• Japan’s economy is once again growing, with its gross domestic product (GDP) rising 3.7% in the second quarter. A rebound in exports to China and a large stimulus program helped Japan bounce back from contraction that, at an annualized rate of 11.7%, was more than double that of the United States’ in the first quarter. Officials at Japanese companies think the nation’s worst recession since World War II is nearly over, according to a survey released last weekend.

• The National Association of Home Builders/Wells Fargo confidence index rose to 18 this month, a one-year high, Bloomberg Newsreported. Still, a reading below 50 means most respondents view conditions as poor. “Inventory is being cleared and that is starting to benefit the new-home market,” Julia Coronado, a senior economist at BNP Paribas SA in New York told Bloomberg. “With a few months’ lag, that will lead to a turnaround in construction activity.”

• The Federal Reserve Bank of New York’s general economic indexrose to 12.1, higher than forecast and the first increase since April 2008. Any reading above zero indicates that manufacturing is growing. “Inventories were drawn down to such amazingly low levels that companies need to start bringing them back,” said Tom Porcelli, a senior economist at RBC Capital Markets Corp. in aBloomberg News interview. “We are coming out of the recession.It’s probably over at this point.“

• Credit card default rates showed signs of stabilization in July,Reuters reported, citing regulatory filings by multiple large U.S. banks. Bank of America Corp. (NYSE: BAC), the bank with the highest default and delinquency rates saw its charge-off rate shrink slightly to 13.81% in July from 13.86%. “It just seems to bear out what we heard in the second-quarter calls, that things seem to be getting marginally better — and I would stress marginally — on the consumer side,” Nancy Bush, founder of NAB Research, said of Bank of America.

• Microsoft Corp. (Nasdaq: MSFT) and General Electric Co. (NYSE: GE) joint venture MSNBC.com has acquired “hyperlocal” news and information Web site EveryBlock. Terms were not disclosed, but in June Time Warner Inc.’s (NYSE: TWX) AOL acquired a similar Web site, Patch for $7 million, The Washington Post reported. EveryBlock offers news in 15 cities. “Joining with MSNBC.com gives us the resources to turn EveryBlock from a cool, useful service into something much bigger,” said Adrian Holovaty, founder of EveryBlock. Holovaty and the company’s staff of five will remain based in Chicago.

• Reader’s Digest Association Inc., whose namesake magazine says it is the bestselling magazine in the world, has filed for Chapter 11 bankruptcy protection as a part of a prearranged plan with lenders to cut debt by 75%. If the court approves the deal, Reader’s Digest’s debt would be reduced to $550 million from its current $2.2 billion. “Our deal has already been negotiated and hammered out with a majority of our creditors,” said Chief Executive Officer Mary Berner in an interview with Reuters. The announcement “doesn’t affect our employees, it doesn’t affect the vast majority of vendors, it doesn’t mean we’ll do mass layoffs, it doesn’t mean we’re going to be selling off assets. It’s business as usual.”

• Continuing weak demand, bad weather and charges related to the halting of its expansion contributed to a 19% drop in Lowe’s Cos.’(NYSE: LOW) second quarter earnings. The world’s second-largest home improvement retailer after Home Depot Inc. (NYSE: HD) saw its profit fall to $759 million, or 51 cents a share for the quarter ended July 31. That compares to a net income of $938 million, or 63 cents a share in the same period last year. Sales fell 4.6% to $13.84 billion and same-store sales dropped 9.5%.

Source: Investment News Briefs Tuesday, August 18, 2009

The dollar fell anew against the euro and yen while yields on U.S. and European government debt traded at or near historic lows on Wednesday, a day after the bold credit easing by the Federal Reserve to combat a worsening recession.

Oil prices dropped as much as $3 a barrel after dealers said a record supply cut by the Organization of Petroleum Exporting Countries would not be enough to counter slumping energy demand brought on by the global economic downturn.

Equity markets on either side of the Atlantic slid as the initial enthusiasm over the Fed’s surprisingly aggressive interest rate cut on Tuesday gave way to weak financial results at key banks and European data reinforced a dismal outlook.

Despite yields already at historic lows, investors piled into debt. Short-term government bonds still offer a safe-haven for investors fearful that a deepening recession will lead to further losses in other assets.

The yield on 30-year U.S. government bonds led a rally in the United States, touching a series of record lows to yield as little as 2.58 percent. Yields move in the opposite direction of bond prices.

“We are trading in no man’s land and expect this will continue into year-end,” said Thomas di Galoma, head of government trading at Jefferies & Co. in New York.

The benchmark 10-year U.S. Treasury note was up 36/32 in price to yield 2.14 percent.

Two-year German government bond yields hit their lowest level since the euro zone was created, with the two-year Schatz hitting 1.842 percent , according to Reuters data.

It was the lowest level since the rate-sensitive Schatz was launched in 1991.

The Fed’s surprisedly large cut further eroded the U.S. currency’s appeal against the euro, which has gained a staggering 11 percent so far during the month.

The dollar hit a fresh 2-1/2 month low versus the euro and fell towards a recent 13-year low against the yen, in a plunge that stoked speculation Japanese authorities may intervene to rein in its climb, which is hurting the nation’s exporters.

“The underlying story in the FX market remains yield. The fact that the Fed made this major policy move yesterday really changed the balance of power towards the euro for the time being,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index off 1.48 percent at 79.011. Against the yen, the dollar fell 1.21 percent at 87.85.

The euro rose 1.65 percent at $1.4331.

U.S. and European stocks fell. Morgan Stanley shares slid after reporting a worse-than-expected $2.2 billion quarterly loss as the credit crisis caused more write-downs.

BNP Paribas revealed an 11-month loss at its investment banking unit, hit by exposure to an alleged fraud by U.S. financier Bernard Madoff.

“Weaker company data are back in focus,” said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Bonn, Germany.

“The news about BNP is the main trigger regarding European banks, while Morgan Stanley’s results only seem to seem to have a marginal impact,” he added.

Apple Inc was a major weight on the Nasdaq after the iPod maker said Chief Executive Steve Jobs will not deliver the keynote address at the Macworld trade show next month, reviving concern about his health.

Apple’s shares tumbled about 7 percent.

Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey, said investors were initially enthused after the Fed’s moves on Tuesday made it clear it would do whatever it takes to get the U.S. economy back on track.

“This morning we awaken with a hangover and the realization of how many bullets do they have left?” Arnuk said.

Before 1 p.m., the Dow Jones industrial average was off 41.50 points, or 0.47 percent, at 8,882.64. The Standard & Poor’s 500 Index was down 3.55 points, or 0.39 percent, at 909.63. The Nasdaq Composite Index was down 6.67 points, or 0.42 percent, at 1,583.22.

The FTSEurofirst 300 index of top European shares closed down 0.76 percent at 828.53 points.

OPEC announced an agreement to cut 2.2 million barrels per day of output starting Jan. 1 — the biggest single reduction on record — adding to previous cuts of 2 million barrels since September.

U.S. light sweet crude oil fell $2.36 percent to $41.24 a barrel.

Spot gold prices rose $8.00 to $864.70 an ounce.

Asian stocks rose overnight, supported by sectors sensitive to interest rates in anticipation regional policy-makers will take more aggressive steps to support growth after the Federal Reserve’s easing on Tuesday.

The MSCI index of Asian-Pacific stocks outside Japan rose 2.3 percent to the highest since Nov. 11. But Japan’s Nikkei share averagE shed early gains to end down 0.5 percent as the yen’s strength walloped exporters.

Herbert Lash
NEW YORK, Dec 17 (Reuters)

What surprises us about this market is that anyone finds it surprising.

Lenders lent to people who couldn’t pay the money back. Naturally, the loans went bad; what’s surprising about that?

Consumers spent more than they could afford. Naturally, they ran out of money and have to cut back. Do you see anything unusual about that?

Wall Street partied for years on cheap credit. Now, credit is becoming harder to come by. Is it any wonder that they’ve had to turn off the music and close down the bar?

Yesterday, the Dow slipped 224 points, after the giant insurance company, AIG, announced a bigger-than-expected loss. AIG got taken down more than at any time since the company went public in 1969.

Oil went up yesterday – $1.32. But gold lost another $5…to $877.

And the 10-year T-note rose to yield 3.93%.

And now we read in the paper that Freddie Mac (NYSE:FRE) has posted a big loss. What a shocker! Gosh, we thought financing houses at 100% to poor credit risks, who lied on their mortgage applications, was a good business. And it was a great business, until housing prices went down. But, who could have seen that coming?

Well…anyone.

Prices go up. Then, they go down. That’s the way it’s been going for a long time. Housing prices are “mean reverting,” as economists say. In fact, as we pointed out here, they’re about the meanest reverters in the whole financial world. Houses, unlike dotcom stocks or paintings by Lucien Freud, are useful. They’re bought by wage-earners to live in. So, they have to be priced at levels that the buyers can afford them. In fact, the average house-price has to be within the housing budget of the average house buyer; that’s all there is to it.

So don’t bother telling us that the housing decline came as a surprise; we’ve been predicting it ever since it began. (Of course…we’ve predicted many other things that haven’t happened yet…but that’s a different story.)

But here comes the article from Reuters: “Freddie Mac’s negative net worth raises questions.” Well…yes. The first question is how a company with a quasi monopoly granted by the U.S. government could make such a mess of its business. And so fast! Hardly 12 months after the biggest bubble in property in the history of the world and it’s already $5.6 billion underwater.

A rumor making its way around Wall Street – started by us – is that Freddie is secretly being run by Robert Mugabe. Of course, a string of bad luck can ruin any business. But Freddie Mac couldn’t be explained by bad luck alone; it took an act of Congress! Or maybe a couple of acts of Congress. The one that created the Federal Reserve System, for example.

But let’s leave that subject for another day. We opined yesterday, that the financial industry has had its season in the sun; it won’t recover its youthful vigor in our lifetimes. Which brings us to the second question: why would investors buy the shares? Freddie is clearly insolvent.

But most investors don’t believe it. Freddie may have a net worth of negative $5.6 billion, but investors buy the stock anyway. These summer forecasters expect the clouds to pass and the sun to come back any day. Ain’t gonna happen is our guess.

The number of unsold houses is at its highest in 26 years. Half of them have to be sold before sellers have any pricing power. That will take a long time. Then too, our bet is that the inventory is understated. We know at least a couple people who have taken houses off the market. Not because they want to own them, but simply because they don’t think they can sell them. When the inventory gets worked off, these houses will be put up for sale again – holding prices down even longer.

But the big change in the economy is not in the housing market itself, but in the change of opinion that it causes. Markets make opinions, say the old-timers. And a drop in housing is about to cause an epochal shift away from debt and towards savings. We report it here, even though it hasn’t happened yet. As we explained yesterday, baby boomers now look to retirement as a condemned man looks to the scaffold. They know they shouldn’t have done what they did…and should’ve done what they didn’t. They regret not saving money – deeply. And now, the poor baby boomer has only one chance for redemption…trying to make up for the last 15 years by saving as if the rest of his life depended on it.

In fact, it does.

*** You may be wondering what is happening in Europe…

Here in England, it has been raining for the last week. “What happened to summer?” we wanted to know.

“Oh…it was over in May,” came the reply.

The summer season seems to have left Britain’s economy too. A report in the newspaper tells us that food prices are rising at almost 10% per year. Meanwhile, housing prices are falling – at the fastest pace in 24 years.

So you see, the typical Brit, like the typical American, is caught in no-man’s-land…with inflation destroying his purchasing power on the one hand, and deflation undermining his assets on the other. At the end of the day, he has less money…and it goes less far.

Here’s the latest from our colleagues at MoneyMorning, here in London:

“There seems to have been more or less a straight fight between the States and us as to who actually plunges into a recession first. [But] within the last few weeks another strong contender for this dubious prize has emerged. The eurozone now looks like it could get a dose of recession before either the US or the UK.

“Anyone who has been keeping an eye on Spain’s troubled economy won’t be too surprised to see that the eurozone is really struggling. The Hispanic housing market is collapsing – sales are down 34% from the peak, say the latest official figures – and the banking system is on the brink, according to Morgan Stanley.

“A momentous economic slowdown in Spain is now under way… though just in the beginning stages, with the bulk of the pain to be suffered in 2009”, says the investment bank, going on to warn that “the probability of a crisis scenario similar to the early 1990s is increasing”.

Meanwhile unemployment has already reached 10.4% and the country’s finance minister recently admitted that: “the economic situation is worse than we all predicted…we thought it would happen slowly but it has hit fast”.

It’s not just Spain. In Ireland too, house prices are tumbling, with Dublin seeing double-digit falls. New housebuilding has hit a five-year low. And over in Italy, things aren’t so hot on the economic front either. Last weekend Prime Minister Berlusconi said he would now be slashing government spending as tax revenues have slumped.

But let’s be fair here. Trouble in these countries isn’t exactly a surprise – Ireland was heading for trouble from the moment it joined the eurozone, as low interest rates poured petrol on an already blazing economy. Spain was the same. And as for Italy, it’s rarely far from economic strife.

Surely the countries at the real core of the eurozone – France and Germany, in other words – are looking a bit more stable? Well, it seems not. After holding out pretty well during the first half, by mid-July, business confidence was declining abruptly, as the German ZEW economic sentiment indicator suddenly plunged, unexpectedly, to a record low. French business confidence has also dropped away.

Then last week, the overall eurozone activity survey plummeted much more sharply than the ‘experts’ had expected, to its lowest point since March 2003.

What’s more, European companies are starting to default on their debts, says Dresdner Kleinwort, which believes that as many as 6-7% of corporate borrowers may fail to pay their debts on time within the next year. That’s a tenfold increase in the estimate since June and, says Moody’s Investors Service, the highest default rate since July 2003. Add in Tuesday’s 0.6% drop in retail sales for the region, and the picture we’re seeing emerge isn’t at all pretty. Because things have got worse so fast that the eurozone now looks like a racing certainty to beat us Brits into recession.

It all points to a sell-off in the euro. Sure, the alternatives may not be great, with both the US and the UK apparently competing to see which can prove the bigger basket case, but to quote one of the oldest market truisms around, currencies are a ‘zero sum’ game.

If one falls, another has to rise. And while it’s very hard to make a convincing case for the dollar, or indeed the pound, all the signs from the continent are that the euro faces even more problems.

Pimco bond fund manager Bill Gross recently said he sees no reason for “the euro’s 25% to 30% overvaluation against the US dollar”, while BNP Paribas (EPA:BNP) also declared: “we’re turning incredibly bearish on the euro.” It’s starting to feel like the dollar, currently trading at around $1.55 to the euro, might just be bottoming out against its continental European cousin. And maybe sterling, which over the last five years has tended to move more or less in line with the buck, could get a ride on its coat tails.

*** And don’t bother to cry for Argentina. Of course, the country is a mess. But that’s the way the Argentines like it. But that story will have to wait until Monday.

Our dollar-based financial system is like a loaded pistol…

Today, we take a summer rest and let a dead man do the talking. Jacques Rueff died 30 years ago. But in a couple of articles written for Le Monde in February 1976, this economic advisor to Charles de Gaulle, explained today’s monetary system and what was likely to become of it. His articles were unusual, in several respects. It is rare for an economist to have any idea what is going on – especially a French one. And on the subject of economics, Le Monde has things worth reading about as often as Leap Years.

To fully appreciate Rueff’s insight – and how it applies to the macro-economic circus circa 2008 – you have to begin by understanding the problem of unemployment. In the world of the ‘30s, the triumph of capitalism was no sure thing. Communism, for all its faults, at least put people to work. Capitalism often left them ‘sittin’ on the dock of the bay.’ And here we have our first measure of how far we have come since the ‘70s; the average post-Mitterand Frenchman now believes that there are worse things than not working. Such as working, for example. Today, he is eager to pass laws to prevent it.

The real cause of joblessness is obvious, even to an economist. People don’t have jobs when it costs more to employ them than employers can get out of them. And in an economic downturn, the unemployment rate goes up. Because, in a slump, prices for ‘things’ fall quickly. But labor rates tend to be sticky. Workers have contracts. And rights! Employers’ profit margins are soon squeezed between slippery revenue…and stubborn costs for labor. Result: output falls and fewer workers can earn their keep.

In a free market, wages eventually ease their way down to levels that allow capitalists to exploit workers again. Always have. But for some reason, in Britain in the 1920s, this didn’t happen. Rueff identified the culprit even before Milton Friedman did:

“Since 1911, there existed in England a system of unemployment insurance that gave an indemnity to jobless workers, known as the “dole.” The consequence of this regime was to establish a minimum salary level, at which workers would prefer to ask for the dole rather than work for less. It appears that in the beginning of 1923 salaries, which had been declining with other prices in England, suddenly hit this new minimum. There, they stopped falling, and since then, they practically ceased to move.”

That’s why France runs such high unemployment rates today; its dole is bountiful. When you add up the costs of “charges sociales,” paperwork, and the minimum wage, more than one in ten potential workers is not worth the money. But no right thinking politician is about to suggest the obvious solution: get rid of the dole. So, Keynes came up with a subterfuge. The central bank should cause price inflation during a slump, he proposed. Rising prices for ‘things’ meant that salaries – in real terms – would go down. That was the greasy scam behind Keynes’ General Theory of Employment, Interest and Money: inflation robbed the working class of their wages without them realizing it. The poor schmucks even thank the politicians for picking their pockets: “salary cuts without tears,” Rueff called them.

“Full employment” was soon no longer a wish, but an obligation.
In France, the Constitution of 1946 obliged the government to present year an annual economic plan that achieves the goal of full employment. In the same year, Harry Truman pushed an Employment Act through the US Congress. And today the central bank of the USA has a “dual mission” – to preserve the value of the dollar while assuring full employment.

“No religion spread as fast as the belief in full employment,” wrote Rueff. “…and in this roundabout way, allowed governments that had exhausted their tax and borrowing resources to ressort to the phony delights of monetary inflation. »

This is where the post-’71, dollar-based monetary system comes in. It allowed the US to issue dollars – and never have to redeem them in gold. At first, the inflation caused by the build up of dollars was moderate and agreeable, said Rueff. It reduced the cost of labor. Then, when the tether with gold was hacked off in the early ‘70s, inflation began “galloping away.” Readers may remember that inflation got the bit between its teeth in the ‘70s, racing along at a record speed of 14.8% in the US in March, 1980, and even faster in Britain. The US government was forced to borrow at 15% yields. Britain could barely borrow at all.

Rueff died in 1978. Had he lived, he probably would have been as surprised as we have been by the stamina of the monetary horses. Except for a brief rest while Paul Volcker was managing the stables, they have run from bubble to bubble…delivering more liquidity wherever it would do the most damage. All the while, inflation continued to cut the price of labor. Between ’74 and ’84, real wages fell as much as 30%. Then, more moderate levels of inflation held them down for the next 24 years.

But Rueff’s insight comes with a warning. The faith-based, dollar-dependent monetary system is like a loaded pistol in front of a depressed man. It is too easy for the US to end its financial troubles, Rueff pointed out, just by printing more dollars. Eventually, this “exorbitant privilege” will be “suicidal” for the western economies, he predicted.

Paul Volcker put the pistol in the drawer. Ben Bernanke has found it. And Jacques .Rueff must look on in amusement to see what happens next.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics , written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

Source: Homage to Jacues Rueff

The main culprits in oil’s decline were a rising dollar and weaker U.S. demand, the inevitable result of high oil prices.

“A stronger dollar translates into weaker crude,” stated Tom Bentz of BNP Paribas (EPA:BNP). “The market is still kind of in this downward trend here in the short term and is having troubling turning back up.”

The bigger effect, however, seems to be that of weak demand for oil in the U.S. New information on worsening demand seems to be arriving daily. Today, the source was Mastercard Inc., which reported Tuesday that consumption of gasoline has dropped for 14 straight weeks under pressure from high prices.

According to John Kilduff of MF Global (NYSE:MF), this is merely the logical extension of the laws of supply and demand.

He remarked that “whether prices drop to $80 … or not, there can only be the unavoidable conclusion that markets are finally working as they are supposed to, as higher prices inevitably act as a brake on demand.”

Source: Crude Drops Again

Nickel noodled around little changed until the late morning, then it too took off, climbing to close near its intraday high at $9.6245/lb., up 42¾ cents. Zinc was up from the pre-dawn hours straight through, ending at its high of $0.8301/lb., up 4¼ cents. Aluminum rebounded well, adding a penny and two-thirds, to $1.4148/lb., while lead also turned in a banner day, gaining just over 6 cents, to $0.789/lb.

Copper was up for the first time in four sessions, as analysts cited the declining dollar, and concomitant inflation fears, as a catalyst. The metal also got a boost after union leaders said that workers at Freeport McMoRan’s Verde copper pit in Peru plan to strike starting July 16.

But Catherine Virga, an analyst with CPM Group in New York, played that down, saying that, “In Peru, they are normally not long-running issues. As long as it’s just them, I don’t think it will be something sustainable, especially with continued increases in stock levels on the LME.”

Copper advanced despite supply increases, as inventories monitored by the LME shot up by 1.8%, to 124,325 metric tons. It was the biggest increase since May 21 and put levels at their high point since May 30.

Meanwhile, lead and zinc were making powerful up moves as short sellers began covering their positions after recent declines, traders said.

“[Lead] stocks appear to be levelling out after four months of strong gains,” said analyst David Thurtell of BNP Paribas (BNP).

“Cancelled warrants have jumped in recent days, which suggests that the low prices of recent weeks has sparked some significant offtake,” he added. Lead prices have dropped more than 50% since March as inventories have more than doubled, due to a slowdown in demand.

Regarding aluminum, which has been lingering near its alltime high, analyst Daniel Smith of Standard Chartered said that, “There’s a lot of metal around on the LME and off-warrant, and premiums are generally drifting lower.”

“It’s difficult to create a particularly bullish scenario for aluminium,” in his opinion.
Source: Base Metals Come Roaring Back, Considerable Short Covering Seen

Nickel experienced a similar fall, closing at $9.2374/lb., down more than 31¾ cents. Zinc recovered some ground after its pre-dawn falloff, ending at $0.792/lb., down 4 cents. Aluminum lost ground but held up better than the other metals, losing 3 cents to $1.4036/lb., while lead had a ghastly day, falling well below the 70-cent mark in the pre-dawn hours before rallying to just above it at $0.7027/lb., still down 6 1/3 cents.

Lead’s fall was its worst in six weeks, as the former market darling is trash now. Analysts cited the steep dropoff in the auto industry, as American consumers cut back on driving and vehicle purchases. 70% of lead production goes into car batteries.

“We’re bearish on lead,” said David Thurtell, an analyst at BNP Paribas (BNP) in London. “High oil prices will damage demand for new vehicles and people will also get rid of their second cars or old ones.”

Lead has lost 39% already this year, and worse yet, as Bloomberg reported: “Supply will outpace demand by 130,000 tons this year, Goldman Sachs(GS) JPWere Pty Ltd. said July 2. That’s 29 percent more than all the lead held in warehouses monitored by the LME.

“Inventories tracked by the bourse have more than doubled this year, to 100,675 tons. Open interest, or outstanding contracts, rose 0.9 percent this week as prices fell, indicating investors are adding to bets on further declines.”

Meanwhile, copper supply worries eased as the Peruvian strike faltered. Mine workers can’t maintain the strike after some miners broke rank and returned to their posts, said Cirilo Yarihuaman, spokesman for the Mining Federation, which organized the demonstrations.

“Workers at three mining operations in Peru including Southern Copper Corp.’s Ilo smelter ended a strike yesterday after the government said the action was illegal,” Bloomberg wrote.

Source: Base Metals Hammered

The week was a bad one from start to finish, what with bonds selling off so much that, according to Barron’s, “the yield on the two-year Treasury, which moves opposite its price, had the biggest weekly rise since ‘82.” This means that the price of bonds went down! Think of it: trillions and trillions of dollars in bonds, and even more bonds all around the freaking world, all impacted by these huge sudden losses, the biggest move in 26 years!

Maybe this had something to do with the latest inflation figures from the Bureau of Labor Statistics, from which we learn the ugly news that the un-adjusted Producer Price Index for Finished Goods increased in price by 7.2% in May! At this rate, prices will double in 10 months! This is inflation in spades!

The door to the Bunker De La Mogambo (BDLM) automatically slammed shut at such terrible inflation news, accidentally trapping me outside and feeling very vulnerable, and I was so busy trying to claw my way back inside that I almost missed the news that producers of Intermediate Goods raised prices by 2.9% in May, which seemed a relief after that 7.2% Finished Goods report, but which didn’t last but a second before we read that the Crude Goods index increased 6.7%! Gaahh!

And, lest we be misled by the facts that inflation is eating us alive, the new “official” rate of annual inflation from the government’s wonks is 4.2%, which makes me laugh at the incongruity of the new BLS figures in relation to this. But this is horrendous news!

Hell, John Mauldin of FrontLineThoughts.com reminds us that 3% inflation was once considered so bad (and it is so bad) that “President Nixon instated price controls on the 15th of August, 1971. Inflation was a little over 4% at the time.”

This terrifying news of rising inflation and rising bond yields had the curious effect of producing a sort of fight-or-flight reaction in the Mighty Manly Mogambo (MMM), in that I start involuntarily crying like a baby, screaming my guts out in fear and anger, and clutching my chest in agony as my heart was pounding, pounding, pounding, because the world is chock-a-block full of “black boxes” that have mysterious algorithms and equations to dictate buying and selling.

And every single one of these computers is now looking at the higher consumer prices and higher yields on Treasury bonds, and factoring them into the implied yields/returns of their various investment options, like stocks, and suddenly stocks and everything else look like the proverbial crapola.

And that explains a graph from the Federal Reserve, courtesy of BNP Paribas (EPA:BNP) Economic Research, forwarded by Junior Mogambo Ranger (JMR) Phil S., showing the terrible news that growth in household real estate assets and growth in their financial assets have both plunged to literally zero! Zero! The chart goes back to 1960, and it has never, ever happened before!

In fact, the latest report is that the combined net worth of all U.S. households is $56 trillion, which is (as Bill Bonner here at The Daily Reckoning notes with, I assume, controlled horror) less than the $57 trillion accrued federal government’s liabilities, meaning that we are technically bankrupt.

So, with wages stagnant, prices rising dangerously, government spending out of control, Federal Reserve creation of money and credit out of control, debts of every kind at record levels, and now this? My God! And you think that we’re not freaking doomed?

Hahahaha! Thanks! I needed the laugh!

The Mogambo sez: You have two choices. For one, you can buy silver and gold and watch in delight as it goes up in price as the value of the dollar goes down, and make delighted squealing noises (”Whee”) as you wax rich.

Or you can not buy silver and gold (thus reducing demand and making it cheaper for me to buy your share, for which I say thanks!), and then watching in horror as the purchasing power of your precious dollars and dollar-denominated assets go down and down, making prices go higher and higher, month after month, until it reaches a crescendo and everything collapses in chaos and brutal mayhem, after which things really get really, really bad.

It’s nice to have a choice, eh?

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Inflation in Spades

And with inflation soaring, we can’t expect the Bank of England to cut interest rates this week to try to alleviate any of the pain.

To add insult to injury, the pound, our national virility symbol, has plunged against the euro, so we can’t even afford to go away from it all on holiday on the Continent. And we came last in Eurovision… again. We seem to be becoming the sick men of Europe.

If you can’t beat them, they say, join them. So has the time finally come to dump the poor old pound and plump for the euro?

Why Europe could be in as much trouble as the UK

With the euro now among the world’s strongest currencies, you might assume that the eurozone was in a much better state than Britain. But take a closer look and you soon see that plenty of problems have been cropping up on the other side of the Channel, as well as across the Irish sea.

Take housing. Last week’s Nationwide house prices survey showed that prices were down 4.4% year-on-year in May, the biggest fall since the early 1990s. That’s pretty grim.

But in Spain house prices have already fallen 15% across the board since September, according to the developers’ association (APCE). And in Ireland, house prices were down nearly 10% year-on-year up to the end of March.

Of course, the UK property market is set to get a lot worse. But the same could be said for Spain and Ireland.

Then there’s consumer confidence. In Britain this has crumpled, according to the latest GfK indicator, to its lowest point since Margaret Thatcher was ousted from office. Again, pretty grim. But the eurozone isn’t immune either – French consumer confidence has now fallen to its lowest level in 20 years.

And as for inflation, despite the European Central Bank’s (ECB) reputation as a hard-nosed inflation fighter, Europe’s having trouble with rising prices too. Last Friday’s figure turned out worse than expected, coming in with an annual rate of 3.6%, adding to what ECB president Jean-Claude Trichet has called policy makers’ “biggest challenge”. Despite the strong currency, that’s 0.6% higher than in the UK. Indeed, the pressure’s now building on the ECB for the next move in interest rates to be up.

And the broader picture for the euro isn’t looking a lot brighter than for the pound, either. Because long-term private investors are pulling their cash out of the eurozone at the fastest rate since the creation of the single currency, says a report by BNP Paribas.

Foreign direct investment in plant and factories has swung down over the past year to a negative €149bn (£117bn), including a drop to minus €19bn in March alone as the surging euro drove up relative labour costs in southern Europe. Add in a $280bn withdrawal of private funds from eurozone equities and bonds, and total outflows have exceeded €400bn over the last twelve months.

The euro is now suffering from the “reserve currency curse”, says Ambrose Evans-Pritchard in The Telegraph, as central banks in Asia, Russia, and the Middle East use it as an alternative to the dollar. “While Asian funding has helped ease the credit crisis in Europe, it has also pushed the exchange rate to damaging levels. The eurozone has gained financial flows, but has lost industrial and investment flows.”

BNP’s currency strategist Hans Redeke sees mounting signs of stress. “There are lots of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were just Germany. We will discover in this downturn whether the eurozone is really an ‘optimal currency area’. This is the test”.

So, on reflection, maybe this isn’t the time for the Treasury’s great and good to contemplate dumping the pound. And if you’re still unconvinced, here’s what the FT’s Martin Wolf has to say. He’s such a staunch opponent of such a move, he’s even just criticised his europhile peers in print: “the Lex column argued last week that the UK was close to meeting the economic tests for joining. Lex is wrong.

Three reasons why our currency should be left alone

We’ve not been hurt historically by being out of the euro, says Mr Wolf. Between the first quarter of 1999 and the first quarter of 2008, Britain’s economy expanded by 28% compared with 21% in the eurozone as a whole and 16% in Germany. Nor has London’s position as a financial centre been hurt.

In fact, had the UK been a recent eurozone member, our present situation could be even worse. Our credit bubble would have inflated more, because euro interest rates have been lower. On top of that, now that the domestic spending boom is over, there’d have been no offsetting benefit from the recently plummeting pound.

Inflation may well now rise faster in the UK than in the eurozone, but at least we have some hope of controlling this. The Bank of England can set interest rates to suit Britain alone, rather than relying on the ECB, which is arguably far more concerned with how suitable interest rates are for Germany. If the BoE sticks firmly to its 2% inflation target, Britain will almost certainly veer into recession, but then so will the eurozone countries.

So forget the euro – our currency should just be left alone, to find its own level. Which of course, looks like it could well be considerably lower than it is now.

Source: Should Britain Dump the Pound for the Euro?