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July 10, 2005

Bride of Frankenmarket
by Gary Tanashian

About a year ago, biiwii.com announced itself with its first macro-economic commentary, Frankenmarket Lives. The theme last summer was one of growing economic angst, a staggering stock market and very confident bears. Sound familiar? The conclusion of that article was that the Fed would not "take away the punch bowl for real" and the stock market would again confound the perma-bears.

Today, we have much the same scenario, except that the Fed is being a good soldier and maintaining an orderly rate hike regimen to contain inflation "expectations" in what appears to be a healthy and growing economy. This does not square with our assessment last summer that "it is too late for our economy to de-leverage in any orderly fashion". Something has got to give, unless this market, the Bride of Frankenmarket, can stagger forward, arms out stretched, and find sanctuary in a new asset bubble du jour, or asset and/or debt monetization. If it doesn't, there is an angry, pitchfork wielding mob of deflationists and perma-bears waiting to strike it down.

I don't see why there cannot be a recycled strong dollar policy, and an illusion that the US is again the safe haven for the world's money. "Invest in our asset markets just because" could be the pitch. "Deflation is GOOD for the market because the US dollar, the world's reserve currency, is gaining in price (I would never use the words value and US dollar in the same sentence) and you want to be denominated in dollars" might go another testament to pure idiocy. The shelf-life of such foolishness would be incredibly short, which is why I tend to lean to the other end of the spectrum, inflation.

I have been keeping an eye on the ongoing inflation/deflation debate which seems to have made a lightning rod of Jim Puplava at Financial Sense. There is much "sense" to be made from Mr. Puplava's views along with other "inflationists", as there is from various "deflationists". But all I know for sure is that the Bride of Frankenmarket needs an angle, and with real estate starting to concern even the most greedy and denial-ridden, we need some asset (or debt) class to come forward to be monetized. I simply do not believe this country, nor the interrelated global system is ready for what the bears have in mind. Nor will we ever be ready, given that an unwinding would be total and ultimately destructive given the debt and derivative levels that have contributed to ponzi-ing up the economy to this point.

The bears and deflationists apply ultimate logic and right-headed thinking. Where they make their mistake is in unquestioningly following their well thought out analysis. Since when has anything in modern macroeconomics been based in "right-headedness" and gone by the book? Watching the Bride of Frankenmarket smash them in the chops on Friday only served to remind us that today's markets do not need sound fundamentals or an economy based on real productivity to rise. They merely need a bit of spin. Witness the London terror tragedy, which was not enough to hurt our markets (was there really any doubt in your gut that this would ignite a rally?). If that's not enough, how about those job statistics? Manufacturing down, no problem. Hospitality jobs made a nice gain! Oil ticked down below 60. Alcoa found a way to goose the numbers through a Russian labor arbitrage, and of course, Jim Cramer has got his Rally Cap on. If you can't laugh at this stuff, you might find yourself crying.

The bears are right, but they weren't right yesterday, and they may not be right for a long time. How can you be right and not right? Our furry friends, the perma-bears may have found a way. They will of course be right in the end. We WILL have deflation. We must. I believe that deflation is the only secular natural trend. It is called progress and productivity. There is no natural inflation, only man made efforts to raid a pure wellspring of progress by finding ways to increase liquidity for growth at all costs. That spring is of course polluted now, hence the idea that man-made inflation is a good thing, when it is couched in such a way that casts it as a savior. Bride of Frankenmarket knows this and has lived off of this dynamic for years now. Why should today be any different? The bears are right and they have been right for a long time. Has that stopped the powers of public denial and inflationary policies in the past? No, it has not.

So, the game is this; we have a market searching for juice. We have a Fed doing what they should do in raising rates, we have gold smacked down (a subject for a later date), we have a society wildly unprepared for what the deflationists envision, oil ready to jump to the 70's or tank to 45 (by our charts), a stronger dollar, and a sleepy bond market. Throw in a real estate bubble and Mr. Greenspan's "conundrum" and it's just a ball of confusion. The kind of confusion that only decades of INFLATION can create. I don't blame only Greenspan for this. I blame us all, collectively. Had he delivered the real medicine years ago, we'd have formed an angry mob of our own and demanded the demise of Frankenchief. Somewhere, something changed from REAL growth and REAL productivity, to faux growth and faux productivity. Hence the Frankenstein metaphors.

When will the bears be right? It could be early this week, which would really need to mark the end of this impulsive rally, or else we've got something else going on here. I bought a few QQQQ puts into the close on friday (either as a hedge or because I felt like jumping in front of a train), but to be clear, I am not at all confident in their ability to make me a profit. Rather, I am watching that sloppily stitched together bride stagger toward me with ill-will on its mind. No perma-bear am I.

As an aside, I just received this email from India a moment ago. As you may know, I am in the precision manufacturing industry. I get these all the time. What does this mean to you, the financial analysis enthusiast? Deflation, the good kind. Good if you are Indian, or Chinese for that matter. Last week I received two more auction notices for liquidations of local competitors in the ongoing Dawn of the Dead. With these dynamics swirling about, I feel blessed when I think about how well my own company is doing and when I ponder what its debt level once was, and is no longer.

Dear Sir,

I am Raja Rupinder Singh, Vice President of [XYZ] Industries, India.

At this point of time we are looking for long term relationships to
utilize our capacities on forging and CNC machining/fabrication
facilities.

We are in a position to supply you a wide range of precision machined
forged steel, stainless steel, aluminium, cast iron components.

Facilities at our plant, include

CNC Turning Centres from Gildemeister Germany and Daewoo Korea
Robotic Welding Systems from Fanuc Japan
Computer Controlled Induction Hardening Plant from GH Spain
Cast Polyurethane Molding facilities
Rubber Compression Molding Facilities
and perepherial machinery to supplement a wide variety of industrial
components for automotive, material handling, textile industry,
aerospace applications.

We also have in-house engineering capabilities on produce 2D and 3D
drawings of parts & assemblies. Ours is an ISO 9001:2000 certified
company.

Could you please let us know if your company would have an interest in
out-sourcing any components from us. We shall be glad to quote off
your prints or samples.

Best Regards
Raja Rupinder Singh
[XYZ] Industries, India

Gary Tanashian
http://www.biiwii.com/

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