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Friday, February 24, 2012

Flying Like A Lead Balloon

This is going to require character. Loads of it.
Before reading further, you might want to check out the latest installment in Shrinkwrapped's series on his father's WWII experiences. The reading's a bit harrowing, but it might predispose you to look on the bright side regarding our current situation.

USA fundamentals, despite favorable YoY conditions, are just not green-shooting. It looks more like somebody sprayed the landscape with Agent Orange, and this concerns me, because most of the negative impact from the Euro money throw and the Fed's next desperate move (hurling money from Mars to Venusians?) have yet to take root. But take root they will, so. ...

The basics: New Home Sales for January are really flat as a pancake YoY. Look at the NSA YoYs. There is more activity in construction, but a lot of it seems to be in the remodeling. Remember, all those foreclosures are rolling out the door and a lot of cash is going into buying, fixing up and in some cases renting. The bright side is that inventory is down. The dark side is that new sales activity edges ever lower price-wise. In part this may be because real sales increased seem to be confined to the south, and maybe the midwest later in the year. Naturally this would push prices down.

You can safely ignore the month over month and even the SA YoY data; the 90% confidence intervals exceed the reported changes so hugely that one can only laugh at them. Reporting these numbers is an exercise in futility, so I won't. There has been a big improvement in months' supply over the course of the year - we are now down to 6.7 NSA, which is good enough. We have reached bottom on this indicator for this cycle; whether we see much of a pickup through 2012 depends on numerous factors - mostly retirement activity and existing home sales. So don't expect fireworks. However since the new home sales/construction seems to have reached its natural low, refurbishing activity on residences should generate a net economic plus through most of this year.

Now, back to basics. As I previously discussed, utility production in the US is on a negative trend, and so far that situation shows not a trace of improving, and furthermore the duration of the trend is so long that it looks like it occurred in a recession.

Rail is now showing almost no YoY growth. Here you might want to start worrying. because seven weeks in rail data should be showing a positive weather-related YoY bias. Perhaps it does, but with carloads up YoY a meager 0.3%??? and intermodal up YoY a Hail-Mary 2.2%, one does not like to think this way. On rail, the period from March-May should have a very positive upward bias in 2012 compared to the same period in 2013. Or so I have marked on my exception charts due to the impact of Japanese supply-line disturbances last year. We can only wait prayerfully to see.

Total products supplied over the last four-week period have averaged about 18.1 million barrels per day, down by 6.7 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 8.2 million barrels per day, down by 6.1 percent from the same period last year. Distillate fuel product supplied has averaged about 3.6 million barrels per day over the last four weeks, down by 5.9 percent from the same period last year. Jet fuel product supplied is 9.1 percent lower over the last four weeks compared to the same four-week period last year.
This is all the more striking, because if you look back at the rail data you see the big pop in oil shipments. We really are exporting a lot more product, but domestic consumption is dropping faster - the export production should be boosting domestic consumption somewhat. YTD YoY domestic consumption is down 5.4%, so this is not one of these statistical artifacts.

Auto production is still cranking along, but I'm wondering if inventory isn't going to get out ahead of itself a few months down the line. I'm starting to hear ads on the radio with "no-payments-for" deals; usually this is a six-month warning for problems. Because of very high deposit-to-loan ratios at US banks, we are in an easy-money environment.

We are going to get absolutely no help from externals. China is in a sag and I don't think measures to boost it very much can work without raising inflation to intolerable levels, because it is coming down so hard that you have to hurl a huge chunk of money in there to counter the downward forces. You can see the impact in the significant nominal YoY drops in sales of existing residential properties (scroll down to find the "second-hand" data) in many cities. This is where weak collateral for bank lending administers a kick in the economic posterior. Clearly consumers are feeling the pinch - look at the last two food price updates. Producer price inflation is now trending down also, but not food. It adds up to an impressive margin compression. It looks like the Chinese economy is at an inflection point to me. CPI for January was still impressive, possibly boosted by the New Year.

Japan has so many problems that one cannot really cover them. Japan's worst problems are that with China sagging, it pulls growth impetus out of the system, and then the shut down of the nuclear power plants has raised their energy imports quite significantly. With the massive public debt they have, not to mention highly negative demographics, they are are facing a towering structural problem. The current theory is that they will raise sales taxes to compensate. All well and good, but then domestic consumption takes another hard drop, thus reinforcing the deflationary tendency. Only a deflated yen can help them much, but that's where the energy import-export balance looms far larger - deflating the yen will raise their structural cost of energy imports. End result - production moves out, domestic economy keeps deflating, gravity takes over and capital exits.

Europe's economy is weak to say the least, and the slide in the peripheral eastern bloc is likely to keep this going.

The only way I can resolve these fundamentals is to remark that most of the US population is in a recession. Real incomes must rise to get us out of that recession, and it appears unlikely that the US can borrow a whole lot more to boost real incomes without producing an almighty ruckus in the markets. We seem to be heading toward some sort of wall effect - the US population is dropping real consumption on stuff like food, utilities and fuel, but I cannot see this continuing for very long without it diffusing into retail because there is a natural limit on ability to adapt in this time frame. Mass-market retailers must be feeling the pinch right about now.

The US has some bright side left, but not enough to overcome significant inflation in the absence of significantly rising exports. We are muddling through so far on energy production and increased energy exports.

It's kind of hard to increase money velocity when tax and
trade policies work against that. Most Americans will spend
A greater percentage of income for less, resulting in a lower standard of living and no capital to invest. You can not force labor to compete with cheaper, foreign labor with
out tariffs to offset wage costs and structural costs. Compete on quality ok, compete on labor costs, no way.
Yep, it looks like we are headed back down the recessionary slope. Throw in some high gasoline prices and it is almost assured. The bulls are slowly rolling over on Wall Street. They may be able to keep the ball in the air for a few more weeks. Except for some energy bets, I'm in the storm cellar waiting for this to blow over.
I tried be crazy to please you, but you are not feeling me anymore, now you have gone after your new nut of the month, Ron Paul, and he is crazier than I am.Nutra Science
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