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Tuesday, September 18, 2007

PPI Release

Is here. August total finished goods PPI came in at a startlingly low -1.4%, which certainly provides some cover to the Fed if they decide to cut 50 basis points (1/2 of 1 percent). There are some revisions in these numbers, so they do look a bit different than earlier this year. Crude goods came in at an astonishing -3.0 in August, and intermediate at -1.2! Energy dropped 6.6!!

This months' number took the YoY increase for finished goods from 4.0 last month to 2.2 this month. Since April this is the new sequence:
Apr: 3.2
May: 4.1
Jun: 3.3
Jul: 4.0
Aug: 2.2
You have your choice of whether to believe in some sort of conspiracy theory relating to Jews/Dick Cheney/Baptists/government statisticians or rather to cogitate on the fact that increases of cost of production haven't been fully passed to consumers for durable goods in a while because of reduced demand.

These numbers, if they are accurate, do tend to support the theory that the economy has taken a genuine turn for the worse and is experiencing slackening demand. IMHO these numbers are in line with reality, because I have been covering a lot of geographic territory in the last month and this is what I have seen. Two weeks ago, I think in a dinky little place called Cecil off I-75 in GA, I saw regular for 2.56. The place is too small to be subsidizing gas, so that's the deal they got on the gas.

UK CPI for August also came out very low.

It's those darned Lutherans I tell you.

All this tells me is that the economy has changed yet again out from under the PPI. They can't change it fast enough to keep up. YoY increases running 3-4% suddenly 2.2%? If true signalling dangerous levels of deflation. Answer is it isn't true. You note correctly that in many parts of the country demand for gas is down. California is using less gas for more vehicles and more miles and more people than 2 years ago. Remodelling of habits and choices kicking in. Lumber mills are closing in the face of falling demand. Seems J6P is bracing for a long economic winter. The problem with the PPI is that it won't pass through to CPI this time. The stuff that is falling isn't the stuff consumers are buyintg and they are 70% of the GDP.
I tend to believe the numbers as well. The inflation of the 1970s wasn't straight up. It was much more like uncontrolled chaos.

I think we'll be toggling between deflation and inflation for some time to come, but each time the Fed protects us against the deflation we'll just get that much more inflation in the next wave.

1970's Style Growth
Mark - not if the bubbles start deflating around the world, no.

That's what everyone is really afraid of.

Both of your guesses are as good as mine, I'm sure. Until a very short while ago, I would have been in favor of raising rates. But stuff changes.

I find myself in the very odd position of hoping that the Fed move was precisely the mistake you both think it was, and being afraid it wasn't.

I find myself in the very odd position of hoping that the Fed move was precisely the mistake you both think it was, and being afraid it wasn't.

My fear is that the long-term is being pushed aside for the short-term, yet again.

Was it a mistake? I really have no idea. Maybe the lesser of two evils was chosen today.

However, if we do not pop the bubbles, there are going to be billions of people attempting to drive cars in the not too distant future.

If we don't have peak oil now, we will someday. And then what?
Penner is quoted in a Bloomberg article as saying that we will have to accept high inflation as the price of escaping depression.

In theory, not that anyone has really ever had a chance to test it, if there really is a risk of depression there is some medium level of stimulus at which you somewhat balance the drags and the impetus such that neither extreme develops.

We don't have the option to produce another bubble, and this cut will not provide enough stimulus to support RE prices, etc. It just prevents some of the diffusion.
If you are a bull, you just buy something.

If you are a bear, you have three choices. You are either a deflationary bear, an inflationary bear, or a combination of the two.

Glad I'm the latter today. Good grief, lol.
Things that make us poorer will be in a cycle of deflation; assets, resource prices. Things that make us poorer will be inflationary; interest rates, food, energy. Even food won't help exports much because of dollar collapse.
Rob - I think that we are doomed to get somewhat poorer (overall) for a time just because we spent so much. We ate into the future.

The key to turning this cycle around will be to consume less junk and produce more.

Also, everyone needs to understand that we are unfortunately not alone in our bad habits, and that the entire world is readjusting. So the relative efficiency of adjustments will mean a lot as the months go on.

This rate cut will not support housing much, that's for sure. It does have the potential to help the producing businesses out a bit. I think that a "bit" of help is about all we can squeeze out in this situation. The Fed is not a free actor in the way it was in 2001 and 2002. It simply must pay attention to what is happening in the rest of the world.
America's manufacturing sector is doing fine ex-autos. Even that as long as you consider American autos to include Toyota and Honda even that ain't so bad.

What is happening is we are being globalized. J6P won't understand but we need to have a quarter of our standard of living removed and half of that redistributed overseas. Ugly and recent actions are making it worse but unavoidable regardless.
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