Consumer spending was much stronger than thought in November, yet Circuit City Stores Inc., Best Buy Co. and other retailers warned of a slump in purchases. A private report today showed consumer confidence slid to the lowest level in more than two years in December. The stock market chooses to see all things bullish, and so it powers ever upward. This week we take a brief look at the consumer, recent "shock and awe" central bank actions, money supply and more, trying to see how it all fits together.

But first, let's quickly turn our attention to a practical way we can help save the lives of those who are desperately suffering in Darfur and Myanmar. Over the years my readers have generously supported the work of a very special group of guys who help bring aid to places where it is the most difficult, if not dangerous, to reach.

Knightsbridge International is a small group of volunteers who go to places that are not safe but the needs for help is critical. Like the Knights of old, who ran hospitals and relief efforts, these modern day knights go to where the need is the greatest. They took food and medicine to northern Afghanistan before the troops went in (very dangerous!). They went to rebel held territory in Sri Lanka after the tsunami when no one else could get medicine and help in. Whether it's driving in to rescue nuns in Rwanda (fascinating story!), or taking solar power for clinics in Myanmar, Water Purification Units and medicine to Darfur, and a lot more, they go where other groups fear to tread. They have no political or religious agendas, just the drive to get aid to where it can do the most good.

Last year an award-wining documentary was made about three of the men, Ed Artis, Dr. Jim Laws and Walt Ratterman, which has been shown on PBS and viewed all over the world. These men are the real deal; heroes who like to do good deeds but get an adrenaline rush at the same time. Some of the things they do I cannot write about, as it would put them and others in serious danger. They are a little bit crazy, but then someone needs to be to get done what they do. But let me tell you about two projects that are public knowledge that they will be doing after the first of the year.

Everyone should know by now what a true world class disaster the genocide in Darfur is. There are literally thousands starving and dying each week. Knightsbridge is going to help in two ways. First, Ed is going to deliver two solar powered water purification plants each capable of purifying 30,000 gallons of water a day. Walt Ratterman, one of the world's leading experts on solar technology will go with Ed to train those who will use the systems. The key, quite bluntly, is getting the plants in and across the desert to the Darfur region. Ed is very good at getting critical items to where they need to be in very difficult if not dangerous conditions. The stories he can tell.

At the same time, Dr. Jim Laws, a cardiologist and others will be going into Chad to work in refugee camps there; bringing medicine and medical help to a very desperate situation. They will be going there several times over the year.

Readers of my letter may be familiar with Walt Ratterman. I have mentioned his work in Thailand where he goes to refugee camps (mostly the minority Christian Karin tribe) along the Burma border, bringing solar power to clinics there. As one doctor said, it is hard to do an amputation by flashlight. They are now bringing in more powerful units capable of providing enough power for small medical devices, vaccine refrigeration, with power outlets that will allow them to operate a laboratory, a computer, and a surgical room that will accommodate minor surgery and cataract eye surgery. These systems are carried on foot into Myanmar for the Internally Displaced People camps where the "hospitals" can now do little more than first aid. These units are truly life savers.

Walt will go to Thailand several times this year. Besides solar power, he takes drugs and equipment specifically requested by the local doctors.

No one in Knightsbridge gets a salary. There is no office. Everyone pays his own way. 100% of the money donated goes directly to the cause. Over the years, my readers have donated more than $100,000 to help in the worst disaster spots of the world. Some readers, like Walt, decide to become part of the team.

I am going to give you a few links below. You can donate by check or credit card. The address is: Knightsbridge International, Post Office Box 4394, West Hills, California 91308-4394. If you write a check, please note on the check whether the money is being donated for Water for Darfur or Solar for Myanmar or split between both.

The Knightsbridge Web site is www.kbi.org. It is being changed as I write to update some of the more recent missions, but the link to donate by credit cards works just fine. Use that if you want to donate to the Myanmar project. If you want to donate by credit card to Darfur, you can go to http://www.onedollar4darfur.com/index.html, which is a web site run by two ladies in Los Angeles who work to raise money for Knightsbridge for their specific Darfur projects. There is a lot of good information on the site, and a trailer for the film Beyond the Call at the bottom of the home page.

You can also read about and see a TV spot on CBS at the following link: http://www.cbsnews.com/stories/2007/04/10/earlyshow/main2666759.shtml

This segment will also be re-broadcast on January 1st 2008 during the 8:30 half hour on The CBS Early Show.

I know these guys personally and have spent a great deal of time with them. They have my full 120% endorsement. I am told all the time that I should charge for this letter. So, instead of paying for the letter, why don't you make a donation? If 10,000 readers sent $100 or $1,000, it would make a huge difference in the lives of desperate men, women and children. Please consider helping people who have so little. And for some of you more adventurous types, maybe even think about going.

A Half A Trillion Here and There

One certainly cannot complain that central banks are being too tight with credit. The European Central Bank auctioned off $500 billion in credit facilities this week, in part to cover over what everyone hopes is just a temporary year-end credit crunch. That is a staggering amount of money. It makes the money the US Federal Reserve bank is putting to work seem small by comparison. They did their second $20 billion auction, and told us that when they said they would do four of the auctions, what they really meant to say that they would do as many as necessary.

But is it having the desired result? That depends upon which set of data that you look at. Let's look at the monetary supply from the St. Louis Fed (courtesy of Bill King). MZM is the measure of the liquid money supply within an economy. Note that it has been rising rapidly of late. But the adjusted monetary base (AMB), which is basically cash plus bank deposits at the Fed which can be turned into cash, is down over the year. MZM might suggest inflation, but the AMB is suggesting the opposite. There is a major disconnect here.



Now look at the chart below. It shows the growth of the various money supply categories. Notice that M3, which the Fed no longer publishes, was rising rapidly through last year. Also notice that M3 is a growing part of the overall money supply. Basically, to get M3, you add Eurodollars, repurchase agreements, CDs to M2. M2 is cash in the banks, savings accounts, money market accounts, etc. What this tells us is that Eurodollars and repos are driving the growth in the money supply.

Can we come to any firm conclusion? Not yet, because the data is still working its way through the system. But the massive actions the central banks are taking plus the growth of the money supply while actual cash is shrinking is a worrisome development. This we'll be watching.



Consumer Spending is Up? Wait, Is It Down?

Consumer spending in November was very strong, the largest rise in two years. So why would Bill Gross of Pimco suggest that the economy probably slipped into recession this month? Because weekly surveys suggest the November spending boom may not be sustained. Holiday sales declined in the seven days ended December 15 for the third straight week, according to ShopperTrak RCT Corp. This year's holiday season may be the weakest since 2002, according to the National Retail Federation. And we were coming off a recession. (Bloomberg)

That would be consistent with a recently published report by Merrill Lynch Chief Economist David Rosenberg suggesting a 100% probability of a recession. Reading from his latest writing:

"We recently unveiled a new recession probability indicator that uses the shape of the yield curve (10-year note/3-month LIBOR) and corporate spreads (Baa) to predict the probability of a recession within the next 12 months. (The model is based on a recent Fed paper, which used the 10/2-year yield curve and Aa spreads.) The results are striking: taking into account corporate spreads, the model is flashing a 100% chance of a recession in the next year, up from 75% in October and essentially zero in the summer. Looking at history, the model did a pretty good job predicting the 1990-91 and 2001 recessions. In December 1989, recession odds jumped to 95%, and by August 1990 an official recession had set in. Similarly, the model was showing 100% recession odds in October 2000; by September 2001, the economy was in an official downturn."

As noted at the beginning, many retailers are telling us that traffic and sales have slowed in December. Consumer confidence numbers which came out today are at the lowest level since 2005, and are continuing to slide.

To repeat a point from last week: we are in the midst of the bursting of two major bubbles. Housing is the obvious one, but the second and potentially more worrisome is the credit bubble. Central banks simply do not react the way we are seeing unless they perceive there is a real crisis.

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. Contact John at John@FrontlineThoughts.com.

Disclaimer
John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.