The Market Ticker

So last "long weekend" we get big dump (and a surprise "rate cut"), and this time we see a huge rally on...... nationalizing Northern Rock?!

Or is it Ms. Crack Whore? The futures market is pricing in a full 75 bips of interest rate changes at the March meeting. Another 75 bips? Yep.

It would appear, from where I sit, that its Ms. Crack Whore who is starting to jones just a bit once again. She's in "giddy mode" right now, but don't worry, the "Ms. Nasty" side will soon appear. It always does when the drugs wear off.

Don't look behind that price curtain over in China. Nor in our nation, for that matter. The most ominous portion of that "price curtain" is the trend y/o/y of import prices from China - we are now going into the ninth month since the trend changed and we started to see higher prices coming from The Land Of Slanty Eyes instead of lower ones, and the trend continues to accelerate.

In a word, "duh".

We have dozens of so-called "economists" who have claimed we've had low "inflation" for the last four years. That's a lie - we've had very high inflation, in fact, but we have managed to "export" the effects of it overseas, particularly to China.

Now we're in trouble because not only are we going to suffer the deflationary "must happen" that comes after a hyperinflationary credit creation bubble, but at the same time we're getting the snapback from the pricing pressures we shoved off overseas!

This, of course, along with oil, leads people to talk about "inflation". Well, if you use a price measure for inflation, ok. That's not a particularly useful definition though, because in case you hadn't noticed, the reason your Jeans are $20 at WalMart is because prices have been depressed over the last 20 years or so by outsourcing those jeans to places where people work for a nickel an hour. May I remind you that back in the late 1970s and early 80s when I used to need a pair of jeans they were actually more expensive than they are now?

Hmmmm...

I guess it depends on what you're looking at when it comes to prices, yes? Don't price disk drives or jeans if you're looking for "price inflation", or for that matter, anything electronic, electrical, or similar. In 1991 I bought a 27" - count 'em - "tube" television and paid nearly $800 for it; I may even still have the receipt laying around somewhere. Philips. Nice set. It has long since gone to the great TV graveyard in the sky; today such a set is barely a couple hundred bucks, and an LCD high-def costs less - but has ten times the capability (and picture quality!) I just replaced my old crusty waffle iron and it was cheaper than the one I bought several years ago, priced in dollars of course. How come? Same reason.

Oil? Now there's something that has gone up in price.

What do I think about all this? I think you better pay lots of attention to something the "short bus" riders don't - the TNX, or 10 year yield. Its telling me that we're fixing to have a lot of "fun" in the equity markets quite soon.

Part of the reason is something people aren't talking about at all in the media - that would be the Elephant In The Room, which is the 30 year fixed mortgage rate.

It is higher here and now than it was a year ago, now at 5.82% .vs. 5.77%, and has skyrocketed by a full 40 bips in the last month! 30 year fixed mortgage money is quite-tightly correlated with the TNX!

This is especially nasty for, of course, that sector of our economy that started this mess - housing. And if that Bullish Flag which broke decisively this morning is any indication we are headed to 4.20% on the TNX - 10 year treasury yield - sooner rather than later.

Unfortunately there is no such thing as a free lunch. Risk aversion drives down the yield on bonds as people flee into them, but risk acceptance drive up yields. Sadly for the crooners this entire mess was driven by money that was cheaper than its true risk-adjusted premium, and we have now backed ourselves into a corner where the only way we can have even a fleeting resurrection of that "cheap money" is for the stock market to collapse!

What's even worse for "Da Bulls" is that this rotation doesn't look to be into equities - it looks like people are buying oil and metals with the money coming out of treasuries.

That ain't so good...... and in fact, could be really bad, in that it squicks Bernanke and company's attempt to "manage" things. What brings down commodity prices? A slowing economy. Oops.

Now couple this with willful ignorance of risk as expressed in the VIX moving lower even on days that aren't so good for equities and you have a market that is setting itself up for some truly ugly realities down the road - and perhaps not very far down the road either.

It would appear that our "correlation risk" game is afoot once again, similar to what happened in August. Of course we know what the markets did then, right?

There are a few people who are honest about this making no sense - Art, who frequently shows up on CNBS in the mornings, said it best today when he commented that the futures being up more than 100 points on the Dow made no sense given the news flow and general realities in the market.

If you think that's nutty you should see what's happened in Britain. In the wake of the Northern Rock nationalization affordability, as expressed in the maximum amount that banks are willing to lend against housing, has immediately come back in to about 3.5x income! This is an absolutely enormous shift downward from levels of just a week ago and is being totally ignored in the FTSE. It won't be for long - it is essentially guaranteed to force a huge downward adjustment in home prices over in England, just as we're facing the same sort of deflationary collapse in our housing market. When you add in the fact that the government just took on the risk from Northern Rock..... Oi.......

But heh, don't expect rationality from this market, because you're not going to find it - at least not today.

Oh, those monolines? MBIA played "shuffle the chairs" in the boardroom and then came out and basically said they have "no business being in the structured products insurance biz." Naw, you think? Hmmmm... so how do you exit that business without raping the banks and others who have relied on you eh? Me thinks you don't, which is likely to be a rather severe problem, no?

Got gravity?

Here's your technical!