Friday, June 12, 2009
Second Half Blues
The only thing consistently rising are confidence surveys, but the underlying detail of those is disappointing, because the surveys are rising on expectation of improvement rather than improvement.
Take consumer confidence, which appears to be based on future expectations, which appears to be based on media reports of economic expectations. However even consumer confidence has peaked and is now falling on gas prices. Oh, I know the Michigan survey eked out a minimal rise from 68.7 to 69, but that's way less than expected and other surveys have showed the beginnings of the fall already. One of them I like is RBC CASH (Cons. Attitudes and Spending by Household). RBC CASH declined 8.7 for June and is now at 34.3.
Coming into the second quarter we still had some heavy business declines. Among them, European industrial production was still falling at a nasty rate in April. I am discounting the positive Chinese news, because I will not believe those numbers until power usage starts rising and it is not rising. Even the Chinese don't believe those numbers. I don't believe the problem is the national government - I believe it is some of the regional governments who are finding ponies in dungpiles. Nobody else can see those ponies, so it is a pretty safe bet that they are allegorical ponies meant to assure the higher-ups of the local power structures' deep commitment to meet and exceed growth expectations. The official Chinese numbers have about the validity of the "saved or created" jobs-stimulus metric being advanced by the Obama administration, and are generated by a pretty similar process.
Yesterday's retail report was disappointing. Reporting about it was apparently heavily influenced by the reported car sales for May, but the figures in the report itself told a different story. From Table 1A on a month to month basis:
Total sales: +1,571Weakness in the dollar increased many drug prices. Grocery sales were mostly real increases. Gasoline appeared to be price increases. This is really disappointing because May was favored this year due to a relatively early Memorial Day holiday and the associated vacations, plus increased auto spending due to the fact that auto dealers were in some cases desperately selling inventory before they were dumped as dealers. When the holiday is later the increase in sales is spread over the two months.
Drugstores: +146 (subtotal 1312)
Total Auto: +261
Most other categories dropped.
It appears that we have returned to last year's pattern of diversion of total spending to the basics. Price increases may produce temporary rises in retail sales indexes, but they also produce job losses and declining profits for the other segments of retail. The summer spending season did not open with a bang. Total retail sales were down 9.6% from the previous May.
In the meantime, our government spending woes are mounting rapidly. It was widely publicized that April's taxes were not sufficient to meet April's expenditures - they were over 20 billion short. This is remarkable because April is the one month the US is sure to see the deficit improve - until now. But May's Treasury receipts were 117,241 compared to outlays of 306,892 for a monthly deficit of 189,651. That's quite incredible. One does not know how to describe it. Let's just say that US mortgage rates are going to continue to trend higher.
The Fed's best hope of keeping mortgage rates the lowest possible over time is to pull a Volcker, because this isn't going to end until they make it clear that they will not allow inflation to go blooey. The problem is that raising rates, according to standard theory, is going to make the economy weaker. However that is not the way it's going to work this time, because oil is going to rise regardless of lower consumption as a hedge against a demented Congress destroying the dollar. The oil will create the weakness, and rates will rise in proportion to the expectation of deflation of the dollar's value.
The other hedge against the Congress dollar (hereby designated the DementoDollar) is the Canadian dollar (aka the loonie). To the extent hedging creates higher chargeable prices (prices for which you can sell oil to refineries who can process it and sell the products at a profit), those oil sands projects are going to open up again, which will raise investment and exports in Canada. The problem is recovering the initial cost quickly enough. Once they are mostly underway, the traveling costs should be under $45 a barrel. ($ quoted are not the DementoDollar).
Anyway, we are going to get our second half contraction through some combination of consumer/small business restraint and/or the Fed growing a pair and destroying the DementoDollar. Right now Congress has control of the currency, but once the Fed raises rates about 50 basis points, Congress loses control of the dollar. That would be politically costly for Bernanke, who probably would not be reappointed.
I'd say we'll be close to a second half decline of 1.8-2.2% so, which doesn't sound like much. But it is, on top of what we've already taken.
If the Fed doesn't seize control of the dollar, the DementoDollar will bring us another 3-4% contraction by 2011. I think I'd prefer to take my medicine now.
In the meantime, anyone who thinks that just voting for Republicans will kill the DementoDollar needs to get a grip and contemplate Isakson (R, GA), who is pushing his 15K buy a home, get a bunch of DementoDollars free program. Any home. The DementoDollar is a bipartisan effort. Needless to say, it's not much a value for the people who use the DementoDollars unless they plan to be in the house for about forever, because as soon as the Federal Government stops paying people 15K to buy a house (any house!), home prices will collapse some more. Most Georgians can't even do percents in their heads, and it appears Isakson is no exception.
I was going to post a bunch of stuff about oil and the BP 2009 report, but tomorrow. Tomorrow. Contemplating the DementoDollar has depressed me.
See, I don't always come here for the cheerful outlook. Sometimes I come just to see what you're going to name the various economic outrages.
I never could have dreamed that the Clinton years would look so good.
I liked the transition from "demented Congress" to "Congressional dollar" to "demento dollar". It proves transitive properties still work.
Besides, if the Canadian dollar is called the loonie, we have to come up with a really special name for the Congressional dollar. I think DementoDollar about covers it. The only thing we're going to be able to buy with these DDs eventually will be GM CongressWagons.
And yes, Gordon, it is an economic outrage.
Craig - I agree. A divided government might at least be a thinking government. At least the two sides might want to score points off each other.
As for the mid-upper range sales, everyone's trying to hold out for something only about 20% off what they thought their places were worth. In some areas, so little has moved that there are almost no comps. When the option ARMs force more sales, reality will begin to hit. You'll need earmuffs to drown out the agonized screams.
I'm sure somewhere there will be a politician who proposes a 200K tax credit for buyers off those homes to save the nation.
I'm excited that today I managed to find a quick way to explain the stark choices in front of us. Speaking to my father, I put it this way:
The baby boomers still have, in the aggregate, a huge amount of savings. Perhaps not enough to retire on, but still a big number if you add it all up. Almost everybody thinks that Washington's policies will cause inflation, and almost everybody with significant savings remembers the 1970s. Remember how baby boomers all started buying SUVs at the same time? How they all bought tech stocks at the same time? How they all bought investment real estate at the same time?
When they all start to think their savings will be inflated away by more than several percent, they're all going to liquidate their assets and SPEND it, at the same time.
Make sure you have a good wheelbarrow, if you intend to buy any bread.
The gist is that a couple local counties bought what was going to be an abandoned track a few years ago and are now renting it back to the tune of $59k/month. It is a 30 mile long parking lot. Of course, some NIMBY's are not pleased.
The story mentions there are 700 cars idled there. Doing a little math. $59k/(700 cars * 30 days) = $2.81 per car-day. I think you said the railroads were increasing their sit charge from $25 to $75 per day. Wow, that's some nice margins.
Every investment trade that's been tried, equities, investment property, equities (again), commodities has "popped" in their face. So even if they are done "investing" and decide they are going to spend it, what's an aging boomer spend it on? Cruise ships? Pre-paid funeral arrangements? Seriously, I can't come up with much (but I'm not an aging boomer).
I think part of the problem is there's nothing left to buy. Hence the lack of velocity of money is overwhelming the unprecedented increase in supply of money.
Seems like everyone is looking to china to stimulate thier domestic economy. But if they start spending the cash at home dont they then have less potential to buy US debt. Which leads to that precarious position again.
"Every investment trade that's been tried, equities, investment property, equities (again), commodities has "popped" in their face. So even if they are done "investing" and decide they are going to spend it, what's an aging boomer spend it on?"
1. It needs the ability to "pop"?
2. It must appeal to those who believe they are done "investing"?
3. It must be as irrational as previous wealth preservation/growth ideas?
4. It must appear to be a sure thing?
I think I have a potential match.
100% Safe Government Backed 30-Year Demento Dollar Denominated Non-Inflation Protected Treasury Bonds! ;)
I own TIPS and post on Yahoo's message board. From where I sit...
Many investors don't understand that bond funds go down in price when interest rates rise. Many investors don't understand that the amount lost is proportional to the fund's average bond duration. Many investors think rising interest rates and rising real interest rates are the same thing. Many investors don't understand that real interest rates were negative during the 1970s.
This one's for you. Prepare yourself for hair pulling.
Just checked out the Yahoo message board for my TIP fund again (inflation protected treasuries).
Yet another post saying that food and energy were pulled from the CPI. Here's a new twist though. He's going to "hold" the fund linked to the CPI anyway!
It really makes me want to pull my hair out. Why would he hold if he thought food and energy were excluded? Especially after energy's big move up?
Common knowledge based irrational investing is still alive and well it seems.
At the moment, it seems to me there's a bubble in Treasuries, with minor Beanie-Baby bubbles in firearms, ammo, and disaster-preparedness. All of which may be in the process of popping right now.
Thanks, Allen for bringing up velocity of money. That may be a good way of modeling current conditions. What I'm predicting is a logarithmic explosion in velocity of money.
Perhaps we're missing what's in right in front of our noses - perhaps the baby boom has placed its new hopes in government services?
I forgot to thank you for your post. That's a really good summation of the monetary conditions you've been talking about.
Yes, I too am spending most of my time looking at velocity and trying to guess the six month parameters.
Like Allan, I don't see the places to spend it.
Further, from my perspective what's occurring in Europe is very worrisome. The Baltic/Eastern European problems don't seem to be ameliorating. Bad loans are building up in the banks of old Europe, and in Germany, in particular, unless that is addressed corporations will have trouble not only covering their debts but covering new capital spending.
From my POV, sections of Europe are perilously close to a semi-deflationary cycle. This is very bad for a lot of the big infrastructure Italian companies, and death on a stick for Germany.
Consider also the Canadian problem. They are a manufacturing/natural resources power house. In an era of declining world trade, their natural resources have boosted their currency. This is hurting their exporting businesses, and may prompt the government to attempt to deliberately devalue their dollar.
More later. I'm sorry - there was a near-monsoon this weekend, and that was a rough way to discover that the roof was leaking! I'm still coping with that.
"From my POV, sections of Europe are perilously close to a semi-deflationary cycle."
I had a deflationary tone today as well. It was a quote from the New York Times.
"Some economists say they are bullish on commodities because they believe that the United States and European economies are on their way to recovery."
Off-topic, but I thought you'd appreciate this article on the coming oil price shock:
There are laws of economics just as there are laws of physics, and just because many economists don't understand the laws of economics, that doesn't mean they don't exist.
Not only that, but it has already been proved. If oil prices get to triple digits, the shock is such that the real economy declines enough to knock them down very far.
Many things can happen, but oil cannot stay in the triple digits. No way. This ride is about over.
The most probable result is that oil supply will increase (the Canadian oil sands projects can about double output in a couple of years and the oil-subsidizing economies will have to back off their subsidies such that oil trades in the $40-$65 range.
The next most probable result is that we overshoot and that oil ends up in the $30s for 5 years or so.
"The next most probable result is that we overshoot and that oil ends up in the $30s for 5 years or so."
Like you, I don't think oil has a snowball's chance in you know where of hitting $140 again anytime soon.
It seems like a prisoner's dilemma game, like much of our overall economy. We keep making choices that are good for us individually but not so good for all of us. Oil traders are not immune.
"In the classic form of this game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defect. Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal."
The oil parabola can continue as long as everyone is cooperating, but the crash begins when the first big trader defects (sells). Since we've already seen what $140 oil can do to oil demand, that implies that someone will defect long before that point.
I don't think most stock market investors are prepared for another commodity crash. You can buy an infinite amount of stocks without driving up the price of gasoline to the point it creates shocks in the economy, but you can't buy an infinite amount of oil. The rules of the game aren't quite the same.
Just my opinions of course.
This phase is marked by investment-to-avoid rather than investment-for-returns.
It's, ah, a bit unpleasant.
As far as I can see, it comes down to one of two outcomes; 1)the baby boomers either grow wary of the dollar, empty their bank accounts and mattresses to buy something, anything, causing hyperinflation, or 2) the boomers don't trust anything but cash, and squirrel it away in CDs at the bank, causing deflation.
If option 1), then I suppose inflation-favored stocks are the must-have thing. If option 2), then it's cash that's not in a retirement account.
Either way, Treasury rates (and probably all interest rates) are going up, there's a high likelihood of Treasury default, and a high likelihood that the Feds are going to confiscate some portion of IRA and 401k funds.
The Fed continues to thread the inflation/deflation needle?
When oil rose to $140+ we were scared to own cash.
When oil then fell to $30+, we were scared not to own cash.
This "turbulence" keeps us all a bit off balance, which might not be the worst thing that could happen, at least in the short-term.
With $70 oil, I'm rather neutral towards cash right now.
Just a thought.
I do think your option 1 or option 2 will eventually win, but eventually could take a very long time.
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