Credit is like cocaine for an economy. It makes the economy feel good, while destroying its health. The Fed has been pumping cocaine into the US economy for nearly 30 years now. Every so often, the failing health of the body makes itself known – in a crashing NASDAQ and then a crashing housing market. The Fed promptly turns up the drip and the body responds, burning more muscle tissue to sustain itself.

Of course, this can go on for quite some time. But the point when the body can no longer respond to the drug is deadly. Despite unlimited support for housing prices, the best that the Case -Shiller report for October could show was flat. More timely reports show that prices have begun to fall again. Even though house prices are receiving a direct subsidy, they can no longer respond. The Treasury sneakily announced over the Christmas holiday that it was removing the cap on support to Fannie and Freddie, probably in anticipation of another wave of defaults.

Massive speculation continues in stocks and commodities. Oil continues to rise, despite a queue of tankers storing oil that now measures 26 miles long (if all in one line, which they aren’t, of course). Everyone seems to think that Bernanke will pump unlimited credit (correct) and cause a boom (wrong). Employment remains miserable, consumer spending is dismal. Look out below, the end will come without warning. Sauve qui peut.

“Just a flesh wound”,” said the Black Knight as his arms and legs were lopped off. Sales of new housing were terrible, the gain in GP was cut drastically, durables were pathetic, but none of that matters to the pumpers. The few who try to rationalize the irrational simply repeat “must be an outlier.” Zero Hedge noted that 100% of the gains since mid-September have been achieved after hours, when liquidity is missing and a few bucks can make for a gap up in the morning. The HFT boyz keep the days flat by their eternal scalping, and the bonus babies take care of themselves. 

All the ingredients are in place for a panic. Read Hussman’s weekly. So I hold my position and wait.

Anyway, Merry Christmas!

One of many stories about the ongoing depletion of our fisheries. From the NYT, “A Fish Oil Story“:

Nearly every fish a fish eater likes to eat eats menhaden. Bluefin tuna, striped bass, redfish and bluefish are just a few of the diners at the menhaden buffet. All of these fish are high in omega-3 fatty acids but are unable themselves to synthesize them. The omega-3s they have come from menhaden.

But menhaden are entering the final losing phases of a century-and-a-half fight for survival that began when humans started turning huge schools into fertilizer and lamp oil. Once petroleum-based oils replaced menhaden oil in lamps, trillions of menhaden were ground into feed for hogs, chickens and pets. Today, hundreds of billions of pounds of them are converted into lipstick, salmon feed, paint, “buttery spread,” salad dressing and, yes, some of those omega-3 supplements you have been forcing on your children. All of these products can be made with more environmentally benign substitutes, but menhaden are still used in great (though declining) numbers because they can be caught and processed cheaply.

For the last decade, one company, Omega Protein of Houston, has been catching 90 percent of the nation’s menhaden. The perniciousness of menhaden removals has been widely enough recognized that 13 of the 15 Atlantic states have banned Omega Protein’s boats from their waters. But the company’s toehold in North Carolina and Virginia (where it has its largest processing plant), and its continued right to fish in federal waters, means a half-billion menhaden are still taken from the ecosystem every year.

For fish guys like me, this egregious privatization of what is essentially a public resource is shocking. But even if you are not interested in fish, there is an important reason for concern about menhaden’s decline.

Quite simply, menhaden keep the water clean. The muddy brown color of the Long Island Sound and the growing dead zones in the Chesapeake Bay are the direct result of inadequate water filtration — a job that was once carried out by menhaden. An adult menhaden can rid four to six gallons of water of algae in a minute. Imagine then the water-cleaning capacity of the half-billion menhaden we “reduce” into oil every year.

Meanwhile the press and politicians argue about “climate change.” Used to be global warming, but that failed to materialize. At best bad science, at worst fraud. Hard to tell which, but really doesn’t matter. Just more misdirection, aimed at distracting the increasing number of folks who don’t care about abortion and gay marriage.

A second Senator exhibits at least a smidgen of a clue. Unlike Time magazine. Oregon’s Senator Jeff Merkley:

“Tomorrow, I will vote against confirming Ben Bernanke as Chairman of the Federal Reserve. The reason, in short, is that as Chairman, Dr. Bernanke failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families.

“My decision is based on my fundamental belief that our economy cannot recover if we do not put Main Street first.

“Our nation is just beginning to emerge from the greatest financial crisis since the Great Depression, and there is no guarantee we will continue on the road to recovery over the long or short terms. Unemployment remains far too high, credit is unavailable to too many businesses, and families are plagued by falling home prices and high foreclosure rates. Even as we move forward with our efforts to get our economy back on track, it is critical we carefully examine what led us to this point.

“For too many years, federal regulators turned a blind eye to signs of an impending financial crisis. Tricks and traps proliferated in the credit card and consumer lending industries. Predatory mortgage loans exploded, fueling an unsustainable housing bubble. Regulators lifted rules requiring banks to keep adequate capital, and a laissez-faire approach to securitization, derivatives, and proprietary trading encouraged excessive risk-taking on Wall Street. As a member of the Board of Governors, Chair of the Council of Economic Advisers, and then ultimately as Chairman of the Board of Governors, Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.

“These failures are very relevant to the future. We need economic leaders who understand that the ultimate goal of economic policies and the key to meaningful economic recovery should be financially successful families, not oversized Wall Street profits.

“Indeed, it should be recognized that although Wall Street prospered in the short-term from reduced leverage requirements, securitization of faulty mortgages, and the explosion of derivatives, Americans did not. The expansion that occurred from 2002 to 2007 became the first economic expansion in which working families were worse off at the end than at the beginning. This is not a path that we can afford to travel again.”

Thank you, Senator Merkley.

Core CPI was flat this morning, although food and energy prices were higher. This probably is a reflection of the underlying weakness in the economy, and a leading indicator of a roll over into outright deflation early in 2010.

Crude oil prices are in an established downtrend (20ma below 50ma), while ag commodity prices seem to have settled back into the range that they traded in before the 2008 commodity spike. So it is probably crude which will lead the CPI headline number into negative territory.