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Five Things You Need to Know: China Facing Inflationary Dilemma; England Facing Inflationary Dilemma; Argentina Facing Inflationary Dilemma; U.S. Facing... Goldilocks!; And Lastly, Foreclosures Only Up 47%!


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


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

1. China Facing Inflationary Dilemma

A slew of overnight data out of China has prompted some selling in Asia. Let's take a look at what's important and what's not.

  • First, China's consumer prices rose 2.7% in the first quarter from a year earlier, the National Bureau of Statistics said.
  • The Consumer Price Index was up 3.3% year-over-year, marking the first time since 2005 the CPI has exceeded 3%.
  • China's first quarter Gross Domestic Product (GDP) rose 11.1%, while investment in fixed assets in urban areas was up 25.3% in the first quarter.
  • What's relatively unimportant is the GDP growth and fixed urban asset investment numbers.
  • Everyone knows China is growing.
  • Instead the focus today is on the increasing inflationary pressures on what now constitutes three separate fronts:
    1) Producer Price Inflation is now running at 2.7% year-on-year
    2) Inflation in basic materials, notably metals, which China's National Bureau of Statistics spokesman Li Xiaochao said could continue to affect domestic prices in the future due to recent price jumps in international markets.
    3) Food prices were up a dramatic 6.2% in the first quarter.
    4) Retail sales of consumer goods are growing at 14.9% year-on-year.
  • This is evidence of a different, more powerful type of inflation cocktail in China than in the U.S.
  • The U.S. is transitioning from cyclical cost-push inflation into slower growth and a modestly stagflationary environment; arguably a stepping stone toward deflation.
  • China, however, is apparently in the throes of a far more powerful combination of demand-pull inflation, cost-push inflation, pricing power inflation and sectoral inflation.
  • In other words, they got inflation, and they got it bad.

2. England Facing Inflationary Dilemma

Back in the West, check out this interesting article on the inflationary mentality of the 1970s... in the UK, in the Times Online by Anatole Kaletsky.

  • Britain's inflation, instead of stabilizing and then gradually subsiding as generally expected, is accelerating sharply and maybe even spiraling out of control, Kaletsky observes.
  • But that's not the half of it.
  • "More disconcerting than the jump in the inflation figure itself is the economic backdrop against which it has occurred," he writes.
  • The 16-year high in inflation is occurring coincident with the pound rising above $2 for the first time since 1992.
  • Moreover, he notes, it's been perfectly rational for businesses and consumers to increase debt given a formerly subdued background of low interest rates and low inflation.
  • But what happens is inflation continues to rise? "The whole new British economy, which is built on foundations of cheap long-term credit, would collapse like a house of cards," he says.

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3. Argentina Facing Inflationary Dilemma

Hmmm, here's an interesting question posed by this morning's LA Times. How much are prices going up in Argentina?

  • Last year's official inflation rate was about 10%, following a 12% rise in 2005 the Times reported.
  • This year? Many Argentinians are saying costs are rising rapidly even as the Argentine government reports moderate increases
  • "It's not just that prices rise from one week to the next, but we see prices shoot up from day to day - or the same day," Mariela Martinez, 60, who was shopping Wednesday at a popular supermarket, told the LA Times.
  • The most recent statistics show the cost of food staples declining in March, a finding widely ridiculed, the newspaper noted.
  • Roberto Lavagna, a former finance minister who is running for president, claims inflation last year was about 50% higher than the government reported.
  • Coincidentally - or not - in January the head of the bureau that produces the price statistics was fired.
  • And this week workers at the national statistics bureau staged a 24-hour strike to denounce what they characterized as official sleight of hand with inflation data.

4. The U.S. Facing... Goldilocks!

Now, closer to home. Here's another puzzler: Why is inflation apparently running rampant in nearly every country but the U.S.?

  • Currently the U.S. has a universally recognized weak dollar, down about 2.5% year-to-date, almost 20% since 2003 - a not so coincident starting point.
  • What will happen as other countries - China, Japan, England, Europe, South America continue raising rates to fight their inflation?
  • What will happen if food prices continue to rise?
  • Watch the dollar.
  • Technically gold and silver both show DeMark sell signals while the dollar is nearing a DeMark buy signal.
  • While the falling dollar (expanding liquidity) has been universally beneficial for all paper financial assets, a rising dollar will be evidence of contracting liquidity - occurring as dollars are used to pay down debt - and contracting liquidity is the equivalent of pulling the stopper out of the drain.
  • So much for Goldilocks.

    The Real Story of Goldilocks (As told by a bear).

    Once upon a time there was a family of three bears; a mama bear, a papa bear and a baby bear.
    This family of bears lived in a quiet cottage in the woods. One day, waiting for their porridge to cool, they decided to take a leisurely walk in the woods, as bears are known to do. While they were out on their walk, a little girl named Goldilocks who happened to be playing in a field nearby, discovered their house, and also the porridge inside, which, let's be honest, is not really porridge, but a metaphor for the collective savings of the three bears which they wisely keep under their mattress for fear of an economic collapse.

    Being curious, and an expert burglar, Goldilocks managed to break into the three bears' house, though she later claimed the front door was left "wide open." Once inside, she examined the first bowl of "porridge'" (a metaphor for U.S. Treasuries).
    "This porridge is too cold!" she exclaimed.
    So she whipped out her cell phone and ordered the Federal Reserve to take some kind of policy action to try and force this "cold porridge" out of the hands of domestic holders and into the equity markets where returns would look great, even to bears, as long as the bears didn't bother to notice that the returns were due solely to the devaluation of their paper currency.

    Moving on to the second bowl of "porridge," which is clearly gold, Goldilocks noted, "This porridge is too hot!" So she dumped it onto the open market, even going so far as to sell gol... er, "porridge," that she doesn't even own and can never ever possibly physically deliver in order to make it unattractive to bears.

    Finally, she moved to the third bowl of "porridge," which in this case is a metaphor for a stack of U.S. dollars that the baby bear kept under his mattress to use as "writing paper."
    "Ahhhhh," Goldilocks said. "This porridge is just right."
    Then, she abruptly fell asleep in the baby bear's bed. (Editor's note: Certain metaphorical acts committed by Goldilocks, such as raising taxes, browbeating foreign trading partners for structural deflation, etc. have been omitted for the sake of brevity.)

    As Goldilocks was sleeping, the three bears returned home.
    "Someone's been eating my porridge," growled the papa bear.
    "Someone's been eating my porridge too," growled the mama bear.
    "And someone's been messing around with my writing paper and used it all up!," cried the baby bear.

    Just then, Goldilocks woke up, saw the three bears and screamed.
    "Help!" she cried.
    "Print more money!" she demanded.
    "Buy something... anything!" she screamed.
    But it was too late.

    By 10:30 a.m. the corporate debt market had locked up and forced selling by overleveraged hedge funds was spilling over into commodities and equities markets. By 11 a.m. the first round of trading curbs kicked in, but this had the perversely ill effect of actually withdrawing even more liquidity and bids from the market. By noon the Federal Reserve had called a special meeting with Wall Street's money center banks to see which, if any, could remain operable through the end of the week.

    Goldilocks, meanwhile, was vilified in the press for her reckless breaking and entering and total disregard for good porridge. The bears felt vindicated, but not particularly good. After all, in a real bear's market, no one wins, not even the bears.

5. Foreclosures Only Up 47%!

Banks repossessed only one in 775 homes in March according to foreclosure-tracing firm

  • RealtyTrac said foreclosures in March only increased 47% year-over-year, a clear indication that Federal Reserve officials are correct in their views that housing problems are "well contained."
  • The five states with the highest foreclosure filings in March were concentrated in the North, East, South, West and Midwest areas of the country, providing further evidence that housing woes are indeed "well contained" to only those areas of the country where people buy and sell houses.
  • California, Florida, Texas, Michigan and Ohio accounted for half of the nation's total foreclosures.
  • Nevada reported 4,738 foreclosure filings, more than triple the number in March 2006, or one filing for every 183 households.
  • Even better news, home foreclosures only rose 7% between February of this year and March.
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