Lowering the discount rate on Sunday night. Way to go, Obi Wan Ben (Bernanke).

Instead of waiting 48 hours to announce this at the end of the FOMC
meeting, you do so early so the whole world will panic. And panic they
are.

Via Zubin Jelveh:

Time to bet on the spread narrowing between Crude Oil and Gasoline?

Via PIMCO:

Via The Capital Spectator:

Via Minyaville:

How Congress Spends your Money: Click on Image for greater detail.

Via CARPE DIEM: Putting Exxon’s Tax Bill In Perspective

.... just one corporation (Exxon Mobil) pays as much in taxes
($27 billion) annually as the entire bottom 50% of individual
taxpayers, which is 65,000,000 people! Further, the tax rate for the
bottom 50% is only 3% of adjusted gross income ($27.4 billion / $922
billion), and the tax rate for Exxon was 41% in 2006 ($67.4 billion in
taxable income, $27.9 billion in taxes).

Via Free exchange | Economist.com

Men this fabulously wealthy have little to fear but the resentment of a public that comes to see such vast holdings as dangerous and illegitimate. And they have little left to gain but even more exalted status. The impulse to quell natural egalitarian suspicions and lock down the people’s high esteem through impressive displays of altruistic care and self-sacrificing magnanimity must be irresistible to the rich and famous. And given our primate psychology, it is hard to help finding this admirable.

Inflation is now running over 4%, or to be precise at 4.3% for the last 12 months. Core
inflation, without those pesky food and energy prices, is at 2.3%. Energy costs
have risen by 21.4% in the last 12 months, and 5.7% in November alone. Since
energy is 8.7% of the total inflation index that means energy costs have
contributed 1.6% of the total rise.

Rational behavior is not a premise of economic theory, though it is often presented as such. The basic contention of theory is rather that competition will make it necessary for people to act rationally in order to maintain themselves. Competition is as much a method for breeding certain types of mind as anything else – Hayek

A lot of economic historians have spent much time considering the way in which the western world, in the last six, seven centuries, evolved a set of institutions that made cooperation in impersonal exchange worthwhile. That is, these institutions changed the payoff so that impersonal exchange paid off and the economies of scale associated with large scale production made possible the world of relative abundance we now observe. – Nobelist Douglass North

The US economy will surely trip and fall over the following hurdles in the coming year.

• presumed continued dollar problems,
• almost certain housing weakness,
• slower economic growth in the U.S. and Europe,
• weaker estimated profit growth in the U.S.,
• higher commodity prices (particularly agriculture),
• more global pressures on inflation.

Economists are, “Sycophantic apologists of the unfair class interests of the
bourgeois exploiters.”

Ludwig Von Mises

As a disciple of Milton Friedman, I am of the view that markets always crop up, even if they are repressed. Markets are everywhere. Even the former Soviet Union had fairly sophisticated informal internal markets, behind the iron curtain.

“Suppressing a market is a bit like squeezing a balloon—the trade will usually pop up somewhere else.”

It did business in every province of the country and its clients included state-owned enterprises and foreign multinationals. It appears to have been operating unnoticed by officials for up to eight years. In the Shenzhen area alone, it was reported to have done 4.3 billion yuan ($544m) of unspecified transactions in the year and a half to May

My father waited 15 years to buy a car. Today I can go and buy a car off the shelf, to give you a simple example. If you think a car is a luxury in India, think of the two-wheeler, the ubiquitous two-wheeler in India. The two-wheeler was the most prized element in the [compensation of] Indian managers, because you had to wait 20 years to get a two-wheeler. You had a black market for cement. You had a black market for every conceivable product, consumer or industrial. So we were running a shortage economy. A shortage economy meant some people were extracting rents from the economy. The monopolists became rich. Industrialists became rich, and consumers suffered.

Dummies’ guide:

(1) 22 year old builds spreadsheet for hedge fund.

(2) One input cell is “credit rating”

(3) Moddy’s designs defective credit product consisting of p** wrapped up in a nice shiny AA wrapper.

(4) Product unwrapped; p** revealed; model explodes.

(5) Many other “investment grade” products widely suspected of perhaps being p** also.

(6) Margins called; bids vanish; market stops.

Via The price of everything

Milk: + 65.4%
Corn: + 39.7%
Barley: + 41.7%
Palm oil: + 24.9%
Soya oil: + 30.4%
Oats: + 20.7%
Wheat: + 24.2%
Soya beans: + 28.5%
Cocoa: + 23.6%
Tea: + 8.4%
All ingredients: + 14%

(Source: Lehman Brothers)

So-called soft commodities are not the only things rising in price. Oil futures are currently up over 18% year-to-date, probably helped by this week’s headlines warning of a worldwide oil crunch “within five years”. While Treasuries will benefit from flight-to-quality flows until subprime calms down, the longer term outlook seems challenged, to say the least.

Jeremy Grantham’s says in his quarterly letter that every asset class in the world is currently under a bubble.

In particular, the current mad rush for ‘alternative investments’ in the hedge fund and private equity misses a crucial point. See an excerpt from his summary below for an answer:

....in the longer run all assets are worth replacement cost and supply/demand imbalances do not change that.  Ben Graham famously said that in the short run the market is a voting machine, but in the long run it is a weighing machine.  In this sense replacement cost is Ben Graham’s ‘weighing machine’ and supply/demand his ‘voting machine.’  Every time the supply/demand imbalance is interrupted, even if only for a short time, prices will trend towards fair value or replacement cost, sometimes quite slowly and sometimes very fast indeed.  So we are probably in for an extended period of mispricing, usually in favor of the trendy assets, but with reactions that will sometimes likely be dramatic.
 
It is also worth remembering that some of these trendy assets are real asset classes like foreign and emerging equities, small cap equities, and timber.  Others, like hedge funds
and private equity, are merely the existing asset classes repackaged at higher fees, with less regulation and much greater leverage.  They are not new asset classes and should be reclassifi ed into their component parts, as I’m sure they will be routinely in a few years.  Above all, these fashionable, repackaged assets are still part of a zero sum game and their higher fees are, in the end, your lower returns.