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Wednesday, October 15, 2008

Yes, It's Crappy, But

The headline economic stats are bad virtually around the world, as well as in the US, and the freight indicators are really bad.

In the US, September retail sales racked up a YoY decrease in nominal dollars ( 375,473 for 08 compared to 379,370 for 07), and producer prices for finished goods fell for the second month in a row. Nor is this surprising, because SA consumer credit outstanding fell in August, which rarely happens, and is the result of a recession. See summer of 2001. Further, the business inventory/sales ratios show the same indication:

Note the big run up in 2006, which was the beginning of the production recession. That was slowly overwhelmed by a pickup in manufacturing, and now the consumer side of the economy has weakened enough to conquer manufacturing strength.

BUT, although we are in a recession, and it looks to be an 80ish recession in many areas, the factors which produced the recession are rapidly heading the other way, and will inject purchasing power back into the economy. Just take a look at crude oil spot prices - Brent below $71, and WTI Cushing below $77. We could very likely see Brent spot in the $60s next week. There is no appetite for buying crude up with current fundamentals.

This is a very needed correction. Whatever economic theory it was that justified crude prices as high as last summer's appeared to have been constructed by the same folks who claimed home prices had little relation to incomes. The "paying for it" step was left out of the equation.

From a community banker standpoint, Wall Street looks about the way it does to Main Street. Nonetheless, the various monetary support measures should function well enough to prevent too much collateral damage to the economy. Now it's a question of clearing some debt whether that happens from paying it down or writing it off.

I am convinced that much current economic bad news is wrongly attributed to the "credit crunch". In fact, it's the result of the combination of extending too much bad credit and the huge run up in energy prices.

The next crucial point is eastern Europe. If that falls too far, European financials will take another hammer blow which they cannot afford. Poland now wants to accelerate its move to the Euro. We'll see. Even the Czech numbers are beginning to come down.

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