Still Short!

The market has ignored some really important news lately.

1. Ambac is losing money much faster than anyone thought possible. The have over $500 billion in credit guarantees. This will evaporate by the end of the year.

2. The Japanese bond market just panicked earlier this week. It dropped 5% before trading was halted. Why? Because there was an inflation panic. Is this a preview of the US Treasury market?

3. LIBOR remains near record high spread over Fed Funds.

4. Oil is a hair away from $120.

5. Consumer confidence is at 27 year lows.

6. HELOC and credit card losses are going supernova. These are very potent sources of losses for the credit industry because there's no collateral for cards and collateral for HELOC's will soon be negative.

7. Housing prices have now fallen half of the amount they did during the Great Depression. And there's no end in sight.

8. Employment has shrunk this year and shows no sign of stopping its contraction.

9. The commercial real estate market is immensely overbuilt. Jobs will be lost, and dilution will cause blight in partially filled shopping centers.

10. The VIX is under 20. Wait 'til it goes to 30.

We are seeing the Titannic model on all fronts here. (The Titannic was built with compartments which were watertight below the waterline. However, they were not sealable on top. When the ship hit the iceberg, the water filled up one compartment until it flowed over the top into the next.) The problems that the market has been worried about are already underwater. What the market is not discounting is the spillover losses that occur as the losses spill over into new compartments of the economy. As each new compartment fills up, a tipping point is reached where it starts to spill over into more and more newly flooding compartments. On top of this, Bernanke refuses to close the watertight doors and cut away the dead parts of the economy, instead trying to right the underwater financial sector by flooding the back end of the boat. This just increases greatly the chances that the entire economy will sink.

Interesting side note: I can't be sure, but it seems to me that going back at least to last August that gold has performed best during heightened fears of deflation, and sold off slightly during resurgences of price inflation.