Inflation Watch

A 1909 cigarette-pack baseball card of Honus Wagner has been sold for a record $2.35 million. The seller nearly doubled his money on the card he bought six years ago.

The card has changed hands four times in the last 10 years, doubling in value on three of those sales.

Shanghai Rallies

The Shanghai stock market rallied Wednesday to gain 109 points, or 3.9 percent. No other Asian stock market did as well, one day after Shanghai’s dramatic sell off.

Tuesday’s market drop sent the Shanghai Composite Index down 8.8 percent, to 2,771 — just about where it was on February 1, before a manic climb sent shares to a record 3,040 on Monday. When the market closed today, the Shanghai index was headed back up again, closing at 2,881.07. The index is still up 121 percent from a year ago.

New-Home Sales Plunge 16.6%

Sales of new homes plunged 16.6% in January to a seasonally adjusted annual rate of 937,000, according to the Commerce Department. It is the the biggest percentage decline in 13 years.

The median price of a new home was down 2.1% year-over-year, at $239,800.

New-home sales are down more than 50% year-on-year in the West, the largest percentage drop in the region since 1981. In the South, sales are down 11% in the past year. Sales are down 2% in the Northeast and are up 1% in the Midwest

Jim Rogers on the China Stock Market Plunge

International traveler, investor and president of Beeland Interests, Jim Rogers, told Bloomberg Television this morning that yesterday's plunge in the Chinese stock market was caused by over exuberance and mania type buying in China over the last year.

Rogers noted that the Chinese stock market had tripled over the last 18 months and that the climb upward caused many novice investors in China to start buying stocks. "You have Chinese taxi cab drivers buying stocks, that's never a good sign in any market," Rogers noted.

Rogers noted that China yesterday raised bank reserve requirements in an attempt to cool speculation in the Chinese stock market.

Rogers continues to see major long-term growth for China with an accompanying strong appetite for natural resources.

Merrill Lynch Cuts Ratings on Investment Banks

Merrill Lynch analysts cut their ratings on five U.S. and European investment banks.

Guy Moszkowski in New York and Stuart Graham in London lowered Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Bear Stearns Cos., Deutsche Bank AG and Credit Suisse Group to ``neutral'' from ``buy'' in a note to clients.

``We see a broad deterioration in customer risk appetites, which generally leads to a moderation in profitability,'' Moszkowski wrote in his report. ``It would seem likely that sequential earnings-per-share trends following the first quarter are likely to be down for at least the next two quarters.''

The Market Plunge: A Damage Assessment

The stock market had its worst day, today, since the 9-11 WTC/Pentagon attack.

On the heels of a stock market plunge of 8.8% in China this morning, U.S. stock markets followed. The Dow Industrials closed down 416.02 points (3.29%). The NASDAQ Composite closed down 96.66 points (3.86%).

The negative yield curve, often a precursor to recessions, widened today. On Monday, 90 day T-bill rates stood at 5.19% and 30 year T-bonds traded to yield 4.73%. By the close of trading on Tuesday, 90 day T-bill rates stood at 5.14% and 30 year T-bonds traded to yield 4.62%. Thus the yield curve on Monday stood at 0.46%. By the close of trading Tuesday, the yield curve turned more negative and stood at 0.52%.

All 30 stocks in the Dow Jones Industrial Average declined. ExxonMobil (Down 3.5%) and IBM (Down 2.85%) were among the largest losers.

Of the most active stocks, Ford Motor closed down 5.81%.

Of the NYSE 10 largest percent declines, 5 were China related:

China Air down 16.59%
China Yuchai International down 14.85%
Yanzhou Coal Mining down 14.85%
Aluminum Corporation of China down down 14.23%
Greater China Fund down 14.08%

Google closed down 16.16 (3.48%) to 448.77.

There was no immediate evidence of Plunge Protection Team activity.

Market declines, such as that experienced today, tend to throw the baby out with the bath water. For example, gold futures for April delivery fell $20.90, or 3 percent, to $666.30 an ounce toward the end of the day in electronic trading on the Comex. Yet, if the stock market plunge is a precursor to more negative activity in the stock market and economy, then the Fed is unlikely to raise rates any further, which would be inflationary and thus bullish for gold.

News over the next few days will reveal if any highly leveraged hedge funds were hurt by today's drop---usually after a decline like this, there are one or two that will be forced to go belly up.

Home Prices in Across the Board Decline

U.S. home prices fell 0.7% in the fourth quarter, the fastest rate since 1992, and are up just 0.4% in the past year, according to Standard & Poor's in the inaugural release of the national Case-Shiller price index.

"Annual changes in home prices are either in decline, flat or yielding negative returns across all markets," said Robert J. Shiller, chief economist at MacroMarkets LLC, which produces the index for S&P. "All metro areas are showing smaller annual returns than those reported for November."

Home prices in the top 10 metro areas fell 0.8% in December, the largest monthly drop since 1991. Home prices in the 20 metro areas fell 0.7% in December.

Boston and Detroit show the greatest one year decline in prices. They are down 5.1% and 5.9%, respectively, on a year-over-year basis.

Alert: Chinese Stocks Fall Nearly 9%

The benchmark Shanghai Composite index passed the 3,000 milestone on Monday after the weeklong Chinese New Year holiday, but fell on Tuesday 268 points, or 8.8 percent, to close at 2,771.79.

The smaller Shenzhen Component index fell even further, dropping 797.87 points, or 9.3 percent, to 7,790.82.

It was unclear whether the decline was simply a normal pullback in an on-going Bull Market. Share prices on the major Chinese indexes climbed more than 100 percent last year, to an important degree the result of liquidity entering the system as China's central bank continues to support the U.S. dollar at above normal market levels.

Rumors about new taxes on capital gains may have fueled the decline.

GAO: Federal Debt Spiraling Out of Control

The GAO explains the ramifications of the aging population:

GAO's current long-term simulations continue to show ever-larger deficits resulting in a federal debt burden that ultimately spirals out of control...By definition, what is unsustainable will not be sustained. The question is how and when our current imprudent and unsustainable path will end...

The long-term fiscal outlook results from a large and persistent gap between expected revenues and expected spending.

The spending that drives the outlook is primarily spending on the large federal entitlement programs (i.e., Social Security, Medicare, Medicaid).

The retirement of the baby boom generation is one key element of this. In 2008 the first boomers will be eligible to draw Social Security "early retirement" benefits, and in 2011 the first boomers will become eligible for Medicare. In the succeeding 2 decades America's population will age dramatically, and relatively fewer workers will be asked to support ever larger costs for retirees.

Although Social Security is a major part of the fiscal challenge, it is far from our biggest challenge. Spending on the major federal health programs (i.e., Medicare and Medicaid) represents a much larger and faster growing problem. In fact, the federal government's obligations for Medicare Part D alone exceed the unfunded obligations for Social Security.

Over the past several decades, health care spending on average has grown much faster than the economy, absorbing increasing shares of the Nation's resources, and this rapid growth is projected to continue. For this reason and others, rising health care costs pose a fiscal challenge not just to the federal budget but to American business and our society as a whole...

Many ways exist to measure the long-term fiscal challenge. One quantitative measure is called "the fiscal gap." The fiscal gap is the amount of spending reduction or tax increases needed to keep debt as a share of gross domestic product (GDP) at or below today's ratio... The fiscal gap can be expressed as a share of the economy or in present value dollars.

For GAO's "Baseline extended" simulation, closing the fiscal gap would require spending cuts or tax increases equal to 3.6 percent of the entire economy each year over the next 75 years, or a total of $26 trillion in present value terms. For GAO's alternative simulation, the gap is 7.5 percent of the economy, or about $55 trillion in present value terms. To put this in perspective, if we were to invest enough today to pay off these amounts over the next 75 years, the sums needed would amount to about $87,000 to $182,000 per person, or about $208,000 to $435,000 for each full-time worker...

Additional economic growth is critical and will help to ease the burden, but the projected fiscal gap is so great that it is unrealistic to expect we will grow our way out of the problem. To do so under any reasonable set of assumptions would require double-digit real economic growth for many decades to eliminate the long-term fiscal challenge. However, since the end of World War II we have not seen economic growth of this kind...

Alan Greenspan: "Don't Blame Me"

Alan Greenspan is at it again--attempting to distort history, and influence how history will view him. He doesn't want to be blamed for the housing bubble, nor any developing recession. He had nothing to do with any of it, if you ask him.

In October 2006, in a speech, Greenspan stated that the housing boom (and thus any future housing bubble) was the result of the Berlin Wall coming down and not because he drove interest rates to record low levels. FT reported his words of distortion this way:

“I don’t think that the boom came from a 1 per cent Fed funds rate or from the Fed’s easing. It came from the collapse of the Berlin Wall,” Mr Greenspan told a private audience in Canada...

Greenspan is back at it again, today. News wires are reporting that via satellite link to a business conference in Hong Kong, he stated that a recession was likely. But, again, does it have anything to do with the enormous liquidity he created during his years as Fed chairman? Not according to Greenspan. It is just that it has been a long time since we have had a recession and one is just due. It seems that Greenspan wants to make a recession a periodic thing, rather than the result of activities of the Federal Reserve, especially the Fed activities under his watch.

This is what Greenspan told the Hong Kong conference attendees:

"When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign..."

Translation: Don't blame him and the flood of new money he poured into the system while he was Fed chairman.

But that is exactly where blame should be placed.

During Alan Greenspan's reign as chairman of the Federal Reserve, interest rates were generally kept artificially low and Greenspan flooded the economy with new money.

When Greenspan took over at the Fed, the money supply (as measured by M2) stood at $2,792.3 billion. When Greenspan left the Fed 18 years later, M2 money supply stood at $6.713.6 billion. An increase of 140.4%

This remarkable explosion in money supply even prompted some at the Fed to point to the money supply boom as a cause of the housing price boom:

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

It's the same for an overall recession. There is nothing purely cyclical about it. It is the actions of the Fed that cause the recession.

As Lew Rockwell explained about the bust in the dot com stocks and the profound impact interest rates have on investment decisions:

"Left to the market, interest rates are determined by the supply of credit (a mirror of the savings rate) and the willingness to takes risks in the market (a mirror of the return on capital). What throws this out of whack is manipulation by the central bank.

When the Fed feeds artificial credit into the economy by lowering interest rates, it spurs investments in projects that don’t eventually pan out. In this economic boom, the high-tech and dot com manias resulted from a decade of sustained money growth via lower interest rates. When the Fed stepped on the brakes to prevent prices from rising, it prompted a sell-off, and hence a downturn."

It is the same with the current housing and stock market led boom. It is a Fed money induced boom, launched during the Greenspan era.

The only face-saving edge that Greenspan has going for him at this point is that new Fed chairman, Ben Bernanke, is pumping money faster than Greenspan did (January M2 money supply growth was 10% on an annualized basis). Thus a full-fledged recession is probably not right around the corner--and thus the mess that Greenspan started will eventually appear to be all Bernanke's fault.

Barack Obama: The Retro Presidential Candidate

Economist Thomas Sowell on Barack Obama:

Senator Obama is being hailed as the newest and freshest face on the American political scene. But he is advocating some of the oldest fallacies, just as if it was the 1960s again, or as if he has learned nothing and forgotten nothing since then.

The Economic Meaninglessness of Political Borders?

Don Boudreaux and Sheldon Richman roll out Adam Smith to argue the economic meaninglessness to political borders, specifically with regard to trade deficits and trade surpluses.

The economic meaninglessness of political borders may be all well and good as a concept if you don't factor in the role of separate central banks for different geo-political areas.

Once central banks are factored into the equation, things change.

For example, the trade deficit the United States shows with China would not exist to the degree it does today if it wasn't for the fact that China's central bank is printing renminbi and buying dollars to support the trade deficit. The trade deficit in this situation does become important because one must ask the very important question, "Just how many renminbi is China's central bank willing to print before the bank cries 'uncle' and stops buying dollars, thus changing the cross border China-US trade situation dramatically?”

A large part of the reason the dollar will collapse is because of the huge trade deficit the United States has vis a vis China as a result of China's central bank artificially propping up the dollar against the renminbi.

On Phil Gramm

Of late, we have been reading through a couple books where the name Phil Gramm keeps appearing. The former United States Senator from Texas once sought the presidential nomination of the Republican Party.

The Irrepressible Rothbard, edited by Llewellyn Rockwell, contains a 1995 commentary (pgs 137-8) by Murray Rothbard where he analyzes Gramm as a presidential candidate:

Gramm is first of all the brightest of the candidates: unlike Gingrich, he is an intelligent academic, having taught economics at the Distinguished Friedmanite economics department of Texas A&M.;

Unlike other candidates, when Gramm sells out principle, which he will do often, he knows he is selling out and why, which I guess is a virtue...Since he bends to the political winds...he is the likeliest of all the major candidates to be an opportunist [in favor of free markets and small government, when he can].

More recently, and from real world dealings, former Citigroup chairman, Sandy Weill, in his autobiography, The Real Deal, writes of his experience with Gramm:

...Phil Gramm..appeared uninterested in serious reform and never missed a chance to remind me that there were no important banks, brokers or insurance companies domiciled in his state of Texas. In other words, financial services companies were far from his natural constituency...Just as we were about to cross the goal line, one last obstacle arose. Senator Gramm, ever the savvy horse trader, took exception to a provision of the bill which forced banks to invest in poor areas, a long-running political football in Washington. One afternoon he called and threatened, "Call your friend Clinton and get him to change the provision or else I'll fire my rockets and blow your bill apart."...Gramm called again the next day to repeat his demand, and this time the president and Texas senator found some way to compromise.

On November 12, President Clinton signed into law the Gramm-Leach-Bliley Act, and in a stroke, modernized the structure of financial services.

On Tuesday of this week in an op-ed piece for WSJ, Gramm endorsed John McCain for president. Wrote Gramm, "He might not be the right president for all times, but he is the right president for these times."

Alan Greenspan Memoir

According to this Alan Greenspan bio, the former Federal Reserve Bank Chairman's memoir will be published during the second half of 2007.

The Danger in Third World Investing

The government of Zimbabwe will nationalize the diamond industry.

Robert Mugabe, the country's president, said in an interview with state television late Tuesday the government plans to take control of the industry.

“Only government will mine diamonds,” Bloomberg quoted Mugabe as saying.

Zimbabwe's two producing diamond mines are owned by Rio Tinto PLC and Riozim Ltd.

Accoring to Bloomberg, it is unclear whether Mugabe's latest pronouncement will be made law.

``We are studying the situation and will discuss it with the mining industry if that's really government's intention, but currently there is no law that specifies certain minerals can be mined only by the government,'' saidDavid Murangari, Chief Executive Officer of Zimbabwe's Chamber of Mines, a business association that represents most mining companies in the country,

Zimbabwe's government on Dec. 7 evicted African Consolidated from Marange, a deposit to which the Nettlestead, U.K.-based company had the rights, after a diamond find there prompted thousands of informal miners to converge on the area. The area has now been cordoned off and handed to the state-run Zimbabwe Mining Development Corp.

Housing: An Inside View

Toll Brothers (NYSE:TOL) is a leading builder of luxury homes in the United States. Today they reported first quarter 2007 financial results, earnings were down 67% versus last year.

More instructive in Toll's earnings release is the news that they continue to reduce their optioned land positions.

In response to current market conditions, Toll said it continues to reevaluate and, in some cases, renegotiate its land options. As a result of its ongoing review, the Company ended FY 2007's first quarter with approximately 67,500 lots under control compared to approximately 73,800 and 83,200 at FYE 2006 and FYE 2005, respectively. The Company's FY 2007 first-quarter-end total was down 26% from its high of approximately 91,200 lots at FY 2006's second-quarter-end.

Robert I. Toll, chairman and chief executive officer, played it straight in the earnings news release and warned those who are optimistic that the worst is over for housing market. ``There are too many soft markets at this stage of the selling season to call a general upturn in the new home market. Demand varies greatly from week to week in individual markets," he siad.

Gold at Nine Month High

Gold contracts on the Comex for April delivery closed $23 higher at $684 an ounce in trading today.

This despite the fact that the European Central Bank says90 million euros of gold and receivables were sold last week, or about 5.5 tons.

ECB said the sales were consistent with the Central Bank Gold Agreement of 27 September 2004 and were conducted by two Eurosystem central banks.

The dollar bubble is about to burst, and Bernanke increased the money supply in January at an annualized 10% rate.

Time To Buy Oil Stocks With Domestic-only Reserves?

WorldTribune.com is reporting on a press confrenece held in Bahrain by the U. S. Fifth Fleet Commander.

"We consider this moment in time unprecedented in terms of the amount of insecurity and instability that is in the region," U.S. Fifth Fleet commander Vice Adm. Patrick Walsh said.

"Although our presence in the Arabian Gulf is for defensive and not offensive purposes, the U.S. will take military action if ships are attacked or if countries in the region are targeted or U.S. troops come under direct attack," Walsh added.

At a news conference on Feb. 19 in Manama, Walsh said Iran could pose a greater threat to Gulf security than Al Qaida, Middle East Newsline reported. The naval commander said Iran's frequent military exercises were meant to provoke tension in the region and threaten the closure of the Straits of Hormuz, which contains about 40 percent of global oil shipping.

"When you look at the recent Iranian exercises, in the last nine months, you see the open display and the implication of the use of mines," Walsh said. "You also see and hear concerns and threats about the closure of the Strait of Hormuz."

"What is different today to a year ago has been the number of exercises and the proximity of those exercises to the Strait of Hormuz," Walsh said.

Fed Minutes: Infaltion A "Predominant Concern"

Don't expect any Fed rate cuts soon. Minutes from the January 30-31 FOMC meeting showed strong concern about inflation.

The minutes included the following detail:

All meeting participants expressed some concern about the outlook for inflation. To be sure, incoming data had suggested some improvement in core inflation, and a further gradual decline was seen as the most likely outcome, fostered in part by the continued stability of inflation expectations. However, participants did not yet see a downtrend in core inflation as definitively established. Although lower energy prices, declining core import prices, and a deceleration in owners' equivalent rent were expected to contribute to slower core inflation in coming months, the effects of some of these factors on inflation could well be temporary. The influence of more enduring factors, importantly including pressures in labor and product markets and the behavior of inflation expectations, would primarily determine the extent of more persistent progress. In light of the apparent underlying strength in aggregate demand, risks around the desired path of a further gradual decline in core inflation remained mainly to the upside...All members agreed that the statement should continue to stress that some inflation risks remained and note that additional policy firming was possible

Of course, while the Fed expressed concerns about inflation, money supply in January grew at a 10% annualized rate.

NovaStar Plunges 40% on SubPrime Mortgage Losses

At mid-session, NovaStar Financial (NYSE:NFI) shares have plunged $7.10 to $10.46, a decline of 40.45%.

The stock plunged after NovaStar announced a surprise fourth-quarter loss as a result of poor performing sub-prime mortgages.

For the quarter ended December 31, 2006, NovaStar reported a net lossof $14.4 million, or $0.39 per fully diluted common share. In the fourth quarter of 2005, net income available to common shareholders was $26.4 million, or $0.84 per fully diluted common share.

“The credit performance of our portfolio, and specifically our 2006 originations, deteriorated during the fourth quarter, resulting in impairments on mortgage securities and additional loss provisions for loans held-in-portfolio in the REIT. Also, our gains upon securitization were reduced during the quarter because of lower whole loan prices. Furthermore, during the fourth quarter, we experienced a greater level of loan repurchase requests due to early payment defaults than we have historically,” said Scott Hartman, NovaStar Chief Executive Officer.

The Mortgage Lender Implode-O-Meter

You know the mortgage industry is in real trouble when a web site called the The Mortgage Lender Implode-O-Meter is launched. The site tracks the number of mortgage lenders that have gone belly-up since December 2006. Current count 23.

The site also breaksdown the top 25 subprime lenders (as of Q2 2006; from the Mortgage Banker's Assoc.) . Don't own stock in any of these companies:


Wells Fargo

HSBC Household Finance [rumored to be up for sale]

New Century [restating '06 earnings downwards; major shareholder lawsuits]

Countrywide

Fremont

Option One [H&R; Block; up for sale]

Ameriquest [owned by ACC; shut most offices, settled with 30 states over predatory lending]

WMC [subsidiary of GE Money]

Washington Mutual [closed 80 branches in late 2006]

CitiFinancial

First Franklin [acquired by Merrill Lynch from National City for $1.3bln]

GMAC [Major layoffs in ResCap]

Accredited Home

BNC [Lehman bros. subsidiary]

ChaseHome Finance

Novastar

OwnIt, 2006-12-07 [partially-owned by Merrill and BofA]

Aegis [recently closed two subprime operations centers]

MLN, 2006-12-29 [reportedly bought out by Lehman]

EMC

ResMAE,2007-02-13 [in bankruptcy; being funded by Credit Suisse]

FirstNLC

Decision One [owned by HSBC; rumored to be up for sale]

ECC/Encore [fire-sale bought out by Bear-Stearns]

Fieldstone [2007-02-16, bought by C-Bass]

Consumer Price Index Higher Than Estimates

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in January, before seasonal adjustment, the Bureau of Labor Statistics reported today. The January level of 202.416 (1982-84=100) was 2.1 percent higher than in January 2006.

The median forecast of 24 economists surveyed by Dow Jones Newswires was a 0.1% increase in consumer prices.

Unadjusted 12-month medical care costs showed the largest gain at 4.3%.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, decreased 0.3% in January. Average hourly earnings rose 0.2%. Average weekly hours decreased by 0.3%.

Bank of Japan Raises Rates

BOJ raised its uncollateralized call rate to 0.5%.

The increase, passed in an 8-to-1 vote.

Fed Governor Bies: "Economy Basically at Full Employment"

Don't expect any rate cuts from the Fed any time soon, if most Fed Governors view the economy the way Fed Governor Susan Bies does.

Following a speech today at Duke University's Fuqua School of Business, Bies stated that "We're basically running at full employment".

Since most Fed members view the economy as some kind of mechanistic Phillips Curve organism, talk of full employment is code for warning about future inflation---not a period to be cutting interest rates.

As for Bies' speech, it must be hard living with a Phillips Curve view of the world, since in the speech Bies had to acknowledge that, even though the economy is at full employment, the housing sector is a mess. Bies said that there still was a high potential for a correction to occur in the housing market and said that made it hard for the Fed to assess conditions.

It certainly does make it hard for the Fed to assess conditions when they basically use some souped-up version of the dis-credited Phillips Curve to model the economy.

"There's a lot of vacant housing out there right now," Bies said. Stating that supply is hard to judge, Bies added that a downturn in demand for housing may be nearly over. "We may be near the floor in terms of demand."

Since the Fed has been goosing the money supply (10% annualized growth in January), Bies certainly hopes demand picks up. Otherwise, what does the Fed fight? Future inflation or declining housing prices?

A Bit of Insight Into the New York Fed President's Style

WSJ this morning profiles Federal Reserve Bank of New York president Timothy Geithner.

One wonders what kind of information will be disseminated by the New York Fed during a period of crisis, when WSJ is able to get Geithner to state for the profile: "...some fog is often useful in getting things done."

Bank of China Raises Reserve Requirement

The People's Bank of China has raised the local currency reserve requirement ratio of deposit-taking financial institutions by 0.5 percentage points. This is the fifth such increase in the last eight months.

Based on the new requirements, beginning February 24, commercial banks must keep 10% of their deposits on reserve.

Ultimately, the BOC will need to increase the value of the yuan vis a vis the dollar to battle domestic inflationary pressures.

Farm Land Soars in Price

Farm land is rising faster in price than apartments in Manhattan and London for the first time in 30 years.

Demand for corn used in ethanol helped increase the value of crop land 16 percent in Indiana and 35 percent in Idaho in 2006. The price of a Soho loft appreciated only 12 percent. Corn prices are at 10-year highs.

Jeff Wilson at Bloomberg has the details.

Bank of Japan Monetary Policy Meeting

The BOJ meets Tuesday and Wednesday to discuss monetary policy. According to Bloomberg,"Economists are almost evenly divided about whether the BOJ will raise rates tomorrow, with 27 of 52 surveyed by Bloomberg News predicting the rate will be kept at 0.25 percent, the lowest among major economies."

Leading up to the BOJ's January meeting, politicians and government officials, led by Hidenao Nakagawa, secretary general of the ruling Liberal Democratic Party, pressured the central bank to heed the government's view on the economy. And the BOJ did not raise rates at that meeting.

Should the BOJ again fail to raise rates, concern that the BOJ is not an independent operator, but merely a puppet of political forces, is likely to rile markets.

An increase in rates, on the other hand, is likely to take a notch out of profitability for those milking the international carry trade. Should a hike in Japanese interest rates result in a serious strengthening of the yen (It has lost 50% of its value vis a vis the euro over the last five years), it may well mean major losses for international carry trade operators. When these operators all try to exit simultaneously, they will not all make it out the door. There will be many carried out on stretchers and some in body bags.

Money Supply Continues to Explode

January 2007 money supply (M2) rose $60.3 billion. This an annualized growth rate of 10.8%.

Since bottoming in mid-2006 with an annualized growth rate of 4.0% in May, money supply growth has shown a quite steady climb. M2 is now 5.5% higher than a year ago.

The reversal in the slow monetary growth that took place in the early months of the Bernanke regime is quite remarkable. Under the regimes of Alan Greenspan and Paul Volcker, a reversal in a slowed money growth policy took place only after some crisis in the economy. For Bernanke to reverse policy before any noticeable crisis suggests that he does not realize how lethal of an economic instrument he controls.

The economy is just about ready to go into overdrive--with the key feature being a collapsing dollar instead of burning rubber.