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Five Things You Need to Know: We're Worried; Really, Really Worried

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What you need to know (and what it means)!

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Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

Rabbit Rabbit

1. We're Worried About Japan

Here's a question: the Bank of Japan was helpless to stop deflation as the economy spiraled downward, so why is it that we have so much faith that the Bank of Japan will be able to manage the "recovery" with hair trigger precision?

  • The BOJ pumped a total of 2 trillion yen into the money market on Monday and Tuesday of this week to stop a sharp rise in the uncollateralized overnight call rate.
  • The central bank has said it wants to keep the overnight call rate below the 0.1 percent discount rate as it tries to drain excess reserves, all of which is a prelude to eventually raising overnight rates.
  • Essentially, the BoJ is looking to mop up the excess liquidity it created through the quantitative easing policy.
  • The current account balance, which was used for liquidity targets under the policy, has been cut by nearly a third since reaching a peak of 30-35 trillion yen.
  • It now stands at 14 trillion yen, up from 12.4 trillion yen last Friday.
  • Meanwhile, this all comes at a cost - a steep cost. Japan's public debt is 150 percent of GDP.
  • Some people who supposedly know about such things (Ben Bernanke) have noted that Fed studies of the Japanese experience with deflation show that it was almost entirely unexpected.
  • Japan spent more than a decade mired in systemic deflation. As Bernanke noted in his 2002 "helicopter speech" linked above, in addition to deflation Japan's economy also faced barriers to growth (financial problems in the banking and corporate sectors and massive government debt) that are still existent today.
  • Of course, Bernanke is a believer in the tools of his trade, naturally, so his view is that political constraints more than central bank policy options caused the deflation to linger for so long.
  • Either way, the economic recovery in Japan, which is linked to liquidity flowing to India, China and even the U.S., seems to us to be considered something of a foregone conclusion by market participants while the actions of the BoJ suggest that conclusion is quite premature.

2. Californians Worried About a Housing Bubble

If you live in California, and there's a good chance you do since it is a big, fun state with the largest population in the country, then you are worried about a "housing bubble" ... at least according to Google "Trends."

  • Google Trends is a beta version of a service that tracks broad search trends and patterns.
  • If you type in "housing bubble" for example, as I did, then you can see a chart that shows the search volume as well as the cities from which those searches originated.
  • The chart below shows a definite spike in the search for "housing bubble" since April.
  • Also, note that the top cities searching for the phrase "housing bubble" are all in California.
  • To be frank, we believe Google Trends is an amazing tool with many applications for financial markets, but we have no idea what those applications are.

3. Ford Worried About Selling Cars

Ford, worried about selling cars, beats consumers to the punch and decides to just give them away.

  • Ford just can't give cars away.
  • No, wait, looks like they can... also gas!
  • Ford announced that it is going head-to-head with GM's risky gas derivatives scheme by slashing interest rates on nearly all of its 2006 models AND giving away a prepaid debit card worth up to $1,000 in gas.
  • Meanwhile, according to the Associated Press, Expedition sales fell 24% in the first four months of this year compared with the same period in 2005, while Explorer sales were down 30%.
  • Both Ford and GM have in recent years earned their largest "profits" from sales of SUVs.

4. OPEC Worried About Spending All That Depreciating Money!

OPEC ministers say they're not concerned that high oil prices pose a risk to the global economy, but they are worried about spending their increasingly worthless dollars.

  • Gathering today in Caracas Venezuela for a special meeting of the Organization of Petroleum Exporting Countries, one of the key long-term issues to be discussed will be a possible shift away from the dollar as a working currency to possibly the euro.
  • Francisco Mieres, a professor of graduate studies in oil economics at Venezuela's Central University, told Inter Press Service News Agency that "Iraq's announcement of its plan to switch from the dollar to the Euro was the final straw that unleashed the U.S. war machine on Saddam Hussein's government; we're now seeing a repeat performance in Iran."
  • Mieres is referring to Iran's plan to establish an oil trading market denominated in euros rather than dollars.
  • The market would be the fifth oil market after New York, London, Singapore and Tokyo, and the only oil market to price crude in euros.
  • OPEC's membership is comprised of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
  • Iran is the fourth-largest oil producing country in the world.

5. Who Isn't Worried?

Ben Bernanke is not worried.

The Dali Lama (who bears a striking, though
subtle, resemblance to the late Hunter S. Thompson,
a chronic worrier) is eternally unworried.

What, Alfred E. Neuman worry? You can't be serious.

Bobby McFerrin is happy... and also not worried.

I am still a little worried, but I took a handful of Prozac, and so now I'm not particularly concerned about whether I am worried or not.

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No positions in stocks mentioned.

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