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Wednesday, November 17, 2010

Jimmy Buffet Time Again

Wasting away in Bohicaville,
Searching for my lost shaker and salt,
Some people claim there's a Fed Bank to blame....
But I know ... it's my own darned fault.
As far as your blogging host (hereby named Our Lady of Stupid Data Fitting) can tell, we are actually in a contraction right now. Admittedly, early in a contraction, but you know, contracting.

That means that I have been wrong. I guess the Fed's action, which really took effect long before they officially did anything about it, was a factor, but underlying growth effects in the economy before they started running their mouths were clearly weaker than I thought. I knew this was going to be a bare patch, but now it's a DOA.

Many of the reports are still mixed, but Treasury data is showing that it started in October (Medicare HI wages went negative YoY, after having been about 1/2 a percentage point better in August and September):


And now, it appears that the patient flatlined in November. Because other taxes were higher, October's WIET looked okay in the Daily Treasury Statements. But now....


WIET, CIT, Excise. Zip, no heart beat.

It seems that the compression in company profit margins involved in higher underlying costs and slim-to-none ability to raise final prices due to poor personal income gains finally shunted companies into a slow-down.

In partial defense of the Fed, this epic and sudden crash-into-the-wall fall is what they were trying to avoid.

Now other people aside from Our Lady of Stupid Data Fitting read this stuff, and it seems like commodity prices will be undercut by Mr. Market looking at Mr. Reality. Inflation overseas in the biggies (China, India, etc) has been running very hot all year.

Things are getting a bit dicey in India. Their current account deficit is worrisome and the Sensex is selling off, although the tech sector is still running hot. They're beginning to get in potential trouble with teaser rate loans, too. Since it is mostly financial-instrument capital inflows that are offsetting their current account deficit, it is time to get a bit cautious. Also, the recent pattern of inflation segregating to food is not a promising sign.

As for China, uh, they seem to be trying to go the Jimmy Carter route to control food inflation, which is not going to work, and will only spook investors. China's food inflation rate is lower than India's, but this is not good. A selection of commentary here. While food inflation is a serious social problem for China, their inflation is showing up in a lot more than food! This is from China's National Bureau of Statistics, and please note that the "previous period" is October 10th of this year. The picture gets worse when you look at the survey of individual food commodities and note the difference in price increases between staples and higher priced items. Also remember that Chinese, in aggregate, spend over 30% of their incomes on food while we spend less than half of that, and it is no wonder that consumer confidence has started falling in China.

The meltdown in the fading ashbeds of the erstwhile European Ring of Fire is epic, and I doubt it can be controlled. If it is not controlled, Italy is next, and no, I don't think Berlusconi's gonads are the underlying problem. Bond traders and prudery are not correlated. Italy's debt is so high (over 115% at least) that it cannot stand to pay much more interest, and it has to roll over a lot of debt within the next year. German long Bunds are yielding lower than US Treasuries, which is not surprising given our current uncontrolled rise in debt. Only worries about the Euro/USD are holding shorter Bund yields up, it seems. BondsOnline.

Our problems are not occurring in a vacuum; the world is going through a disruptive patch and we can all expect a volatile environment.

Comments:
"Now other people aside from Our Lady of Stupid Data Fitting read this stuff, and it seems like commodity prices will be undercut by Mr. Market looking at Mr. Reality."

My thinking also. I thought the QE was going to drive commodity prices higher and profits lower. I've been riding gold, agriculture, coal, and the S&P 500 for a couple of months.

I just closed out most of my positions today. Methinks it is time to batten down the hatches and go back to the observe part of the OODA loop.
 
First we exported jobs, now we export inflation. Meanwhile, the second down leg on the lazy W begins.
 
MOM,

hereby named Our Lady of Stupid Data Fitting

You are being far too harsh on yourself.

I live by the rule that if one must panic, then at least panic *early*. There is no shame in that.

The S&P 500 closed at 676.53 on March 9, 2009. It sits at 1,178.59 today. It's 74% off the bottom. At today's interest rates, that's decades of safe gains.

The S&P closed at 1,225.85 on November 5, 2010. It is therefore only 4% off its recent high and it has only been two weeks.

If hindsight shows that you were right to "panic" here, then hindsight will also show that you are an *early* panicker.

Panicker

The word 'Panicker' was derived from the Sanskrit word 'Parinayaka' meaning 'captain of warriors'...

I will be among the first to salute you!
 
MOM,

"The picture gets worse when you look at the survey of individual food commodities and note the difference in price increases between staples and higher priced items."

"Also remember that Chinese, in aggregate, spend over 30% of their incomes on food while we spend less than half of that, and it is no wonder that consumer confidence has started falling in China."

Exactly!

I've been thinking about how this relates to wheat in recent days.

CPI Conspiracy Theories Continue

Note the chart of wheat prices. If wheat is $270 per metric ton then it is about 12 cents per pound.

If the cost of spaghetti actually rises from $1 per pound to $1.12 per pound then the typical American won't really notice it all that much.

If wheat rises from 12 cents per pound to 24 cents per pound, then many Chinese will notice it. Big time.

I think that's one reason Chanos (the guy who shorted Enron) thinks China is on a treadmill to hell.

I continue to be of the very strong belief that income inequality matters. Those who ignored it during the subprime mortgage crisis did so at their own peril.

"History never repeats itself, but it often rhymes." - Mark Twain
 
Come on MoM. You are being needlessly harsh on yourself:

Worries about stupid policy aborting the recovery foetus were never far from your mind after all. That it has manifested even earlier, and harsher, than expected comes with the territory in forecasting. Life wouldn't be life if perfect forecasting were possible.

But yes, the trained idiocy of the policymakers beggars belief. Difficult to see how this will end well.

Keep the good work up; you educate us more than most.
 
I feel you MOM - So if the fed did not act would this baby have kept rolling on up or rolled over on it's own.
It's hard to say but over at http://pragcap.com/ he is proposing that QE2 is the Fed preparing for a bank bailout early next year.
personally I don't know BUT if I were to deduct from my question above "would it have rolled on up" if the fed did nothing then they would have done nothing, right ???.

kay
 
Dear Mom,
Your insightful comments are as usual on the money.

Here in the UK we are being prepped ready to bailout whoever needs bailing out in the EU. That on top of our own debt and problems.

It is difficult to be optimistic about anything. I see anger in the States is growing, although you have some who are actively taking up the cudgels against the Fed. The following takes you to an interesting 8 minute video if you have not see it.

http://dailybail.com/home/the-fed-under-fire-the-federal-reserve-is-the-black-hole-in.html

Hope all is well, Regards Barry Sheridan
 
Kay - if the Fed had not acted, I think we would now be in better shape.

I thought we would oscillate between a bit negative and a bit positive, emerging into stronger growth toward the middle of 2011.

Obviously there is no possible way to check that theory.

My word verification is "dembushi". Which I guess is what Obama is now.
 
Barry - because the UK has a very significant volume of trade with Ireland, the current problems affect it more than most. I would guess that one way or another, the UK will at least be forced to extend credit lines for liquidity over the next two years.

On the other hand, the UK never did go Euro, and in some ways that is a real ace in the hole now. I cannot figure out how Italy can make it through this without an effective default, and France is in a pickle too.

Ireland and Spain are different cases; neither had huge debt accumulations before the bubble burst, but both had economies partly predicated on the bubble.

It has to be obvious that Germany is calling a halt to Greek-like bailout deals. Its central bank has been in revolt ever since the first deal, and the truth is that Germany assumed a massive amount of implicit debt through default obligations in the first deal. Now if the fund is funded, those guarantees will kick in, and Germany's taxpayers will be facing a very unpleasant situation.

The German central bank is essentially relying on ex-Euro exports to Asian and ME countries to sustain its industry even if intra-Euro trade drops off, and when I look at China I feel some doubts. It is going to be difficult for China for at least a few years.
 
The Fed gets real time data, the rest of us don't.
When QE2 was announced the Fed new we were
slipping into a contraction. I believe the time is nearing to buy real assets. If you are going to default then
QE2 doesn't matter in the long run.
Sporkfed
 
I don't know. I think a lot of us in this country just have this nagging feeling that things are not going well and not likely to pick up any time soon. For me, I tend to think squirrel-like of buying more food to stash. I bet I'm not the only one thinking that way
 
Well, I'm mostly on the sidelines and the market rallies. Very few losers on a big up day on good volume.

Oops, Mr. Market faked me out and is in my six o'clock with guns blazing. Should I raise my gold and silver shield to thwart his dastardly plans? OODA knows.
 
Jimmy J.,

Oops, Mr. Market faked me out and is in my six o'clock with guns blazing. Should I raise my gold and silver shield to thwart his dastardly plans? OODA knows.

Beware the gold bug known as Khan!

He tasks me. He tasks me and I shall have him! I'll chase him 'round the moons of Nibia and 'round the Antares Maelstrom and 'round Perdition's flames before I give him up! - Khan, Star Trek II

My word verification is "blessin". No joke!

I bought gold in the low 400s and sold in the high 600s. Perhaps that person sold in the 800s to someone who sold in the 1000s to someone who sold in the 1200s to someone who sold in the 1400s.

With overall inflation running so low, every step in the chain makes each generation of gold bug quite prosperous. Apparently gold has the power to make any and all freshly converted sinners into winners, and at any price.

It truly is a miracle metal and a wonder to behold! $43.70 per gram it is better than any "Street" drug. It never gets consumed when you "use" it!

How am I doing? Would I make a good chief economist at the World Gold Council?
 
One more thought.

World Gold Council

The World Gold Council’s mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders.

They are much better at fulfilling their mission than the National Association of Realtors apparently, at least in recent years anyway.
 
Teri - I'm laughing helplessly at the idea of you crouched in the backyard burying a tightly wrapped bags of beans, maybe some cans of tomato soup.

When I look at bank deposits, I think a lot of us are stuffing the acorns in the tree trunk. Of course, to some extent the millions of people who are currently unsure whether their unemployment benefits are going to expire have to do that.

It's not all personal deposits, but since August Other Deposits are up 100 billion. A lot of that is probably on defaults; Q2's delinquency rate for all loans and leases reached a staggering 7.32% SA. Residential 11.4%.

But still, Q3's annualized rate of growth in other deposits was 7%, and here is the recent monthly trajectory:
July: 6.9%
August: 7.6%
September: 8.1%
October: 8.7%

In Q3 hard money (NSA) other deposits increased 70 billion.

However, large time deposits are much weaker and actually dropped a smidge in October on an SA basis, so it would appear that the gap in spending is being financed partly from savings. When people don't roll over a CD they may end up with part of it in a savings account, and withdraw some to put in stocks or spend or whatever.
 
Mark - love the World Gold Council. Perhaps NAR should try to hire some of its employees and start over.
 
"How am I doing? Would I make a good chief economist at the World Gold Council?"

Mark, not bad, not bad at all.

Inflation has been low to nonexistent but "the smart money" knows we are facing hyperinflation.(Hold onto your TIPs?)That has been the consensus (with occasional breathers) for some time. But the fundamentals don't support it.

So, for me, gold is a trade. My motto is, "The trend is your friend." Many trends have no fundamentals behind them, only emotion or hopes/dreams of things to come.

Unfortunately, I'm not Spock. Sometimes my emotions take me where I shouldn't be. Then it's time for OODA again.

The fear now is that China is going to cool their economy down and kill the demand for commodities. Will they? Will it work? Can it work? Then what?
As the Gambler says, "You've got to know when to hold and know when to fold." Constant OODA. It's what I spend much of my days doing.

Mr. Market sometimes fakes me out, but I'm ahead on points this year.
 
MOM (& Jimmy),

"Perhaps NAR should try to hire some of its employees and start over."

A merger of equals?

WARG - World Association of Realtors' Gold

Warg

"Warg is the term used to describe the evil wolves who were used as mounts by orcs. They could only harm others when darkness had fallen."

Perfect!
 
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