The Economic Trifecta: Inflation, Devaluation, High Interest

We are leaving the period where nothing would surprise to a period of defined economic issues:

• too much growing government debt and spending, and
• too little private sector wealth to finance government debt.

This will play out either with inflation, devaluation of the dollar, high interest rates which tear the heart out of the meager recovery forecast – or all the foregoing.

The dollar's slide has began.

Interest rates are now climbing.

We only need to await the arrival of inflation for the deadly Trifecta to be in place.

Would you be willing to bet that the combination of inflation, high interest rates, and a declining dollar will be good for American business? The weapons the Federal Reserve will use against the Trifecta will kill the green shoots.

Currency devaluation, by itself, would be good for American business making it more competitive overseas. But combined with inflation and high interest rates will just add to a toxic soup of anemic domestic consumption as Americans will pay more for most things.

I remember the line from the Three Stooges “Well, this is another fine mess the government and the Fed has gotten us into.” Actually, I took some liberties with the quote but I can hear Larry, Curly and Moe saying this today.

Additional Economic Events from this Past Week

The BEA's revised its 1Q 2009 GDP from the advanced number of -6.1% to a less bad decline of -5.7% (the preliminary number). The main reasons for the revision

• a larger decrease in imports (which will increase in 2Q because of rising oil prices)
• a less bad consumers purchase of durable goods
• a smaller decrease in personal consumption of nondurable goods
• a larger decrease in private inventory investment and in nonresidential structures
• a downturn in federal government spending (wait as stimulus kicks in)

Although being less bad is good, my take on reviewing the detailed data is the massive reduction of private investment. In 1Q 2009, we spent at 1997 levels. This foretells that we are not investing in the new which is continuing to result in a lack of competitiveness with the emerging economies. Although 2Q 2009 should be less bad than 1Q 2009, I still believe we should see GDP declines between 2% to 3%.

In the same BEA data release, 1Q 2009 corporate profits were released. Again, when compared to 4Q 2009, 1Q 2009 is less bad. But consider that corporate profits are at 2004 levels.

Midwest manufacturing declined 1.1% in April 2009 following a 2.9% decline in March. After reviewing the data, I was unable to draw any conclusions concerning bottoming. The data is less bad, but this index cannot be considered a green shoot unless less bad is a green shoot.

The April 2009 economic coincident indicator for the New York / New Jersey area continued to decline. It is interesting that the rates of decline are essentially unchanged from the previous month demonstrating the bottoming process has not begun in this region.

Like a broken record, I particularly hate confidence surveys – particularly surveys which incorporate feelings about future economic conditions.

The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April.

• The portion of the index which indicates the current situation increased to 28.9 from 25.5 last month. Those claiming business conditions are "good" increased to 8.7% from 7.9% while those claiming conditions are "bad" increased to 45.3% from 44.9%. Those claiming jobs are "hard to get" decreased to 44.7% from 46.6% in April. Those saying jobs are "plentiful" edged up to 5.7% from 4.9%.
• The Expectations Index rose to 72.3 from 51.0 in April. Those expecting business conditions will improve over the next six months increased to 23.1% from 15.7%, while those anticipating conditions will worsen declined to 17.8% from 24.4% in April. The percentage of consumers expecting more jobs in the months ahead increased to 20.0% from 14.2%, while those anticipating fewer jobs decreased to 25.2% from 32.5%. The proportion of consumers anticipating an increase in their incomes edged up to 10.2% from 8.3%.
• The Consumer Confidence Index is now at its highest level in eight months (Sept. 2008).

I submit that what this survey has revealed is that consumers are not seeing the violent economic degradation anymore. Current conditions are not improving yet but because the current situation is not seemingly getting much worse – people have a better outlook of the current situation. After all, this survey is subjective.

Despite Spring improvement in the Case-Shiller March 2009 data, it appears 2009 may be worse than 2008. Home prices are still falling and this is the prime season for home sales.

New Home Sales increased 0.3% in April 2009 following a downward revision to February and March data, which still leaves April’s level of sales well above the record low annual rate of 0.329 million units hit in January. Year-over-year new home sales were down -34.0%. The supply of new homes fell to 10.1 months worth and compares to 10.6 in the prior month and 10.4 months in April 2008. In the opinion of the analysts at the Bank of Tokyo – Mitsubishi UFG:

New home sales, along with a handful of other housing activity indicators still point to a January bottom, though a clear turnaround is very difficult to see. New homes are fighting a losing battle against existing homes where prices have dropped so low due to sales of distressed homes. This is likely the reason behind the decline in new home sales in the West in April where sales of foreclosed homes are running at extremely high levels. Typically sales of existing homes lag sales of new homes, but for the foreseeable future this relationship will remain reversed.

Advance April 2009 data for durable goods showed new orders for manufactured durable goods increased 1.9% . This was the second increase in the last three months and followed a 2.1% March decrease. Over half the increase was due to transportation equipment. But the data does not make sense.

• Unfilled orders are down 1.2% (down seven consecutive months, and follows a 1.7% March decrease).
• Inventories of manufactured durable goods decreased 0.8% (down four consecutive months, and follows a 1.7% March decrease).
• Shipments were down slightly (down nine consecutive months, and the longest streak of consecutive monthly decreases).

Something is wrong with the data gathering. New orders cannot be up if inventories are down, shipments are down, and unfilled orders are down.

Keeping in line with the “less bad” data, the Chicago Fed's May 2009 index which summarizes 85 indicators of national economic indicators – improved but all categories are still negative. This index is now at October 2008 levels. The primary reason this index improved was due to production “only” declining 0.5%.

The National Association of Realtors March 2009 data on existing home sales shows an increase or decrease (depending if you look at median or mean prices) in home prices but a decrease in sales volume. For me the volume of sales is the issue as it remains near the recessionary low levels. The volume must dramatically improve before this crisis is over. There was no statistical evidence we are approaching the end of this crisis but there is evidence the price free fall is abating for now. Without volume, there is a real threat the housing prices will take another leg down.

The four week moving average of mortgage loan application volume decreased 4.7% and increased 29% compared with the same week one year earlier mostly caused by a decline in refinanced mortgages. The refinance share of mortgage activity decreased slightly to 70% of applications.

This is not good news as the trend line on mortgages is down – and that means the volumes of homes being sold is not rising. The average interest rate for 30-year fixed-rate mortgages decreased slightly to 4.81%.

However, as I write this the 30 year fixed rate mortgage quoted yesterday by Wells Fargo (WFC) is now over 5% as long term Treasuries are soaring.

Initial unemployment claims are essentially holding steady for the week ending 23 May with the four week weekly moving average of 626,750 claims. There is no indication that this recession yet is coming to an end.

Filing for Bankruptcy: R.H. Donnelley Corp, Metaldyne Corporation, Visteon. Bank failures this week: none.

Economic Forecasts Published this Past Week

The WLI from ECRI is continuing to show improvement in economic conditions six months from now. In their statement last Friday, they said

With WLI growth climbing by 20 percent in 26 weeks, the economic growth outlook is getting steadily brighter.

I am fairly confident that we will have bottomed out economically by the end of the third quarter. Because of the silly way recessions are defined, this will be when the recession ends and recovery begins. But the average American will probably still be shedding wealth, and unemployment will still be rampant.

And the biggest problem is in front of us as our government and Federal Reserve borrowed from our future so this recession would not be severe. Now they are talking about instituting a general sales tax (VAT) which will take more private money from consumption to cover this building debt.

^{Disclosures: long MMFs, PYEMX, EWZ, TBT, PGJ, EWY, PIN, GLD, Physical Gold}

Comments

[me3tv:]

sarge 907 is right. All the economic moves currently in play or planned by the Obama regime run counter to the proposed outcome to benefit the poor. Inflation (a hidden means of taxation across all socioeconomic strata) will devastate those to whom income is being transferred (whatever they gain - they will lose) .

Carbon taxation and many of the "green initiatives" have a deleterious effect on productivity that grows the GDP.(read- job losses for the poor and middle class). Private investment is increasingly punished in favor of taxpayer funded jobs (read- reduced federal revenue from the true base of government funds). Political payback to unions by handing over entire companies while divesting capitial investors (read - strangle the confidence of future investors in any corporation that has a government contract).

So - in the end - these polices are driving the poor and middle class to greater despondence .. and greater dependence on the government which will print more money to solve that issue and the cycle continues. Inflation will soon be endemic.

These kinds of taxes, however, remove the government from primary contact with the "taxpayer" consumer. The average poor and middle class consumer will react to higher prices AS IF they are coming from greedy capitalists who are trying to profiteer off the consumers. And these people will vote for more of the same. The poor will suffer the most. The higher level politically connected people with government contracts will do quite well however. These are the nastiest taxes of all. And they do not even call them taxes.

May 31 10:26 AM

[Steven Hansen:]

"First the attribution of the quote was wrong. It was Laurel and Hardy, not the Three Stouges.' - Dave Wrixon

Your are right. i was so concerned about getting the phrase correct that i did not realize the attribute was to the wrong people.

Let me be clear on the point of inflation - i do not see this as an eminent problem. but if i would have written one year ago about fears of deflation, what would you have thought?

you cannot keep taking different drugs and not expect a reaction between the drugs. the fed is conducting monetary policy on the foundation of computer models. if anyone has some statistical information relating to similar economic conditions from the past, please share it.

i find it interesting that the punters believe
- we are exiting the worst global economic situation since the great depression,
- the government can spend money like there is no tomorrow,
- the fed can massively expand the money supply,
- that we can destroy massive amounts of wealth,
- the boomers are exiting stage right,
- we can dramatically increase our taxation,
- the whole world can engage in QE
and you can predict the outcome. not one swinging dick can say what will happen next.

i remain convinced that when a recovery occurs - there will be inflation. however, if this is a L shaped recovery, i would agree inflation most likely is not a concern.

May 31 10:29 AM

[Market Sniper:]

The deflation vs. inflation arguement has believers in both camps with valid arguements on both sides. I believe it stems from a misunderstanding of "credit". Credit is NOT money. They appear to be similar and at times act the same but they are not the same. What we have had is one of the largest credit bubbles of all time which is now deflating. The end result of credit bubble deflation appears to be deflation. It is not. Somple explaination: guy buys a house for $40,000. He moves in and makes the payments. He watches as the "value" of his property goes to $60,000, then to $100,000, $200,000 and then to $500,000. He still lives in the house, is prudent and continues to make payments on the loan he got when he bought the home for $40,000. NOTHING has changed for him! He feels richer becaue on his balane sheet, he has an asset that has multiplied in "value" many times. He buys a few extra toys and takes a cruise. Called the "wealth effect." As long as he does NOT use his home "equity" as an ATM machine, nothing has changed for him. Now, the house drops from $500,000 to $400,000 and then to $300,000 in "value." Now we get the "wealth effect" in reverse. Even though nothing has changed, he now does not take a cruise and may even sell a toy or two because he fells "poorer." IF he had been foolish and borrowed on that equity at or close to the top of the market, he now owes $400,000 on that house and his position is then radically different. Let us say he did not borrow that "money" for a good purpose (putting the capital to work in such a manner as to increase wealth through the production of goods and services that people want and need) but instead spent it for more toys and cruises. God forbid, he may have bought rental real estate also at the top of the market! He is now a bankrupt. No, credit is NOT money. Meanwhile, everything he needs goes up in price! Everything he owns and owes on is going down in "value." The federal government then steps in in an attempt to reflate real estate values back to credit bubble highs to no avail as our guy has lost his home and his rental properties back to the bank. CDO's and CDS's are all now kicking in and demand is made for performance on all of those derivatives. The "money" that is now being spent for bailouts does find its way back into the economic system. It does NOT just disappear! Do you honestly beieve there are no CONSEQUENCES for this? So, both camps in the deflation vs. inflation arguement end up being correct. The deflationists are correct as to the credit but the inflatonists are correct as to the CONSEQUENCES.

May 31 10:45 AM

[Market Sniper:]

I think I need to write an article about this.

May 31 10:54 AM

[thotdoc:]

Market Sniper (beloew) again proves there is a difference between analysis, when you understand the operational definition of what you are analyzing....and "analysis" when you compare apples and oranges.

In your reply, IMHO, you confuse the US now and Japan, etc. The business culture in Japan is very different than the business culture here.

I also take it that you do not shop for food, nor do you pay for gas for your cr apparently. You must have also not noticed that the price of electricity for your home and business are going up.

Food, gas, energy are all going up substantially. They are not deflating.

G


On May 30 09:54 PM JCC wrote:

> We exited World War 2 with debt being the quivalent of 120% of GDP.
> At that time, similar to today, many were crying about eminent out
> of control inflation. It did not happen!!
>
> The Bank of Japan made huge debt purchases between 1997 and 2003.
> Many predicted run away inflation. What happened - Prices fell.
>
>
> You reported a lot of interesting data, and it is generally a good
> article. But like many, the article fails to predict based upon factual
> analysis. Maybe we will have hyper-inflation, but it is by no means
> necessary, not is it a a foregone conclusion. Proper handling of
> the economy can avoid an inflationary conclusion.
>
> Furthermore, in the short term a major worry is deflation.
>

May 31 11:18 AM

[thotdoc:]

What is your plan, if you do not like Obama's?

This is truly a time to offer ideas that will work, not simply throw stones at others' plans.

I don't have a plan. I don't like many things that have happened. But, I do not have an alternate plan.

I'm serious; what's the alternate plan?

G


G


On May 31 09:24 AM sarge 907 wrote:

> Buying a foreclosed property that must be backed by fanie or mac
> is a ploy by the government to indicate recovery.
>
> What poor soul wouldn't sign anything to put a roof over his family's
> head (for at least six months) when the bright boys in Washington
> make the down payment for you (first time buyer=$8,000) and then
> forces the lender to forego or delay kicking you out.
>
> Wake up American obamonites, you're not going to like what's coming.

May 31 11:22 AM

[Market Sniper:]

Perhaps the ONLY viable plan is to declare "Jubilee". The final step in the bankrupcy proceedings started in August of 1971. Declare ALL debt, both public and private, null and void. I will grant you it is a "radical" solution and one, for obvious reasons, rarely discussed. We shall end up there anyway with the printing press. But the hyper-inflationary route leads to all manner of civil mayhem. The above "solution" would be much better. When you understand the consquences that come from "money" debasement and destruction, I think you just might agree with me.


On May 31 11:22 AM thotdoc wrote:

> What is your plan, if you do not like Obama's?
>
> This is truly a time to offer ideas that will work, not simply throw
> stones at others' plans.
>
> I don't have a plan. I don't like many things that have happened.
> But, I do not have an alternate plan.
>
> I'm serious; what's the alternate plan?
>
> G
>
>
> G

May 31 11:49 AM

[VALUEDIV:]

Your Trifecta article was a QED financial and economic classic exercise in reason. BRAVO! I can only add a question to all who speak of an economic recovery... what will be the impetus or mechanism to put our world financial statements in the black? Nothing is being done "bottoms up" in any economy except perhaps in France, Germany, and Sweden (at a minimal level). All of our efforts are in feeding the hogs who ate all the corn.
The consumer drives the economy. It is NOT Supply and Demand; it is DEMAND and then Supply... a very cogent distinction. It took from 1945 to 1975 to build the economic base that was milked from 1975 through 2007 by "creative financial instruments assets dilution". Those financial instruments are still floating in the economic structure like dormant termites. But, they will awaken when the Derivatives are called in by needy institutions...hundreds of TRILLIONS of dollars.

The current bailout is a "nibble" of the total debt cheese that brought AIG and Bears & Stern down. More failures are coming when the printing presses have to stop making absurd monopoly fiat money with no value except "good faith"! Who today has any faith in our financial institutions and the real capability for our government to bail them all out as their already announced coming losses mount??

We can only consolidate and build a foundation for long term economic growth that ressembles 1945 rather than 2009. Educate, work, innovate, constrain usury, build capital, and all of the basics a family uses during life. We must not revive the monstrous and inefficient economic allocation model that has devoured us. It is NOT "Free Markets"; it is the "Freedom to Create Goods and Prosper".

Note the "creation of goods" that have "utility and value" is a key ingredient. Moneylending is not "value enhancing" at all.
It is an economic service, but who can eat services? Wealth is based on tangible goods for consumption. We must restore the creation and manufacture of goods to regain our wealth. Pretty basic Economics 101..isn't it.

The sooner we stop whistling in the dark and face the obvious facts, the sooner we can start to truly rebuild an economy for ourselves and our children and restore the standing of the United States. Americans should bite the bullet of truth and lead the world in a concerted rebuilding.

May 31 02:42 PM

[TradingHelp...:]

The trough in the economic cycle is already behind us. Admittedly, unemployment will continue to rise, as it usually does being a lagging indicator. But you will see a much shallow negative GDP figure in Q3. QoQ it may even be up a little. We have truly unprecedented internationally co-ordinated monetary easing and government 'hard-cash' intervention onto the balance sheets of strategically important firms. It's only gold sales people and the odd bond obsessive that is still talking "depression" surely? Gold bulls shouldn't worry. You are going to have so much inflation by mid 2010 the price of gold, oil, in fact all resources will go up just fine. Oh sorry... they are already. I think the equity market has been agreeing with me for some months now too. seekingalpha.com/insta...

May 31 04:40 PM

[JCC:]

Steve - I appreciate your intelligent argument. I agree that the danger of inflation is not eminent, but it is certainly possible upon recovery. You are correct that it could be avoided with an L shaped recovery. I submit that it is also possible with a U shaped recovery, depending upon the economic policies used at that time.

Currently monetary velocity has slown to a crawl, which if anything is a deflactionary factor. When velocity increases, then we must very carefully manage the monetary supply to avoid significant inflation. This might be difficult but it can be done.


On May 31 10:29 AM Steven Hansen wrote:

> "First the attribution of the quote was wrong. It was Laurel and
> Hardy, not the Three Stouges.' - Dave Wrixon
>
> Your are right. i was so concerned about getting the phrase correct
> that i did not realize the attribute was to the wrong people.
>
> Let me be clear on the point of inflation - i do not see this as
> an eminent problem. but if i would have written one year ago about
> fears of deflation, what would you have thought?
>
> you cannot keep taking different drugs and not expect a reaction
> between the drugs. the fed is conducting monetary policy on the foundation
> of computer models. if anyone has some statistical information relating
> to similar economic conditions from the past, please share it.<br/>
>
> i find it interesting that the punters believe
> - we are exiting the worst global economic situation since the great
> depression,
> - the government can spend money like there is no tomorrow,
> - the fed can massively expand the money supply,
> - that we can destroy massive amounts of wealth,
> - the boomers are exiting stage right,
> - we can dramatically increase our taxation,
> - the whole world can engage in QE
> and you can predict the outcome. not one swinging dick can say what
> will happen next.
>
> i remain convinced that when a recovery occurs - there will be inflation.
> however, if this is a L shaped recovery, i would agree inflation
> most likely is not a concern.

May 31 10:28 PM

[Carlos Lam:]

On May 31 11:22 AM thotdoc wrote:

> What is your plan, if you do not like Obama's?

1. Let the banks fail
2. Let the auto companies fail
3. Let the retailers fail
4. Bring all the troops back from Afghanistan, Iraq, Kosovo, Bosnia, Germany, UK, S. Korea, etc. & honorably discharge HALF of them
5. Cut federal transfer payments in HALF
6. Cut federal monies to states for education in HALF
7. Stop the War on Drugs & allow States to decide if they want to continue spending billions on it
8. Tell the public that we're going to take the pain NOW because we have spent, borrowed, & printed too much money

Frankly, thotdoc, it's not that I don't like Pres. Obama's plan, I think it's idiotic. Too much debt and spending are what got us to where we are today. To believe that more debt and spending will somehow get us out is ludicrous.

May 31 10:39 PM

[Sober Realist:]

I think it's pretty obvious than we will settle at an "L"-shaped "recovery", a new deleveraged world. There simply is no country to take the place of the U.S. consumer. Read my instablog.

Tyler Durden hit the nail right on the head in a recent article:
San Francisco Fed Concerned About Consumer Deleveraging
seekingalpha.com/artic...

"...as time passes and the consumer savings rate increases, the bifurcation between the Fed's plans and reality will only become more evident, with the cost being increasing deflation, while the U.S. accumulates higher and higher sovereign debt. The combined impact of both processes could end up having a devastating geopolitical impact on the United States."

The key words there are "DEVASTATING GEOPOLITICAL IMPACT ON THE UNITED STATES."

May 31 10:52 PM

[realold:]

Nor did the ridiculous levels of the Nasdaq in 2000 until ..........


On May 30 10:26 PM Sovestor wrote:

> All the bad news and dire outlooks have not been able to shock the
> global markets and US markets. The rules of the game are changing
> or have changed. We are now more bullish on US markets.

May 31 11:30 PM

[ExaminerB:]

The Fed has committed to purchasing $1.75 trillion in Treasury and mortgage related securities as part of the current stimulus program. The Fed creates our money supply and it must be remembered that this is nothing but fiat money. Thus, the infusion of $1.75 trillion (vastly magnified by the "money multiplier" effect we all should have learned about in basic economics classes) will vastly inflate the money supply beyond the $1.75 trillion the Fed will directly create. Unless the expansion in federal debt now taking place is funded by existing dollars held as foreign reserves by China and other sources, the current stimulus program will lead to far greater inflation that we have recently experienced. Say goodby to the value of your retirement savings and remember that inflation is the hidden tax. Also remember that the Fed is well aware of the true effect of it's actions.

May 31 11:49 PM

[Fighting Yoda:]

Lot of commentators suggest- "when the recovery happens there will be inflation". The tacit assumption is there would be recovery, and likely recovery is round the corner a V or a U. This is a very unlikely scenario. The economy likely will be an L - it is all about job losses and consumer deleveraging. We are a credit driven economy when credit vanishes you simply can’t buy – it is end of the road. The much vaunted home ATM is gone – now there is simply lots and lots of debt to repay.

All these green shoots that Fed is watering are actually dangerous weeds - adding more debt to system that is already drowning in debt. It will end very badly, the worst outcome is of course deflation - you lose more and more of everything.

Jun 01 12:22 AM

[milkchaser:]

Is this a prediction or real numbers? If so, what is the time period? Time to go with EEM, I suppose.


On May 30 06:38 PM Donald Ingram wrote:

> Agreed.
>
> World stock markets (BRIC countries) versus S&amp;P 500
> Russia up 72.1%
> India up 51.6%
> China up 44.6%
> Brazil up 39.7%
> S&amp;P 500 up 0.22%
>
> Nuff said.
> On May 30 03:35 PM Jeff Nielson wrote:

Jun 01 01:35 AM

[milkchaser:]

Carlos Lam -- agree with most of your plan except for halving he military. They are there for a good reason, the expense is necessary. Allowing failures to fail is painful, but distributing the pain across the entire American economy (if not the globe) is worse.


On May 31 10:39 PM Carlos Lam wrote:

> On May 31 11:22 AM thotdoc wrote:

Jun 01 01:54 AM

[Carlos Lam:]

On Jun 01 01:54 AM milkchaser wrote:

> Carlos Lam -- agree with most of your plan except for halving he
> military. They are there for a good reason, the expense is necessary.

No, it's not "necessary." We need not play world policeman just in case the Bosnians, Croatians, and Serbs want to kill each other, for example. We don't need troops in Germany, the UK, and Italy any more to guard against an invasion via the Fulda Gap. Having a large standing army--something which the Founding Fathers would find distasteful--is a luxury, much like the Smithsonian and a space exploration program. In the end, though, that's beside the point: We cannot afford it.

Jun 01 12:58 PM

[Blair Dehuff:]

Trying to guess between long term deflation or hyper-inflation is like trying to pick between two very bad no win scenarios in order to guide your investments in the right direction. Sometimes the best "decision" is to do nothing at all in response to doomsday forecasts (which rarely play out anyway). For example, I don't buy gold as a hedge against hyper-inflation. Reason: I would never buy enough gold as a percentage of my portfolio to make a real difference. So what if you hold 10% in gold and the remaining 90% of your portfolio gets creamed? Meanwhile your 10% in gold is just a highly speculative gamble which guarantees you nothing. Example: I hold very few stocks, and what little I do hold is not in the US market. Belief that theUS stock market will sooner or later eventually come roaring back just because it is now so low is not necessarily good logic. The new "normal" for the US stock market could be just a sideways drift for many years to come. Long term hyperinflation or deflation scenarios make little difference in ths. Both camps could be (and probably will be) wrong.

Jun 06 07:28 AM

[spqrusa:]

On May 31 04:28 AM spqrusa wrote:

> Ok - put away the crystal ball and let us all get back to earth.
> Even with all the added zeros on Fed balance sheets, inflation would
> only occur if those added zeros pursue commodities. With the declines
> in manufacturing, increased savings, the general retrenchment of
> consumers, and moderated demand in emerging economies, we don't see
> significant long-term movement on raw materials.

You seem to put a lot of stock in the American consumer. With household debt at 100% of GDP, he is not coming back for a long time. The 2.5 billion people in China and India, though, WILL consume, though. Those nations' middle classes are tiny compared with ours, but their combined populations are more than 8 times our own. Even if a small percentage of their populations are middle class, that will be a significant consumer base. These Chinese and Indian consumers, then, will certainly be purchasing cars, consumer products, and energy.

Carlos - I don't put any "stock in the American consumer". You must have confused my post with someone else's post. I think there is a general retrenchment of consumers in America, i.e. they are wary of returning to go-go spending attitudes.

I very much agree that the emerging economies consumer's will power the distant future. But you have to remember that GDP/head and Spending/head in the emerging economies still has a long way to go before they create a comparable "middle class" - maybe 20-30 years before they reach parity with USA/EU regions assuming the same relative growth/wealth rates.

Jun 09 12:01 PM