Five Things You Need to Know: Politicians Take Up "The Crisis of the Real"

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

1. Consumer Prices Hit the Wall

And to think, just a few years ago they said it couldn't be done; that declining consumer prices were virtually an impossibility. Yet here we are just two weeks into 2009 and seemingly every day we get news of another area of the economy where prices are deflating as a consequence of demand destruction.

This morning the Labor Department released the Consumer Price Index report, which showed that prices rose just 0.1% in 2008 - the smallest increase since 1980. Prices in December fell 1.7%. Deflation was most severe in consumer discretionary categories such as automobiles, apparel and recreation. But categories that seem immune from deflation saw only modest increases. Health care prices, for example, rose just 2.6% last year, the smallest increase since 1964.

Perhaps most stunning is the demand destruction in the energy complex. The American Petroleum Institute reported that US fuel demand fell 6% last year. Gasoline prices plummeted 43%, the most since 1937.

2. Farmers Cut the Cheese

Relax, I'm talking about prices! They cut the cheese prices! Turns out that the price of cheese has collapsed by 40% over the past 30 days. According to an Associated Press story which appeared in the Chicago Tribune, the decline in cheese prices is impacting Wisconsin's 15,000 dairy farmers who are now struggling with declining milk prices. Why? Because about 805 of the state's milk is used to produce cheese, "so cheese prices largely determine milk prices paid to farmers," the article said. 

3. Pressing Question of the Week

Question: How can the dollar rally during a deflationary debt unwind, especially if the central bank is hell-bent on printing dollars to avoid deflation?

It's counter-intuitive, isn't it? The dollar is rallying, up more than 4% so far this year after rallying nearly 6% last year. How can this be? Simple, as credit is destroyed, whether through access due to higher lending standards and credit line reductions, or through balance sheet repair, writeoffs, bankruptcies and restructured loans, dollars become more scarce.

A manifestation of this thirst for dollars actually flew under the radar yesterday via the Richmond Fed portion of the Fed's Beige Book. "Several retailers also said that in recent weeks more customers paid with cash than with credit cards."

4. Now THIS Is a Depression

Yesterday someone forwarded me a news brief from an ad agency commenting on the Detroit economy. Being the epicenter of the automotive world, one would expect the news to be grim, but this was stunning.

The average home price in Detroit is $18,513 and the unemployment rate is now 21%. The crime rate in the city has fallen... but that's simply because of a lack of targets. "Meaning there is nothing left to steal. In fact, even the criminals don’t want to leave jail."