March 3

Some Prices Are Up, but Is That Inflation? FRB of Cleveland.

The flexible CPI is intriguing in that, by design, it is likely to show evidence of pricing pressure ahead of the sticky CPI. However, the series is very volatile relative to its sticky-price counterpart and likely dominated by relative price changes. As a result, inflation forecasts based on the flexible CPI perform rather poorly.

While rapid price increases in a few categories seem to have pushed up the headline CPI lately, underlying measures of inflation are relatively low and have only ticked up slightly in the past few months.

Perspective on the copper/oil divergence. Pragmatic Capitalism.

Excerpts from Seth Klarman's 2010 Letter. My investing notebook.

Revisiting the Shiller P/E. Pragmatic Capitalism.

The complexity of Persian Gulf unrest. Stratfor.

Energy Talking Points Series, #1: Three Signs the end of oil exports is coming. American Society of Mechanical Engineers.

Australian debt update. Steve Keen.

Extend and pretend practices attracting SEC scrutiny. Barry Ritholtz.

Budget forecasts, compared with reality. NYT interactive graphic.

What happens if there is no QE3? David Rosenberg responds. zerohedge.

Cash and credit; implications for the markets. John Hussman.

the gap is still too wide between the credit that has been extended and the productive capacity that we have accumulated. Much of that gap has emerged because we continue to punish saving by depressing the rate of return available to investors, while at the same time pursuing policies aimed at consumption rather than real investment, research & development, and other activity that would add to the productive capacity of the nation. Stimulating consumption and speculation have been the life-blood of government policy interventions over the past two years, yet they are exactly the approaches that got us into trouble, and are likely to fare no better in producing better outcomes in this instance. Our problem is not with debt itself (much of which represents productive past investment), it is with imbalances, misallocated resources, distorted financial markets, bad debt held on the books as if it is good, and the quiet reliance on the public to bail out losses that should be borne by the private sector.


I strongly believe that part of the gap between total credit market debt and cumulative gross investment is literally thin air, in the sense that assets are being held on the books of banks and other financials that are not worth the sharpened pencils that are needed to perpetuate the illusion of value. On that subject, we've received a number of notes from observant shareholders pointing out that the Chief Financial Officer of Wells Fargo has inexplicably resigned. I observed several quarters ago that we could observe a wave of fresh risk aversion "at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further," but as I've noted below, the FASB appears intent on preserving the existing set of accounting rules allowing financial institutions to value their assets with "substantial discretion," with no necessary link to market values. So it remains unclear what the true state of the banking system is, and the extent to which further bailouts will ultimately become necessary down the road. It will be important to keep watch on how this develops.