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Wednesday, May 04, 2011

Let's Get Set For Reality

Aside from the problems in Japan, which are real and can only be slowly addressed, the rest of the market consensus is about to be broken

We can see it fraying at the margins already. Overnight commodities did not do well and shares of commodity-dependent companies didn't do well either. Asian stocks are beginning to go to the altar.

I think the news of the fall in March retail sales in Europe as a whole will knock the stuffing out of some of the optimists. ADP released its US April report. No surprises here; employment gains, which have been running above 200K this year until April, were listed at 179,000. This is private sector jobs only. ADP plus the rise in initial claims in the US this month will induce some thoughtfulness before the employment report on Friday.

As for ADP: Small companies gained 100K last month; this month they gained 84K. Medium sized companies gained 85K jobs last month, and gained 84K this month. Large companies gained 22K jobs last month, and added 11K this month. The numbers for March were revised up a bit.

Today we get crude inventories; oil is trending down.

Just to keep the fun alive, a couple of notes from BLS. A) Q3 2010 Business Employment Dynamics:

How special. Q4 2010 and Q1 2011 were better, but our base has been so driven down we have a long way back.

March headline +0.6. YoY 3%. March food +0.7; YoY 2.9%. Why don't those pikers take the bus and stop complaining? YoY public transport +9.8%, Feb-March +1.1%, Jan-Feb +2.2%. Water and sewer and trash YoY: +5.2%. Motor fuel + 27.8%, which really makes driving 15 miles to one part-time job and then driving 20 miles to another part-time low wage job a totally winning proposition!

Food costs for poorer people have risen much more than shown. If you were already eating "basically", you have certainly gone more basic in the last few months. But the cost of stuff like beans and milk and flour and canned vegetables has all gone up at least 20% together over the year. I track it and I know.

Here I would just like to remind everyone that in a bipartisan move, the Dems and the Reps passed a tax measure last December that INCREASED federal taxes on low-income people and handed a large tax cut to people with UPPER class incomes, apparently as a way to encourage working for high wages. Ah, bipartisanship. Between Congress and the Fed, our public policy appears designed to make low-wage workers too poor to get to the polling places. As soon as we can accomplish that, the damned serfs will stop being such a problem.

Who'd a thunk? ISM Services growth rate suddenly drops hard. I wonder if this could have anything at all to do with the fact that WalMart says its customers are running out of money each month, and the types of price increases that are shown in the CPI? New orders fell 11.4% in March for services.

Wall Street analysts are quite surprised! Everything's unexpected! Because companies are so profitable because they are paying declining real wages!!! Services should be booming!!!! I have had this article up since early morning, waiting for the actual release. What was projected:
Service industries in the U.S. probably accelerated in April, a sign the biggest part of the economy is weathering increases in fuel prices, economists said before a report today.

The Institute for Supply Management’s index of non- manufacturing companies rose to 57.5 from 57.3 in March, according to the median estimate of economists surveyed by Bloomberg News. Another report may show companies added 198,000 workers to payrolls last month.

Gains in employment and stock prices, along with falling debt levels, are helping to underpin the consumer spending that makes up 70 percent of the economy.
Read the whole article - the justification is that increasing stock prices are going to just make the consumer spend, spend, spend. The actual result: 52.8. Still growing, but it's a startling change. The new headline US ISM Services Index Falls More Than Expected in April.

Perhaps it is time to visit Assistant Village Idiot for his series on
anosognosia (definition). Part IV. It clearly takes someone versed in the ways that the mind breaks to explain the conceptual failures of most Street analysts. In defiance of all reality, in defiance of decreased incomes from several years ago, in defiance of declining real incomes now, analysts are still hoping that it's gonna be different this time?

There is a stampede into treasuries. I've gotta think a lot of this is going to come out of commodities.

Last, but not least: Crude inventories. Diesel up (economy not crumpling yet), four week gas supplied -1.9%.

This comment has been removed by the author.
The Telegraph spells it out more bluntly.
Money continues to flood into TIPS as well.

In 2008, TIPS prices peaked months before oil prices.

This implies that deflation was the major concern last time but this time it seems to be a pure slowing growth story. Just a theory.

Even Jeremy Siegel figured out that real yields tend to track real GDP growth. I'm very bearish on real long-term GDP growth, hence why I was willing to lock in long-term TIPS. He was a believer in historical real GDP growth as a predictor of future real GDP growth though, hence his belief that I was/am a fool.

As a side note, the new I-Bond rate is what I predicted back in February: 4.6%. The real rate is just 0.0%. It is all hindsight inflation though. Sigh.
John - absolutely. There really is no doubt about it. The Arab street has been crushed by economic circumstances.

Mark - good prediction, but this current round as a ways to go yet.

It's a very stagflationary deal.
Who Struck John,

Krugman would no doubt find that link very useful (to rationalize using soft subjective political science).
Oops. I said I made the prediction in February. It was April. I need more sleep and this economy isn't helping!
We are at the tipping point for gasoline. Two employees that live check to check, started carpooling with their wives this week. One leaves a Chevy Tahoe and the other a full size Chevy truck at home. The pack a day cigarette habit is now on the radar. The lower income strata is getting ground down, just as the Walmart CEO and MOM predicted. What is perplexing is that both employees balk at the thought of working any overtime. Just for context, my Aunt retired from her job at 85 (just shows what living through a depression does for you).
Anon - well, once you carpool it is hard to work overtime. Especially if picking up the kids at daycare is involved - that can become a logistical nightmare!

I just keep wondering what happens to all those people who got jobs (retail especially) that basically have them on-call? They'll be called in for four hours, they never know how much they work from week to week....

It makes it very hard to work a second job, especially if the second job won't give you a fixed shift either.

The redeeming factor is that now we have a couple of months at which cooling/heating costs are at their lows, so that will put a few bucks back in people's hands.
I know a lot of people who would now rather
do without than work overtime. They have been
on the hamster wheel for quite some time and
their mind and body can't take it anymore.
Productivity has gone through the roof over
the last decade, but wages have declined, accounting
for inflation.That won't be good for asset prices.
We have an aging population and sometimes rest
trumos all other needs.

M_O_M, I suspect commodities may have another month or so before they peak. I've been watching sentiment in the metals and agriculture markets, and there's an awful lot of people claiming prices just can't go higher and we're back to deflation now. This looks more like a temporary correction than a change in direction.

But in general, yeah, we're getting close.
Neil - from my perspective the problem with commodity prices is that the market has to absorb the money somehow, and it really can't go into stocks.

It may eventually flow into markets like India, and be nullified by say India's central bank tightening. But it's there.

It was interesting to watch heating oil prices drop more than gas; people are just hanging in there with whatever they believe they can sell.

The reason I believe stocks can't support it is that already we are seeing collateral stock drops when commodity outlooks change for the worse. That's not a good sign.

I would agree with you. However these two didn't want overtime before they started to carpool. One is expecting an unexpected child soon and the other is trying to keep is car from being repossessed. I keep hoping one of them will quit so I could hire an upgrade. To fire one would be unbelievably costly because it would drive my unemployment insurance expense to an amount that it makes more sense to keep him and hope one quits. The unemployment tax rates vary from a low of .7% to a high of 8.4%, a 12 fold increase.
Yeah - the hike in unemployment rates serves as a very effective way of preventing further employment. It's a big marginal tax on hiring employees.
It's that rings of Saturn graph you came up with a couple of years ago rearing up again, you know. I wish you still had the capability to produce another one.

I think we need a bulldog post.

I'm up in the air right now. I've had two major electronics chains disappear in the last two years, which really hurts my income. Gas is killing me, and I expect that to get worse.

So, I consider going back to landscaping/lawn care, which is steadier, but I suspect my body won't be able to handle the labor, even from a supervisory/management angle. It just hurts too much.

Gourmet food truck, here I come. I have the good fortune to have a potential partner who not only knows catering/food management, but she's a brilliant chef. I just have to do what she says, and charm the customers.
But, but, how can this be true? President Obama has been working day and night to create jobs. The Bernank has been priming the pump.
This is not what was supposed to happen.

Welcome to a re-run(if we're lucky) of the 70s. Stagflation will be hard on everybody - consumers, the unemployed, businesses, and retirees. Only government employees and millionaires will not feel the pain.

There is a solution, but when the NLRB can tell a company where it can do business, economic activity is being discouraged by those who should instead be prepping the field for growth. In 60 days the EPA is going to rule that driling companies cannot use fracking on directionally drilled gas wells. Gas drilling, one of the few hot spots in this moribund economy is about to be shut down. Heckuva job Obama. At least that's my opinion
Gordon - I can't do another one because now way too much hangs on what government does. And that's an either-or, not a normal economic set of circumstance.

See Jimmy's post below yours. The EPA is going to try it; Congress may wake up and get the EPA out of it, or they may not.

Over the last year the EPA has instituted a number of measures that, if enforced, would seem to imply that in about 5 years we will be sitting in the dark eating cold, expensive beans.

The only thing I can tell you for sure is that companies now have a huge incentive to invest in their own power plants or fuel cells; from my perspective, this economy is increasing its net reliance on fossil fuels because of our environmental and green power attempts.

And then there's bleeping banking non-regulation. That terrifies me.
"A Colossal Fracking Mess"

I've been watching the slow motion train wreck that is 'fracking' with morbid incredulity. The whole process, even when operated as designed, is a disaster. If I were born yesterday I would be amazed that anyone is even contemplating moving forward with this tech before it's fixed. But since I'm too familiar with how corporations are willing to kill for money (especially Halliburton -- killing for $ is their SOP) and politicians are willing to sell out for the same, I have not been holding my breath waiting for sanity to arrive. When everyone's tap water has a milky tint, a corrosive odor and has to be kept away from open flames, Lewis "the moron" Black will still be going on about how people who prefer bottled water over tap are stupid.
I've done a quick perusal of online articles about fracking and ground water pollution. There are reports from the usual sources - mostly organizations that have been trying, since the 70s, to stop all oill drilling in the U.S. But none from a responsible organization like the U.S. Geological Survey.

I am a former oil geologist and know something about the subject. For water wells to become polluted from fluids injected into a formation a mile below the surface would require many years and a unique geology. My suspicion is that many people's wells may have been affected by the earth movements that have been reported as a result of fracking. I do know that many water wells just go bad because of changes in the aquifer. I also know that you can drill a good water well a thousand feet from a well that is filled with methane and sulfur. What goes on beklow the surface is often changeable, but polluted water dioes not migrate fro a mile down and get into shallower water wells inm a short period of time.

Oil drilling is a dirty business and a well site is an ugly thing to look at. I suspect that many environmentally sensitive people have seen the well sites and have been repulsed. If their well became bad or went dry(Most common of the reports I saw) the explanation is likley that it is not related to the drilling but natural causes. However, it would be normal to connect the two.

I also know that environmental activists are turning over any little shred of evidence of damage to stop oil and gas drilling here in the U.S. It would ne normal for them to set up shop in an area where drilling was going on and then start planting seeds in people's minds that surely these gas wells are affecting their water, their health, and certainly the value of their property. I;'ve seen them in operation. Thhey have been very successful thus far.
Isn't Vanity Fair the outfit that flew Leo DeCaprio, photographer, makeup artist, hair stylist and several assistants to Iceland for a cover shoot to promote DiCaprio's anti-AGW film?

The envirocialists can read a poll, and they can count the checks coming in. AGW has run its course, and they need another big scare. Fracking is being trotted out for an audition to see if it has what it takes.

Bulldog post. We need a bulldog post.
MOM, in honour of our constantly surprised economists - youtube vid (1:29):


p.s. haven't read one of your global roundups lately.
So, attack the messenger -- not really convincing.

"My suspicion is that many people's wells may have been affected by the earth movements that have been reported as a result of fracking."

I don't think they care *how* fracking ruins their lives, only that it has.

"but polluted water dioes not migrate fro a mile down and get into shallower water wells inm a short period of time."

Except when it does. There are four main ways for this to happen that I know of so far. 1) Poor handling of the waste water. (This not only results in toxic crap in people's water, but also in the air.) 2) Poor sealing of the well (so the well shaft acts as a conduit). 3) Conduits opening "by the earth movements that have been reported as a result of fracking". 4) High pressure (fracking's modus operandi) forcing material through any opening it can find. (That may be an existing opening that was previously too constricted at the natural pressure. Or it may be due to #3 or #2 above.)

But you have now added #5: Earth movements allow bad stuff that was previously not reaching water sources to do so, without any direct connection to the fracking fluid or waste water. (Doesn't it logically follow that if earth movements can happen relatively close to the surface due to fracking going on a mile down that they may also happen anywhere in between?)

#1 and #2 are not what I consider "inherent" problems of fracking. They can be managed. #1 is best handled by recycling the waste water into future fracking jobs (after filtering out the nasty crap it picks up during use), but this is neither universally required nor done. #2 can also be handled with good engineering (though the BP Gulf incident demonstrates that #2 is not always handled so). #3 and #4 (and now #5) though are inherent to the fracking process.

Even with something manageable like #2, the greater costs of failure have to be considered. Leaking X gallons of radiactive water filled with heavy metals into an ocean is not going to be as disasterous as leaking the same into an aquifer used for drinking water and crops by millions of people.

"I also know that environmental activists are turning over any little shred of evidence of damage to stop oil and gas drilling here in the U.S."

But that does not explain why I am concerned about fracking. Nothing I have seen with respect to traditional oil drilling tells me that there is an inherent problem with it. (Yes, the BP disaster was massive. But BP screwed up -- and it's only because our government is corrupt that BP is still conducting "business as normal", or that the disaster even happened considering the rediculous number of safety violations BP had on record.) Ditto with things like coal mining and many other dirty processes where rational weighing of public good vs public/individual costs puts a rational person in the "let's proceed with due caution" camp. And even a bigger fail by the enviro-nazis on the CO2 front -- it's clear to me that there is no real science (but a lot of stupidity and fraud) behind the global warming scare. (Direct temp increases due to CO2 increases are very real, but small. Where they go completely off the tracks is when they try to prove much larger indirect temp increases.)

I was a nuclear proponent long before some eco-nuts decided it might be a good thing due to lower CO2. (Though I've backed off a bit from that position. I still believe that from an engineering standpoint it's perfectly possible to build nuke plants that achieve a rational cost/benefit ratio. Unfortunately the engineers aren't in charge and instead the politicians, penny pinchers and eco-nuts conspire to make things less safe AND more expensive than they would be if they just let the engineers do their job.)

So everywhere else, the eco arguments failed on me. But with fracking I don't need to even hear their arguments -- the raw facts of the process are scary enough.
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