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Friday, October 14, 2005

A Good Cure For Economic Denial

This Free Republic thread has a lot of individuals on it discussing their economic outlook due to rising energy costs. I would recommend reading it, because the roof is going to crash in. Energy is the economic problem.
Heating oil prices are going up 70% in Oregon. Back East people are really dependent on heating oil. Much more so than the West Coast. To make matters worse, this winter will be really, really cold. Some people may face heating bills as high as $ 200 a month or even higher. There goes Christmas! Retail sales may fall as much as 20% for the year.
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The gal who runs the riding stable at my Mom's place told me yesterday that 3 wire Alfalfa hay just went up $4.00 a BALE (over 60%) in the last week. She has been getting calls from people who no longer are able to afford to feed their horses, just wanting to give good quality, well trained animals away. (In California it's illegal to slaughter horses for meat).
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In the company I work for there are a lot of orders that are not being filled. The reason? The customer's margin is such that they can't afford the shipping costs, and the market is such that it is not easy to pass the costs on.
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Corn and soybean prices are low, and many farmers are just chopping the crop for silage. With the drought and high gas prices it is to much money for to little return to harvest.

What caught my eye recently (anecdotal and very local) is that there are a lot of cars, boats, ATV's, etc for sale. Also, there are more houses on the market that are staying on the market. (Again, very local). It seems there are a number of people coming up short and looking for quick cash.
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In the core markets (food, energy, etc) we are seeing rising prices. The markets for these are fairly stable (if you don't eat you die), and the margins are small. So they are raising price to cover the margin.

In the sectors like for instance toys, where the product is more of a discretionary market (junior really doesn't need that new GI Joe), there is a lot of pressure to move the price down. The margins are higher, so there is more room to cut prices even with rising costs.

What worries me is that this all implies the same thing. Joe and Jane Sixpack are feeling the pinch and are starting to cut back. It is happening a lot in my industry. Half of what we make goes to pharmaceutical companies, half to places like Brachs candy. Both are cutting orders. The candy guys because they are not moving as many marsh mellows as expected and the phrama companies because with the excess stock on the market they can pick up cheaper product on the spot then on the contract.
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I run four businesses. My labor costs are the largest portion. My energy costs (auto/truck/heavy equipment fuels, and now heating costs coming) were second, and are now doubled, and rising. I have cut back on some things, to conserve, and still have doubled, in cost. I have to use oil, and its products.

I can't imagine how many bankrupt truck drivers are out there right on the road right now, praying for something to break... I can pass my costs on to my buyers.
See Mover Mike (just scroll down, but pay attention to his RefCo posts), and don't miss this one about US investment income going negative.


Comments:
No question- fuel costs will tell the tale. Even a 'soft' winter won't bring down food costs at the supermarket.

Housing costs are a more intersting story. I think hot markets will stay hot. Everyone else is is going to get skewered. Look for bargains for rental investment.
 
Yes, it's going to be a rough, rough winter, especially for a lot of older people on fixed incomes.

When you are younger most people can get a part-time job or something, but for the older people the big increase in food and fuel over the last few years is extremely difficult to manage.

Half the hot markets are lukewarm at best.
 
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