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Friday, January 02, 2009

Chirpy, Chirpy, Bright, Happy Economic News

Alrighty, that title might have been just a bit misleading. Oil is tending to sag, because crude inventories are pretty high and the range of bad manufacturing reports keeps growing.

US inventories 12/26.
Compared to the previous year, stocks of crude are up 10.4%, and total stocks of petroleum products excluding SPR are up 3.7%. Distillate (diesel and heating oil) stocks are up 1.4%, and gas stocks are down 3.4%, which is right in line with the US gas consumption trend. Futures buying is constrained by the fear of getting stuck with the stuff.

Nor do other stats help. Some economists are predicting that Japanese GDP is going to fall in the double digits based on poor domestic consumption and falling exports in recent months. Indian exports continue to fall, but as far as I can figure it out, that is mostly due to currency depreciation. Markit's European PMI for December manufacturing was released at 33.9 (see article). The consensus now is that the ECB will have to cut rates again, and thus the Euro is trending down a bit.

I have been watching Germany for a clue as to how far Europe must go. German retail sales held for the holidays. The population is mostly not debt-loaded. Yet Germany's economy depends more on manufacturing than France or the US, so it is hard to believe that they won't take a pretty rough hit. The uptrend in recent years at least has them moving into this thing in relatively good shape, and the fall in consumer level inflation is helping sustain domestic demand for the most part.

The problem for manufacturing powerhouses is that you can have your choice of a strong currency and collapsing exports, or a weak currency and expensive imports. Japan's strong yen is a problem for its exports. India's exports are impacted, but seem to be dropping off less in real terms. Countries like Singapore, South Korea and Taiwan are severely impacted.

US rail traffic has been collapsing over the last month, racking up increasing double digit declines in December. Cumulative volume for 2008 compared to 2007 is still down only moderately, but look at this trend in YoY changes:
Cumulative 2008:
Carload -2.2%; Intermodal -4.2
Week ending December 27:
Carload -21.7%; Intermodal -21.8%
Week ending December 20:
Carload -16.7%; Intermodal -16.5%
Week ending December 13:
Carload -9.3%; Intermodal -11.6%
Week ending December 6:
Carload -8.5%; Intermodal -9.8%
Month of November:
Carload -10.1%; Intermodal -7.9%
Some of this may be due to a relative gain in trucking vs rail as diesel prices fall, but I still cannot twist these figures into anything remotely reassuring.

I will post on Treasury receipts tomorrow if the final 2008 figures are posted tonight. It is already clear that tax revenues are dropping hard and fast. There are tentative FUT suggestions that things may be searching for a bottom, but we will have to wait another month to confirm that trend, and that trend could be short-circuited by global forces.

Cold, harsh reality is going to short-circuit Obama's rhetoric. The challenge for him will be fierce. I don't think he is a man who has a tight hold of reality, and his appointments show a pronounced bias for hubristic idealists, so I am not hopeful. The advice he is going to get will be poor for the most part. He needs older people with a lot of practical business experience, and what he has are primarily money mechanics with very little practical experience, and worse yet, what practical experience they have has been gained during times when fundamentals were little in evidence. They have now returned with a vengeance.

An older post from Chicago Boyz explains aptly what I fear. Read the Drucker excerpts. I remembered the post because I thought it might be prophetic:

From these two encounters, Drucker draws this conclusion:

“Fifty years or more ago the Uncle Henry’s and the Charlie Kellstadts dominated; then it was necessary for Son Irvin to emphasize systems, principles, and abstractions. There was need to balance the overly perceptual with a little conceptual discipline. I still remember the sense of liberation during those years in London when I stumbled onto the then new Symbolical Logic (which I later taught a few times), with its safeguards against tautologies and false analogies, against generalizing from isolated events, that is, from anecdotes, and its tools of semantic rigor. But now we again need the Uncle Henrys and Charlie Kellstadts. We have gone much too far toward dependence on untested quantification, toward symmetrical and purely formal models, toward argument from postulates rather than from experience, and toward moving from abstraction to abstraction without once touching the solid ground of concreteness. We are in danger of forgetting what Plato taught at the very beginning of systematic analysis and thought in the West, in two of the most beautiful and moving of his Dialogoues, the Phaedrus and the Krito…They teach us that experience without the test of logic is not “rhetoric” but chitchat, and that logic without the test of experience is not “logic” but absurdity. Now we need to learn again what Charlie Kellstadt meant when he said, “How else can I see a problem in my mind’s eye?”" (emphasis added)

Absurdity is Austan Goolsbee theorizing that mortgages should be underwritten not on the borrower's current payment capacity but on what the borrower believes he or she could pay in the future. Absurdity is GMAC becoming a "bank" holding company with capital extended by the government. Absurdity is a bunch of investment banks becoming banks, with not a real banker amongst them. Absurdity is getting Mary Schapiro as head of the SEC to replace Chris Cox (see Oraculations on her). For over 15 years we have been following the path of airy theory without permitting the gross, defiling touch of reality to impede our triumphal progress on to a new, joyous, future of staggering short-term profits, and I cannot see that Obama is anything but the summit of this progression. People voted for change, but what they got was the past with its excesses cubed.

Be afraid. Be very afraid.

Several of the Japanese auto companies are dumping JIT. I strongly suspect that globally, the costs of production will rise for many classes of goods, and that will not help. Production levels can only drop so far before the unit costs of production rise. Capital costs are fixed, and there is a base cost to keeping a manufacturing facility running. Capital is now more expensive, and worse yet, we have expanded rapidly recently and that means a lot of debt has been added to overhead. We have a global production overcapacity for many classes of goods.

The situation is not hopeless, but it is very difficult. The only way out is to return to fundamentals and slowly dig ourselves out with a judicious helping of bankruptcies serving to destroy debt as fairly as possible and restore the ability to go on.

US real incomes probably dropped by 3-4% in 2008, net. I doubt the official figures will show it, but they did.

PS: For an example of politically correct hubris, you have to read this Telegraph article:
Researchers at the University of Birmingham found that 630 million years ago the earth had a warm atmosphere full of carbon dioxide but was completely covered with ice.

The scientists studied limestone rocks and found evidence that large amounts of greenhouse gas coincided with a prolonged period of freezing temperatures.

Such glaciation could happen again if global warming is not curbed, the university's school of geography, earth and environmental sciences warned.

While pollution in the air is thought to trap the sun's heat in the atmosphere, causing the planet to heat up, this new research suggests it could also have the opposite effect reflecting rays back into space.
There you have it. Whatever happens to the climate, it's CO2's fault. And it will be a disaster. These people have no shame.

It's idiotic. People are treating climate science as a positive science : 100% guided by first principles, with all variables known in advance.

We cannot, at all, isolate variables in climate science. Nor can we run experiments to verify any first principle we come across. Therefore it IS NOT a positive science and all formulas should be taken with the same boatload of sand that the average "psychological theory" is taken with.

Yes these formulas are "probably" not completely made up, and there may be some basis in reality for their content, but they're missing 99% of the variables. And all those variables are in constant flux and most are unpredictable (the temperature of the sun has varied nearly 40% in the last 2 years alone, given that 1% is more than enough to throw off any prediction you can imagine how reliable they really are).

Climate science is a "social science" : 95% made up to fit the current political climate. Crackpots with money drown out the few realistic papers there are as everybody tries to be "relevant".

Unfortunately this "we gotta be relevant to society" is even infecting previously positive sciences like physics ("quantum mechanics" crackpottery : everybody knows the physicists themselves are partly to blame for this). This is very, very unfortunate.

Science should be orthogonal to society. Sometimes it will give good news (e.g. "genesis is not the absolute truth") sometimes it will give really bad news (e.g. without the christian principle of "do onto your neighbour as you'd want him to do onto you" society will fail, and fail fast. Which obviously makes a strong case to enforce ideologies that push this behavioral pattern for it plainly means that if fundamentalist christianity dies in America, America dies with it).
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