Wow. Just wow.

The technical today is well worth watching...... overnight got nutty, and that's being polite.

Last night the futures were literally all over the place. There was a creep north on the news that Citibank was going to take its SIVs back on its balance sheet (if there was ever an indication that equity traders ride the short bus, this was it!) followed by a huge dump - 10 handles in a few minutes - after the news crossed that Moody's was hitting them with a credit downgrade. The amusing part of this, of course, is that Citi's alleged reason for taking the SIVs back was to prevent THEM (the SIVs) from being downgraded - so instead, the downgrade got redirected to find itself a new bunghole to home in on!

In any event this change is extremely positive for "clearing" the credit markets. While such moves should cause immediate (and strongly negative) reactions in the share prices of the firms that do it, that's not a bad thing - its a good thing. These firms have "enjoyed" an overly-inflated share price due to keeping this trash hidden, and now that its out in the open its only reasonable to expect that premium to come back off, perhaps quiote violently.

However, the issue in the financial markets as a whole is trust. It is not liquidity and it is not that "Fed Funds is too high."

How can we achieve trust without transparency? We cannot. Citibank's move, irrespective of whether it costs them $5/share in the short term (and it should) is a big move in the right direction, and Vikram Pandit deserves an "attaboy" for it. Yes, I know, it was done because now Citi can head over to the "new and improved discount window" (the term auction facility) to try to fund it in part, Moody's probably sparked it with their threat of a downgrade of the SIVs (which they then redirected to Citibank itself), and the Level 3 problem remains, but that's ok. The motivation, to me, is not relavent. That moves in the right direction are being taken is! Now let's see the Level 3 games stop and we'll be making real progress!

What I want is for the off-balance sheet (and on-balance sheet!) games to end so that the system can clear and trust can be restored. This includes eliminating the "Level 3" baloney; if there is no bid for an asset, it has a value of zero on your balance sheet. Tomorrow, if it has a bid, you can record that. Whatever dislocation we must take in the equity markets in order for this to happen has to occur.

If financial institutions don't quit screwing around and fix this problem we are heading for a 1930's style deflationary credit collapse - indeed, it may be too late to prevent it now, but I refuse to throw in the towel on the attempt until the inevitability of the event becomes clear.

If the deflationary credit collapse does come we'll get the same disclosure - it'll just come via a different form (bankruptcy!), and you'll like it less because the knock-on effects on our economy will be far more severe.

I also want all derivatives forced onto public exchanges, traded with a published bid and ask, and with a clearing corporation such as the OCC in the middle. This will force margin maintenance requirements to be enforced and stop the practice of people writing unlimited numbers of derivative contracts they do not have a prayer in hell of performing on if they go the wrong way on them.

And finally, I want Regulation FD applied to the credit markets. Whatever information you hand to one person you must hand to all. This includes the information that goes into the rating agency models - all of it! If you give it to them, you must give it to a potential buyer. Period.

Do those things and the credit markets can clear. It won't stop a nasty recession but it will stop the incipient downturn from turning into an all-on deflationary collapse in the credit markets.

CPI is out - up 0.8% headline, up 0.3% on core. WOW!

Unadjusted, food and housing rose at more than a 4% annualized rate, with apparel up 3.1% and the real nasty, transportation up 9.6%. Medical care up 5%. Energy was up monstrously, 21.4%. The nasty in the numbers was that the 3 month compound annual rate is now 2.6% with the 12 month annual rate up 2.3%, showing a nasty accelerating trend that is well above The Fed's "informal targets."

We're getting damn close to the Sun there boys..... Feeling warm yet?

Now here's what confounds many, but not me - the dollar is spiking and Gold is collapsing! HUH?

Here's why guys - the FX markets are coming to realize, and quite quickly, that the rest of the world is more screwed than we are! As that realization sinks in guess where you want your money? Yep - in DOLLARS!

Oh, and Gold is selling off too. So much for the "inflationistas" argument that "Gold will go to the mooooooooon!" due to ramping inflation numbers. Nope - because we won't get hyperinflation. We will get a deflationary credit collapse as the credit market chokes off on a GLOBAL scale!

Now there is some argument for whether this is "stagflation" or "a depression." Really, the difference is one of semantics and severity. There's an old saying "if your next door neighbor loses his job that's a recession; when you lose yours its a depression."

But the truth is more complex than that. The difference between "stagflation" and "depression" are one of degree, but not substance. In both cases real borrowing costs go to the moon, goods you need become more expensive (as a percentage of income) to buy and goods that are discretionary or "large capital expenditures" tend to become very cheap due to surplus beyond purchasing capability. Both are marked by tightness in credit and a huge slowdown in production, but there is a difference in degree.

So which are we headed for?

Does it matter?

Its going to suck either way.

In the "amusing idiots" category we're finally starting to see so-called "economists" talking about '08 profit numbers being totally unrealistic. Gee, you guys are only six months behind the curve on that; I've been calling for that since I made the "Grinchmas" call, and said that 3Q profits would suck, 4Q profits will suck, and '08 will be lucky to be positive, especially if this downturn gains some legs.

But now Pimco is saying it, so it might be right. Better late than never I guess!

Here's the technical....