The model portfolio’s performance, from the launch point of September 1, 2009, reflects these developments. We of course have stayed away from nearly everything connected with OECD style consumption and stayed close to consumption patterns instead from the developing world. And that of course means natural resources. Speaking more fully to this comparison, you might want to read Edward Harrison’s very good analysis of consumer demand here in the US: How Strategic Defaults Are Boosting Consumer Spending. It’s both eye-opening, but perhaps not completely surprising, that 7 million homeowners not paying their mortgage (and many credit card owners not paying their revolving debt) should translate into free cash flow for new purchases. Only in America!

One question now presents itself: should I make changes to the model portfolio to add exposure to western consumption? (…this article continues through the membership gateway via the Join Tab, at the top of this page…)

Interview with Bearing Asset Managment’s Bill Lagner: by Eric King, King World News.

Money, Markets and Community Support Officers: global macro with Michael Hampton, Frisby’s Bulls and Bears Podcast.

Economics Perspectives: discussion of Inflation with Dr. Peter Warburton, Financial Sense Newshour.

Parking Militants and Hotheads: the problem of the automobile, with Jim Kunstler, The KunstlerCast.

Jobless and Looking: roundtable on Unemployment, Dianne Rhem WAMU Radio.

-Gregor

Painting: Mao, by Andy Warhol.

Cocktails and Real Estate in Greenwich: Bruce Krasting,  ZeroHedge.com.

World Bank Spends Billions on Coal-Fired Power Stations: Ben Webster, The Times of London.

Fastest Food Inflation Since Riots Means Milk Up 39%: Bloomberg.com.

Greece Defies Europe as EMU Crisis Turns Deadly Serious : Ambrose Evans-Pritchard, The Telegraph UK.

Letter from China – Beijing’s Crash Program for Clean Energy: Evan Osnos, The New Yorker.

-Gregor

Painting: Milk Jug, by James Neil Hollingsworth.

Hardly any observer of the economy was fooled into thinking that the Cash for Clunkers program represented a sustainable recovery in the automobile sector. So it has been a surprise to me this Autumn that so many composed for themselves a broader housing recovery narrative from the acute, artificial effects of FHA, Fannie Mae, and Tax Credit programs. (not to mention the FED’s operations in the MBS aftermarket). I’ve been watching 4-6 American cities for over 10 years now, starting from the time I moved back to the US from London. I have seen the entire cycle. But more important to note is that curating your own database or data sources on any subject is now quite possible for just about anyone with an internet connection, and some research skills. Thus, as we got into late October, I could see that house prices were once again coming down. More importantly, and unsurprisingly, it’s the upper end of the housing market–that sits above government infusions–that’s starting to turn downward.

My view is as follows: the American house has reliably acted as an inflation hedge for most of its history but during economic expansions a house becomes a more volatile call option on future wage growth. Given the structural changes to the US economy, and how those changes were papered over by the credit bubble, it’s now unlikely that a US house will act as a high-beta, upwardly tending call option on future wage growth–in the aggregate–because we still have a lot of heavy lifting to do before we get to the other side of this crisis. Accordingly, I now have to question whether many American houses can be priced above…(this article continues for subscribers through the membership gateway, on the right side of this page)

Let’s recall that deflation leads to reflationary policy, which triggers inflationary pressures that then crush the real economy–leading to more deflation. The policy response? More reflationary policy. And so on. This is the doom-trap the United States has fallen into since the year 2000. The problem is that we keep fiddle-diddling with monetary and fiscal policy without putting into place industrial, transport, and energy policy. Adam Smith’s invisible hand which magically organizes the economy and which transitions everything smoothly between different eras does not always work. Unless, of course, one believes the Crash and Rebirth dynamic is also natural, and therefore a good thing. And maybe it is.

A significant stock market rally is a prerequisite, in a collapsed economy, to a bout of hyperinflation. While I’m still not ready to sign on to any hyperinflation call just yet, let me say two things about the phenomenon. One, an economy can easily experience a hyperinflation that is less than the magnitude of the kind unleashed in Wiemar and Zimbabwe. For example, Israel experienced just such a hyperinflation in 1982-1985 and I happened to be there to witness it. So don’t let polemical debaters snooker you with their false dilemma arguments: there is a ton of inflation risk that exists well before one reaches the most extreme historical examples of hyperinflation. The deflationistas will try to bury the discussion of inflation risk by casting everyone as silly, Weimar hyperinflationists. Don’t let them do it. Secondly, the US economy has so much spare capacity, so much unemployment, and so much classical debt deflation that the route to hyperinflation here is rather singular: it would have to come through the currency, and the currency alone. But that should give no comfort.

The model portfolio is currently positioned quite well, for these eventualities. We are now on watch, for example, to track the way in which market fear expresses itself …(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.)

Steve Roberts, on what it means to be an immigrant in the US today: The Dianne Rehm Show WAMU Radio.

Harvard’s Ferguson Says Dollar to Fall Another 10%-20%: Bloomberg Surveillance.

Urban Thinkers: Burnham, Mumford, Le Corbusier via James Kunstler: KunstlerCast Radio.

The Mystery of the Arctic Sea, Sarah Rainsford on a cargo ship’s disappearance:  BBC Documentary Series.

Rogoff, Reinhart on Their Book `This Time Is Different’: Bloomberg On the Economy.

-Gregor

Photo: Portrait of John Law.

GregorWeekly subscribers might enjoy reading a Gregor.us post from this evening, on the topic of California’s vulnerability to a second oil shock. | see Break Point.

Peter Maass: “Crude World” (Knopf), The Dianne Rehm Show WAMU Radio.

Los Angeles: Provisional Civilization, James Kunstler on KunstlerCast Radio.

Inflation/Deflation, Or Both? Michael Hampton, Commodity Watch Radio.

Michael Hudson: Dress Rehearsal For Debt Peonage, KPFA Guns and Butter Radio.

Natural Gas: Advances in natural gas drilling techniques, The Dianne Rehm Show WAMU Radio.

-Gregor

Photo: Camera Girl, From the Black and White Photo blog of Billy Gray: Billy is Gray