Ugly omens

I am worried. Far more worried than the official '09 rebounders, more worried than the gold bugs, and only slightly more worried than Bernanke. Obama and crew don't have a clue how bad it is -- or perhaps they do, but have better sense than to show it ... a very real possibility, but appointments such as Panetta would indicate otherwise.

What I am worried about is this: world trade is falling off of a cliff.

I have been reading about strings of freighters and tankers lying in the roads of major East Asian ports, freight rates for trans-Atlantic shipping falling well below cost -- all indicating that the grease of world trade has turned to sand. How bad is this? Well Japan saw a fall of 65% in their trade surplus in November, year over year, featuring a 26% drop in exports. And this surplus drop with oil being a half to a third of the previous year's cost basis. That is bad. Japan depends on exports and a surplus to stay afloat -- and buying U.S. Treasuries.

And the U.S. needs to sell a lot more Treasuries to pay for the massive spend to avoid deflation effort. So who will buy them? China's massive growth rate may shrink -- maybe not into negative growth (like Germany and Japan), but curbing an appetite to buy paper from those to whom it sells its junk.

I see the papers talking about the resilience of the Southeast Asian economies and how bad off the U.S. is comparison to them ... why the dollar should be on a par with Kleenex. But those ships are sitting outside Singapore, KL, Jakarta, Taipei, Hong Kong. And those economies absolutely depend on exports ... exports to ... where exactly? And Mexico? Which country is the largest trade partner? And which country is simply deciding to save for once?

So a tension is set up: to attract capital, U.S. rates either have to go up, or the worldwide options have to be so grim that there is simply is no other choice (that scenario is pretty good). But if there is no surplus to invest, then it won't matter what the rates offered are -- who cares what 30 year paper goes to if there is nobody around to buy it? Friends, this is a liquidity trap. "Print" tons of money that you haven't even borrowed (or can't borrow) to inflate the economy or stall it from collapsing. Say you do manage to halt the slide ... then you have the recipe for massive hyper inflation. Sure you can raise rates, but that kills the recovery.

And Europe? Why should they be any better off? No reason. None at all. Germany can't sell its overpriced goods abroad -- and won't commit enough to reinflate their own economy. At least Germans tend to buy German, so they don't bleed for the benefit of the Chinese. Spain, France and the Eastern EU are in far worse shape. The U.K. is trying the same thing as the U.S., and if it succeeds, then in about 3 years they will boom again while the Euro bloc sits in a pool of its own poop.

Why is the U.S. a better bet than most? Because in extremis the U.S. can both produce and consume domestically. We have resources. We have people. We have relatively cheap labor (or did have until Obama/Pelosi screws this one up). We could be relatively self-reliant, but Europe? No. Not a chance. And when you have to buy gas from Russia to heat your homes, you are in deep doo-doo indeed.

Oh, I forgot to mention this: once hyper inflation hits, there will be a massive dumping of US treasuries and other paper. As prices fall, rates go up. Commercial rates, too. Business cannot survive without some access to liquidity and there won't be any at rates anyone can afford. The final bubble will burst.