It’s been sometime since the last Occasional Letter and with more than a few questions about the macro-economic situation being posed by Livechart members recently, I thought it would be a good time for an update.A recap of the scenario:bubble, easy money, inflation in fiat money supply, inflation in commodities and hard assets, inflation, fear of inflation, rising rates, YC inverting, flattening, rising and inverting again, tightening, withdrawal of liquidity, corrections, crashes, talk of stagflation, FEAR, withdrawal of speculative funds, further corrections and crashes, demand collapse…….Deflation.”

I am not going to tell you where we are but for myself I think we are at the “talk of stagflation”. From my perspective we are living with the products of a credit boom that resulted in monetary and asset inflation and distorted yield curves. Without doubt, the credit boom has turned to bust and in my opinion is now beginning a crash. It is for this reason that I believe the talk of stagflation will not see the actual event take place. It will be over-taken by other events. The recognition of these other events will produce the FEAR.Notice I use fear, not shock. Shock occurs when an unforeseen event happens. Such writing as those by Minsky and used by others like John Mauldin base the cause of disruptions in the markets upon such “Minsky” events. There is of course a major dichotomy about Minsky moments which is known, to some.Remember back in ’03 when the US Dept of Defense started a gaming programme designed to see if the public could work out when/if the next terrorist attack would occur? At the time there was a somewhat mixed reaction and I think the idea was eventually shelved. The idea behind the process was sound. Simply put, draw on the minds of those with imagination and apply it to a real situation situated within a virtual world.

Some of you are already ahead of me here. What if the Central Banks and large Financial Institutions decided to invoke a similar plan? Let’s discount the gaming idea but use the framework to screen the writings of “privateers” and bloggers. Would such a programme have identified the onset of the credit crunch much earlier? Let’s face it, relying on analysts and economists in the pay of Govt or Financial Institutions to identify trends has not been a profitable experience over the past year.

The point is, would the so-called Minsky moment back at the end of June ’07 have existed if the pool of knowledge beyond the establishment had been utilised? I will leave the idea floating for now; we may well re-visit it soon.

The first flickering of FEAR has been sighted and an old friend of my readers has helped to bring it to our attention. The carry trade.

Dollar/Yen vs. Dow

Will the short term saviour of the US Markets be in the form of Bank of Japan /Ministry of Finance currency manipulation? Looking at the sudden move up in the Yen from mid-February it would appear not, so far. Watch for statements from either the BoJ or the MoF directly targeted at forex “fluctuations”. Such methods in the past have placed support under the carry trade.

Finally in this edition I want to look at the words of an independent Central Banker. I use the word independent as an identifier for a CB not under the influence of the Fed, BoJ or the ECB. On Monday Philipp Hildebrand spoke at a conference on financial regulation hosted by the London School of Economics and Deutsche Bank. Hildebrand is vice chair at the Swiss National Bank, here are his comments:

The global economy is “clearly not yet out of the woods” of the credit crunch. “There is no apparent reason to be optimistic … things are likely to deteriorate further until US house prices begin to stabilise” Markets will remain difficult, he said, including the continued woes of the US housing market, tighter lending conditions imposed by banks and a wave of countries downgrading their forecasts for economic growth.

Turning to potential solutions, Hildebrand downplayed the usefulness of new regulations, he said; “ever more complex regulation is unlikely to achieve its goal”, due to the lack of resources to enact new regulation. Even with national authorities co-operating, regulation will not be enough, he warned. Hildebrand said authorities should focus on the “shock absorbers” in the financial system. Banks should hold larger pools of liquidity and have limits imposed on their leverage.

He also had some revealing remarks in the Q&A after his speech. He remarked that he was “fearful of third wave of credit crisis” and that a “risk of feedback cycle between markets, economy” existed.

Compare his remarks to those of Ben Bernanke last week. I could almost believe it was a direct criticism. By the way, according to Wikipedia (warning: knowledge may go down as well as up) Hildebrand is derived from Old German an Old Norse, with Hild meaning battle and Brand meaning sword.

Sounds like my kind of Central Banker.

Market Snippets

Fed Govr Kroszner’s remarks on risk mgmt at IIB “banks may experience liquidity demands from both asset/liability side; some may not have conducted enough due dilligence on structured product; banks should be prepared for occasional shocks; regulators are working together on disclosures etc.”

Take that as the Fed recognising that a credit squeeze has become a solvency issue.

Thomson Financial – General Motors Corp. said Monday U.S. February light vehicle sales fell 12.9% to 268,737 from 308,411 in the same month last year. After adjusting for an additional selling day in February of 2008, sales for the month fell 16.3%, the Detroit-based automaker said. Car sales dropped 1.2% to 107,592, while light truck sales fell 19.2% to 161,145.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.