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Tuesday, May 31, 2011

Mene, Mene, Tekel?

I did not expect Chicago PMI to come in quite this low. Release. Production at 56 has dropped to a bit lower than the 40 year median and mean levels. In February it was almost at the 40-year MAX. This is a hit-the-wall type of deceleration; some of it should even out a bit, but still...

This index seems to have a lot to do with central activity, some of which is quite ag-related. Thus, I have the option to believe that cold temperatures and flooding of farmland have shown up here, and that this is both a combination of deceleration and a "blip". However, when one starts describing every report as a "blip", one should immediately go here, and realize that you are the guy lip-syncing. While others may admire your passion for the lyrics, they are unlikely to share it, and without that leavening factor, you appear foolish at best.

Reasons why one might not want to be the fat guy include: peak in February (one month off carload peak), order backlogs down to 51.7 from their high of 69.6 in March, and inventories having risen from 53.5 to 61.6 in one month. The combination of declining backlogs and rising inventories is something that rarely bodes well for future growth. Prices paid are still accelerating, which is hardly surprising but which presents us with a somewhat dire third quarter picture and a nine-month drag at best.

The Japanese supply line problems unequivocally showed up here, but they should have had less of a relative impact on May than on April, and comments showed that the margin crunch is settling in. Mr. Packaging Guy is on the sidelines for the duration, which puts a definite upper limit to the growth momentum. There may be some marginal growth momentum in manufacturing at this point, but not much for the US and it is dependent on global growth, which is not that hot.

As I said before, the other potential growth edge for the economy this year (home-building) just never had a chance. S&P Case-Shiller released its data for Q1; it is pretty much an economic snuff film, so once again I am not going to dwell on it. CR will, so go there if you like gore. There is no prime any more - we could see upper end home prices in many areas go down an additional 20% over five years. Lower priced housing will do the best if it is in a decent neighborhood and if local property taxes are restrained. I could write a lot about the future of home prices, but I am waiting very impatiently for Census income data. The entire Fed seems to be singing along with the fat guy on this topic; there's no recognition of the underlying fundamentals.

The only consolation here is that Goldman Sachs apparently draped itself over the barrel on oil; oil speculators are just about to find out what it is like to be the Hunt brothers.

In Q1 Denmark crossed over into two declining quarters. We are seeing a global deceleration; in economies dependent on consumer spending it turns to retraction and contraction. Inevitably manufacturing will start its downshift now, and we will see a slow drag from that on growth in manufacturing-dependent economies.

Of course, we must have our "unexpectedly" headline, so we'll round this out with consumer confidence. On Friday we get the unexpected party with employment.

Note: When I say "hit-the-wall", I mean HIT THE WALL, as in like fall of 2008 hit the wall. It's time to drag your butt to safety. Anything could happen except to have stronger growth in the third quarter than in the second.

Comments:
Numa Numa Guy has more uses than that - Germany considers the electorates of Europe:

http://www.youtube.com/watch?v=gEKErVF9zHc
 
That's sorta ... frightening.
 
Monetary policies, tax policies and the lack of
tariffs for imported manufactured goods have come home to roost. If we had chose a 10 to 15% tariff on
manufactured goods we would of had some job growth, a stronger dollar, and therefore cheaper energy costs.
Instead we debased the dollar and screwed every
American who could not move the assets to protect themselves. It is global economic warfare against the have nots.

Sporkfed
 
http://economistsview.typepad.com/economistsview/2011/05/are-taxes-in-the-us-high-or-low.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FKupd+%28Economist%27s+View+%28typepad%2FKupd%29%29

For your consideration, MoM.

Sporkfed
 
MOM,

"The only consolation here is that Goldman Sachs apparently draped itself over the barrel on oil; oil speculators are just about to find out what it is like to be the Hunt brothers."

I offer supporting evidence for your "Hunt brothers" theory (which I share).

Real Oil vs. Real Interest
 
Maybe Goldman Sachs will wind up like the Hunt brothers, or maybe they know something about what's going to happen soon in the Eastern Province of Saudi Arabia. Take your pick, either outcome isn't likely to be pleasant.
 
John - It doesn't matter what happens in the ME, the world is hitting the gel wall (making progress, but it's hard going) and in just a bit it will turn into the concrete wall (splat).
 
Spork - I am a little depressed, but the reason why I noted Denmark is that it too has gone to the high individual tax/lower corporate tax route.

There is such a thing as too low corporate taxes.

However, if we actually COLLECTED 25%, we'd be getting a lot more than we do now. Certainly to close deficits we are going to have to charge corporate tax (de facto).
 
If you think what happens in the ME doesn't matter, you are wrong. The splat will be much harder if the lid comes off in the GCC states. Try cutting global oil production abruptly by 10% for six months and see what that does to the size of the splat.
 
I agree with WSJ on this one. The price of oil would go higher if the House of Saud turns out to have real issues with stability. That's one thing that could turn a nasty double-dip into a collapse.

As much as I'd like to see G-S "blown away" by the oil cannon, they've been on the right side of so many bets that it's worth considering they may know something. That's what they're good at, after all.

Or maybe they're not as wedded to the bull trade on oil as it seems.
 
Neil - I think the House of Saud HAS real stability problems. I don't think that's in question.

John - in at least one way, the current price of oil is sustaining the Saudi ruling family (all 10K +), because it is funneling money to them that they can use to pay off their population.

I worry that when the eventual correction comes, then the Saudis will run into problems.

This is one of the reasons why I am so strongly in favor of drilling off the coasts, doing the shale, etc. It is a nightmare scenario to see the world hit a dip, and then just as it is recovering, have a major ME problem. I think it might be very destabilizing for the Asian countries most of whom get far more of their oil from the ME than we do. So then you add in the eventual day of reckoning in Europe (which must come) to the Saudi upheaval, and the eyeballs bulge.

What would you call that? A double splat?

Shortages in food are always going to move the world economy and shortages of energy are always going to move the world economy, and that's that.
 
However, if we actually COLLECTED 25%, we'd be getting a lot more than we do now. Certainly to close deficits we are going to have to charge corporate tax (de facto).

How much of this deficit is aid to banks, aid to insurance companies, aid to auto companies, etc.? Heck, we might as well throw in back-door aid to pharmaceutical companies.

There needs to be a reasonable corporate tax, but at some point we have to realize that robbing corporations A, B, and C, to pay for the aid to corporations X, Y, and Z is counter-productive.
 
I worry that when the eventual correction comes, then the Saudis will run into problems.

So will Iran and Venezuela.

I can bike to work 6 months a year. If I still have a job.
 
MOM, the difference between the splat we're having now and a ME-in-flames splat is the difference between hitting a concrete wall at 100 MPH and doing a Mars Climate Orbiter maneuver (hitting the Martian atmosphere at 10,000 MPH because somebody screwed up).
 
A Challenger double-splat.

Okay, that's what's making me sleep VERY badly.

Because I can see it coming, and if it happens, of course China goes to war.
 
If China goes to war, we'll find that the USN and USAF are stretched very, very thin.
 
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