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Another conceptual problem that I see, in this narrative of our now burst housing and credit bubble, is the number of observers who continue to expect a post-war type of recovery to a “recession” that in no way takes part in the typical model of US post-war recessions. There are so many examples to illustrate the mistake of comparing this recession-depression to previous, post-war recessions but let me just use one example: California unemployment. First, let’s remember that employment started to peak in the US in the Summer of 2007. That is almost three years ago now, and one of my views is that Car and Truck Sales and also employment began to peak out that Summer as a number of regions began to produce the effects of the peak and turn down in Housing (which itself peaked over 6 quarters starting in late Q4 of 2005 in some regions, and rolled into and out of peaks.) As the country then moved towards its financial and economic collapse in Q3 of 2008, employment began its downward path–roughly in line with the dating of the start of the recession in Q3 2007. So first, employment travelled downward for a full year into the spider-hole of the economic collapse. Then, understandably, employment went even lower into the first part of 2009. Were this a typical post-war recession, however, that Springtime low in the economy and employment would have been close to the bottom.

The United States should now be in the early stages of a powerful, V-shaped recovery led by housing and automobiles. Workers should be going back to find employment not only in existing industries, but in new industries as many were “freed up” from dying industries that were no longer viable. Low interest rates should be pushing savings off the sidelines into small businesses. And capital intensive business which are interest rate sensitive should be locking in low, long term rates. While there is indeed some of this activity occurring at the margin–largely owing to recovery …(this article continues for subscribers through the membership gateway, on the right side of this page)

I did not have to wonder for long. The surprise hike in the FED’s Discount Rate now looks nothing more than the brief flare of a technical operation. The meat of the matter, the major thrust of the FED’s intentions, were revealed this week when Janet Yellen hinted that QE of MBS could be put back on at any time. And, when Bernanke testified in his Humphrey-Hawkins appearance that the FED would need to keep rates very low, for a long time. It should also not be forgotten, in addition,  that even on the day of the FED’s surprise discount rate hike at least one FED governor made remarks that evening to broadcast the FED’s intention to keep rates low.

Because further clarity on FED policy has come at the same time as news releases on the economy, I think it bears mentioning again that housing…(this article continues for subscribers through the membership gateway, on the right side of this page)

Excuse me but I’ll need to check your bag

The second group are the brittle deflationists, who see 60% of our current, sorry situation with ice-cold clarity but refuse even now to acknowledge the country’s currency as the governor to our ultimate outcome. In my own work I actually read a great deal of the analysis of many of these deflationists, because their articulation of the problem is so correct, so spot-on, so finely crenelated, if you will, that to ignore them would be a great error. And then, having paid their fine work the respect it deserves, I then move on to the other 40% of the problem to see the full picture. I don’t mind at all they they cherry-pick year-over-year inflation data from July of 2008 to July 2009, knowing full well they will silently ignore that same data series when the January 2008 – January 2009 data is published. That’s OK. Their long form treatment of dead shopping malls, permanent unemployment, and grands sweeps of history are well worth my time.

I have many questions for both these groups of people, but, as we head into next week’s gargantuan debt auctions, the most pressing one is this: what are you going to do about your Treasuries? And then further to this, what are you going to do with all your other assets should Treasuries start to run into trouble? You may not have noticed this week, but the recoiling in global equities did very little to improve the position of either Treasuries, or the US Dollar. It is wise to note such action. For a number of years I have gladly joined others in the dark joke of the Four Horsemen: Equities down, Treasuries down, Dollar down, Gold up. Did we see hints of the Four Horsemen this week? (this article continues for subscribers through the membership gateway, on the right side of this page.)

The US Dollar has enough structural problems already without the further weight of a kind of  pan-global assault unleashed in the past 60 days from various global players, but mostly China and Russia. The anti-dollar theme has actually been building all year. We started in mid to late Winter, with tons of IMF/SDR (special drawing right) chatter, but the volume has picked up this summer and seemed to culminate at the World Economic Forum last week. Martin Wolf was quite blunt: “The US is going to default through inflation,” he declared, likening the prospect to President Richard Nixon’s decision in 1971 to unilaterally pull out of the Bretton Woods system of fixed exchange rates, which some analysts argue was a de facto default on U.S. debts. The week ended with Putin of Russia criticizing the US for “an uncontrolled issue(ance) of dollars”, and this came only a day after a fairly meaningful concession to Russia on the issue of Eastern European missile shields.

Amidst all the complexity however the main thrust of the problem is quite straightforward: (this article continues for subscribers through the membership gateway, on the right side of this page.)