The past is prolog.

It is time to revisit the past so we might see what the future has in store for us. The first three graphs down (Baltic Dry Index, Copper and Lumber) give us an idea of the state of the economy from a different point of view. The Baltic Dry Index is a measure of shipping, so it is a measure of the world economy. We see a decrease in August 2008 as oil prices peaked then a dropoff in Sep 2008. The second graph is the price of copper. It reflects world-wide demand for copper in industrial use. We see a small decrease in August 2008 then a precipitous drop in September. The next graph is gold price; it began to rise in Nov 2008 and has been going up since.

The Stock Market began its dive also in September of 2008. Normally, the Stock Market dives before a recession hits and recovers before the economy hits.

We see a correction in the Baltic Dry Index, Copper, stocks and gold, but not in Lumber. So, we avoided a slide into a second Depression, but the question is whether we are about to have a double dip recession.

Taken together with the graph of the money velocity and the GNP(see my July 19 post), we reach the inescapable conclusion that something happened in September of 2008 that stopped money circulation and sent every financial and economic indicator into the toilet. And we know what it was! It was the FED putting 'mark to market' accounting into place. Do not blame Wall Street or the big banks! Blame the people who made the change in accounting, which made the big banks insolvent and cost the Country over 10 trillion dollars.

Fast forward to March 2009 and you see a simultaneous reversal in the first three economic indicators as well as in stock prices. The FED had flooded the markets with trillions of dollars to pump up the economy. Yet we had avoided inflation by the continued deflation caused by bankruptcies of companies which were taken over by the government.

And so we arrive where we are today, the time of adjustment in the markets. We have seen a shallow (maybe 10%) correction in prices and recovery from that is under way in the Baltic Dry Index and Copper. Even Lumber (construction indicator) is holding up. Conversely, we see the dollar recovering about a third of its loss, while gold had given up about 10-15% of its recentgain.

Will we now enter into hyperinflation? Not yet. The continued poor performance of the job market is putting pressure on home owners with another wave of foreclosures in the offing. A wave of foreclosures in commercial real estate is also starting. We need to consider the basic formulas of the economy to see where we are heading.

MxV = GDPxP relates the amount of money (M), its speed (V), the GDP and prices (P). While M is being expanded greatly, P is steady and V has improved. Since, this is an equation that would imply that the GDP is still falling, government figures notwithstanding. The reason why GDP growth has been reported shows up in the formula:
GDP = C + I + Govt + Net exports. C is spending by consumers, I is inventory and Govt is the spending by government. So, most of the rise in GDP is due to inventory replacement and government spending.

Given that almost half of the stimulus money is yet to be spent, we shall see further rises in the GDP, though these figures will not reflect a stronger economy.

The last figure shows that when investment falls unemployement rises and we are still in the recession phase.

The markets will be choppy for a while, inflation low, gold will trade sideways and the economy will recover slowly, in spite of the tremendous govt spending. We are approaching seizmic changes in finance though and it is best to satay out of mthe Market.