WTO Director General Pascal Lamy, told Reuters Television:

That’s the situation and I’m afraid I can’t read any good news in my trade numbers.

This news doesn’t bode well for any type of recovery. “Jobs picture turns gloomier” say the headlines. The U.S. unemployment rate officially popped up to 9.5% as nonfarm payrolls shed 467,000 jobs in June. The market is tanking today on this “brown shoot”… But the real story is far worse. And as reality seeps into the empty head of Joe Investor it could spell the end for the post-2008 wipe-out sucker’s rally…

As James Davidson points out in Crisis Strategy Alert, the BLS numbers have been massaged, manipulated, and contorted into giving only half the story. He says,

To get a real picture of the current unemployment levels you need to focus on the grossly underreported U-6 data set known as “alternative measures of labor utilization.” The U-6 data set includes everyone counted in U-3, plus “all marginally attached workers” and people who aren’t working full-time but wish they were (i.e., the underemployed). (Marginally employed covers “persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.)

When you add up U-3 and all the underutilized workers, the official U-6 rate for May 2009 is 16.4%. In other words, the employment picture is twice as bad 14 months after the recent peak as it was in December 1930, 18 months after the peak prior to the Great Depression.

But this surge in people lining up for welfare isn’t limited to the US either. According to the BBC, unemployment in the eurozone also jumped to 9.5%.  Leading the charge is Spain with 18.7% unemployment, while the liberal Dutch are experiencing a mere 3.2%.  Martin van Vliet an economist at ING on the new numbers:

May’s sharp increase in eurozone unemployment demonstrates that the ‘green shoots of recovery’ are not yet showing up in the labour market.

Ireland looks like the next eurozone nation to bite the dust. Our Irish editor, Chris Hunter, is taking holiday in Dublin right now.  In an ode to his arrival, Moody’s slashed Ireland’s debt rating from AAA to AA1.  Dietmar Hornung of Moody’s Sovereign Risk Group had this to say in news release:

The pronounced weakness in the economic activity has been translating into a severe deterioration of Ireland’s public finances, and the country is set to emerge from the current economic crisis with a considerably higher debt burden for the foreseeable future.

Moody’s is the last large agency to cut Ireland’s credit rating.  Fitch and Standard & Poors cut it earlier this year citing soaring public debt and a negative economic outlook.  As Irish GDP continues to contract, we expect further cuts in Ireland’s bleak future.

Yes dear reader the next leg down in this Greater Depression is not far off. The textbook sucker’s rally is losing steam. Take profits and buckle up because the second half of this year could test the March lows. If that were to happen, or even anything close it would be devastating to investor sentiment. Most “investors” have never seen a prolonged bear market, they wouldn’t recognize it or know what to do.  But one thing they will do is flee to cash.

In the short-term, we here are Notes are bullish on the dollar for this reason. Long-term of course we think the buck is doomed. But woe to those who go against the dollar too early. We think that James Davidson is doing all the right things to capture short-term dollar strength while hedging against long-term weakness with the Crisis Strategy Alert portfolio, click here to learn more about what he’s doing…

President Nixon instated price controls on the 15^th of August, 1971. Inflation was a little over 4% at the time. Price controls manifestly did not work (resulting in shortages of all sorts and a deep recession) and were rescinded a few years later. President Ford went to Congress with programs to fight inflation that was running closer to 10% in October of 1974, with a speech entitled “Whip Inflation Now” (WIN). He famously urged Americans to wear “WIN” buttons. That policy too was less than effective, and the buttons, in a history replete with silly gestures by governments, should stand on anyone’s top ten list of such silly gestures.

Cynics more thoughtfully wore the buttons upside down and said the inverted letters (which looked like NIM) stood for “No Immediate Miracles.” They were right. There was no miracle, just eventual pain and lots of it. Ultimately, Paul Volker defeated inflation, but at the cost of two serious recessions and a lot of economic misery, with unemployment levels over 10% for nine months in 1983.

This week we were given the data that inflation as measured by the Consumer Price Index (CPI) over the last year was 4.2% and unemployment is now 5.5%. Some call for the Fed to raise rates so that we do not have to experience another lost decade like the ’70s and then ultimately see some future Volker forced to raise rates and drive unemployment back to 10%. Others suggest that “core” inflation is what should be paid heed to, and urge caution.

This week we look at the cost of what could be a renewed effort to Whip Inflation Now, not just here but in countries worldwide. Will Trichet in Europe raise rates even as the European economy seems to be slowing down? If you think inflation is bad in the US and Europe, take a peek at Asia. And I ask, “What will Ben do?” It should make for an interesting letter.

Whip Inflation Now

Nixon and his advisors thought inflation at 4% was serious enough to institute price controls. Headline inflation in the US is now 4.2%. What kind of economic policy should we pursue to bring inflation back into the Fed’s comfort zone of 1-2%? Would it work and would it be worth the pain? To get a handle on the question, let’s go to the data from the Bureau of Labor Statistics and see where inflation is coming from.

And let me note, this is the same exercise we could do for a host of countries. The answer will be roughly the same: there are no easy solutions.

Core inflation, or inflation without food and energy, grew at 2.3%. Inflation without food costs was an even 4% and without energy was 2.7%. Clearly energy was the leading contributor to inflation in the past year.

But the recent trend in rising inflation is even more worrying. If you look at just the last three months of data and compute an annualized rate of inflation, you find that overall inflation has risen to 4.9%, energy inflation is running at a staggering 28%, and food costs have risen 6.2%. Meanwhile, core inflation during that period dropped to 1.8%. You can see all the data at http://www.bls.gov/news.release/cpi.nr0.htm.

Now, gentle reader, let’s think about these numbers. Food (over 14%) and energy (over 9%) combined make up roughly 24% of the CPI, yet were responsible for over 60% of the recent three-month trend in inflation. By the way, housing was up 4.9% and transportation up 8.7%, so it was not just food and energy.

What would it take to drop headline inflation back to under 2%? Well, one way would be for food and energy prices to fall. Let’s look at the possibilities.

As Donald Coxe has noted, North America has had an 18-year run of remarkably good weather in our growing season. You have to go back 800 years to get a string of years that were that good. Yet today food reserves of all types are at decades-long lows. There is very little room for any type of problem.

This growing season is not off to a good start. It looks like the yield on the corn crop will be lower than normal, and that is if we get very benign weather this fall. Given how late much of the US corn crop was planted, and how torrential rains in the corn belt have devastated crops (not to mention flooding cities, and our thoughts and prayers go out to those who have lost their homes to flooding), an early frost would be disastrous.

Because we have devoted so much of our arable land to corn (in a very misguided policy to turn food into ethanol), we have less for soybeans, which is putting upward price pressure on beans and other grains that are used to feed cattle, hogs, chickens, etc. In fact, it costs so much to feed livestock that ranchers are shrinking their herds.. This means more meat is coming into the system now, which is dampening prices. Increased supply will reduce prices in the short term, but next fall we will find that supplies of all types of meat will be short. That will potentially send meat prices soaring. Cereal and bakery products are up 10% over the last year. They could continue to rise in the fall if the corn crop does not yield more than currently projected. It will cost even more to feed your household and feed the animals we need for meat.

Food is the most basic of commodities. Demand is fairly consistent, and supplies may come under pressure. Looking for food inflation to drop back by the fall to 2% is not realistic in the current environment.

What about energy? There is some more hope there, at least on the oil front. High prices have reduced demand in the US, with gasoline usage down about 4%.

I think we have reached a tipping point. The psyche of the US consumer has been permanently scarred. Slowly, this country is going to replace its fleet of cars with smaller, more fuel-efficient cars. Over time, we will see demand continue to fall. We could see further drops in the demand for gas in the next few months.

Much of Asia used to subsidize oil prices to their consumers. That is changing, as Indonesia, Sri Lanka, and Taiwan have announced they are decreasing their subsidies, as the cost is simply too much. Malaysia now spends 25% of its budget on oil subsidies, and must raise prices or cut other services – or watch inflation get worse. India is now contemplating how to cut its subsidies. Even China is likely to start to raise costs after the Olympics. These countries are going to go through their own price shocks. All this will reduce world demand for oil.