits would have fallen significantly instead of rising.

This revised picture paints a lot more bullish outlook. The higher corporate profits will mean that business investments is likely to be stronger than otherwise. Yesterday's durable goods report suggested a downturn in business investments, but the stronger profits means the chanse of a turn around has increased.

Still, there were details supporting the bearish case even in this report. While the dramatic downward revision in labor income enabled a increase in corporate profits, it also means that the household savings rate is a lot lower, -1.3% rather than the -0.5% previously reported. And as more than half of the upward revision in GDP comes from larger inventories, this means that production could be reduced in the fourth quarter 2006 or in 2007.

All told, most signs still indicates that a recession in 2007 is more likely than not. But the strength of corporate profits in this reports means that the probability of a "soft landing" have increased somewhat.

The Rich Are Getting Richer and the Poor Are Getting Richer; The Good Old Days Are Now

Click to enlarge.

Steve Horwitz at the Austrian Economists blog has a good post based on Census Bureau data that were recently released on "Living Conditions in the United States, 2005." The chart above (click to enlarge) shows the percentage of all U.S. households owning various household appliances in 1971 and 2005, and the percentage of poor households (below the official poverty line) owning those appliances in 2005. The data show a significant improvement in living standards between 1971 and 2005, as the percentage of households with clothes dryers increased from 44.5% to 81.2%, the percentage of households with dishwashers increased from 18.8% to 64%, and the percent of household with air conditioners increased from 31.8% to 85.7%.

data from the Department of Energy (based on Census Data) in the chart show that the percentage of households owning two or more vehicles increased from 34.8% in 1970 to 57% in 2000, and has likely increased since then.

What's most impressive though is the comparison of the living standards of households living below the poverty line in 2005 to all U.S. households in 1971. By almost every measure of appliance ownership, poor American households in 2005 had much better living conditions than the average American household in 1971, since poor households in 2005 had much higher ownership rates for basic appliances like clothes dryers, dishwashers, color TVs, and air conditioners than all households did in 1971.

As Steve Horwitz concludes "Life for the average American is better today than 35 years ago, life for poor Americans is much better than it was 35 years ago, and poor Americans today largely live better than the average American did 35 years ago. Hard to square with a narrative of economic stagnation or decline."

The reasons for the significant improvements in living standards for all Americans (at all income levels) include innovation, technology improvements, supply chain efficiencies, increases in productivity and other market-driven efficiencies that drive prices lower and lower year by year, measured in what is most important: our time, and the amount of labor it takes to earn the money to purchase household appliances and other goods and services.

Time Value of Common Household Appliances, 1973 vs. 2009
The chart above (click to enlarge) shows retail prices for eleven different household appliances in both 1973 (data here) and 2009 (data here), and the cost of those appliances measured in "hours of work" at the average hourly wage for all industries (BLS data here, $4.12 in 1973 vs. $18.72 today). The charts shows significant reductions in the real cost of basic household appliances between 1973 and today of from -50.7% for a basic kitchen stove (70.4 hours in 1973 vs. 34.7 hours in 2009) to -83.5% for color TVs (97.1 hours in 1973 vs. 16 hours in 2009), and an average reduction in real cost of more than 70% between 1973 and 2009.

In other words, to purchase those 11 basic household appliances in 1973 would have taken 551.1 hours of work, 13.8 weeks or 3.4 months working full-time at the average hourly wage in 1973. To purchase those same eleven appliances in 2009 would have only taken 171 hours of work, or 4.3 weeks or 1.1 month. Or the typical worker in 1973 would have had to work from January 1 until the second week of April to earn enough income to purchase those 11 appliances (pre-tax), whereas a worker today would only have to work from January 1 until the first few days of February to earn income for those appliances.

Bottom Line: As much as we hear about declines in median income, economic stagnation, the disappearance of the middle class, falling real wages, increasing income inequality, the data tell a much different story: The rich are getting richer and the poor are getting richer.

Weekend Weimar and Beagle

It's that time of the week again. The markets are closed. That means it's time to think about anything except the markets. I'll be back bright and early Monday morning.

Personal Spending Flat

From marketwatch:

U.S. consumer spending was flat in February after adjusting for inflation, the third consecutive month of weak consumer demand, the Commerce Department reported Friday.

Real consumer spending has risen less than 0.1% seasonally adjusted since November, a clear sign that the main engine of U.S. economic growth is stalling as job growth wanes and house prices tumble.

Real consumer spending is on track to rise 0.8% annualized for the first quarter, economists said. "The plunging confidence numbers clearly point to an outright decline in the second quarter," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics.

Let's look at some pertinent charts

The real year over year change in disposable income has been dropping for a while now and is now lower at pretty dangerous levels.

Year over year change in consumption expenditures are also dropping.

Consumer confidence and sentiment are dropping as well.

For an economy the depends on consumer spending, these are not good developments.

Skuldavskrivning är bistånd

Jag har ju upprepade gånger (exempelvis här) framhållit mitt motstånd mot målet att slänga bort 1% av BNI på bistånd, som av någon underlig anledning blivit någon slags helig graal för alla riksdagspartier utom moderaterna, och moderaterna har ju som väntat gett efter för de andra tre partiernas krav. Jag anser ju att 30 miljarder i bistånd är 30 miljarder för mycket.

För folk som sväljer innehållet i denna missvisande SR-artikel så kanske man kan tro att jag skulle glädjas. Den påstår ju nämligen att 1 miljard av biståndsbudgeten kan användas för skattesänkningar. Om det ändå hade varit så väl.

Men vad man gör är att okritiskt citera den socialdemokratiska biståndstalesmannen som påstår detta. Premisen bakom hans påstående är då för det första att bara en tiondel av avskrivningen är en kostnad och för det andra att skuldavskrivningen inte är bistånd. Angående det första är jag ju förståss i och för sig medveten om periodiseringsproblematik i bokföringen och att den verkliga kostnaden för de nämnda avskrivningarna mycket väl kan till stor del ha legat i tidigare år. Men man tillämpar ju här en dubbelmoral då man inte tidigare år tagit med den verkliga kostnaden och inte nu tar med den verkliga kostnaden i år för framtida avskrivningar.

Angående det andra är det helt obegripligt hur man inte kan se skuldavskrivning som bistånd. Sskuldavskrivning innebär ju att man ger bort pengar till andra länder. Att inte ta med det hade ju inneburit att biståndet hamnat på mer än 30 miljarder.

Att nu SR och andra biståndsanhängare försöker att mixtra med begreppen här innebär ju att svenska skattebetalare riskerar att bli skinnade på ännu mer än 1% av BNI.

High Money Supply Growth Shows Continued Need For ECB Hikes

There have been a number of voices recently calling for a pause in ECB rate hikes. This includes Bloomberg News columnist Matthew Lynn, Times columnist Anatole Kaletsky, not to mention of course European politicians.

Their argument is risks slowing next year due to a downturn in the U.S. economy, the lagged effect of ECB tightening, a rising euro and tax hikes in Germany and Italy. Well, they're probably right that the European economy will slow, primarily due to the tax hikes. Yet what is relevant here is the effect that ECB policy have. Trying to meet negative supply-side shocks with an "easy" monetary policy will only result in excess inflation. And so far we have yet to see much of a lagged effect of the ECB hikes. Money supply growth continued to be high, at 8.5% in October.

And while the strong euro and falling oil prices should contain consumer price inflation, it too will be pushed up by the tax increases. And by the boom in other commodity prices and the tighter labor market. The ECB should not damage the European economy with more inflation just because German and Italian politicians foolishly tries to reduce their budget deficits with tax increases rather than spending cuts.

Someone Have Been Watching Too Many Arnold Movies

South African man took seven days off work, claiming he was pregnant. Ii guess that's what happens when you watch too many Arnold Schwarzenegger movies. Well, I guess it could have been worse. He could have claimed to be a killer cyborg from the future or an extra-terrestrial trophy hunter or a person from another dimension.

Are More Banking Problems Coming?

From CNBC:

"I would say that while to date the problem banks have been quite low, there clearly has been some deterioration since the beginning of this year, and should the economy continue to slow down, as many expect, it is likely that we will continue to see some growth in the problem institutions," he told a seminar at the Bank of Korea.


Rosengren said the turbulence was difficult to foresee because bank models focused solely on their exposure to riskier assets like subprime mortgages, ignoring the possible knock-on effects on other sectors.

"What these stress tests crucially failed to capture was the effect of house price declines on the large holdings of highly rated securities that global banks held -- the products of mortgage securitization activities, with their payment streams ultimately tied to the performance of subprime loans," he said.

The belief that housing prices would never fall on a national basis, which permeated even the Fed itself, was partly to blame for this underestimation of risk, Rosengren said.

So -- the models that measure stress aren't as attuned to this chart of the national Case Shiller Price Index:

as they should be. That's comforting.

Seriously, banks are nowhere near catastrophic levels of problems. So please do not read into this the fact that bank failures are occurring with regularity because they aren't. However, given the current situation it's clear the situation will get worse before it gets better.

And the FDIC is clearly thinking failures will increase: (hat tip to Calculated Risk

Federal bank regulators plan to increase staffing 60 percent in coming months to handle an anticipated surge in troubled financial institutions.

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency's chief operating officer, said Tuesday.

"We want to make sure that we're prepared," Bovenzi said, adding that most of the hires will be temporary and based in Dallas.

There have been five bank failures since February 2007 following an uneventful more than two-year stretch. The last time the agency was hit hard with failures was during the 1990-1991 recession, when 502 banks failed in three years.

The FDIC provides insurance for deposits up to $100,000. While depositors typically have quick access to their bank accounts on the next business day after a bank closure, winding down a failed bank's operations can take years to finish. That process can include selling off real estate, investments and dealing with lawsuits.

There are 76 banks on the FDIC's "problem institutions" list — which would equate to about 10 expected bank failures this year, though FDIC officials declined to make projections. Historically, about six banks fail per year on average, FDIC officials said.

Since 1981, total failures per year averaged about 13 percent of the number of institutions that started the year on the agency's list of banks with weak financial conditions.

There have been two failures in 2008 — both of which were small Missouri-based banks. By far the largest recent failure was the September 2007 shutdown of Georgia-based NetBank Inc., an online bank with $2.5 billion in assets. NetBank's insured deposits — representing more than 100,000 customers — were assumed by ING Bank, part of Dutch financial giant ING Groep NV.

And consider the following charts from the FDIC's latest Quarterly Banking Survey

Clearly the situation is deteriorating.

Is the Fed Rethinking Its Policy Toward Asset Bubbles?

From Bloomberg:

Federal Reserve officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during former Chairman Alan Greenspan's 18 years at the helm.

After this month's near-collapse of Bear Stearns Cos., Minneapolis Fed Bank President Gary Stern -- the longest-serving policy maker -- said in a speech yesterday that it's possible ``to build support'' for practices ``designed to prevent excesses.'' New York Fed President Timothy Geithner, whose district bank took on almost $30 billion of Bear Stearns assets to rescue the firm, argued two years ago for a larger role for asset prices in decision-making, and there's no indication his views have changed.

For Fed policy makers, ``the consequences of their permissiveness have become so disastrous that they simply can't keep singing the same old tune in public,'' said Tom Schlesinger, executive director at the Financial Markets Center in Howardsville, Virginia.

While the soul-searching is unlikely to result in immediate changes to monetary policy, Stern's comments show how the credit freeze has forced officials to scrutinize long-held philosophies about the Fed's role in markets, and even ask how their current policies may undercut those views.

``As a risk manager, the Fed needs to take account of both directions, not just dealing with the aftermath,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. ``We have had two asset-prices bubbles in the last 10 years that have had big implications for the Fed's desire for a more stable macroeconomy.''

While it is easy to criticize the Fed for its lax policies (God knows I have done it many times), the reality is the situation is far more complicated. When the economy is slowing (as it is now) lowering rate is the primary method the Fed has to soften the landing. However, how low is too low? At what point do low rates which are supposed to stimulate economic growth become excessively low, encouraging reckless behavior? And how soon after the economy comes out of a recession should the Fed raise rates? This is a difficult balancing act.

However, I am pleased to see a tacit understanding from the Fed that their policies have in fact been a reason for today's problems. Something I am sick and tired of hearing is the "we had no idea this would happen" defense -- especially from a bunch of economists who are well aware of basic supply and demand. When Greenspan tells everyone that he had no idea the reckless lending would happen it takes all of my resolve not to throw large objects at the television screen.

Another V-Sign: Manufacturing Overtime Hours

Scott Grannis writes about another V-sign of the economic recovery: the rebound in real personal consumption expenditures:

The turnaround has nothing to do with cash-for-clunkers, since that washed out of the numbers by the end of October (i.e., some spending was accelerated, followed by some payback). On balance, real spending increased in 5 out of the six months ending October, and it rose at a 2.6% annualized rate in the four months following the likely end of the recession in June.

Scott concludes:

Things could be a lot better, to be sure, but there are things to be thankful for this Thanksgiving. One year ago we were standing on the edge of a fearsome abyss, while today we are arguing about how fast the economy is going to grow.

MP: Another V-sign of economic recovery is the turnaround in overtime hours for manufacturing workers (see chart above). The 23.1% increase over the last seven months, from 2.6 hours in March to 3.2 hours in October, is the largest 7-month percentage increase in manufacturing overtime hours since 1983 following the 1982 recession.

See related from today's Wall Street Journal "
Overtime Creeps Back Before Jobs," which starts by saying that "Overtime is returning at many manufacturers, boosting workers' battered wages and helping companies increase output during a period of uncertain growth."

Fattened Up Over Time: Turkeys and Americans

THE ECONOMIST - Between 1960 and 2008, turkeys bulked up by around 11 pounds to 29 pounds, an increase of 64%. Coincidentally, in that same period the average American man gained 28 pounds (166.3 pounds to 194.3 pounds, a 16.8% increase), almost the equivalent of a turkey (see chart above).

Update: "Recently I asked an acquaintance in Bombay why he has been trying so hard to relocate to America. He replied, “I really want to move to a country where the poor people are fat.” From Dinesh D'Souza's column "What's So Great About America."

What If Food Shopping Worked Like Health Care?

Today's "Crash"

Stock markets all over the world sold off heavily after a rumor that the Chinese government will impose a capital gains tax. A rather weak argument for the relatively dramatic sell-off we saw today considering 1) That it is just so far a rumour which has yet to be confirmed 2)Chinese equity capital is still relatively insignificant.

Considering the irrational ground for today's sudden move, this would seemingly appear to be a buying opportunity. And indeed, unless the markets are hit with more bad news, a recovery in stock prices seems highly likely.

However, I am not sure I would recommend people to buy stocks as I do in fact expect more bad news.

Update: The Chinese government now explicitly denies the rumour.

Today's Markets

Yesterday the market's broke through an uptrend that started on Monday, March 17. Yesterday the markets traded in a range from 133.5 to 134.5. Today the market consolidated lower in a triangle pattern. Also note the market sold-off hard at the end. End of the day sales are never a good thing. It means traders are taking money off the table at the end of the day, or they are nervous that a bad overnight event could hit the markets.

The markets broke through upward resistance on Monday and peaked on Tuesday. Since then they've been trading in a downward sloping channel. Also note the QQQQs had a late day sell-off.

The IWMs broke their trend yesterday. Since then they have moved slightly lower, but it wasn't until the close today that they really fell hard. Again, traders are nervous about something happening overnight.

And Whose Fault is That?

In my last post that the probability of a U.S. recession during 2007 has risen to 50-60%. In light of today's durable goods numbers, even that number may be too low.

Interestingly, now even Alan Greenspan joins the bearish camp, and argues that there is a risk of a recession by the end of the year. What he neglects to say is that this likely recession will be the result of the bursting of the housing bubble that he himself inflated.

Has the Fed Removed Downside Risk?

I've been thinking about this portion of the latest Fed statement:

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Let's take this one part at a time.

1.) There are two inter-related problems in the financing market right now. I call it C&C risk -- collateral and counter-party risk. Collateral risk is caused by all the junk paper out there (which everybody and their brother seems to own). This has led to the counter-party risk, where every lender is concerned that every borrower will default on even a short-term loan. Therefore, we're seeing a ton of cash hording right now.

2.) The Fed's action helps to alleviate that problem by doing three things. First, it opens the lending window to a wider audience. Now investment banks can borrow from the Federal Reserve. Secondly, it broadens the collateral the Fed sill accept. Essentially, borrowers can use a lot of the crappy paper out there (so long as it is investment grade or better) as collateral. Third, lowers the interest rate charged.

3.) What was the primary fear before the Fed's action? Default. What are the possibilities of a default in the current environment? Much lower. Why? Because if an institution gets in trouble it can use the paper that is probably causing at least part of the trouble to get a short-term loan from the Fed.

Does this prevent all problems? No. But it does alleviate the biggest fear out there right now -- a bankruptcy of a major Wall Street firm.

It's a Very Difficult Market to Read

Sometimes the charts are incredibly clear and give very clear signals. Sometimes they're about as clear as mud. The current market is definitely a case of the latter. Consider the following:

Above is the chart using simple moving averages. These SMAs give equal weight to all the numbers in the calculation, assuming that every number is equally important. Notice the following:

-- The long term SMAs (the 50 and 200) have continually moved lower, indicating the market's overall trend is down.

-- In February, the 10 day SMA was level and it intertwined with the 20 day SMA, giving hope to the bulls that a possible rally was underway.

-- Notice there is a great deal of buying support at the 126/127 level, indicating traders think this is fair value. We'll have to get through another earnings quarter before this changes.

Above is a chart with exponential moving averages, which give more weight to later/more recent numbers. This calculation assumes that what happened yesterday is more important than what happened a week ago. Notice the following subtle differences with the SMA chart:

-- The SMAs maintained a very bearish orientation of the lower averages below the longer averages for a longer time.

-- The 10 day EMA only crossed the 20 EMA for a brief time in February as opposed to intertwining with it.

Now consider the following line chart:

Line charts can be helpful because they clear out excess noise and help to show the underlying trend. With the above chart, notice we clearly formed a consolidating triangle from the beginning of the year to the end of February. But what about now? The markets are less clear.

And finally, we return to the candle chart. Notice the following:

-- We have a pretty clear triangle pattern.

-- Do be have a double bottom where the arrows are pointing? Technically we may. The question is does the fundamental information back-up this conclusion? I think the answer to that question lies with the Fed's action last week and the market's belief that it is enough to prevent a financial meltdown or recession.

A Quick Oil Update

Oil is rallying again.

Notice the following:

-- Prices retreated roughly 8% after the last Fed rate cut.

-- Prices retreated to the previously established support around 100

-- This price is also very close to the 38% Fibonacci retracement level for the early February/mid-March rally.

-- Yesterday the price moved through the 10 and 20 day SMA

-- The shorter SMAs are still above the longer SMAs

-- The 20 and 50 day SMA are still moving higher

Also, consider the following:

rude oil rose to its highest in more than a week after a pipeline explosion in southern Iraq, threatening to reduce exports.

The pipeline was on fire and the disruption will likely cut shipments to the Basra export terminal, an Iraqi official said. Iraq, holder of the world's third-largest crude reserves, ships most of the 2.32 million barrels it pumps each day from Basra.

``A setback like this and the militia activity in the last two days makes hopes for long-term peace and supply look fragile,'' said Robert Laughlin, a senior broker at MF Global Ltd. in London. ``We'd only just got used to Iraq supply becoming more reliable.''

Today's Markets

The SPYs are currently in a consolidation pattern. Note that today they broke through the trend line established a week ago Monday. But the average has been trading in the 133 - 135 range for the last three days. While there could still be a double top formation on Monday and Tuesday of this week, there is usually a stronger, sharper sell-off from that formation.

Like the SPYs, the QQQQs are essentially in a trading range between 44.40 and 45. This shouldn't be surprising considering the QQQQs were in a range for about 7 days on the chart. Also note there is still an uptrend in place that started last Monday.

Much of the QQQQ analysis applies to the IWMs. However:

-- The average is trading between 69.25 and 70.25

-- The average is bumping up to its trend line.

Accelerate the Appreciation?

Nicholas Sarkozy has visited China where he reportedly secured deals worth €20 billion for French firms. Fairly impressive, if it is really true that the visit really caused them.

Anyway though, he also spoke on the issue of the Chinese currency and told Chinese leaders that they should allow the yuan to strengthen and that doing so would be in China's best interest as well. Here I for once agree with Sarkozy on a monetary issue, but I can't resist the temptation to point out an error in his statement when he said:

"This means that, for its own sake as well, China needs to accelerate the appreciation of the yuan against the euro."

Accelerate the appreciation? Make that decelerate, stop and preferably reverse the depreciation of the yuan against the euro. While the yuan has appreciated against the U.S. dollar, so has almost all other currencies, and most -including the euro- have in fact appreciated faster against the U.S. dollar than the yuan. That means that the yuan has depreciated against the euro. The euro has risen from 10.2 yuan in June to 11 yuan today. This is of course one of the reason why the Chinese current account surplus have continued to rise despite the steady appreciation of the yuan against the U.S. dollar.

EU Blackmails Switzerland For a Billion Swiss Franc

Swiss voters have in a referendum approved with a 53% majority a new deal with the EU. Or actually, calling it "a deal" is a bit misleading. It is more like blackmail.

Switzerland is not a part of the EU, but being completely geographically surrounded by EU states and having 70% of its trade with the EU, its economy depends on having good trade relations with the EU. So, they have instead tried to achieve a free trade agreement with the EU. Since free trade is mutually beneficial one would have thought that this would be a no-brainer.

But the EU, knowing that little Switzerland depend far more on them than vice versa, told the Swiss that they cannot just cherry pick the advantages of the EU, while completely opting out of paying money to the EU budget. So the EU told the Swiss: pay us a billion swiss franc per year, or we'll institute trade barriers that would harm the Swiss economy even more. Pure blackmail, in other words. The EU will thus get to enjoy the benefits of free trade with Switzerland and cherry pick another billion swiss franc, while the swiss will have to pay up a billion swiss franc in "protection money" to the Don Corleones of Brussells.

Varför en riktig a-kassereform vore välbehövlig

Niklas Ekdals senaste krönika är väldigt bra och viktig. Ett till synes gåtfullt faktum är hur industrin kan göra rekordvinster samtidigt som vi har massarbetslöshet. Det förra skulle ju antyda att svenska löner är för låga, medan det senare skulle antyda att lönerna är för höga.

Lösningen på denna gåta går att finna i den så kallade "solidariska lönepolitiken" där LO samordnar sina krav och utgår från att alla yrkesgrupper ska ha samma lönepåslag i kronor räknat. Detta innebär ju att de procentuella löneökningarna blir mycket högre för låginkomsttagare än för höginkomsttagare, samtidigt som löneökningarna blir lika stora oavsett om företaget är framgångsrikt eller ej och oavsett om det råder brist eller ej på den yrkesgruppen.

I praktiken blir den faktiska lönesättningen något mer rationell än så tack vare att löneglidningen vanligtvis blir klart högre hos framgångsrika företag och inom bristyrken än hos andra, men slutresultatet blir ändå i grunden att löneökningarna hålls tillbaka i vinstrika företag, samtidigt som de blir så höga i många svaga brancher att arbetslöshet skapas.

Det är alltså inte så att det generellt är för höga eller för låga löner-utan att lönestrukturen är fel med för höga löner i vissa brancher och för låga i andra.

LO verkar dock inte ha lärst sig, utan deras bud i den här avtalsrörelsen kommer ju förvärra situationen ytterligare. Dels så anger man ett krav i kronor per månad och dels kräver man särskilda kvinno- och låglönesatsningar. Detta innebär i praktiken att det kommer att bli för låga lönesökningar inom industrin samtidigt som arbetslösheten kommer att förvärras av att det blir alltför stora höjningar av minimilönerna för lågproduktiva.

En av orsakerna till att LO kunnat komma undan med en sådan irrationell lönesättning är att den subventioneras i praktiken genom a-kassesystemet där ingen åtskillnad i vare sig avgifter eller ersättningsnivå görs på basis av hur hög branchens arbetslöshet är. Regeringens omtalade a-kassereform kommer inte egentligen innebära någon nämnvärd förbättring. Sänkningen av ersättningsnivån kommer nämligen bara drabba höginkomsttagare (dvs de vars arbetslöshet inte kommer att höjas av LO-kraven) och det kommer även fortsättningsvis vara nästan ingen differentiering alls av avgifterna baserat på arbetslöshetsnivån inom en viss branch.

För att komma åt LO:s irrationella lönesättning borde man -förutom en del andra åtgärder för att minska fackens makt- helt avskaffa subventioneringen av a-kassorna. Då skulle LO:s irrationella lönesättning automatiskt straffa sig endera i form av att många medlemmar blir arbetslösa med låg ersättning och/eller att de som behållit sitt arbete får skyhöga avgifter. Långsamt skulle LO:s irrationella "låglönesatsningar" och "kvinnosatsningar" försvinna och lönesättningen mer baseras på företagens betalningsförmåga och utbudet av arbetskraft. Och även om "de nya moderaterna" inte vågar ta ett sådant radikalt steg borde man nu när man liks ta strid i frågan, arbeta för en högre differentiering av avgifter beroende på arbetslöshet samt genomföra en mer generell sänkning av ersättningsnivåerna och inte bara sänka taken.

Men det gör man alltså inte. Följden lär bli att LO kan driva igenom en lönepolitik som delvis kommer att sabotera den sysselsättningstillväxt regeringen hoppas kunna åstadkomma. Något som facken säkerligen inte har något emot (Ja, man behöver inte vara alltför konspiratorisk för att tro att detta kanske delvis är syftet). Och som Reinfeldt på grund av sin feghet kommer att förtjäna. Men även om Reinfeldt gjort sig mycket väl förtjänt av ett valnederlag 2010, så är det synd för landet att den chans som den borgerliga valsegern innebar kommer att kastas bort.

Another Example of Why Arab Democracy May Not be Such a Good Idea

As if the civil war-like chaos in Iraq or the electoral success of jihadists in Palestine, Shiite Lebanon and Egypt wasn't indication enough that Arab democracy is not the way to stop global jihad, the election in Bahrain end with the vote being split between Shiite and Sunni jihadists.

Help Wanted: No Real World Experience Required

Great post and graph on the Enterprise blog from my friend and colleague at the American Enterprise Institute Nick Schulz.

The Marvel and Mystery of the World

But we can all remind ourselves that the richness of this country was not born in the resources of the earth, though they be plentiful, but in the men that took its measure. For that reminder is everywhere—in the cities, towns, farms, roads, factories, homes, hospitals, schools that spread everywhere over that wilderness.

We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth.

Wall Street Editorial on the day before Thanksgiving

Commodities/Dollar Update

One of the big stories for the last 3-6 months is the commodities boom. Just to refresh your memory, the commodity market has been on fire for two inter-related reasons. As the Fed started to cut interest rates it became clear to traders that the Fed was going to let inflation run. As a result, traders bid up commodities as an inflation hedge. In addition, as the Fed cut interest rates the dollar became less attractive as a place to park money, so the dollar continued to fall. Because most commodities are priced in dollars a drop in the dollar is a de facto price gain in anything priced in dollars. So, the commodity and dollar markets were involved in a fairly vicious circle.

The Fed's last rate cut announcement led to speculation the rate cuts were nearing an end. This led to a rally in the dollar and sharp drop in commodity prices last week.

Let's see where the charts stand now:

On the dollar chart, notice the following:

-- The dollar rallied to its 20 day SMA and then fell back.

-- The dollar is currently trading at the 10 day SMA.

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

The next few days are exceedingly important for the dollar.

On the monthly chart, notice:

-- The dollar is in a clear, multi-year downtrend. It is in a pattern of lower lows and lower highs.

-- The chart has continually broken through technical support.

-- There are several strong downward sloping trends in place.

On the commodities chart, notice the following:

-- Two other times in the last 6 months prices have dropped to the 50 day SMA over the period of about a week to a week and a half. Both times prices rallied back.

-- However, the last two times this happened, the SMAs were closer together. Over the last month the 10 and 20 SMA have moved pretty far above the 50 day SMA. In other words, the SMAs might need time to catch-up with price action.

-- Note the 10 day SMA has crossed below the 20 day SMA. This is a bearish crossove and may indicate we have lower prices ahead.

-- So far, prices have repeated what has happened twice before.

On the monthly CRB chart, notice the following:

-- Prices are currently at the uptrend.

-- There is support at 366 -- about 6% below current price levels.

Are We In For Long-Term Stagnation in Stock Prices?

From today's WSJ:

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.

The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.

Until last fall, many investors had viewed the bursting of the tech-stock bubble as a nasty but short-term setback. The market had resumed its upward march, reaching new highs in October. Then the credit crisis began weighing on stocks, as did the possibility of a recession. By March 10, the S&P 500 was down 18.6% from its Oct. 9 record close, nearing the 20% decline that signals a bear market. It has rebounded since then amid the Federal Reserve's efforts to stabilize the financial system, but it remains 13.3% below its October record.

Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn't held up for stocks bought in the late 1990s or 2000.

Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.

This is a really good observation and it raises many troubling questions for the next 5-10 years.

While no one has a crystal ball that sees perfectly (or imperfectly for that matter) there is no denying that current economic conditions are terrible. Our current problems started with a massive real estate glut. Supply and demand are still massively out of whack (see this article) and will be for some time. Anyone who is calling a bottom in housing that occurs before the 4th quarter of this year is engaging in spin rather than analysis.

The real estate problems have infested the US financial system. Simply put, everyone jumped on the real estate bandwagon with the end result being that now everyone is hurting. And there is no reason to think this won't continue for some time. Economic problems are at the heart of the financial systems problems as more and more homeowners stop paying their mortgages or simply walk away because their home's price is now horribly below the total value of the mortgage.

And this is before we get to to heavily indebted consumer who is literally drowning in debt payments. The national government isn't doing much better and state governments are quickly making up for lost time.

There are two charts the bolster the WSJ's points. Here is a 15 year chart of the SPYs. Notice we are clearly on the downside of a possible double top formation with the first top occurring in 2000 and the second occurring in 2007:

The second chart is the reset chart for the mortgage industry. Notice that we have a second wave of resets that starts in 2010! This means we could experience the exact same situation today that we're experiencing now.

I want to caution -- no one has a crystal ball and the above analysis is largely an extrapolation of current events to the future. But it's also important to remember the long-term chart formation of the SPYs is not good and the underlying fundamental economic backdrop is poor right now with very little positive news filtering through. In short -- things ain't that good right now.

Yesterday's Markets

Here's an interesting question for Bonddad readers: Is it better to have the market wrap after the market closes or in the morning before the market opens?

Anyway -- let's look at the long-term charts

The SPYs have the most interesting 10-day chart. On the left, notice we have two triangle consolidations. The first is more level and the second is a downward sloping wedge triangle. We get a gap up on the opening of "Fed day". This was followed by a further spike up after which the market dropped hard for the rest of the day. Starting on Thursday of last week we had a rally. But if you look carefully at the SPYs (and where I added an arrow) you'll see the possibility of a double top.

On the QQQQs we have a clear trading pattern followed by a break-out in an upward sloping wedge.

On the IWMs, notice we have another trading pattern followed by a break-out. But there is the possibility of a double top with this chart.

First Retail Clinic Opens in DC 2 Miles from Capitol

FOX BUSINESS NEWS -- MinuteClinic, the pioneer and largest provider of retail-based health care in the United States, has opened its first retail health care center in Washington, D.C. inside a CVS/pharmacy store on Bladensburg Road. The clinic is open seven days a week and will serve patients in Northeast neighborhoods, including Trinidad, Carver Langston, Kingman Park, Atlas District, Ivy City and the Gallaudet University campus.

"Through this conveniently located store-based clinic, we are expanding access to high-quality, affordable care for common family illnesses in the Northeast neighborhoods of the District of Columbia," said Andrew Sussman, M.D., MinuteClinic president. "We are committed to making our innovative model, which includes a series of prevention and wellness services, part of the District's extensive efforts to broaden access to quality medical care for its citizens."

The MinuteClinic health care center in Northeast is open Monday - Friday from 8:30 a.m. to 7:30 p.m., Saturday from 9 a.m. to 5:30 p.m. and Sunday from 10 a.m. to 5:30 p.m. Examinations typically take 10-15 minutes and no appointment is necessary.

Additional MinuteClinic locations are expected to open inside CVS/pharmacy stores in the District of Columbia in 2010. There are 23 MinuteClinic health care centers inside select CVS/pharmacy stores in Northern Virginia and Maryland counties surrounding the District of Columbia.

MP: While Congress considers how to bring down health care costs and expand access to medical care through various grandiose government interventions, programs and public options (and they've got 2,000 pages worth of "health care reform" to prove it), the private marketplace is already doing it - lowering costs and expanding access at more than 1,000 retail clinics (with maybe as many as 4,000 by 2015, see chart above). And unlike government-based health care reform, the explosion of affordable, convenient retail health clinics across the country didn't require any tax increases, government spending or funding, or special legislation.

Isn't it ironic that within a week of the Senate vote to start debate on health care reform, the first retail clinic opens in Washington, D.C. less than two miles from the U.S. Capitol? Could the senators maybe take a field trip to the clinic to see what market-based health care reform looks like before they plot their takeover of the health care system?

Today's Markets, er, Tomorrow

I've got a doctor's appointment that I have to run to (I'm fine. This is routine stuff). But I'm leaving before the market closes. I'll run "today's markets" tomorrow morning.

New Home Sales Highest in a Year, Inventory Measure of New Homes Lowest Since 2006

WASH POST --Sales of newly built homes rose to the highest level in more than a year while the supply of these homes dropped to new lows, according to government data released on Wednesday.

Purchases of single-family homes rose 6.2% in October from September to a seasonally adjusted annual rate of 430,000, the Commerce Department reported. The jump was driven solely by the South, the largest new home sales market in the nation. That region, which includes the Washington, D.C. area, posted a 23% gain while sales in other regions slipped.

Meanwhile, the supply of new homes has plummeted to the lowest level in nearly four decades, a promising sign that supply and demand for new homes will soon fall in line and help stabilize home prices.

MP: The months supply of homes at the current sales rate fell to 6.7 months in October, the lowest reading since December 2006 (see bottom chart above), almost three years ago. The balance between supply and demand for new homes is returning to the conditions of a normal housing market, and the October inventory of 6.7 months supply is just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.

Arbitrage Opportunity

Arbitrage is usually defined as an opportunity to make a profit that requires no initial net investment -no negative cash flow- and that presents no risk for the arbitrageur. Such opportunities regularly arise, although they are usually short-lived.

More lasting discrepancies are opportunities which do not fully satisfy the technical definition of arbitrage, since they are either not 100% certain or because they require some initial investments.

One of the more fascinating cases of profit opportunities which may not be 100% certain but are nevertheless fairly certain and which requires no initial net investments are in the U.S. bond market.

Whether you look at the latest 20 years or 5 years, the historical average for U.S. consumer price inflation has been 3%, and currently inflation likely stands at more than 4%. Yet the spread between the regular nominal U.S. treasury note and the treasury inflation protected securities of similar maturity is just 2.3% for the 5-year note. While that is up somewhat since the Fed's September rate cut, it is still irrationally low.

So, in other words, even as Helicopter Bernanke has rapidly accelerated the pace of inflating and shown his willingness to in effect throw the dollar to the wolves, the U.S. bond market is pricing in a significant decline in inflation in the coming years!

While that scenario may not be impossible, it certainly appears highly unlikely that inflation would fall under the current circumstances, and fall to less than 2.3%. It is much more likely that inflation will instead rise and stay at a level higher than 3% over the next 5 years.

So, here is a almost risk free arbitrage strategy that requires no initial net investment: first you sell short the nominal treasury notes. Then you use the proceeds from that to buy inflation protected treasury securities of the same maturity. Then you hold this position and watch the interest income to you come in at larger sums than the sums you have to pay to compensate the owner of the treasury notes you sold short. And as you've made no initial net investment, you won't face any exchange rate risk (except in the sense that the falling dollar will limit your gains, but it can't inflict direct losses on you).

Case Shiller Index Drops Record Amount

From the AP

Home prices in many cities continued to plunge by record levels in January as sellers cut their asking bids and rising foreclosures took their toll, new data showed Tuesday.

While the spring selling season usually gives the market a bounce, some analysts say any notable improvement may not come until well into the summer. U.S. home prices fell 10.7 percent in January, and the Standard & Poor's/Case-Shiller home price index of 20 cities saw the steepest decline in the index's two-decade history.

Here's a chart of the price gains/losses for the index in the big cities:

Let's take a look at the chart for the US:

Notice the following:

-- During the 1990s the national price level really didn't move that significantly. Now, the stock market was our preferred bubble at the time so that might have taken some of the speculative excess out of the real estate market.

-- Notice the huge price increase during this expansion. Compare that increase to the increase during the last expansion. In comparison it looks like the latest price increase is unhealthy.

-- Notice we're just turning the corner on the downward move.

In other words, we have a long way to go.

Giving Thanks for Capitalism, The Invisible Hand, the Miracle of the Free Market and No Turkey Czars

Like in previous years, you probably didn't call your local supermarket ahead of time and order your Thanksgiving turkey this year. Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you showed up "unannounced" at the grocery store to select your bird.

The reason your Thanksgiving turkey was waiting for you without an advance order? Because of "spontaneous order," "self-interest," and the "invisible hand" of the free market - "the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many." And even if your turkey appeared in your local grocery stores only because of the "selfishness" or "corporate greed" of thousands of turkey farmers, truckers, and supermarket owners who are complete strangers to you and your family, it's still part of the miracle of the marketplace where "individually selfish decisions lead to collectively efficient outcomes."

In a 2003 Boston Globe column titled "Giving Thanks for the Invisible Hand" Jeff Jacoby explains below why he is thankful for the miracle of the invisible hand that makes affordable turkeys automatically available so efficiently at Thanksgiving:

The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.

No turkey czar sat in a command post somewhere, consulting a master plan and issuing orders. No one forced people to cooperate for your benefit. And yet they did cooperate. When you arrived at the supermarket, your turkey was there. You didn't have to do anything but show up to buy it. If that isn't a miracle, what should we call it?

Adam Smith called it "the invisible hand" -- the mysterious power that leads innumerable people, each working for his own gain, to promote ends that benefit many. Out of the seeming chaos of millions of uncoordinated private transactions emerges the spontaneous order of the market. Free human beings freely interact, and the result is an array of goods and services more immense than the human mind can comprehend. No dictator, no bureaucracy, no supercomputer plans it in advance. Indeed, the more an economy *is* planned, the more it is plagued by shortages, dislocation, and failure.

It is commonplace to speak of seeing God's signature in the intricacy of a spider's web or the animation of a beehive. But they pale in comparison to the kaleidoscopic energy and productivity of the free market. If it is a blessing from Heaven when seeds are transformed into grain, how much more of a blessing is it when our private, voluntary exchanges are transformed - without our ever intending it - into prosperity, innovation, and growth?

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