Credit Markets Finally Thawing Out

LIBOR rates dropped dramatically today, even the 1- month and 3-month rates dropped by a massive 43 basis points and 36 basis points respectively. That's nothing short of incredible. The TED spread dropped 36 basis points too. This actually is good news (short-term anyway), and will stoke a pretty significant rally in the next few days, especially if these numbers keep dropping at this pace.

But the base problem of the world housing depression remains. Third quarter will be a recessionary one, guaranteed, as will 4Q 2008 and most likely 1Q 2009. It could spread deep into 2009, depending on the new administration's first few moves in January. We're still looking at a long-term bear market here. The good times are over.

And it will get worse before it gets better. We've set a huge land mine with trillions in the bailout plans. When that liquidity shakes loose in the money markets -- and indications are that's thawing out now -- the other shoe drops.

Hyper-inflation. We've solved one problem by making the base problem worse. Yes, the housing collapse means massive deflation. But the massive bailout means massive inflation too. Which one will win out?

Best case scenario is that we've taken trillions in real estate values and equity and given them to banks...a transfer of wealth on an unprecedented scale. We've taken away trillions of American homeowner wealth...not that we had all that much to begin with, and given it to banks and the market by creating fiat money instead.

I'm voting for inflation. Lots of it. And very, very soon. The credit markets are thawing only to reveal the the long frozen inflation beast hidden under all that ice like Godzilla buried under the North Pole, and it's about to wake up and go on a rampage.