Friday, December 31, 2010
Farm Prices, Dudes And Dudettes
Now, I have been working 12-15 hour days, so I don't have much time. But here's a gentle hint as to what I would write about if I did have the time to write:
A) Prices Paid by Farmers
The December Index of Prices Paid for Commodities and Services, Interest, Taxes, and Farm Wage Rates (PPITW) at 191 (1990-1992=100), is up 1.6 percent from November 2010 and 7.3 percent from December 2009.
Production index: The December index, at 197, increased 2.1 percent from last month and 8.8 percent from last year. Prices are higher in December for complete feeds, feeder cattle, feed grains, and nitrogen.
Feed: The December index, at 214, increased 5.4 percent from November and 18 percent from last December. Since November, prices are higher for complete feeds, feed grains, supplements, concentrates, and hay & forages.
Livestock and poultry: The December index, at 140, increased 4.5 percent from last month and 23 percent from last year. Since November, prices are higher for feeder cattle and feeder pigs. The December feeder cattle price, at $118.20 per cwt, is up $4.60 from the November price. December feeder pigs averaged $149.00 per cwt, up $20.00 from November.
Fertilizer: The December index, at 273, is up 4.2 percent from November and is 19 percent above December a year ago. Since November, prices are higher for nitrogen, potash & phosphate, and mixed fertilizer.
Chemicals: The December index, at 147, increased 0.7 percent from November but decreased 7.5 percent from last December. Compared with last month, prices for herbicides, insecticides, and fungicides/other are all higher.
Fuels: The December index, at 305, is up 2.7 percent from a month earlier and is 16 percent above December 2009. Compared with last month, prices are higher for diesel, gasoline, and LP gas.
Machinery: The December index, at 233, increased 0.9 percent from November and is 3.6 percent above last December. Compared with last month, self-propelled machinery, tractors, and other machinery are all higher.
B) Prices Received by Farmers:
All Products, Livestock and All Crops.
Note the Bernanke signal following the earlier $200-a-barrel-oil crazy Wall Street signal.
Grains are like oil - they tell you where the system is headed.
It's, er, headed up. Very quickly. The Bernank hath struck, and he hath struck a mighty blow.
Because this is the category with the most flux on the consumer side, the proteins tell you whether there is a consumer-side wall. Look at those poultry and egg prices.
WALL. Consumers restrict meat purchases but compensate somewhat with beans, eggs and dairy when they are broke.
A lot of consumers are broke.
C) Now integrate that with the last few posts showing that over 40% of consumers next year will have less (higher taxes, constrained or reduced nominal incomes) money to live on. Remember that the SS recipients haven't received an increase in two years. You can throw them all in the barrel with that bottom 40% of earners who got a federal tax increase. And most people are paying higher local fees and taxes.
Sooner or later, my schedule will slacken and then I'll lay out for you the consequences. If DC could have acted like human beings and passed a fiscal stimulus that put some more in the bottom of the income barrel, perhaps the Fed's desperate attempt to kick the system into higher gear might have worked. But with the bottom 50% in trouble, don't expect to see a wave exuberance sweep through the economy. When prices go up for producers but prices cannot go up for consumers (consumers have to restrict purchases because of higher prices), production goes DOWN.
There is little slack left in grocery store margins, so the farm prices are going to start showing up on the store shelves. When I don't know, because what I have seen in the last two weeks are falling prices on the discounted side (most prices higher, but loss leader discounts to retain and increase price-sensitive customers).
PS: Good reading courtesy of Carl at NoFP. WaPo takes a bit of a critical look at financial reform:
Take, for example, the resolution/seizure authority of Title II, ostensibly designed to end bailouts and "too big to fail" risks. The Treasury can petition federal district courts to seize not only banks that enjoy government support but any non-bank financial institution that the government thinks is in danger of default and could, in turn, pose a risk to U.S. financial stability. If the entity resists seizure, the petition proceedings go secret, with a federal district judge given 24 hours to decide "on a strictly confidential basis" whether to allow receivership.This appears to have been designed to deal with investment banks (not regulated by any agency except the SEC), but the way the law is written anything could be seized. It's all Chavez, all the time. Under this law, the feds could seize a department store chain that offers credit, or a car dealership, or any number of businesses. It is an invitation to overreach.
There is no stay pending judicial review. That review is in any event limited to the question of the entity's soundness - not whether a default would pose a risk to financial stability or otherwise violate the statute.
Sunday, December 26, 2010
China Hound News
The finance ministry sold 16.76 billion yuan ($2.53 billion) of 91-day securities, falling short of the planned 20 billion yuan target, according to a statement on the website of Chinabond, the nation’s biggest debt-clearing house. The average winning yield was 3.68 percent...The reserve ratio was recently increased, and banks are short money.
The seven-day repurchase rate, which measures lending costs between banks, has more than doubled in the past two weeks and yesterday reached a three-year high of 5.67 percent....
Banks are short money in India also. There it seems mostly related to the huge government sales of rights and stakes. The Indian government has raised a lot of money doing that, but it has also pulled a lot of money out of the system. So cash is being injected there.
But back to China. First, there is some non-official lending going on. Second, I'm kind of surprised that they sold as much of the government bonds as they did with an interbank effectively that high.
The Chinese government imposed price controls on coal, which resulted in power problems and outages in some provinces recently. I'm not convinced that All Is Well.
A huge boom in copper - look at the Chinese PPI for manufactured goods. The "previous period" was December 10th of 2010. That is a two week appreciation rate, not an annualized rate.
Saturday, December 25, 2010
In case the UN forces do not make it in time, please stock up on ammo and come to her rescue at:
Here, Where She Is,Due to judicious application of woeful eye rays, the invasion is now sequestered in an upper floor. She suggests several AKs. Or perhaps the machine gun.
Being Chased by Giant Bug-Eyed Monsters,
Which May Carry Disease,
Poor Little Thing,
And They Won't Give Her All the Cookies Either,
Send Help Fast.
Recommended attack pattern is to come in low while laying down a suppressive line of fire, and then belly-crawling up the stairs shooting as you go. She'll be right behind you - that is, as soon as she finishes up the cookies underneath the tree. After that she'll be right behind you.
PS: Bring more cookies.
Friday, December 24, 2010
Merry Christmas! Happy New Year!
A New Year always brings some hope, and since change is coming whether we want it or not, here's to the hope that the change will be for the better! I think that we will be forced to it. I think that we will answer the call. Some do, you know.
Ashland University ECards. Great music.
This one I got from Shrinkwrapped: Hyperbole and a Half: The Year Kenny Loggins Ruined Christmas. I roared, but this is also a very clever satire of two thousand years of do-it-yourself Christian theology.
I cannot believe how lucky I am to have this Christmas with the Chief. A heartfelt thank you to all of you who prayed for him when he was in dire straits just about a year ago.
Oddly enough, I wasn't even that daunted when it seemed that he had Alzheimers. I just figured, hey, there could be no lay person on the face of the earth better equipped to deal with it than I would be. M_O_M Does Drooling. I was still just as overjoyed to be having this Christmas with him. He's much happier with the outcome, so of course I am glad for him. But the Chief was so desperately ill last year, and he was going down hard. It wasn't the ending I wanted for him.
Wednesday, December 22, 2010
Census, Population and Reality
The data from the 2010 Census will be coming out for about four months. The first figure is out, and it is of course the constitutionally-mandated population-by-state. News release. For our purposes, 308.75 million is the number.
The 10 year rolling estimate is available at the Census website as a download. Census also made an interactive map available which gives the history by decade.
Last year's July 1st estimate was 307 million (the 308.75 figure is as of April 1st, 2010), so our population is growing at a rate much less than 1%. 1% would have been on the order of 2.5 million, rather than the 1.75 million reported gain. Well, demographics always show the effect of severe economic downturns in the form of lower immigration and a lower birth rate.
For the purposes of understanding our currrent pickle, I am going to use the 2009 age breakout available from the 10 year rolling estimate.
The easy way to do this is to remember the 20s rule of thumb. If you look at this image of the table available at the download, you see
The four age brackets below 20 roughly break into 20 million groups. This gives you approximately 80 million below 20.
The last group (15-19) is a large one at about 21.5 million. But use 20.
The 65-74 group is approximately 20 million.
These two groups (15-19 and 65-74), totalling 40 million for our purposes, are important because they are "flux" groups. In a good economy, the 65-74 are out of the job market and the 15-19s are entering it.
In a bad economy, such as our current economy, more of the 65-74 group is in the job market and the teens are pushed out of the job market. Because this group is almost all eligible for Social Security, those in need will take Social Security and work to supplement it. (The average current retiree Social Security check before medical insurance is about 1.35K monthly. It is not enough to live on.) However that plus another 500-700 dollars a month from part-time work is available. So now we have geezers duking it out with the young 'uns for those Walmart/fast food/grocery store jobs. This also means that there is no pressure on wages at all except for muscle work.
The last group of 75 and up is about 20 million as well (especially this year). This gives us six cohorts (four younger, two older) of approximately 20 million each. These cohorts are out of the prime working years, and almost all have either parental support or at least Social Security.
That gives us about 120 million out of the main workforce, leaving us a rough core working age population of 190 million in 2010.
Now let us compare this with 2000's population figures:
Total population was about 27 million less or 281 million.
However the rule of 20s basically holds for the four youngest cohorts.
The 65-74 group was about 18 million instead of 20 million. The 75 and older group (the last six rows) are about 16.5 million. So subtract 79 + 18 + 16.5 from 281 to get a core working population of 167.5 million.
2000: core working population of 168 million.
2010: core working population of 190 million.
Now you guys find out why I have been bitched out by so many bank presidents. I never give up, and I never go away, and I never change the facts. In short, I'm an obnoxious bitch when you don't like the facts.
I repost a larger version of the full-time workers' graph:
We have about 2.9 million LESS full-time workers in November 2010 (111,114,000) than we did in November 2000 (114,076,000).
Gee, core working population grows by over 22 million, we lose about 3 million full-time jobs..... At least the trajectory is positive - oh wait! No, it isn't!
If you are a Fed president, here you start complaining about labor force inflexibility, if you are progressive, you pass a law mandating that people who clearly can't afford it buy insurance, and if you are a lunatic, you start talking about lazy inflexible workers who just don't want to get off unemployment, move across the country, lock their kids in a closet and get two part-time jobs for minimum wage, no benefits.
If you are a college professor, you talk about getting a college degree. Did I mention that the subsidized student loans are not dischargeable in bankruptcy? Believe it or not, if you are still carrying student loan balances, they will deduct a portion of your Social Security check to pay for them.
If you are Congress, you pretend to extend unemployment but don't, and pass a tax cut bill that raises taxes on poorer workers and gives a nice bonus to those who are doing well!
We have added some part time jobs. Here is a larger version of THAT graph:
Most of these part-time jobs are also temp and they pay $10 or below. No benefits.
I recently saw an advertisement for a bookkeeper with four years of experience, references, and a minimum associates degree. Part time, $7.50 an hour. I've seen ads for machinists at $10 hourly. No benefits at first. Mechanics $9, hours variable.
It does not keep you afloat. If you have kids and a spouse who isn't well-employed, you are doomed. And you can't afford to move away from your support network, because you damned well can't afford child care. You have to stay near family or friends, because how else are you going to have a place to live?
In the last two months, I have read more economic nonsense than I ever did before. Since 2000, the US has added 4.3 million total jobs with a core working population expansion of 22 million. And we have lost nearly 3 million full-time jobs.
Merry Christmas!!! Happy New Year! If you are decently off, please give to a food bank or any basic charity this year.
Update: Neil still questions my contention that a lot of low wage earners are getting a tax increase in 2011 as compared to 2010.
See Social Security wage data for the basic distribution. 2009 data were released quite recently:
Remember that in November 2010, YoY total wages and salaries were 1.2% less than in November 2009. So this is going to be right on target.
Anyone earning less than 20K a year will get a tax increase in 2011. That is, let's see, about 40% of all wages. By number of earners, it affects over 60 million people out of the approximately 150 million who earn something during the course of the year. That's over one third of the population any way you look at it.
Maybe this is not a problem to Neil, but remember that the price of food and fuel is escalating rapidly. With unemployment near 10%, raises are not a significant factor.
In addition, social security recipients did not receive an increase. There is a substantial overlap between the chart above and social security recipients, many of who are still working. Nonetheless, that adds another 30 million or so who will also see a drop in real incomes.
A worker earning 10K will get a $200 tax increase ($200 payroll tax rebate - $400 MWP), and a household with two workers earning 15K will get a $200 tax increase ($600 payroll tax rebate - $800 MWP).
In the meantime, a worker earning 50 K is going to get a $600 decrease in his federal taxes ($1,000 payroll tax rebate - $400 max MWP tax credit). A household with two workers each earning at the 50K level will get a $1,200 decrease, and a household with two earners at the 100K level will get a $4,000 decrease. Median US household income is about 48 or 49K, so the benefits of this proposal are very concentrated toward the top of the income spectrum.
This really is government union payola, but it's going to FUBAR the economy.
Monday, December 20, 2010
Too Busy To Blog
I am steamed up over that wicked tax compromise bill.
Consider this - at least 4 million people will lose unemployment benefits next year entirely. They may be able to find part-time work, but it won't pay very well. In short, they will be poor.
And in comparison to the MWP, the payroll tax cut returns most to the highest earners. Thus, a person earning 15K next year will get less than the MWP ($300) in tax cuts. A person earning 10K will get $200 back. A person earning 100K will get $2,000 back, whereas under the MWP they got nothing.
So I am truly pissed and discouraged about this. SuperDoc is demanding I write a book because I showed him some graphs, directly from Bureau of Labor Statistics:
Labor Force. Note the increase of, oh, about 11 million since 2000 and over 13 million since 1999.
Here we see those of working age who are not working and did not actively seek employment in the last month.
And here we see the number of those who did not actively seek employment during the last month but want a job. Gee, quite a step function there correlated with the downturn. I wonder if it could have anything to do with not being able to find a job?
Here we see Core Employment (persons over 20 who are working).
This number has risen only by a few million since 2000.
And here we see persons employed full-time (defined as usually working 35 hours or more a week).
And guess what, this number is below the 2000 number.
THERE ARE NO BLEEPING JOBS.
WE DO NOT HAVE A LAZINESS PROBLEM. WE HAVE A STRUCTURAL UNEMPLOYMENT PROBLEM.
All of our problems are related to the lack of jobs, and most especially the lack of full-time employment. The low spending and the credit defaults are a result of people not being able to earn money. Likewise, the number of uninsured people is related to the lack of full-time employment. The "disinflation" problem is caused by people not able to earn money to spend. The states' fiscal problems are related to the retirement benefits situation and low spending and poor people needing public benefits who cannot find jobs.
Further, we are still shedding jobs. Not adding, dropping. And the reason it is not showing up as rising initial claims numbers is because most of the people being laid off don't qualify for unemployment, so they don't file claims. Temporary employment or casual employment or short-term employment doesn't qualify you for unemployment benefits.
Education is not the answer, either. The unemployment level for the college-educated is shooting up rapidly.
Since the Great Depression, WE HAVE NEVER SEEN ANYTHING LIKE THIS. So talking about some imputed relationship that held true in a different economic circumstance is an exercise in fantasy.
Spending nearly 900 billion isn't going to help much because of the way it is being spent. People who are high wage earners are mostly older, and will either pay down debt or invest for retirement. Since the US environment is bad for investment, much of the invested money will go overseas.
Now, 400 billion would create a huge public jobs program, which could be extended for years, and most of the money spent would feed back directly into the US economy.
We are crazy. We are literally insane. Public policy just goes from bad to worse.
Addendum: Some doubt we are crazy. Here's why this is crazy.
First, we have the 2010 GAO audit of the public debt available in pdf. This graph is from page 16.
Haha! Makes me want to build the Parthenon! Might as well be scenically bankrupt. It would be a good public works project.
This graph shows the maturities of our debt held by the public (the stuff we have to pay interest on).
If you are wondering, debt held by the public was 9.3 trillion yesterday. Exactly four years ago, it was 4.9 trillion.
In 2006, the average interest rate on the instruments was in the 4.9% range. This year it is 2.36% (November). It is now traveling upwards.
Annualized nominal and seasonally adjusted GDP for Q3 2010 was 14.75 trillion. Passing this tax bill means that we will add about 3 trillion to the public debt in two years, which will bring us to 12.8, 12.9 trillion. Assuming that the economy grows six percent over the two years, nominal GDP will be about 15.64 trillion. At that point our debt held by the public will be about 78% of GDP.
But we will also be facing huge additional yearly draws relating to the new public entitlement program for medical insurance, Medicare/Medicaid (Medicaid rolls are to expand immensely), Social Security, and the state and local debt. Note that a bunch of localities are due to default over the next two years. And even if the Feds don't bail them out, additional costs will be incurred by the Feds and states.
And we'll be facing huge rate increases on our debt. At that point, we cannot continue to roll over our debt short term, because in just a few years the cost would double. I.E., we would be Greece. So we will have to start writing larger bills, but the going rate for those bills will be increasing, as it is now. Risk premium. So there is a double interest whammy impending.
By 2014 or 2015 we will cut Social Security. By 2015 or 2016, we will cut Medicare. Is this a good deal for the people who are doing so well now and will get back $2,000 on the payroll tax cut? No, because they are the ones with assets who will be faced with extraordinarily high tax bills later, and will likely take the brunt in the Social Security cuts later when they wish to retire.
You can't save any money on SS by cutting the benefits of the lower income people - they just move to public assistance. You have to cut those who are getting higher benefits.
If our net interest rate were to go to around 5% on our public debt by 2012 (very close to the 2006 rate), here's what it would cost each year:
A) 1% on 1 trillion is 10 billion. 5% is 50 billion. (A trillion has 12 zeroes. A billion has nine zeroes. Subtract 2 zeroes to get 10 zeroes.)
B) On 12 trillion at 5%, you pay 600 billion a year just in interest. We will be borrowing money to pay that interest, so each year thereafter even if we were running a primary surplus, we will be paying more interest.
C) The alternative is to remain in the shorter maturities and to buy a few more years. Greece did that.
D) If we do that, then in 2015 or 2016 Congress will basically confiscate 401Ks to get money to put in treasuries, so they can pay their hapless victims 2 or 3 percent. Safe as houses, they will assure us. This is why I do not have any money in a 401K or any sort of retirement account. They're going to take it.
Look to Europe. Watch the skies. This is a suicide pact of a bill; it only confirms that the US is planning to default on its debt. Along with the rest of this, mortgage rates and corporate financing rates will be rapidly driven up in competition with public debt, so growth will be strangled in the future.
Politicians think only to the next election, and that is two years away. The cost of that shortsightedness is immense.
Tuesday, December 14, 2010
Colds Always Leave Me Confused
Are they really saying that liberals are promiscuous, alcoholic, gambling risk-takers, but it's not their fault due to a gene? No, I'm NOT making this up:
A particular version of a dopamine receptor gene called DRD4 is linked to people's tendency toward both infidelity and uncommitted one-night stands, the researchers reported Nov. 30 in the online open-access journal PloS One.Here's a link to an article about liberalism/gene thing. Read carefully in view of the first article, one wonders if the "having a lot of friends in adolescence" really means "was a teen slut".
The same gene has already been linked to alcoholism and gambling addiction, as well as less destructive thrills like a love of horror films. One study linked the gene to an openness to new social situations, which in turn correlated with political liberalism.
The perils of really bad science seem to grow with each year. Assistant Village Idiot is guilty of bringing this lot of garbage science to my attention.
The actual study is here, if you are interested. Among the more hilarious moments occurs when you realize that the average age of the human subjects assessed was 20, the total sample was 181 persons, and only 24% of those had the risk gene.
You might suspect that this would result in a paucity of data about sexual experience, and you might be right. More than 20% of the subjects had no sexual experience (Binghamton University; it is not precisely the hub of the world). The virgins were not concentrated in the population without the risk gene. Among those who did not have the risk gene, the average number of ex-relationship sexual partners was about one, and among those who did have it, the average number was less than two. Among the "promiscuous" population with the risk gene, less than 45% of the group reported any one-night stand.
Assessing long-term fidelity is not going to be possible in subjects of this age. Given the age of the participants and the general lack of getting around, one might just as well conclude that the "risk" gene was expressed as being better at getting someone to go to bed with you!
Retail Et Al
Retail: November's retail report had a very substantial upward revision for October. That got the numbers to a point at which they generally made sense to me. The early holiday shopping should have produced a good pop for October. November's numbers are pretty good, but they do show the drop in furnishings and electronics I was expecting.
It's also worth noting that November's numbers are biased upwards by prices. I expected this holiday season to be good, although not great, due to high deposits at banks. I still think that describes the trend, although some analysts will be a bit disappointed by December sales. The question is really more January sales, and at this point I suspect they might be disappointing.
As to profits, I think trends will mostly be disappointing. Today's Best Buy announcement is probably going to be somewhat typical.
Producer prices for November were released, and they are very interesting. If you have the time, read through Table 4 and look especially at services. You can see the price compression I have been describing develop.
Small business: NFIB's November survey was released. On the face of it this looks more positive, with a business optimism index of 93.2. However actual earnings dropped, which makes me worry a bit. Actual sales also dropped. October seems to have been a better month overall. Expectations are up, but if the current trend holds they will evaporate. Prices are rising much faster than planned on - you guessed it - costs. Actual employment changes are still negative, but significantly better than October. They have returned to their August/September levels which is a real positive. See the employment planned vs actual job openings graph on page 11. Compensation did rise! Page 12.
On labor, the commentary:
Nine percent (seasonally adjusted) reported unfilled job openings, down one point and historically very weak. This Index component is a very good predictor of the unemployment rate – and this number indicated the rate will nudge higher. Over the next three months, nine percent plan to increase employment (up one point), and 12 percent plan to reduce their workforce (down one point), yielding a seasonally adjusted net four percent of owners planning to create new jobs, a three point gain from October.So improvement, but nothing that would show that small businesses can begin to pick up the slack from government. Inventories are flagging a possible problem. Short term credit rates are extremely low.
Last but not least, Manufacturing and Trade Inventories and Sales: It stalled. Some claim this is good; I look at the rise in mfrg inventory ratios and the compression at wholesalers (1.18 and holding) and think that it is not that good:
PS: Looking for the most positive indicator I could find left me with JOLTS; October openings seemed to have reached the level at which we would normally start to see a real jobs recovery. Perhaps not coincidentally, November's household survey data seemed to show that the private sector had reached the turnaround point, although the fiscal problems of government are still swamping the private gains. But the private sector is larger and gains there should slowly conquer the government jobs trend.
I do not know whether current inflation will crush the nascent signs of a stronger recovery. It would be tragic if they did.
Also, sometime in here retirements should escalate and create some openings for younger folks.
PPS: I have been remiss in my Canadian coverage, although I still plod through all the reports every month. Last year and in the spring I warned about Canadian household debt trends and mortgage trends. Now it's going mainstream:
Canada’s top economic officials yesterday urged households to be wary of taking on too much debt after data showed the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years.Part of the problem in Canada is high inflation, which is causing a lot of households to either pull back on spending or amass more debt! In any case, it is time to start looking very carefully at Canadian banks, because the lending trends have been a bit dicey at some. Mortgage lending is a bit suspect.
Bank of Canada Governor Mark Carney, Finance Minister Jim Flaherty and Prime Minister Stephen Harper said in separate public appearances that they are concerned about rising debt. The ratio of household debt to disposable income in Canada was 1.48 in the third quarter according to Statistics Canada, exceeding the U.S. level of 1.47.
Monday, December 13, 2010
But first, I need to finish trimming the tree, the Christmas baking and wrapping all the gifts. So.....
I would strongly encourage everyone to watch the triumph of reality over theory. It can be watched in real time using the Treasury's new charting option. Long term rates here. Yield Curve here. Look at this:
No one can say we didn't know this was coming, and monetary policy made it worse.
The full text of the VA decision on Obamacare is here. It's worth a read. Ultimately this will be decided by the SC. They can't get out of it now. That's the significance of today's decision. SC has to rule, because lower courts are conflicted. In theory they don't have to do anything, but this is a classic situation. If they refused, we could theoretically have a situation in which in some US circuits Obamacare was not legal and in some it was. The SC will be embarrassed into it. According to the Chief, Obama will have reason to regret pissing in the SC's beer during the State of the Union address. The Chief describes this as "short-sighted". Update: See Carl's analysis of the decision. It's, er, comprehensive.
On the last post, Neil commented on the Chinese data:
This sorta kills the growth story of the "developing Chinese middle class". Those aren't high-value consumer goods categories experiencing inflation. The Chinese leadership seems to be about out of time. "Out of speed, out of altitude, out of ideas", as the saying goes.There has been a lot of talk about the Chinese middle class. You can make up your own mind, but remember Michael Adam's dictat about the middle class and frugality. High inflation is extremely injurious to capital formation for those who rely on their labor. As to Neil's opinion on the Chinese leadership, the Chinese leadership did not raise rates in response to this report. They may be feeling a lot of pressure.
Here are some links bearing on the Chinese middle class issue from a non-Wall Street perspective:
Link one: ADB and the Asian middle class.
Link two: The Chinese Middle Class doesn't feel that way.
Link three: Middle Class: Mother-in-laws and Mixed Emotions. (read this in its entirety)
Link four: No Home, No Middle Class.
Link five: One-Third of Your Income On Discretionary?
Obviously there is a conflict here. It's only been a bit over a decade since private housing was encouraged in China, and I think the mating-associated drive to purchase a home has on net driven down living standards for Chinese. This has produced a rather distraught generation. The one-child policy produced a generation of males that really have to kow-tow to their prospective mother-in-laws. Since the parents are really being taken for their savings in order to get that all-important grandchild, I think the Chinese housing boom for the middle and working class is beginning to reach the buyer's exhaustion point. In any case, something has to give. Either they can have the car and the restaurants and the vacations, or they can have the home (in some cases). But the Chinese middle-class can't have both.
Since WWII, Michael Adam's frugal middle class has been the rule in the US. Most people had to save and spend much less than one-third of their income on discretionary purchases in order to buy a home and eventually achieve financial security. The pressures on the Chinese are more acute because they have little in the way of a social safety net. It is a paradox that a generation of elders are spending a good chunk of their life's savings to get their one child into an apartment and a grandchild. What will happen to them when they need to retire?
Even in the US, the recent trend away from frugality and limiting consumption has imperiled a huge group of middle-class wannabes and truly destroyed our economy. However one can walk away from that house and declare BK on those CCs, so there is a repair mechanism - but the time frame from bust, cards-on-the-table to the generation of a new group of the unencumbered is generally five years for smaller purchases and 7 to 9 for housing. Oops!
Saturday, December 11, 2010
Ohh, Chinese Hurting
In November, the consumer price index went up by 5.1 percent year-on-year. The price grew by 4.9 percent in cities and 5.6 percent in rural areas. The food price went up by 11.7 percent while the non-food price increased by 1.9 percent. The prices of consumer goods went up by 5.9 percent and the prices of services grew up by 2.6 percent. Grouped by commodity categories, in November, of the eight categories of commodities, six of them experienced prices rise and two witnessed prices decline. Of which, prices for food went up by 11.7 percent; prices for tobacco, liquor and articles rose by 1.6 percent; price for clothing went down by 0.7 percent; prices for household facilities, articles and maintenance services went up by 0.7 percent; health care and personal articles rose by 4.0 percent; transportation and communication went down by 0.7 percent; recreation, education, culture articles and services grew by 0.6 percent, and housing went up by 5.8 percent. In the first eleven months, the year-on-year change of consumer price was up by 3.2 percent, or expanded by 0.2 percentage point as compared with that in the first ten months of this year.That's pretty rough for most Chinese. On average they spend over one third of their incomes on food. Note the difference between the inflation rates between clothing, food, medicine and transport/communication. More discretionary categories seem constrained; more basic categories are escalating.
The pace of consumer inflation continues to escalate; in November alone, consumer prices rose 1.0% in cities and 1.3% in rural areas. That is not an annualized rate, but the rate of increase for one month. Food prices rose by 2% in just November.
The Chinese raised their bank reserve ratios to 18.5% (last rise this week, three raises this month). They'll probably have to hike interest rates now, because so far they aren't making progress on inflation.
PS: A portrait of Spreading Containment courtesy Treasury:
How Mr. Market changes QEasing to QTightening.
Friday, December 10, 2010
November Hospital Insurance Receipts
Total wages and salary (because hospital insurance is charged on the entire amount) dropped YoY by 1.2%. That is worse than October. I was hoping to see go the other way (about -0.8% YoY). So much for my cheerful speculations.
Note that self-employed receipts are better, which is true of October also, and squares somewhat with NFIB data. This is the government finance problem coming to haunt us. We just have to live through it. Because government jobs pay better than private sector jobs, losing one government job outweighs two average private sector jobs gained.
Thursday, December 09, 2010
Kill Or Cure?
Title: The New Age of Mortgage Lending: Dramatic Changes from Dodd-Frank.
From the blurb:
From applications to appraisals, disclosures to secondary market operations, HMDA reporting to fair lending, product offerings to underwriting standards - virtually every aspect of the business will be affected, and the regulatory changes have already begun.This is more of an "awareness" program than coverage, because most the regs have not been written, and some that have been written are in dispute and will likely be changed.
Register Now! The many statutory and coming regulatory amendments will cause many lenders to question whether they should stay in the mortgage business, or if they do, to what extent. This is more than a compliance event: it is a larger, business-related decision, since the changes go far beyond just new disclosures.
Mortgage lending will become both more risky and more expensive as a result.
Here's an example of the complexity:
Q: What is a "qualified mortgage," and why is this term so important?Theoretically the legal changes in reform should have contained exclusions and protections for small banks (Bankers Online caters to community banks), but in fact this theory breaks down on examination. For example, some CBs originate directly for Fannie. But their in-house loans are often much riskier, and you do have to charge more or ultimately you will go broke.
A: Under Dodd-Frank, a "qualified mortgage" is a loan containing no risky provisions, such as balloon payments or negative amortization (among others), and has a rate that doesn't exceed certain higher-rate thresholds.
The concept of "qualified mortgage" is critically important for two reasons: (1) if a mortgage loan is considered "qualified," it should be exempt from the risk retention requirement, meaning originators won't have to retain any credit risk after selling the loan to an investor; and (2) qualified mortgages enjoy a presumption of compliance under new TILA standards, meaning they won't undergo the same degree of regulatory scrutiny.
In the end, lenders choosing to make mortgage loans that aren't considered "qualified" will choose to take on a much greater degree of risk than those that don't. Is your bank prepared to do so, and if not, what will the cost be?
It is very unsafe to write longer-term loans that you can't sell in the open market, which will always be dominated by the larger institutions. Thus, theoretical safe harbors for community banks do not, in fact, exist.
I expect financial reform to take out another 400-500 community banks. That's on top of the 600 minimum that are going to die because of the debt implosion.
Initial Claims - What Do They Mean?
The number of workers filing first- time claims for unemployment insurance payments fell last week in the U.S., showing the labor market continues to improve.See, we don't know that the labor market is improving. The reason we don't know is that in November, we saw a very nice and consistent drop in initial claims, yet the November employment report showed that job losers and those completing temporary jobs rose by 390,000 SA from October. Apparently the reason initial claims were lower was that many did not qualify for benefits and did not file for them.
Applications for jobless benefits decreased to 421,000, less than the median forecast of economists surveyed by Bloomberg News, from a revised 438,000 the prior week, Labor Department figures showed today. The four-week moving average, a less-volatile measure, dropped to the lowest level in more than two years.
We have little current experience with this deep and protracted labor downturn, so trying to calibrate this data with post WWII recessions helps little. We'll find out what all this means when the December report comes out January 7th, with the additional problem that that release incorporates a bunch of revisions, followed by the new quarterly B.E.D birth/death adjustment schema which takes effect for the release in February.
I hope that this nice fall in claims means something real. I don't know that it does. Seasonal adjustments also have more impact at this time of year. Actual initial claims this week were 582,007, which sounds rough unless you know that initial claims for the comparable week in 2009 were 665,85. We seem to be clocking around 80K less each week in initial claims.
The other things about the November employment report which worried me so were that in unemployment duration, SA, the < 5 weeks number rose 171,000, and the number of discouraged workers rose over 400,000 compared to 2009. I wrote before about the sharp rise in unemployment among the college-educated.
I can tell you what I think is going on, but it is really a guess. I can only hope it is an educated guess. I think that employment in private industries is kind of marking time with a little underlying improvement, but that the real negative pulse is in government, with some knock-on from government-related job categories in the private sector.
If you look at Table A-14, you see that the most government-linked categories show significant YoY increases in unemployment, whereas the least government-linked employment categories show significant improvement YoY.
I bring this up because the sloppy economic reporting may well be fooling politicians into thinking that we can safely cut people off from benefits because they can find jobs, while in fact there is little solid evidence for that theory. If I were running the country, at this point I would be instituting a daily public jobs program, in which persons could show up, work a day, and get paid. It doesn't have to be for high wages, and in fact such a program is less susceptible to working off the books and claiming benefits at the same time than an unemployment benefits extension.
Wednesday, December 08, 2010
Tumbling T-Bills, Batman!
So all that money heads back out in the investor market. And you know what? The investors no longer want the junko bondso, and higher quality debt is getting a bit thin on the ground due to the fact that it was A) run up earlier, and B) higher rates mean lower borrowing. (Like, ya know, mortgages - watch those refis plummet!)
So, C) all that money goes into commodities with some offset to stocks, which were basically priced for a good year (better than we're going to get) next year already.
So, D) inflation, which does not exactly make anyone want to buy junko sovereign bondso erupts like Godzilla from the bottom of the bay. Where is James Bond when you really need him?
Another way to look at this is that the central banks, and also China, are all trying to futz with prices. But the pricing system is intimately interconnected. It seeks stability for a maximum of salable goods at possible production prices, but when the thing was very tightly balanced anyway, and all of a sudden everyone starts to hurl money into the pot, the entire system becomes unstable.
PS: And the best one-sentence post ever on this topic, which I have duly snaffled in its entirety from Small Dead Animals:
When Pelley asked Bernanke what degree of confidence he had in his ability to control inflation, the Fed chairman responded, "one hundred percent."It's the artless humility that so grabs you, doesn't it? Lenyrd Skynyrd's "Simple Man".
Because Sharing Is Caring
Can you spot the egregious fiscal errors in his example of what the family ought to do?
Only in the DC-NY Axis of Factlessness do pundits and politicians concoct fictitious examples that disprove the cases they are trying to make. Our "betters" are incompetent, and too incompetent to know they are incompetent.
Update: Mark at Illusion of Prosperity assigned his entire research department to this problem, and those fine folks delivered once again. You've got music, you've got lyrics, you've got old hairstyles.... This is great stuff:
And it's par for the coarse to see that camping's endorsedFor a slightly more realistic look at the situation, The Sarcasm Report update.
As our jobs are outsourced
Small Dead Animals (because a picture is worth a thousand words):
Average cost of a master's degree. The figures given here are quite low; degrees that are more marketable generally cost a lot more. I cannot figure out how anyone could get a master's for less than 30K, and that would be one hell of a Disney vacation. The really cool thing is that if you get one of those el cheapo master's, your average lifetime return is negative. So maybe you don't want to waste the money on a tent.
Monday, December 06, 2010
An Unmitigated Disaster
A) No increase for SS/Disability folks.
B) Severe governmental constraints.
C) Bad freight figures.
D) Declining profit-per-unit figures across a bunch of industries.
E) An inventory replacement cycle with a high sell-off factor.
This all adds up to a sudden, explosive burst of inflation. Companies that were tightly managing margins will abruptly raise prices, which will signal other companies to raise prices.
However the money is not out there to pay these prices, so you will suddenly see very concentrated falls in spending in more discretionary categories over the next three months, which will produce some job attrition.
And then we must discuss services. Services are less subject to base-levels of inflation, but they are acutely sensitive to consumer spending patterns. So you can figure some major, major job and income losses in services.
I am out walking around looking at the disaster unfold. The problem is that the Fed won't see it until it is too late and we have dumped another 500K jobs, and after that it will be hard to recover.
Obama's proposal to cut employee payroll taxes is a very good one; unfortunately he is pushing on one side of the economic truck with a bunch of Fed governors pushing on the other side, so the truck is doomed to move backward.
The October 1% drop in YoY Medicare wages was the first sign of the apocalypse. The November employment report was the second sign of the apocalypse. Rail data shows a distinct slowing now.
This was a very sudden reversal. To understand the problem fully, look first at historical Census income (look at all races and scroll down to get it in 2009 dollars) for households by fifth of incomes (quintile):
Second Lowest Quintile:
Second Highest Quintile:
2009: $100,000 (and this is a shame number, the real number is lower)
Now sit and think about the fact that in October 2010, total wages and salaries were LOWER than in October 2009. Yikes!
From November's employment report (which really covers half of October):
On an NSA basis (Table A-1), total employed persons rose by 283,000 persons from the PREVIOUS NOVEMBER. That's it. That's all. A whole year in recovery, and we netted less than 300K extra jobs, which did not even keep up with population growth. The employment/population ratio fell from 58.8% to 58.4%.
On an SA, month-over-month basis, we see that total employment peaked in November at 139,391, fell to 139,061 in October, and fell again to 138,888 in November. In August and September, even though there was clearly a negative impact from school-system related government employment cuts, we were still running ahead YoY.
November's Monthly Treasury Statement should be published this week, and I'll update you when it is. But although I am expecting some improvement YoY from October's, it is unlikely that we will be positive YoY.
When you look at Table A-8, matters become a bit clearer. Table A-8 splits wage and salary workers out between government, private household (domestic staff), and other industries. And here we see that private household employment has fallen by over 100K over the year, that government employment has fallen hard, and that private employment was making nice gains. However, once you look at the data split this way, it shows that private other industry wage and salary jobs peaked in AUGUST, and fell (on a seasonally adjusted basis) over 700K since then. November actually added about 11K jobs. So this is the end of the inventory cycle and some knock-on from government cuts.
I am not so concerned about government employment. It simply must fall. And I am not concerned about November's disappointing showing, because the seasonal adjustment is probably off due to retail jobs. No way were retail jobs cut; what probably happened is that fewer workers were added because existing workers took a lot of the extra seasonal hours. That's why I expect November's Medicare wages to come in better YoY than October's.
So that does not concern me, but when you factor in higher heating, transportation and food costs, it means that a population with dropping incomes is going to see their incomes drop much faster, and that spells disaster (B. E. R.N.A.N.K.E).
Our entire hope of bridging this temporary slack period was based on the idea that private employment was slowly growing and that the base had formed, which would carry us through. That is becoming an extremely implausible scenario. Additional deductions from worker's incomes include higher health insurance and copay costs. An additional factor is that a surprisingly high number of households were living rent and mortgage free, but as the pace of foreclosures picks up, that bonus is rapidly dropping out of the picture.
Friday, December 03, 2010
Major Mood-Altering Stimulus Discovered
Well, here's a joyous excursion into that realm. Why you should make sure your infant smokes weed. No, it's real!!! Also it's really good if you smoke weed while you're pregnant. Wonderful. Cannabis is good medicine! And a great additive to baby food!
Some foolish persons might wonder if the source of funding (a medical marijuana funding group) might have something to do with the conclusions. Well hah! The researcher is the dean of nursing at the University of Iowa. She MUST KNOW.
DU is very excited about this discovery. There is something about pot which makes people very, very credulous.
So if you are depressed, read the links and laugh. If you find yourself believing this stuff, report to the Shrink for treatment. SuperDoc is already full up with recovering addicts.
The Moment Of Truth Two
I'll probably cover this in detail after I recover from the wretched shock of it, but that might take major mood-altering life steps.
Among the horrible clarifications this thing contains, the paradox of low wage tax receipts combined with falling initial unemployment claims can only now be reconciled with this report by persons losing jobs but now being unable to qualify for unemployment. So it's a fool's paradise. Job losers rose by 390,000 in November.
I will eventually go into this in more detail, but right now I need to recover from the shock of it. And you know, I was expecting something much worse than most. Yesterday I was reading the expectations and hollering at the screen "In what universe, you $(##!!;! Lay off the egg-nog, suckers, you're obstructing the blood flow to your brains!"
But this morning I have to apply the same language to myself. I actually expected a marginal gain in Census employed, about 20K. Instead, -173,000. There is nothing like missing by 200,000 to wake you up in a very unpleasant manner.
According to household, the October/November combined employment loss from September is 503,000 jobs. Going to the specialty tables makes it worse. Emp/pop ratio is down again to 58.2%.
The more you read of this thing the worse it gets. The 25-years and over unemployment rate for those with a four year college degree or better rose an epic 0.4% in one month, rising from 4.4% in September to 4.7% in October to 5.1% in November. This is dreadful.
Here's a graph of the 25 and older, BA and over (LNS13027662) data:
Meeting and exceeding our former unemployment achievements!
Thursday, December 02, 2010
The Moment Of Truth
We do not pretend to have all the answers. We offer our plan as the starting point for a serious national conversation in which every citizen has an interest and all should have a say. Our leaders have a responsibility to level with Americans about the choices we face, and to enlist the ingenuity and determination of the American people in rising to the challenge.I can't truthfully claim to be thrilled with all this. I do think it ought to be discussed in detail. They are trying hard.
We propose a six-part plan to put our nation back on a path to fiscal health, promote economic growth, and protect the most vulnerable among us. Taken as a whole, the plan will:
• Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.
• Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).2
• Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.
• Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.
• Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.
• Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.
I think it is very important to broaden the tax base. A key to doing so is to lower tax rates, which will paradoxically result in wealthier paying more taxes. I am not sure it is possible to get spending below 22%.
Beginning on page 33 you will find proposals for corporate tax reform, which do broaden the base somewhat. This is absolutely essential if we want to create more jobs.
As time permits, I would like to go through this thing and publish some analysis and numbers for reference purposes. I cannot say when I will get this done, because currently I am scheduled for Medical Care, which I am not happy about.
Wednesday, December 01, 2010
Thinking so hard that I may, to casual observers, appear to be in coma. Occasionally I take breaks to go play TSA Officer with the Chief, just to reassure him and keep the holiday spirit going.
What I am thinking about is our current real situation, for which we won't have November data until about the middle of December, and the combined effects of the Fed's Doom Dayz program with the Euro's Badda-boom Badda-bail mishaps.
The horrible thing is that the confluence pretty much forces the most basic commodities up because it is forcing the dollar up no matter how the Fed tries to bust it, and there is no longer much hope in Treasuries, and the muni-market overall is highly suspect, and really most stocks are overvalued. So now we are going to see the real pop up in gas and fuel, followed by a real surge of food inflation.
The early indications are that manufacturing is already beginning to wear away on lower profit margins.
If the Fed hadn't launched QE2, a lot of the money would have gone into T-bills, but now it really can't. Not for a while, anyway. So the net result is that bond yields are higher and that the structural price of loans should have increased, but demand for mortgages is so low, for example, that prices can't increase that much. Nor are you seeing much in commercial paper rates, because demand for short-term paper net is so low that it is a seller's market.
Four-week gasoline supply is down 0.5% now YoY. Distillate is high, but that is due almost certainly due to forward buying and not structural demand. Sooooooo..... Pricing is going substantially higher, but not on demand (four-week jet fuel is now down 3.6% YoY). Also there is some current speculation that ethanol subsidies will cut out, which is going to blow up Bill Gates' farmland portfolio in a major way. There is a huge ethanol glut, but right now it costs way more to produce it than it does gas. So without the subsidies, it's a crash, and even with the subsidy, we have huge oversupply. The ethanol crowd was trying to get Congress to force a 15% gas mix. Among other things, that would have effed up most people's lawn mowers, so I say "DIE ETHANOL LOBBY, DIE!". FRB helpfully added a "farmland" category to the RE section of delinquencies and charge-offs reports, aka the Al Gore Column.
On the consumer side, especially low-end consumer side, things are somewhat better due to increased current stability. I'm not sure that will hold for long.