Last week’s PPI and CPI reports, along with the Fed’s lowering of interest rates, have pushed the question to the front burner again as to whether inflation will be heating up further, or if it’s just a temporary phenomenon.

From my non-economist view, I find it hard to believe that inflation numbers will worsen given the fact that banks and other financial service companies are writing down huge debt and real estate prices are falling. Those are deflationary signs unless we were to return to the stagflation times of the 70s where both, inflation and deflation, were a problem.

Minyan’s mailbag addressed this important issue in more detail with a Q & A session titled “Deflation, The Fed And Control.”

Here is a snippet:

Your statement assumes that in fact the Fed is “’in control’’ here which is manifestly is not. The idea that the Fed directly controls the creation and destruction of credit is termed the potent director’s fallacy.

What the above suggests is that we are in a deflation now. The write downs you see by Citigroup (C), HSBC (HBC), Washington Mutual (WM) et. al plus the 30%+ decline in asset back commercial paper volume since August 1 is in fact a deflation of the most serious kind. What you have not yet seen en masse is this credit deflation rolling downhill into the regular economy – into CPI, into PPI, into wages. Having such a massive – unprecedented – destruction of credit that we have seen worldwide not make its way from the financial economy to the ‘regular’ economy would be unprecedented in any cycle in any country at anytime in the modern financial era.

Only time will tell how this scenario will play out, but how do you cure a deflation if in fact it happens? Minyanville’s answer is “what cures a deflation is marking down the previously high valued assets to their new (much lower) market-determined price.” Once that cycle has passed, I guess, we will back to inflating ourselves to prosperity again.

Not too long ago, I read John Perkins’ bestseller “Confessions of an Economic Hit Man.” It’s an extraordinary real-life tale which exposes international intrigue, corruption and little known government and corporate activities that have dire consequences for American democracy and the world.

John describes economic hit men as “highly paid professionals who cheat countries around the globe out of trillions of dollars. Their tools include fraudulent financial reports, rigged elections, payoffs, extortion, sex and murder.”

John Perkins should know—he was an economic hit man. His job was to convince countries that are strategically important to the U.S.—from Indonesia to Panama—to accept enormous loans for infrastructure development, and to make sure that the lucrative projects were contracted to U.S. corporations. Saddled with huge debts, these countries came under the control of the United States government, World Bank, and other U.S.-dominated aid agencies that acted like loan sharks—dictating repayments terms and bullying foreign governments into submission.

It is a compelling story that also offers hope and a vision for realizing the American dream of a just and compassionate world that will bring us greater security. A fascinating read, I give it thumbs up.

Jon Markman wrote an interesting piece called “Big banks vulnerable to takeover,” which touches on more fallout from the reckless real estate era. He calls it the ushering in an era of ‘reverse colonization’ with reference to large foreign investments into UBS and Citigroup. Here’s part of it:

In the past two weeks alone, Singapore announced that it would make a $10 billion investment in UBS, and the Abu Dhabi Investment Authority pledged to make a $7.5 billion investment in Citigroup.

We really need to be plain about this: Companies such as Washington Mutual, which announced a $1.6 billion write-down of home-lending-unit losses Monday, essentially took money placed in passbook savings accounts by hard-working, conservative customers — many of them retirees — and shoveled it to low-income, Fantasy Island condo flippers. Bankers paid 2% or less to customers they obviously considered suckers and lent it out at 6%-plus to customers they courted.

It’s hard to disagree with his view, but only time will tell if other cash-flush foreign companies will take the opportunity over the next few weeks/years to pick up or support failing U.S. institutions. Deep down, I hope that this will not happen to a great extent; however, if it means that sane and fiscally responsible lending and business activities will return, then I find it easier to accept that kind of a change.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The Fed’s ¼% lowering of the interest rate, along with worldwide coordinated efforts to provide liquidity to “needy” banks, had the bulls on the run and the bears took over.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +3.79% above its long-term trend line (red) as the chart below shows:

The international index dropped to -2.12% below its own trend line, keeping us in a sell mode for that arena.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Lack of confidence has played a big role in the markets lately. When banks don’t want to lend to each other then fear has to be stronger than greed.

Tuesday’s 300 point drop in the Dow was based on disappointment that the Fed lowered rates only by ¼%. Wednesday, the markets (Dow) rallied some 272 points right out of the gate after the Fed’s plan of adding liquidity to credit markets received a warm welcome. However, enthusiasm faded fast as the markets dropped into negative territory by 111 points at its trough. That’s a huge range and shows utter confusion in the trading community. The reason: Lack of confidence in the Fed’s ability to deal with the crisis at hand. Only last minute upside activity pushed the major indexes into positive territory for the day.

I was reminded of that when I read MarketWatch’s feature story titled “Falling into the liquidity trap,” by economist Dr. Irwin Kellner. I have referenced his articles before, and I like his no-nonsense approach to analyzing economic events. Short, sweet and to the point.

He writes that “today there are some similarities to the liquidity trap of the 1930s. The credit crunch is clearly one of them. No matter what the Fed does on Tuesday, it will not be able to thaw out the frosty financial markets.

This is because the markets lack confidence. As I wrote two weeks ago, “fear, and not a lack of liquidity, is what’s freezing up the credit markets … and … it’s going to take a lot more than infusions of liquidity to thaw them.”

While I agree with his assessment, I am also aware that his article, and many others I have pointed to in various posts, do not give you any idea about market direction. It’s simply an unknown and the only way to make reasonable investment decisions is to follow the major trend. Markets will react to fundamental economic changes or crises in any way they see fit, but you can be certain that prices of underlying securities will reflect any change in sentiment, either to the upside or to the downside.

That change we can measure via our Trend Tacking Indexes, which only have one function: To keep us on the right side of the market.

The Fed did the expected yesterday by lowering interest rates ¼%. For Wall Street, it turned out to be a disappointment since false hope of a ½% cut was not met. The reaction was fast and furious, and all major indexes retreated sharply with the Dow dropping some 300 points.

It will be interesting to see if this pullback was a one-day event and if the markets can resume their upward path again, which they started the beginning of December. Here’s what I can’t figure out. The markets are usually in an anticipatory mode by focusing on possible events some 6 months in the future. The worsening housing market and credit crisis would certainly qualify as an event that can have some dire impact, yet Wall Street seems to completely ignore the implications. Maybe the old saying about climbing a wall of worry has something to do with that…

In the meantime, the major trend continues to be murky and more time is needed to sort out where we’re going. Our Trend Tracking Indexes (TTIs) are offering a mixed picture with the domestic one still sitting above its long-term trend line and the international one still in sell mode:

Domestic TTI: +5.19%
International TTI: -0.61%

Below please find the link to the most recent ETF Master list, which has been updated with yesterday’s closing prices. This will enable you to work with more recent data. You can download the file at:

http://www.successful-investment.com/SSTables/ETFMaster121107.pdf