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Thursday, March 18, 2010

Various Notes

Weekly unemployment claims dropped to 457,000, however the four week average remains high at 471,250. If the current trend continues, next week that average will start falling significantly. But we are nearing Easter and spring breaks (Easter is April 4, usually most spring breaks cross that holiday), and that's one of those periods in which the seasonal adjustment can produce some odd numbers. Some school systems shut down for 2-3 weeks, and a lot of colleges and universities have relatively long spring breaks. Many workers file claims for that off period. Because the timing is erratic, the seasonal adjustment can be off and produce odd numbers. So the next couple of weeks with really strong numbers come in the second half of April. With any luck initial claims will be looking better by then. The SA insured unemployment rate is still sitting at 3.5%.

CFNAI for February is due out March 22nd. One of the reasons I like this very broad index is that it corresponds more to what the average person experiences in the economy:

Those of us who were around in remember how it took so long for things to improve on the ground after 2001. Just looking at CFNAI reminds us all of why incomes are such a problem and households are so pinched. (Added link: CR post on the same topic.) Marginally negative values for CFNAI do not necessarily indicate recession, but a slowing of growth that shows up in hiring and incomes.

CPI was reported as benign, but the year over year is what's important. For February, CPI-U YoY was 2.1%; CPI-W YoY was 2.8%. CPI-W is usually closer to the rural mix, especially when fuel is a significant factor. The rural population has a much greater exposure to the cost of fuel than the urban population. The price of used vehicles is up 14.1% over the year. Medical care was 3.8% and 3.7%. Over the last year, the cost of food fell very significantly, which really helped those on tighter incomes. The all items-less-food 12-month is 3.4 and 2.5.

At some point, consumers are going to need higher incomes to cope. Given projections of high unemployment rates over the next few years (let's start with the joint statement from Geithner, Orzag and Romer and this CR post), wage pressures are not going to be a problem for quite some time - with the unemployment rate possibly dropping below 8% only at the end of 2012.

So we have to be realistic; we are entering an extended period of restructuring and slow growth. At best.

I do not think we are looking at a Japanese future, because consumers are just defaulting on their debt. But don't expect near-term growth out of this, and don't expect consumers to magically gain the ability to pay for commodities that they can't afford.

In any case. Treasury yields for the longer terms are remarkably stable right now.

We also have a big problem with bad government debt - not just state and local. CBO's latest report on TARP projects losses of 109 billion. Add to that GSE losses of at least 300 billion. There's a lot in the woodwork that is going to add to liabilities in the future, and just shoving the debt onto the federal government does not make it go away.

Comments:
"I do not think we are looking at a Japanese future, because consumers are just defaulting on their debt. But don't expect near-term growth out of this, and don't expect consumers to magically gain the ability to pay for commodities that they can't afford."

I think another deflationary event is possible, but only if China's economic miracle story turns into a bust and the commodity "sure thing" story falls with it.

I don't necessarily think that outcome would be all that bad for us. Maybe I'm biased though. These commodity driven stock markets scare me as a saver, as seen with a casual glance at my toilet paper hoard.

In any event, I do not think we'll be seeing a billion Chinese driving gas guzzlers, regardless of what extrapolated future trends might show.

Just opinions of course.
 
CPI was reported as benign, but the year over year is what's important.

M.O.M.,

I agree that the yoy number is more important. That said, I'm also looking at the year over 2 year numbers. I'm expecting we'll be seeing negative CPI prints on a 2 year basis in the months ahead, specifically in June and July of this year.

The CPI-U peaked in July 2008 at 219.964 (with oil at $134/bbl). The June 2008 CPI-U print was 218.815 (with oil at $133/bbl). I don't see how we get there.

There's even a possiblity we will also see negative prints on a yoy basis come fall. The monthly noise aside, I'm just not seeing inflation. In fact, I strongly believe deflation is upon us and there is little Bernanke can do to stop it - although he is clearly a fanatically determined central banker when it comes to preventing deflation. Or should I say a fanatically determmined central banker when it comes to papering over his own incompetence?
 
One important factor missing is taxes. I hope your
property taxes are falling because the rest are rising
especially those that are more regressive.
 
Anon - taxes and local fees > UPUPUP.

Let's not kid ourselves - the shortfall in sales taxes alone has local and state governments in an agonizing bind at the same time that their borrowing costs are often rising, and the retirement crunch is destroying their budgets anyway.

MAB - when you look at stuff like medical costs (which our current essay in wishful thinking will only exacerbate), state and local taxes, insurance costs for other items, and base costs (fuel), it is the same pattern of inflating necessities and deflating discretionary.
 
Well, Mark, straight line extrapolations rarely do work out.

They aren't making any more land! Grummble, grumble.
 
Speaking of taxes...

I just had my income taxes done. They came in roughly 80% less than projected a year ago. Behold the power of Treasury Inflation Protected Treasuries in a deflationary environment.

It's a good thing for me. My purchasing power did fine and my taxes went down.

It's a bad thing for the government. Their purchasing power did not do fine. In fact, they've got to cough up a rather substantial tax refund on my behalf.

Of course, they'll be paying me with money that they'll borrow from me, my children, and my grandchildren. It almost all works out in the end I guess. Almost. I say almost because I don't have children or grandchildren. I have pets instead. Oops!

Dizzying.
 
I live in a county heavily dependent on AG,Tourism and FIRE,with a healthy dollop of $ from wealthy retirees who don't feel as wealthy as they did a year or two ago.We also have black money from pot growers and meth labs,but it is difficult to quantify.Commutes are typically long and with gas at $3 plus a gallon the wage earners are badly squeezed.Fire is dead,tourism is OK,and AG is as always,uneven.Many planted Pinot vineyards expecting the high prices to continue and last year the spot price dropped 75%.Contracts are usually for one,sometimes 2 years and all but the best growers are seeing offers at 1/2 or less of last years crop.I have 2 close neighbors who have small vineyards planted in pinot,they are on the same hill and one is getting the same price as last year,the other half as much.one is a good operator with a lower cost basis on his land,the other is excellent.A lot of good grapes will go to bulk wine,or rot.
 
MAB - another comment about your comment (I'm sorry, I'm having yet another run-around day).

Your point about the two-year is very important. But what I usually figure is a flex rating (for different types of sample households), and since incomes have dropped significantly, flex ratings appear to still be degenerating on a multi-year basis.

Not for everyone, though. Some people like Mark have a good net increase. Because there is generally a deflationary trend for assets and big purchases, it really does not hurt anyone to hold onto money right now.

For people who have tight cash flow streams, the reverse is true. The buying power of their money is generally diminishing.

So what we have is a two-tier economy of an ugly variety.

By flex rating I mean that I am assessing marginal ability to compensate for economic changes. We use this to figure loan trends; as flex ratings decrease loan defaults go up.
 
MOM,

"For people who have tight cash flow streams, the reverse is true. The buying power of their money is generally diminishing."

It's bad for those who "need" their money to do more than just keep up with inflation. It's easy to compensate by taking on too much risk. If the last decade is any indicator, it has been too easy.

It's especially bad for those with heavy debt and declining real wages though. The money grows but in the wrong direction.

And lastly, a good example of what you just said can be seen in TIPS yields.

If you have tight cash flow streams, then you cannot afford to invest in 30-Year TIPS paying 2% or more over inflation. You cannot afford to hold them until maturity. At best, you are stuck earning just 0.2% in 5-Year TIPS instead.
 
and since incomes have dropped significantly, flex ratings appear to still be degenerating on a multi-year basis.

M.O.M.,

Now we're on the same page. Just because I don't see high inflation does not mean I don't foresee tough times ahead.

Wages have taken a beating, especially private wages. Add in debt loads and the loss of guaranteed retirement benefits and it's pain city for far too many.

The system is rigged. The Fed enabled Wall St. to push way too much bad debt into the system. People never would have taken on such massive debt loads absent the lies from the Fed and Wall St. about asset values. Wall St. has skimmed off all the surplus for themselves. No way is Wall St. going to allow that money to be re-distributed. If the majority have no money, where will the inflation come from?

I live in NJ and huge budget cuts are in the offing. My town is set to lose 100% of its state school aid. I'm not trying to say if we can or can't afford all the public spending. My point is that we definitely CAN'T afford Wall Street bonuses. Yet the bonuses are defacto gauranteed by the Fed and our Government. Our financial overhead is WAY too high.

Regardless of how it is reported, the majority are not seeing a recovery. Rather, they are slipping into depression.
 
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