Even as the chances of healthcare reform passing are rising, the list of fatal flaws in the reform bills gets longer. I've discussed these before, here and here. Here's the summary so far:

Fatal flaw #1: The penalty imposed for not buying a policy is very likely to be less than the cost of insurance for a great many people. This, combined with the requirement that insurance companies may not deny coverage to anyone with a pre-existing condition, means that a large number of people will forego signing up for a policy, knowing that they a) will save money and b) can always sign up for insurance if they turn out to develop a serious medical condition. Thus, the actual revenues will fall way short of projections.

The dollar is up almost 5% from its low of last month, but commodity prices are still rising across the board.

These charts (click to enlarge) show the Journal of Commerce commodity price index (top chart), followed by the four sub-categories of the same index. All are indexed so that their price is equal to 100 at the time the 2001 recession ended.

These two charts (click to enlarge) show year over year changes in the consumer and producer price indices; the top chart shows total, or "headline," inflation, while the bottom chart shows just "core" inflation (excluding food and energy). Energy prices are a big part of the current headline numbers, as the difference between these two charts illustrates.

Looking at all prices, inflation has jumped rapidly from negative to back to where it was on average over the past decade or so (about 2%). But on the margin, the jump is even more impressive. In the past six months, consumer prices are up at a 4.2% annualized rate, and producer prices are up at a 8.3% annualized rate.

Not every sector of the economy is in a V-shaped recovery.

Based on housing starts data so far this year, residential construction is in a U-shaped recovery (click chart above to enlarge). It sure looks like it's hit bottom, but the upturn is relatively anemic.

This chart shows the breakeven inflation rate for 10-year TIPS (aka the market's 10-year expected inflation rate). It's simply the difference between the nominal yield on 10-year Treasuries and the real yield on 10-year TIPS. (Click chart to enlarge)

As should be obvious, after collapsing last year, inflation expectations have rocketed higher this year for a rather spectacular comeback. Inflation expectations haven't completely returned to the levels they were registering several years ago, but at this rate it won't take much longer to get there.

Industrial production has surged at a 9.3% annualized rate since the recession ended late last June. Consumers are getting back their spending mojo, and factories are gearing back up after having shut down in a panic. (Click chart to enlarge)

This is just the standard stuff of any recovery. Factories still have tons of idle capacity, but that just means that revving up production is relatively cheap and painless—no need to go out and build new plants, just turn the machinery on.

<< Go to Why a Strong Dollar Is Not a Problem, Part 1

It's amazing to me that the market seems awfully concerned about the recent rise in the dollar's value. This chart shows what is arguably the best measure of the dollar's value against a large basket of currencies, since it is both trade-weighted and inflation-adjusted. At the end of November the dollar was trading (for the fourth time in history) at its lowest level ever. Today it is up about 3% from that low. How can this possibly be construed as a bad thing?

Here's a graph of the price of a AAA-rated commercial mortgage-backed security index that is published by the folks at markit. Earlier this year, prices fell as low as 56, whereas today they are over 82 and rising. That's an impressive gain, and it comes despite the ever-increasing drumbeat of concern for commercial real estate.

What this means is that the market was way too pessimistic earlier this year about the prospects for commercial real estate loan defaults. Even though defaults are likely to rise next year, they are now projected to rise by less than previously expected. This ties into a reply I made on a recent post comment, to the effect that rising default rates are not likely to be bearish for the market or for the economy, since the market has already discounted those losses. Enormous losses have been booked already in our forward-looking markets; what remains to be seen is whether the actual losses are more or less than what has been anticipated.

This chart puts the past 100 years of inflation into a context you've unlikely seen before. The message of this chart is that the "best" days of inflation are in the past. By best, I mean the times when inflation was low and relatively stable. The best decade, as shown in this chart, was the 1990s, with the second-best being the 1960s.

Here's yet another V-sign (and a very graphic one at that): the impressive strength in retail sales over the past six months.(Click chart to enlarge)

This, despite 10% unemployment and a significant amount of "resource slack" in the economy. What it means is that there are still an awful lot of people working; they have been working harder and more productively, and their incomes have been rising faster than inflation.

According to the Federal Reserve, in just six months following the low of last March, households' net worth has increased by almost $5 trillion, or 10%. Household debt fell by almost $60 billion, while the value of household real estate holdings increased by over $600 billion (yes, increased!) and, thanks to a strong stock market and increased savings, households' financial assets increased by $4.2 trillion since last March.

Moreover, in the six month period ending Sept. '09, household disposable personal income rose by $235 billion, owner's equity in household real estate rose by nearly $1 trillion (yes, one trillion!) and owners' equity as a percentage of household real estate rose by 12%. This is an impressive and across the board improvement in key indicators of households' well-being.

Inspired by Mark Perry, here is my version of the stock market's VIX Christmas Card: the gift of implied volatility that has returned to almost-normal levels. We couldn't ask for much more at this time of the year. One year ago the world celebrated Christmas and New Year's with Great Fear and Trembling, whereas today we are getting ready to celebrate the return of conditions that are much closer to normal. That's a really big deal.