reality-based educator

After Ben Bernanke cut the Fed's benchmark rate back in September, we kept hearing from all of the shills on CNBC and elsewhere that all was well with the economy, the credit crunch was over, the weakening dollar wasn't a big problem and although the housing bubble burst was problematic, the overall economy would be fine.

Both the Dow and the S&P hit all-time highs last week despite some fairly anemic earnings results for the third quarter and some lukewarm economic data.

The Wall Street Journal ran an article last week asking if anything could stop the confidence of Wall Street.

Funny, but just a week later, we have some items in the news that have the shills on CNBC's Morning Call sounding very, very pessimistic.

First, the news about Citigroup:

Citigroup, the global banking giant, said today that third-quarter profit dropped 57 percent after it faced heavy blows to its fixed-income and consumer businesses. The news helped send the stock market to a sharp decline.

...

Concern that the financial system had not yet put the crisis behind it led Citigroup and two other big banks, Bank of America and JPMorgan Chase, to announce an initiative today to insure liquidity in the credit markets. The plan, fostered by the Treasury Department, calls for the banks to finance a pool of short-term debt and to draw from it.

“There really is a lot of deterioration happening in mortgages right now,” Gary L. Crittenden, Citigroup’s chief financial officer, told investors and analysts on a conference call today. “We think we are running better than the industry, but there clearly was an uptick and we think that is going to continue in the fourth quarter.”

To reiterate that the fourth quarter and perhaps the first half of next year aren't going to be so hot for the financials, Citigroup said that foreclosures across the nation are "accelerating."

That means when the shills say the credit crunch and housing market problems are behind us, they are wrong.

Not until all the toxic ARMs and NINJA loans (No income, No job, No assets) reset next year will we be able to say the worst is behind us.

Of course Uncle Ben and his merry helicopter men can just keep cutting rates to stave off slaughter in housing.

But what will that do to inflation and commodity prices?

Oil hit nearly $88 dollars in overnight trading and looks to be heading to $100 a barrel before the winter is out:

Oil prices surged more than $1 a barrel to new intraday highs Tuesday on fears Turkey will pursue Kurdish rebels into Iraq and disrupt oil supplies in the region.

A weakening U.S. dollar, low U.S. crude inventories and increased buying by investment funds also supported prices, counterbalancing expectations of higher inventories in the weekly U.S. supply report.

...

Light, sweet crude for November delivery rose $1.56 to $87.69 a barrel in midday electronic trading on the New York Mercantile Exchange in Europe after rising as high as $87.97. The contract on Monday jumped $2.44 to settle at a record close of $86.13 a barrel. Brent crude advanced $1.21 to $83.96 a barrel on the ICE Futures exchange in London.

Despite the gains, Nymex oil is still below inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today.

We're not at an all-time high on oil yet, adjusted for inflation, but we're getting there.

Energy bills this winter ought to be a lot of fun to pay.

Here's how oil has fared over the last year:



Now of course the Fed tells us that headline inflation doesn't mean anything for the economy and we should only pay attention to core inflation (i.e., inflation numbers stripped of food and energy costs), but in the real world, inflation is running well above the 1.9% Bernanke and Company are claiming.

If the Fed decides to cut interest rates against this month or in December, that really ought to do a job on the weakened dollar and send oil shooting well past $100.

Oh, and did I mention gold currently cost $762 an ounce.

Take a look at the gold chart for the last year:


Yes, Uncle Ben can continue to cut rates to stave off worsening problems in housing and financials, but he surely risks stoking 70's style inflation.

Which means much higher interest rates in the long run.

Even Greenspan said we may see double digit interest rates in the future.

If Bernanke keeps cutting rates now, we may see double digit rates even faster than Uncle Alan thinks.

POSTSCRIPT: Oh, and did I mention that Bernanke sees continuing problems in the mortgage, debt and housing markets?

Looks like he's greasing the wheels for more rate cuts in the near-term.

Remember when he used to say he was fighting inflation?

Inflation has only worsened since then, but now all he seems to be doing is caving to Wall Street, handing out the cheap money and helping to inflate equity and commodity prices.