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Wednesday, June 15, 2011

Spuds, Trains, Switches, Sleepy Watchmen

Empire State Survey:
In June, the general business conditions index fell below zero for the fi rst time since November of 2010, declining a steep twenty points to -7.8.
The six-month outlook was notably less optimistic in June than in May. The future general business conditions index fell thirty points, reaching 22.5, its lowest level since early 2009. While the index was still above zero—an indication that conditions were expected to improve in the months ahead—its June decline represented the second largest drop in the index in the history of the survey.
New orders below zero, shipments below zero, number of employees at 10.20, but average employee workweek at -2.04. Since the question was asked on the last post, most are planning to increase wages:
Finally, when asked about estimated changes in wages per worker and benefits per worker from 2010 to 2011, more than three in four respondents indicated that wages would increase by less than 5 percent, and almost all the rest of those surveyed said that wages would stay about the same. However, a sizable proportion of respondents, 34 percent, estimated that increases in benefits would exceed 5 percent.
You may be wondering why they are planning to increase wages? Well, in one of the more "unexpectedly" results that an ape could have foreseen ( it takes a lot of postgraduate education an an elite institution to produce economists worse at predicting these results than a baboon ), CPI rose quite strongly in May:
CPI-U: 12-month 3.6%, food at home 4.4%, gas 36.9%.
CPI-W: 12-month 4.1%, food at home 4.6%, gas 37%.
I imagine employers are planning to raise wages because, while the Fed thinks you can eat an iPad, the manufacturers know quite well you can't. Note that the CPI-W is used to calculate the Social Security COLA, but it is chained. If Social Security recipients can manage not to starve or freeze before January 2012, they will get a little help then.

Btw, the plight of retirees largely dependent upon Social Security probably accounts for the astoundingly low rate of increase at drugstores in yesterday's retail sales report. I say astoundingly, because the drug companies are mostly raising prices. I think the only way those pharmacy numbers could have happened is if a lot of old folks couldn't fill their prescriptions. This is contributing to the tone of increasing asperity you may have noticed in these posts. In general I like people, and I think it is a good thing if they are allowed to eat, have medicine and stay warm. The policy of starving the poor into prosperity is causing me angst.

If I were a malign person, I would here print a bunch of excerpts I have saved from recent Fed speeches, but I am not that evil. Yet.

Manufacturing has been the healthiest portion of the economy, and the industrial production report bears that out. +0.4 on the month for manufacturing after having fallen 0.5 in April, mostly due to Japanese supply problems. However capacity utilization YoY still in negative territory at -0.3.

Last, but not least, homebuilder index dropped to an abject 13. That link goes to CR who will give you the grisly details. Mortgage apps took a nice rise, because we do have low rates, and it is the season. When you look at the time series, it is still apparent that we are in "abject" territory. CR post w/ nice graph.

"Core" inflation rose 0.3%, which is the highest increase since July 2008. I rest my case on demonstration. Unfortunately the demonstration has not ended yet.

Earlier some Fed luminary had mentioned inflation and talked about 4%. Well, the "core" does not mean a thing - what matters is the net. Because the economic activity is controlled by the net. The Fed has created this beast; the Fed does not know how to control this beast; the market will respond by destroying the money the Fed has created in order to get us back into a condition from which we can grow again. It will, however, not be an orderly process.

I would remind everyone that the peak rate of job losses during the first half of the Great Recession (we are in the interlude now) occurred in the first half of 2009. Maximum unemployment benefits, which were never available to all of those forcibly ejected from the job market by a flood of easy money, extend about 23 months. Thus every week a relatively large number of persons lose their unemployment benefits without having been able to find ANY employment. The last JOLTS survey reported 4.6 unemployed for each open position.

It might be time for the administration to address this reality; the law, in its majesty, cannot afford to simply abandon people on the streets. In many states, adults without dependents are eligible for almost nothing in the way of social benefits. I am angry at both Republicans and Democrats because the politicians in power seem to be willfully ignoring the reality that government policies have largely created.

Crude inventories:
Total products supplied over the last four-week period has averaged 19.0 million barrels per day, down by 3.2 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 9.2 million barrels per day, up by 0.5 percent from the same period last year. Distillate fuel product supplied has averaged 3.8 million barrels per day over the last four weeks, down by 3.6 percent from the same period last year. Jet fuel product supplied is 0.1 percent higher over the last four weeks compared to the same four-week period last year.
Diesel production dropped, gas production rose. Supply is still quite high on everything but propane. YoY YTD imports are down 8.6%, but in part that is because domestic production is up 3% for the four-week running total. To get a gander on how quickly this has changed, look at March's ending report.

MOM: "It might be time for the administration to address this reality; the law, in its majesty, cannot afford to simply abandon people on the streets."

But the C-in-C chuckles about the stimulus not really having any "shovel ready" jobs in it. It's all good fun, you see. Golfing while the economy craters. Is it inexperience and ineptness or is this a plan? I swear it's looking more like a plan. When most of us are in penury, will we be forced to look to the government to save us? Is that the plan?
It's not a plan - it's the government of the professors.
My HR person said that our group health insurance is going up another 15% this year.

I assume that's at least part of the wages-and-benefits "increase". We working stiffs sure aren't getting extra money in our paychecks.
M_O_M says:

"...it's the government of the professors".

That is way too true. And when those professors fail (see Romer, Bernstein, Goolsbee, and Bernanke), they go back to teaching their failed ideas.

How (and why) does that even work? Bernanke trashes the US monetary system, but there is no doubt he will be welcomed back to Princeton where he can sit at the right hand of Krugman to pontificate on how he saved our system. No one will question any of these guys policies. So, we will get another generation who will be mistaught and someday (if we survive that long) will be in a position to implement the same failures. Their failures will be just as "unexpected" as these failures.

Romer wrote a paper, shortly before joining the administration, showing tax cuts provided more stimulus than government spending. But, instead of pursuing this, she bows down and works with Bernstein to totally miss the unemployment curve. Then, with no apology or mea culpa, she trots back to Stanford as if nothing had happened.

There is just no price for failure. When did we develop a system that gives full credit for trying, but failing?
Rick, everyone gets a trophy. Especially the poor elites.

Yesterday you said that my hour had come. I think you may have chosen wisely on the duration.

The last time my (stagflationary) hour came was back 2008. The hour lasted about 60 minutes.
"I am angry at both Republicans and Democrats because the politicians in power..."

Are you angry at the politicians? Or the people that voted them in? To me, getting angry at the politicians would seem to be misdirected -- a waste of anger.

Of course, voters aren't necessarily particularly active in the process of picking candidates -- they let "insiders" lead them by the nose, letting themselves be told who the can and can't vote for. And what better way than a system where votes are all or nothing (so voting for the "wrong" person means your vote is "wasted"), and a MSM that tells voters who can win and who has no chance, no matter how much they have to tweak reality to make the results come out the way they want: http://www.youtube.com/watch?v=e_w811ck9PA Like Orwell said: "Who controls the past controls the future. Who controls the present controls the past."

"...seem to be willfully ignoring..."

I don't think it's just the appearance of willful ignorance. It's a combination of actual willful ignorance and flat-out lies and not caring about it (except for the "avoid getting caught" part). The voters get exactly the government they deserve when they buy into arguments that things like morals don't matter and they should just elect the most effective immoral politician they can (the whole "he may be a power of evil, but he's *our* power of evil" BS). And I have no idea how anyone can expect any good results to come from abandoning principles like "Thou shall not steal", no matter how much you dress up the act of theft.

"...the reality that government policies have largely created."

What, you mean realities like "retirees largely dependent upon Social Security"? If so, I agree. That is most definitely a reality created by government policy.

Why was it *ever* believed that politicians and bureaucrats would be motivated to get long term retirement funds planning right? Why should they care about your retirement anywhere near as much as you care about your own retirement and that of your immediate family? Why did this belief continue even as the government spent what they took (to buy votes no less) and replaced it with IOUs (which are nothing more than bonds stealing freedom from future generations)? By that point pretty much everyone should realize that this scheme is not actually *saving* anything for their retirement.

I think that's the real "willful ignorance" that needs to be addressed -- pretending that Social Security is "saving" for retirement, pretending that government can just magically create wealth out of thin air to fund retirements, and remaining willfully ignorant that government can't give anyone anything unless it takes it from someone (under threat of force), the immorality of that, and that politicians do *not* have your best interests at heart so it's really not a good idea to hand over to them your life's savings -- they *will* blow it. I suspect you are against the taking of 401Ks and IRAs, but to me that just looks like more of the same -- more theft, more empty promises, more pretending that government can manage your wealth better than you can, all to be accompanied by more sleazy justifications for why "it's just the right thing to do -- save our seniors!".
This may be a rehash of thoughts others have already had, but I will ask anyway because it is new to me. I heard a stat that all retirement accounts are worth $65T or some such number, and I suppose there is a similar valuation for the stock market. But those values are based on pricing the WHOLE stock market at the price of the stocks sold TODAY. That means that today, based on the amount of people with cash who are buying and the amount of people with stocks that are selling, we project what the whole market is worth. But what if everyone wanted to sell in just one day?

If SS does not keep up with inflation, the oldsters who do own assets will have to sell them in order to get food. That means that they will have to trade their stocks for cash, but here is the question. Since the rest of America is strapped for cash, who is going to have cash to trade for the oldsters' assets? Investments are only as liquid as the amount of money that is available to invest. What if there weren't enough buyers to keep up with the sellers? We have never had a situation before where demographically the number of sellers has equaled the number of buyers - there have always been fewer sellers than buyers in the past. Now economically there is more pressure on the sellers to sell and less ability of the buyers to buy. Is this a recipe for disaster for the stock market? And every other market?

If the amount of cash available can't keep up with the need, what happens to people who think that their retirement is secure because they have saved?
Anon - read _When Money Dies_, and look at what happened to the Austrian, German, and Hungarian pensioners in 1922-1923. At the extreme, that's what happens.

Our situation need not be that dire, had we the will to face it. Unfortunately, I think it will be two more electoral cycles before the moment will arrive.

Pray we don't miss the moment, because truly awful days lie ahead if we do.
Anon - well, what is going to happen is what is happening to people now who think they have saved. Assets must devalue in proportion to incomes less necessary expenses, including taxes.

Right now you can read a bunch of puzzled articles about the US housing market's slump in the face of "historic affordability". But the affordability analysis is flawed, because it is not taking into account property taxes, which have greatly raised over the last decade. And in most of the country, those property taxes never go down. If property values drop, the millage rate is raised. Property taxes are the main locality financing mechanism - and there the retirement crunch is going to require more money, not less.

So housing will continue to deflate, and in the higher property tax areas, housing loses its value as a capital savings account altogether, and does not have any implicit value until the cost of owning falls decently below the cost of renting.
Foo - I can't argue with much that you write, but when you step back and look at the broader picture, it is clear we will have to work out a reasonable solution that does not leave the aged and disabled begging on the streets.

I am currently too closely engaged in watching the Euro Game of Nim to write much about this - there are a lot of moving parts. It also implicates some large US institutions.

Can we get back to this later? Social Security has become a giant fraud, and so has Medicare, and the Democratic party is much more guilty in that fraud. But Republicans have to deal with the basic reality of people without jobs and without the prospect of jobs, and if they don't, they just commit another fraud on the public.

Our best future is going to come about through recognizing reality and dealing with it, and DC is so insulated from reality that we will probably have to throw out half our legislators before we can get a basic core who know what reality is.

Clearly the fraud must end.

Yes, I am adamantly against the taking of retirement accounts. The necessary corrections should occur through the tax adjustments, and should preserve the ability of the middle class to save, or we are all doomed. It appears that our large financial institutions have become wealth-destroying mechanisms of awesome efficiency.
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