Friday, June 6, 2008


Well it was crunch time and the market got crunched. The irrationality yesterday followed today. It was just as irrational today in my opinion as it was yesterday. Together the market probably was close to rational. Just like the retail stores were not great but not that good either, the jobs number was not horrid but not that bad. The jobs lost actually beat consensus estimate, it was the unemployment number that was the problem. It is getting blamed on teenagers and college student looking for jobs. I think that is absurd. One, my understanding is they seasonally adjust for that already and two, my guess is alot of adults (think mothers, older "retirees") are all of sudden actively looking for jobs because of inflation and mortgage woes. Instead of one bread winner you need two. Probably it was overstated. It is probably 5.2 or 5.3% but the direction is still bad and isn't teenie boppers.

Oil was probably equally irrational. I already discussed Israel but a couple of other things I have read and heard today is that one of the problems, get this, is there are not enough speculators. Oil has become so volatile that the really big experienced traders who would normally take the short side of a big buyer are not there. The floor of the NYMEX has become sparse with traders. The thing is broken. On top of that the short traders can't get margin as the banks are not willing to lend.

Which leads me to my next point. I am so sick of hearing everyone acting like this is a whole new issue. That if we enter into a recession now it is because of oil not housing and credit woes. All of this is a result of something before it!!! It is all connected!!! Think plankton theory people. Oil speculators can't get margin, goes back to banks taking huge writedowns on housing. Inflation becoming a rampart problem, it all goes back to Bernanke in August of 2007 in January of 2008 splashing money everywhere!! Money flows to what tingles the brain cells. It is basic psychology 101. The only thing that has been tickling the brain cells is commodities. In 2000 with the tech blow up psychologically you fleed stocks and all that money flowed to credit. Because Greenspan flooded the market with money you created another bubble. Now what is most psychological painful is credit. All the flood of money has to go somewhere. Stocks have less psychological pain (and have held up better) but there are still memories of pain so the money flows to emerging markets and commodities. All this leads to higher inflation compounded by the fact that we had huge supply and capacity issues when Bernanke started cutting rates. I said in August (sorry I was not blogging at that time so you will have to trust me) that what Bernanke was doing was going to be extremely costly. One of the biggest misconceptions is that recessions will slow down inflation. Not necessarily!! Eventually yes but inflation is a monetary issue not necessarily an economic issue. Inflation went through the roof in the 70s into the 80s despite all kinds of recessions and it was not until the late 80s that it was put under control. We needed to go through a serious slowdown in early 2007 into 2008 and more importantly we needed monetary (the issue that drives inflation) restraint. We needed excess supply of resources to increase. We needed the fluff to be destroyed. I have said for months that the cost of trying to save everybody is going to be much greater than if we would have let some things fail. To make matters worse huge increases in minimum wage goes into affect in July which will add to the inflation fire.

The market was irrational to the downside today. As a bear I will say that but it was irrational to the upside yesterday. Inflation is the biggest thief in the world and once he get the get out jail card it is very difficult to catch him again. Recessions don't by definition automatically fix the problem. If it is deep enough and long enough it will.

By the way if you blue and want a bullish pickup, go to and watch the Kudlow clips. He never fails to deliver. Though I think he is wrong, it will cheer you right up if you need a bullish pick up.

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