Thoughts

A December Surprise?

An Associated Press report that "Iraq authorities have obtained confessions from captured insurgents who claim al-Qaida is planning suicide attacks in the United States and Europe during the Christmas season" has likely hurt the markets in the last hour.

A senior U.S. intelligence official confirmed that the threat was credible.

The Media Is Not the Message

Nearly every single talking head in the business media offers the identical tactical strategy and ideas.

Industrial Production Shows Some Upside

Industrial production was slightly better than expected, rising by 0.4% vs. consensus for a 0.3% increase.

Importantly, the strength was broad based.

Foreign investment in our financial assets weakened dramatically, but this is a volatile series.

Mortgage Data Dropping

The U.S. housing market faces renewed challenges from rapidly rising interest rates.

Refinancing applications and applications for new mortgages dropped for the fifth consecutive and third consecutive weeks, respectively.

Based on this morning's data, the U.S. housing market faces renewed challenges from rapidly rising interest rates, and so does the retail outlook (and consumer confidence), which is underpinned by the cash from refis which are an important source on personal consumer spending plans.

I continue to be of the view that the swiftness of the rate rise will challenge the smooth and virtuous self-sustaining thesis in the year ahead.

Our country's leadership has taken the easy route and has demonstrated still further that there will be no meaningful movement on our burgeoning deficit. The bond vigilantes smell blood, recognize this inertia and are demanding a price to be paid in much higher interest rates.

Despite the Fed Chairman's protestations (and the cheerleading of Wharton's Dr. Jeremy Siegel), QE2 has likely bombed - so far.

As Bill King wrote last night, the Fed and many investors are victims of Plato's allegory of the cave, a moral about the difficulty of people who exist in a world shaped by false perceptions to contemplate truths that contradict their beliefs. This is why, as Bill scribes, "so many people missed the greatest financial and economic crises since at least Reconstruction."

In the famous simile of the cave, Plato compares men to prisoners in a cave who are bound and can look in only one direction. They have a fire behind them and see on a wall the shadows of themselves and of objects behind them. Since they see nothing but the shadows, they regard those shadows as real and are not aware of the objects. Finally one of the prisoners escapes and comes from the cave into the light of the sun. For the first time, he sees real things and realizes that he had been deceived hitherto by the shadows. For the first time, he knows the truth and thinks only with sorrow of his long life in the darkness.

-- Werner Heisenberg, Physics and Philosophy

Meanwhile the talking heads' chorus of smooth and self-sustaining economic growth has grown ever louder (in the powerful bull), ignoring the warning signs of worsening payrolls growth, the temporary nature of the stimulus, a continued buildup in household savings, a banking system that is still in a healing mode and a worsening housing market (among other issues).

We should be mindful that, with few exceptions, most observers (and that includes Ben Bernanke) missed the 2008-2009 downturn despite the clear and accumulating evidence of economic uncertainty and growing credit risks (and abuses). The analysis of multi-decade charts and economic series convinced most (along with other conclusions) that home prices were incapable of ever dropping, that derivatives and no-/low-document mortgage loans were safe, that there was no level of leverage (institutional and individual) too high and that rating agencies were responsible in their analyses. Importantly, they also failed to see the signposts of an imminent deterioration in business and consumer confidence that was to result in the Great Recession and credit crisis of the last decade.