I think retailers knew this year would be a challenge. Consumer attitudes are changing (housing expenses, rising taxes, inflation, medical expenses, cost of utilities???). Disregard the cheerleading as exactly that; I know they sense that all is not well.

In the past few years the major chains have extended the holiday season to the point of being ridiculous, making the consumer feel more and more like a target. It seems the Christmas season now begins at midnight on Halloween. This year, I began seeing Christmas items before the leaves even began to fall! My six-year-old son (who, like all first-graders, LOVES Christmas) said after a visit to the mall in early November, "This really isn't fair to Thanksgiving." I think his point of view is becoming popular. People are disgusted by the rampant consumerism (those missing their turkey to line up at Best Buy excluded.)

I've spoken to quite a few people who are trying to "not get so crazy" this year. I, too, have not had any problems getting a great parking spot at the mall (in previous years I practically needed a shuttle service!) Grab Bags seem to be more popular and a large number of parents in my area (middle to upper middle class) are really scaling back, focusing on buying a few special gifts and then spending time with their kids making cookies and decorating ornaments. Everyone (yes, everyone) I've spoken to is buying less and trying to come up with interesting, personal gifts (meaning not something that would be found in the aisles of Target). I've noticed a reticence to spend money on "little extras".

I'd like to think this is coming from a good dose of true Christmas spirit, and it may be, but I think a fair amount of us are really strapped. At the close of 2006 we are taking a hard look at all the ways we took it on the chin this year (gas, groceries, medicine, utilities, property taxes, resetting ARMs, etc.); and deciding that starting a shaky looking 2007 with hefty credit card debt probably isn't a such a good idea. I think that message is finally filtering through our thick American skulls!

Today¹s post (12/19/06) is near and dear to my heart. I read Imperial Hubris: Why the West is Losing the War on Terror by Anonymous over two years ago and it is clear the author was right on the money. I also read a book that I can no longer find in print Vietnam: A Thousand Year History (I don't remember the author). What is similar about Iraq and Vietnam is that we didn't understand the people and the cultural history of either society. This is one of the many "checkables" Anonymous discusses that this administration failed to take the time to know let alone consider in their rush toward madness.

Side bar: I have observed that if a man is poor or of modest means and unwise, suffering is limited to himself and his family. If a man is unwise yet wealthy and powerful he can make the world suffer.

This administration never considered what Saddam's role was in Iraqi society and the region. By the use of terror he controlled any sectarian conflict to the point where it didn't exist. He was the only check and balance for the predominantly Shiite Iran. Sectarian divides among Muslims is long, deep, and bitter. It would not have taken much to see that once the lid had been taken off the box of sectarian chaos would ensue. We see it today in other countries. What made this administration think it would be any different in Iraq?

At one time pre-emptive warmongers were the laughing stock now their madness is policy?

The gentlemen with whom you spoke might as well have totaled the daily worldwide death rate to rationalize (marginalize?) the almost 3000 young men and women who have paid the ultimate price for *something*. But these men and women were not the victims of arbitrary fate; they were deliberately placed in harms way by a government they trusted not to waste their precious lives. When one pays a high price, something of equal value is expected in return. There is no way to honor their sacrifice as the mission was flawed from the beginning and therefore doomed to failure. We will have to come to terms with the fact that these heroes died for nothing.

Has either of those two men heard the sonic crack of a bullet passing their head or heard the shriek of an incoming mortar round? Have they ever gazed into the lifeless eyes of their best friend with whom just hours before they were laughing and playing cards? How can we calculate the value of one life let alone thousands of lives?

Let us not forget the many Iraqi dead. Have any of those two men seen the terror and anguish in the face of a mother or father carrying their mortally wounded child, their precious gift from the Almighty, in their arms as they frantically look for someone, anyone to help them?

We went to Iraq on the premise of WMD. When nothing was found we heard that we dethroned a terrible dictator. We tried to link terrorism to Iraq and failed but now it is the central front in the war on terror. Did it become so before or after we invaded? And now we talk of a surge in troops. I fear a surge in troops will result in a surge in combat related deaths. And should this fail, and I am almost certain it will, the question remains, how do we extract ourselves from this folly?

So far we have had distortions, omissions and outright lies told to us to go to war in Iraq. We have had the misfortune to marvel at mindless slogans that don't invite critical analysis, the bungling of and sheer incompetence in the handling of this war. We have had direct attacks on Constitutional freedoms via the relentless power grabs by the executive branch not to mention the suspension of habeas corpus for non-citizens.

We have had outright dereliction of duty of the Republican Congress to exercise oversight but I guess they would have to spend more time in session to do their jobs. At what point are Americans going to call for impeachment? Once again, Nixon faced impeachment for far less than this administration. When does blind hubris crossover to criminal malfeasance? All this and a global economic tsunami is rushing onward with the U.S. at the epicenter as an afterthought.

My teenage daughter watches this reality show called Sweet Sixteen, where wealthy parents throw parties and buy gifts for their children normally reserved for royalty. Most of this is acting but to me it sends the wrong message. What ever happened to humility? What the ultra-wealthy are doing is but a symptom of a condition that is epidemic in this society.

This same symptom entices people of lesser means to load up on debt they can never repay to live lives they cannot otherwise afford. I caution my daughter to not get any ideas from this show. Her trader daddy and nurse mommy will not lavish her with six-figure parties and gifts. She will earn her wealth the old fashioned way. Building financial security for oneself and his or her family through high achievement IMO is a spiritual journey; I'll bet this concept is not taught at Ivy League business schools.

I spent 18 years proudly serving my country. Lately I grapple with myself to come to some understanding of what has gone wrong. What can I do to inspire my countrymen to take back this wonderful Republic given to us by our founding fathers from the greedy, power-hungry profiteers and ideologues? Harun I.

Long-time correspondent S.B. recently recommended the book The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan. Of the many intriguing dollar-trade topics, let's consider this one:

As we have already seen, the US Current Account deficits are causing an explosion of the global money supply which, in turn, has been responsible for the rise of a series of bubble economies that leave systemic banking crises and deflation behind when they inevitably implode.

In other words, the United States’ Current Account deficit, by flooding the world with Dollar liquidity, is creating (in fact, has already created) a global credit bubble of enormous proportions. It is only a matter of time before something will have to give.

Either government finances will snap under the strain of bailing out failed banking systems, or deflationary pressure stemming from global excess capacity will undermine corporate profitability to such an extent that unemployment will soar, causing a backlash against free trade, or the rest of the world will eventually lose faith in the ability of the United States to finance its ever growing indebtedness and, in a panic, dump their US Dollar-denominated debt instruments, making it impossible to finance further deficits.

One way or the other, this global credit bubble will—like every credit bubble before it— come unwound, the Dollar will lose much of its value, and the US Current Account deficit will correct.

Unhappily, the correction of the US Current Account deficit will have extraordinarily damaging impact on the global economy. The world economy has grown dependent on exporting to the United States. At 500 billion Dollars, the US Current Account deficit is the equivalent of almost 2% of global GDP—and, that’s before any multiplier effect is taken into consideration. (NOTE: this was written in 2003; the deficit is now $866 billion.)

The inability of the United States to indefinitely expand its indebtedness to the rest of the world at the current rate of a Million Dollars a minute means that Asia’s era of export led growth will soon be coming to a close.

If policy makers don’t come up with a new source of global aggregate demand to replace that presently created by the US Current Account deficit then the global economy will not be able to avoid a severe and protracted deflationary slump.

This, therefore, is the point I want to stress: trade imbalances of the magnitude experienced over the last 25 years cause unsustainable economic bubbles in the surplus countries which subsequently implode, leaving behind wrecked banking systems, heavily indebted governments, excess capacity and deflation.

On February 27, 2003, Deputy Defense Secretary Paul Wolfowitz rejected the claim of then-Army chief of staff General Eric Shinseki, now retired, who predicted that "Something on the order of several hundred thousand soldiers ... would be required" to provide adequate security in a post-invasion Iraq. Wolfowitz said that Shinseki was "wildly off the mark," and that he was "reasonably certain that they [the Iraqis] will greet us as liberators, and that will help us to keep [troop] requirements down." Wolfowitz's position was shared by Defense Secretary Donald Rumsfeld, who predicted that post-war troop levels would be lower than what was required for the invasion of Iraq.

Harun I.'s note in your December 13 posting on holiday shopping (or the lack thereof) prompts me to offer another bit of anecdotal information. Except for groceries, I do most of my shopping on-line -- books, music, movies, clothes, contact lenses, medicine, computers, wine, even big-ticket items like living room furniture -- so I get a ton of e-mail offers from the sites that I've done business with. What has really struck me over the past few weeks is not only the sheer quantity of the "special offer" e-mails coming in, but the increasingly generous concessions that on-line retailers seem willing to make, especially in the area of shipping ("free shipping for the next five days!" "free FedEx second-day through the 17th!" "free shipping on all orders over $50!"). Even L.L. Bean, which years ago disappointed me when they started charging for regular shipping, has had to make concessions for the holidays. The overall tone strikes me as almost desperate -- you don't carpet-bomb the ether with discounts if business is booming. Perhaps this is another little indicator that the canary down in the coalmine has been feeling some shortness of breath lately?

I forget how exactly I happened upon your blog, but it's been required reading now for at least half a year -- thanks so much for your excellent work.

J.M.

I went out mid last week, early in the mid evening (after rush hour) to do some shopping. Hit Best Buy and Target. I was shocked: it was dead.

It was not Black Friday, but we're talking mid December here.

I've seen nothing like this in my life.

The official reports stink to high heaven, which I had already gathered when noting that no one could decide whether Black Friday sales were up 22%, or 12%, or maybe just 6%. No one could get the story straight. Yet at the same time Wal-Mart revenues were down; Best Buy, down; Home Depot, down, etc. Wal-Mart alone is $330bln of the economy per year... it overshadows everything else. That should be the only bellwether needed.

Aaron K.

Exchange-Traded Funds are essentially open-ended mutual funds that trade on stock exchanges. Each fund is a trust that holds specified assets, typically shares of stock; the shareholders of the ETF are the trust’s “beneficiaries.” Where an ETF differs from a closed-end mutual fund is that the “trust agreement” requires the managers of the ETF to intervene in the market to keep the market price of each ETF share within a narrow range around its net asset value (value of the trust’s assets, the underlying stocks, divided by all outstanding shares). Note that closed-end mutual fund shares, unlike ETF shares, may, and do, sell at significant discounts from, and premiums to, their net asset value.

Here’s how the pricing mechanism works for ETF shares. Let’s say an ETF has an NAV of $100 and the shares of the ETF are trading at $100. Assume that several investment fund managers decide nearly simultaneously to sell their holdings of the ETF. These investment funds then put all of their ETF shares on the market. At this point the number of sellers of the ETF shares overwhelms the number of buyers and the floor specialist, to attract more buyers, pushes the price of the ETF down to say, $95. At this point some other investment fund managers may see a bargain opportunity (shares with a liquidation value of $100 trading at $95) and buy the ETF. If this occurs the price of the ETF will move back up to the NAV.

What if no other investment funds jump in to buy at the discounted price? At that point the managers of the ETF will cause the ETF itself to buy the shares. These bids will then move the ETF price upwards towards the NAV. Where will the ETF get the money to buy back its own shares? Eventually it will sell the stocks that it holds. These sales may then push down the market price of the underlying shares.

So, when many, many ETF sell orders go to the exchange floor there are several pricing factors at work: some investment funds selling the ETF shares, other investment funds attempting to get a bargain, the ETF buying back the ETF shares, and the ETF selling its assets (the underlying shares). Eventually an equilibrium is reached where the market value of the ETF share is approximately the NAV. You noted correctly that this equilibrium may be at a lower NAV. It all depends on the liquidity of the shares of the ETF itself, the relative size of the ETF’s holdings, the liquidity of the underlying stocks, and the extent of the imbalance between buyers and sellers of the ETF.

When several investment funds decide to buy an ETF the process operates in reverse; the ETF issues new shares and buys the underlying stocks.

So large purchases and sales of an ETF, just like large purchases and redemptions of an open-ended mutual fund, can affect the market value of the underlying assets be they stocks, bonds, or commodities.

If you want to find out the details for any specific ETF, read its prospectus and governing documents. Also, I believe an ETF can borrow short-term to maintain market liquidity without having to immediately place on the market the assets that it holds.

Peter F.

IN HIS LATEST CHILLY BLAST FROM UP New Hampshire way, Fred Hickey, proprietor of the wonderful High-Tech Strategist and member of the Barron's Roundtable, muses on the disconnect between Wall Street and the real world, like Nashua, which he calls home. The differences have never been greater, he laments, and the wealth disparity is at the highest level in history. By way of illustration, he cites the fact that the average pay of the top 126 hedge fund managers last year was $363 million, up some 45% from the year before. He doesn't tell us what the annual paycheck of the average working stiff in Nashua is, but we suspect it's somewhat less than $363 million.

Fred's point is that the enormous financial gap between Wall Street and Main Street obviously colors their views of the economy and how easy or hard it is to make ends meet Because he's more attuned to vox populi, he doesn't go along with the notion common in the Street that everything's fine and dandy. And he cites the recent Democratic sweep in the elections as proof that it isn't.

The discontent he detects among the populace bodes ill both for the economy and the stock market and he's a growling bear on both. And he's also flat-out bearish on his special preserve, the electronics sector.

Anecdotally, my wife reports holiday shopping traffic is down substantially in my area. She is hearing the same thing from her sister and her colleagues. Of course there may be an increase in online shopping. I think we would agree that online shopping will not make up for the overhead of bricks and mortar stores. I went out with her on Black Friday and was surprised that it we had no problem with parking or checkout. The mall was normal.

As I drive around I notice European and Asian luxury SUV's and sedans parked in the driveways of even the most modest of houses. All this free money must seem pretty good...for now.

As you say the economic reports will say everything is just fine. Oh what a wonderful world.

Can't think of what to give people who already have everything? Hate shopping? With Amazon.com gift certificates, they pick their own gift and love you for it.

Don't waste money on useless gifts this year! Buy yourself some investment gold instead at the online gold vault BullionVault.com.

As you have Posted stuff RE: Manipulated Stocks / MKT, just have a close look at yesterday's "Moves" in MSFT ! It traded "Flat", at about $ 28.90 for ~ 5.5 hr, & then started UP in last Hour, followed by a "SPIKE" up ~ 2% ( ~ $0.50 to $ 29.40 ) in last ~ 15 min of trading -- TWICE Avg Volume to ~ 108 MILN shares, vs 59 MILN ; I found it "only takes" ~ $1.50 BILN & ~ 50 MILN shares to move MSFT ! What is your take ??! ( NOT, orderly stock pricing ?)

Was reading Doug Noland's recap of Q3 flow of funds when the following caught my eye - it's from Daniel Hauck at Bloomberg:

"Stock sales by America's corporate chieftains exceeded purchases last month by the widest margin since 1987... executives...in aggregate sold $63.18 of shares for every $1.00 they bought in November..."

Seems like you had a comment this last week or two about how the media always paints a rosy picture.... well, I was shocked this week: on two occasions, (one tonight, just a couple of weekends until Christmas) out at stores for Christmas shopping. Almost completely deserted, no people at all. Early December, freezing cold where I am at and Old Navy is selling outerwear 50% off and no one was buying. Huge discounts on clothing. At a mall - most stores I passed had clerks standing idly about, no customer in sight.

Yet I imagine that I will soon read in the paper or see on the TV that sales are just dandy. Just not sure that people are waiting for the great deals - this year just does not seem like shopping seasons of recent memory.

Could it be that people are already tapping/tapped out financially - even on the credit card? Honestly, it was almost eerie this week, a bit surreal.

Just some thoughts that seemed worth sharing.

Best regards,

Bob K.

This is just plain wrong:
"When someone sells an Internet ETF, then the ETF has to sell its shares of Google, Yahoo, etc."

ETF shares are held in a trust for a specific length of time. The underlying stocks are not sold when an ETF is sold.

The most interesting thing so far came from Bill Gross the Pimco bond manager. I think he is saying that bond yields will drop and risk will precipitously increase. Missed him on msnbc today but there was a quip about him saying that yields would go to 2s and 3s long term. Basically stagflation like japan had after its bubble... This is a bit scary. So far he is very very on the money. He said that yeilds would hit 5% and go back down on treasuries and thats basically what happened. Reality Check (by Bill Gross)

Investment U article on high-yield bonds (very long article but good to some degree)

Excerpt: "Bill Gross predicts a 3% to 4.5% yield on 10-year nominal Treasuries into the near future; but this only approximates inflation. Gross draws a parallel between U.S. Treasuries and the vulnerable "king" of U.S. debt securities, stating he is "content to acknowledge our reigning King's clothes, the poor quality of the stitchery, and the partial exposure of his bare bottom... "


Excerpt: "The deflation warnings have been growing louder and louder in recent years, further fueling the U.S. Treasury bull market and justifying ever lower long-term Treasury yields."

My opinion is if we hit deflation a lot of banks are going to go down. There would be a RTC or whatever that was called the US govt did to take over S&L's and sell their loans. To some degree deflation makes perfect sense if real yield isn't given to investors to compensate for funding the gov't and hiking the interest rate is not doable deflation is definitely a way out. The major banks with super-sized credit card portfolios will become beneficieries as well as take a hit and perhaps be net/net positive a little. The medium-sized banks are going to get skrewd if they overlent to mortgages and once defaults go to historic highs 2-3% bye bye Washington Mutual... (yes I do think it will go down as well as IndyMac). WaMu has been selling its service rights like crazy and euro denominated debt lately.


(CHS Note: Albert sent in two other interesting links which I view as related to the milieu of leverage and debt which has inflated risk to the breaking point: an explosion in private and governmental debt, plus an attitude of entitlement--that the government is supposed to bail us all out of our laziness, poor choices and greed:)

U.K. debt addiction interesting paper but somewhat depressing. how young people get into debt addiction in England but I'm sure it applies to US as well. I like how they defined learned helplessness and it being stimulated... government dependency index

As part of tour of the Southwest we were checking for over-building. Still lots of building every place we went. Bullhead City has developments going up everyplace. What a God forsaken place. I really like Flagstaff and there is a lot of building there, but there are no jobs. Who is going to buy those homes?

The most ridiculous price on a house I saw was in Mesilla, New Mexico. For those that do not know Mesilla is next to Las Cruces, NM. Las Cruces was named about 3 years ago as one of the top 10 places to retire to in the US. I personally like it far more than Phoenix. Anyway, Mesilla is a very historic town that time forgot outside of Las Cruces. I saw a little shotgun shack about a block off of the town square that had been remodeled and they wanted $200,000 for it. We are talking about a place with no lot and about 6 inches on each side from its next door neighbors. Probably 2 bedroom and 1 bath.

Mesilla reminds me of one of those Mexican (it was part of Mexico for a 100 years) towns in a Western film where a stray starving dog runs down the street right before the Magnificent Seven ride into town. It has maybe 3 places to get something to eat, a convenience store and 2 gas stations. I doubt that it has a supermarket. However, it is nestled against the Organ Mountains and it is pretty. I just kind of laughed to myself and shook my head. If there is a job in Mesilla or Las Cruces where you could make over $50,000 a year I would be surprised. Jobs, we don't need any stinking jobs! We have options ARMS! That is a poor imitation of "The Treasure of Sierra Madre."

Excerpts from the story: "Merit did put loan officers through a 19-step program. "Loan Officer 101" was 15 minutes long, as was "Mortgage Glossary." Thirty minutes were devoted to "10 Step Loan Flow."

Saulness wasn't impressed. She sat next to two 18-year-old loan officers. "They didn't even know how to read a credit report," she said.

Barry said wryly that many "had no idea what product they were selling, but they knew how much money they could make." Merit employees proudly posted their résumés, plus photos of their luxury cars and drinking parties, on various Web sites. One loan officer had come to work fresh from being a Hooters Girl. Another solicited clients for two endeavors: writing mortgages for Merit and selling marijuana paraphernalia on the side.

Indeed, several Merit loan officers boasted online that doing drugs was a favorite pastime. "Let's get hopped up and make some bad decisions," wrote one beside a photo of himself grinning broadly."

"I have listened to the horseshit concerning housing for 35 years. It is impossible for anyone I have talked to, to imagine a time when houses will not increase in price.

However, just for a moment imagine a scenario when houses are not going up in price and they won't be going up in the future. Now how many people will commit to a thirty-year mortgage they can't afford. Maybe half of the current mortgage holders?

Houses are now perceived to be a financial asset, buying a house is considered to be an investment. A house sits out in the rain and cold and sun for 30 or 40 or 80 years and is supposed to be worth more.

How about a time, now, where houses drop by 80 per cent over the next 10-15 years and stay there. How much will someone making a Wal-Mart $8-$9 an hour salary be able to pay for a house? Three times annual gross would be about $50,000, and an $8-$10 an hour job may be a good job in the future.

Once people realize a house is not a financial asset the final wave down will begin and its anybodys' guess how low it will go. The wave length up has been about 60-70 years, how long will the wave length down be?"

Riley T.

As I watch the market rally further today, I sit back and wonder if the rest of the world is just doing meth or has everyone else turned into a pod person. As you mention below it is rather unbelievable how the press and everyone else just accepts that the enormous supply of unsold houses will be sold. It takes years for a housing boom to bottom out. I see where foreclosures in numbers (not percent) have hit an all time high in Denver and also see similar statistics for Dallas and these are not even bubble areas. This is still overhang from the telecom boom in the late 90's. It shows how long the housing bust can drag on.

The other thing I wonder about is all of the LBO deals for big dollars. It really appears that these guys are buying at the top.

It all just leaves me in a state of wonder. Is it me and a few other people or has the rest of the world lost its senses? Someone described this like a snail crawling towards a spinning circular saw blade which I find quite apropo. It is just wearing me out getting there.

Just sitting here in wonderment.

The SafeHaven link below has some USA MKT / DJIA Charts and a "Megaphone (TOP) Pattern" (which is a FRACTAL Pattern), which seems to form at MAJOR MKT TOPS.

Has the DOW & S&P 500 "Rally", from 2002/ 2003 to 2006 been that of a "BEAR (Trap) RALLY", OR is there More LEG-UP to this, to carry Forward into 2007 ?

The link below has some "VITAL CLUES" to this in the Form of a "MEGAPHONE TOP" Pattern, which incidentally does agree with your MKT PUT Option for the DJIA .... BUT a KEY matter is the "TIMING". MY best guess is that this "Bear (Trap) Rally" MAY carry into 2007, before A "FREEFALL" from ~ 12,000 to 12,500 DOWN to the 8,000 to 6,000 level for a 1/3 rd to 1/2 REVERSAL off the DJIA TOP.

Lots of good reasons for this "MKT CRASH": US Debt and US Deficits; Collapse of USD$; 2007 Recession in US GDP; Collapse of US Housing Bubble; the US at WW III with the Muslim Terrorists in Iraq , Iran, & Mid-East; and US consumers end their Spending Spree.

MAYBE these Charts should NOT be POSTED, as the market Crash could become reality, as a PANIC for EXITs, ensues?

Something I've noticed this week with the stock market that sure makes me think someone is manipulating the indexes - example is today - the Dow, Nasdaq, and S&P were negative most of the day but then shortly before the market closed the Dow and S&P rose to end the day positive which causes ridiculous headlines like this: Dow Rises to Another Record High (Yahoo News)

Anyone just reading the headlines is left to think that we had a booming day in the markets, and I'm convinced it's being manipulated. Now I don't know how it's being done or by whom - or who would benefit from this? Just thought this would make for an interesting topic for your blog. I've seen this happen two times this week and it sure looks contrived.

Really enjoy your straightforward and interesting site. It's one of the first sites I visit every day. Keep up the good work.

David S.

If George Muzea is right, Monday's decline is just the start. Muzea, who runs Reno-based Muzea Insider Consulting Services, has been negative on the market for just two weeks -- the first time he has been bearish since July 24, when he turned positive. Muzea makes market calls based on the activity of corporate insiders. He's considered the grandfather of the insider-tracking industry, generally keeping a low profile to all but his high-paying hedge fund clients. But, according to Muzea, this is likely the beginning of a sharp and steep decline not unlike the one that hit the market last spring -- and maybe worse.

Before you go calling this a scare tactic on a down day, keep that Muzea has a record, and he is basing his forecast on a history of following the market as it relates to the actions of insiders. "If you want to lose money over a long period of time," he says, "buy when insiders are selling and the public is bullish."

"A few days ago, you wrote:

4. Full employment eventually raises labor costs. In case you haven't noticed, the economy is basically at full employment. Sure, many of the jobs are not great, many are low-paying, and many professionals are under-employed. But to someone who remembers the 15% unemployment of 1981, well, this is as close to full employment as reality can manage.

Actually, I don't think this is the argument to make. It is becoming more and more clear, in my opinion, that employment is only weakly connected to inflation, if at all. Stagflation was the first time this was "learned" in the modern era in this country. But it should have been learned earlier by looking at low unemployment levels in Switzerland (2-3%) and the lowest levels attained by Hong Kong (~1-2%, from back in the days before the dollar peg). 4-6% is not "low" in any absolute sense, and based on the example countries just listed, doesn't need to set off inflation. And of course, inflation can be set off anyway at much higher levels of unemployment.

Further, there is plenty of evidence that employment statistics are being manipulated to hide the true level of unemployment. John Williams at shadowstats.com has more details. When I look around me I sure as hell see a lot of unemployed and underemployed folks, and the vast bulk of IT people I know who are working doing so either directly or inderectly for the government. This doesn't at all add up to robust private sector employment in my book. The numbers are being goosed and the picture distorted.

I think we're about to see an era where a large chunk of the population is destitute in real terms, but inflation will be set off anyway, at the very least, due to government debt and bail-out spending. In other words, we're headed into stagflation again, not a growth-driven inflation, as one would expect based on the conventional analysis with the current "data". In essence, I agree with you completely (e.g., the Dow is set to fall as fundamentals don't support stock values), but simply don't consider the employment situation to be part of the case for inflation. Rather, the true employment situation is more of a case for stagnation!

I think it is pretty clear that labor costs are *lagging*, not leading inflation. One would expect the inverse to be true if employment was driving inflation.

This has been my working hypothesis for the past year, which led to me look upon the 7% number with suspicion. That view has been vindicated."

Are the Dow Industrials & the S&P500 "topping out" from a Bear Rally, OR will this ~ 4 year rise from ~ 2003 go on more until spring 2007? Jed H.

Every time I look at these charts I wonder how any reasonable economist could state with a straight face that there is a wealth effect. Against gold and commodities, the dollar’s purchasing power has plummeted at a mind boggling rate and somehow CNBC doesn’t think anything is wrong. Why haven’t they put up any of our charts on their screens and discussed their implications?

Are the Dow Industrials & the S&P500 "topping out" from a Bear Rally, OR will this ~ 4 year rise from ~ 2003 go on more until spring 2007 ? Jed H.