Understated Inflation in the U.S.; Decline in BRICs without Oil; More Defaults

MWF (Friday) Briefing:

Classic economists have some of the catchiest phrases.  Currently, Williamson's classic Transaction Cost Analysis (TCA) pops to mind since we are in a period of heightened, as he would say, "information impactness."Inflation is much worse than what's reported in the U.S.  All BRICs are not created equal, though they are not so different.  More Defaults are on the way from Wall Street to mainstreet.  The losses are trickling up and up.

The irony to Williamson's TCA is that it's not an agency-based economic theory whatsoever, which was what he assumed.  It's actually a sociological theory once you pull back and see that it's a structural argument to transactions.  Things are quite different sometimes when you look at the bigger picture.

• Bill Gross, in his June 2008 Investment Outlook, presents comparative charts on inflation reporting.  U.S. inflation is understated and commodities would then not be valued correctly at this time.  He questions the authenticity of U.S. inflation calculations"by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S."  Pimco

• India and China aren't holding up well under the BRIC name. "Give me a BRIC...hold the I and the C" is an order many BRIC investors would have loved to have made over the last six months... Brazil is up 9% and Russia is up 7% since early December, while India is down 21% and China is down 31%.  If things don't begin to turn around for the two laggards soon, we'll probably start seeing just Brussia ETFs." Bespoke

• Fuel costs threaten trade. In the industrialized era, the cost of shipping manufactured goods fell by some 90%. This massive decline in transportation costs, and coincident improvements in communications technologies, allowed firms to fracture and disperse their production chains.  Globalisation owes at least as much to declining transportation costs as it does to institutional liberalisation. So what happens when transportation costs go up? And up and up and up? At Econbrowser, Menzie Chinn cites a Thomas Net story on the subject:The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing.  Economist

• The rate of new foreclosures and late payments surged to the highest levels since 1979 affecting 1 in 10 American homeowners.  The period from January to March 2008 marked the worst quarter for American homeowners in nearly a quarter-century, according to a widely watchedreport put out by the Mortgage Bankers Association, a trade group. NYT

• We highlight historical default risk for JP Morgan, Lehman, Morgan Stanley, Merrill, Goldman and Citigroup as measured by their 5-year credit default swap prices. After peaking in March during the Bear Stearns blowup, default risk for banks and brokers declined sharply but still remained elevated when compared to normal historical levels.Bespoke