The Binary Circumstance

It started in 9% drop in the Chinese stock market and rippled through global financial markets. The Dow ended the day down 416 or 3.29%.

A 9 percent slide in Chinese stocks, which came a day after investors sent Shanghai’s benchmark index to a record high close, set the tone for U.S. trading. The Dow began the day falling sharply, and the decline accelerated throughout the course of the session before stocks took a huge plunge in late afternoon as computer-driven sell programs kicked in.

The Dow fell 546.02, or 4.3 percent, to 12,086.06 before recovering some ground in the last hour of trading to close down 415.86, or 3.29 percent, at 12,216.40, according to preliminary calculations.

It was the worst decline since September, 2001, and wiped out three months of gains in one day.

Ironically, Robert Kiyosaki, in a column that I’m sure was written before today’s decline, explains why all booms eventually go bust. He also discusses what happens in a deflationary economy.

If such deflation happens, cash will become king. There will be half-price sales on BMWs, expensive restaurants will close, and people will be out of work. And anybody who caters to people with dumb money will be in trouble. As I said before, deflation is much worse than inflation.

Deflation is great if you’ve got cash because every day your cash has more buying power. It’s bad if you’re in debt up to your eyeballs.

In an inflationary economy, every day your cash has less buying power because the government keeps putting more money into the system.

Inflation is the result of the government manipulating the money supply. Deflation happens when the manipulation doesn’t work any more and reality catches up with the fantasy.

While I’m on the subject of food:

I sometimes eat a black pasta that’s made from black soy beans. It’s very high in protein and fiber and you can do interesting things with it in terms of presentation because of its color.

A new study suggests that black soya may protect against weight gain and diabetes.

In a study published in the February issue of the Journal of the Science of Food and Agriculture, a team of Korean researchers studied the effects of black soya in 32 rats.

The researchers allowed the rodents to gorge on a fatty diet supplemented with various levels of black soya.

After two weeks, the rats getting 10 percent of their energy from black soya gained half as much weight as those in the control group, and their total blood cholesterol and LDL (so-called “bad”) cholesterol fell by 25 percent and 10 percent, respectively.

It’s been many years since I’ve eaten a Hostess Twinkie but I sure ate plenty of them as a kid, and Hostess Cupcakes.

Now there’s a book, Twinkie, Deconstructed, that traces the origins of all 39 ingredients in a Hostess Twinkie back to their source.

From MSNBC/Newsweek:

At the heart of the book is the fundamental question: why is it you can bake a cake at home with as few as six ingredients, but Twinkies require 39? And why do many of them seem to bear so little resemblance to actual food? The answer: To stay fresh on a grocery-store shelf, Twinkies can’t contain anything that might spoil, like milk, cream or butter.

You mean, anything like real food?

…it can be unsettling to learn just how closely the basic ingredients in processed foods resemble industrial materials. Corn dextrin, a common thickener, is also the glue on postage stamps and envelopes. Ferrous sulfate, the iron supplement in enriched flour and vitamin pills, is used as a disinfectant and weedkiller. Is this cause for concern? Ettlinger says no, though you wouldn’t want a diet that consists solely of Twinkies. Ultimately, all food, natural and otherwise, is composed of chemical compounds—and normal ingredients like salt have industrial applications, too. Still, it gives you pause when he describes calcium sulfate, a dough conditioner, as “food-grade plaster of Paris.”

Alan Greenspan warned that we might be headed for a recession later this year.

“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Greenspan said via satellite link to a business conference in Hong Kong. “For example in the U.S., profit margins … have begun to stabilize, which is an early sign we are in the later stages of a cycle.”

“While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown,” he said.

Greenspan said that while it would be “very precarious” to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.

It’s interesting that he doesn’t see the slowdown in housing causing a problem.

Greenspan also said he has seen no economic spillover effects from the slowdown in the U.S. housing market.

“We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing,” he said.

It was recently reported that January housing starts were down more than 14% from the previous year.

WASHINGTON (Reuters) - The pace of U.S. home construction fell 14.3 percent in January, the sharpest drop since October that bucked two months of increases and that was much worse than economists had expected, a government report on Friday showed.

The Commerce Department said housing starts clocked an annual pace of 1.408 million units in January compared to 1.643 million units in December. Economists had forecast January housing starts to fall to a 1.60 million unit pace from December’s originally reported pace of 1.642 million units.

UPDATE 2/27/07: After the stock market dive today, other economists were quick to disagree with Greenspan calling a recession this year unlikely, although they did admit to this possibility:

The biggest risk to the five-year-old U.S. economic expansion is that the housing slump might take an unexpected turn for the worse, analysts say. In one dire scenario, not only would consumers and businesses clamp down on spending and investing, but troubles could spread to lenders dealing in risky mortgages, triggering a financial crisis.