The above is a headline from today’s WSJ.

Prices are going up, driven by asset inflation - but wages aren’t, held down by overseas competition - outsourcing. As a result, according to Paul Kasriel at Northern Trust, households ran a record deficit in 1Q2005. At an annual rate, households spent $322 billion more than they took in. This money was, of course, borrowed from other sectors.

This is stagflation. A recipe for disaster. Last time, it took 18% interest rates to stop it. This time, probably not, it will collapse from debt repudiation.

Be careful out there.

Now that they’ve got the bankruptcy bill through, the inevitable: Credit Card companies are doubling the minimum payment

And just a note, Jeremy Grantham has a new letter out - well worth the read as always; GMO Letter

Just read that the QQQQs and the SPYs can’t be borrowed to be shorted. This is because the insider boyz have been shorting them naked (not bothering to actually borrow stock to sell) to the extent that the “fails” (to deliver) have gotten out of hand. Doesn’t this industry realise that eventually they are going to get creamed by the outrage when they are found out?

BTW, CDPD access to the Internet (9.6K over a cell connection) is just about useless, I found out on this recent trip. Sloooow.

Economic data - notably a terrible durable goods orders this morning, declining chain store sales and consumer confidence yesterday - are showing that the consumer is probably rolling over. If that is the case, this bubble is history. Futures seem to agree.

The Fed’s meeting minutes got the stock and bond markets all excited today based on the staff’s analysis that inflation wasn’t a problem. The markets interpreted this to mean that rate rises would continue the steady 1/4 point per meeting pace for a while, and then stop at some nirvana point.

Inflation isn’t a problem because wages aren’t going up and the measurements are biased. Competition from overseas, both in direct terms and in outsourcing, has flattened wages. The price indices the Fed uses don’t include financial assets and housing (because equivalent rents are used, not the price of houses), and typically they also eliminate “volatile” food and energy. To squeeze any hint of price increases out of the rest, “hedonic adjustments” and “substitution adjustments” are used. These deflate price increases by supposed improvements in quality or by, for example, substituting hamburger for steak in the index if steak gets too expensive.. Inflation measured in this way is not going to be a problem.

Leaving aside the measurement distortions, the labor demand isn’t there to ignite a wage/price spiral. Instead, the consumer will be gradually squeezed to death between flat or declining incomes and higher prices for food, energy and housing.

The Fed could raise interest rates to rein in these costs. But it won’t because it knows that to do so would quickly topple the financial markets. By maintaing the present “measured” pace, the Fed will allow the unmeasured inflation to grow unchecked, leading to a future collapse of demand and pricking of the credit bubble. But Uncle Al hopes that will be on someone else’s watch. Poor Ben. He has mentioned dropping money from helicopters in order to counter deflation. He’s better get his fleet together.

The Deutsche Bank analyst quoted in the previous post looked pretty good when Ford announced after the close that it was cutting its 2005 profit forecast from $1.75-$1.95 to $1.25-$1.50. I expect further lowering as the year goes on.

It is not far-fetched, IMO, to expect that both Ford and GM will at least threaten, if not file, bankruptcy this year, in order to break the crippling grip of the UAW.