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Friday, March 23, 2012

I Wake Up Every Morning In A Good Mood

And then, sooner or later, I read the financial data and wind up disconsolate. This is not looking peppy.

Ignore the New Home Sales report. Yeah, yeah, the headline is that sales dropped 1.6% in February. They may well have done something like that, but the 90% confidence interval is +/- 23.9%, so that figure is worthless. Sales might really have increased 5%, or dropped 8%. No one knows with an error bar that big.

The YoY YTD increase is 11.4%, and the 90% confidence interval on that one is +/-17.8%, so there is a good chance that YoY YTD sales have increased. We have several months to go before we can get to a 90% confidence level that new home sales are doing anything. Builder confidence and comments probably mean more than this report right now. Not to mention results.
Link
The NSA YTD increase, probably the most reliable figure, is +8.2%. The 90% confidence level on that one is 12.2%, so I think sales YTD probably increased 4-5% at least, but they could have increased 10%. Among my worries are the south region, which contains more sales in total than all the other regions. On an NSA basis, it does not look too good up at only 6.5%.

The other way a forlorn, rapidly aging blogger might be able to resolve this is by looking at rail and the construction-related categories, and there I think I find foundation for an increase in new home activity, but not a very large one. This week's rail report is really quite subdued. On a YoY YTD basis, carloads are now down 1.8%, with intermodal only being up 2.3%.

On a YoY YTD basis, the following carload categories are negative:
Grain (-10.3%)
Farm Products
Coal (weather plus EPA rules - summer electricity rates are going to be pretty high even with NG)
Minerals
Grain mills
Food and kindred
Primary forest products
Chemicals
Waste & scrap.
The combined Canadian/US/Mexican YTD YoY totals as of this week (almost at the end of the first quarter) are carloads -0.4% plus intermodal up 3.4%. For the US we have the minor hopeful comment that paper and pulp is up 2.6% on the year. If you scroll down on that link you'll get the Mexican data - the Mexican economy is not doing well. Canucks are doing much better than the US or Mexico, but now it looks like they may be slowing too.

Bullish this ain't. The Fed Heads are now quarreling in public over inflation risks and policy stances. Bernanke is right that household consumption is depressed relative to before 2008, but that's because we were funding household consumption by borrowing, and we can't do that. We were funding short-term consumption with long-term debt, and it is a recipe for future economic collapse. So really Bernanke is saying that the economy will continue to be very weak, which explains why he wants to hit the gas pedal. The other part of his claims - that dumping more money into the economy won't raise gas prices - is obviously false, and the Bullard/Fisher axis of non-voting dissent disagrees on inflation pressures. It seems as if more than 70% of consumers have reached the fiscal breaking point at which higher forced spending for some items is forcing contraction in spending on other items.

When you have reached that point, the economy tends to weaken. The fix is deflation in some items to rebuild consumer buying power. Since Bernanke fears that like death, the Fed is unlikely to let that happen. Yet the commodity bubble must collapse, or the world economy is just going to continue to slow.

One of the problems is that under current circumstances, it appears likely that many firms don't have the ability to cut pricing much without cutting operating expenses, which means that we are nearing the rapid diffusion series in which consumer restraint is suddenly bolstered by business restraint. That's why I'm so focused on inventories.

If inventories can correct from here slowly, then we still have a chance to travel through this one on a skipping recession basis. If not, there is little life left in this economic body.

I would say that there is over a 50% chance that we have already entered diffusion, and if we have, the chances that we get out without a longer contraction are below 10%. If we have not yet entered diffusion, then the chances of doing so over the next two months are clearly above 20%. This leaves me in a somewhat doleful frame of mind.

Comments:
MOM,

I Wake Up Every Morning In A Good Mood

It's funny you should say that. I wake up very day in a thankful mood. No joke. I am very grateful and thankful that I was born in America when I was born. I have no right to complain about anything really. I never even got drafted into the military.

At some point in the day I start picking at the wound though, probably because it itches.
 
The other part of his claims - that dumping more money into the economy won't raise gas prices - is obviously false...

March 22, 2012
Bernanke Says Low Rates Didn't Fuel Bubble

What an amusing inside joke that must be (or at the very least should be) at the Wall Street Journal. Didn't "fuel" bubble? What a great way to word it.
 
We were funding short-term consumption with long-term debt, and it is a recipe for future economic collapse. So really Bernanke is saying that the economy will continue to be very weak, which explains why he wants to hit the gas pedal.

But inflation is a tax which will reduce consumption which means hitting the gas pedal is a recipe for future economic collapse.

This wouldn't matter (much) if wages were rising at the same rate, but the whole point of hitting the gas pedal is so that wages DON'T rise at the same rate.
 
I assume QE releases money into the commodities market.

LTRO seems more complicated, unless the maturity of the loans is another joke along the lines of QE sterilisation.

Can anyone describe the actual mechanism by which these policies cause rises in the prices of commodities?

It's been bugging me!
 
shtove,

"Can anyone describe the actual mechanism by which these policies cause rises in the prices of commodities?"

I can offer one data point.

In 2004, I felt that I could no longer earn a positive inflation adjusted return in short-term treasuries. I therefore decided to put one third of my nest egg in physical gold and silver.

In 2006, I sold my physical gold and silver for a juicy profit to the next round of investors who believed as I once did, that hard assets were the place to be.

If real estate is any example, then that process will go on until it is exhausted (i.e., the bubble pops). There comes a point when the hard investment asset rises in price too much compared to non-investment hard assets.

Picture real estate prices vs. toilet paper prices. Bubble.

Picture gold and silver prices vs. toilet paper prices. Bubble? I tend to think so. One ounce of gold will now buy a lifetime's worth of toilet paper.

Just the opinions of a former commodity speculator, or as some might say... a gold heretic. Once had faith in it, but lost it.
 
shtove,
My take is thatthe money that doesn't go to buying treasuries and building bank reserves finds its way into Wall Street because they have some borrowing power that the general public doesn't have at this stage. The bid for higher prices in oil or other commodities is then based on activities that might restrain supply (wars [Iran ?], droughts, floods, mine closures, local unrest, etc.) or increase demand (China, India, general rise in the 3rd world incomes) are all hyped by the financial media and the buying begins. The money, by and large, cannot go elsewhere because of the economic background (stagnation and deflation in U.S., Europe, and other developed countries). However, because prices rise and incomes cannot rise, demand eventually falls off and we're back in recession. At least that's my take.

MOM, how did I do? Is it close aor am I being delusional?
 
@jimmy j:
The trouble I have with that is in the phrase "finds its way into Wall Street" - how? That's what I'm getting at with the query about the mechanism.

@stagflationary mark:
Thanks for your blog. I appreciate the offer of a data point instead of a universal thesis.

Bit concerned about the hoarding of toilet paper. Are you sitting comfortably?
 
shtove,
The money finds its way through the borrowing mechanism. It's called margin and provides leverage. Enough investors such as hedge funds, mutual funds, investment banks, and now ETFs all leaning the same direction can force prices up even when the supply of something is adequate.

Twenty years ago only about 20% 0f commodities markets were made up of speculators. The other 80% were the end users who were hedging the commodities they used or produced. I understand that now it is about 50% speculators. Much more pressure can be exerted - IMO, it's somewhat like the Hunt brothers when they tried to drive silver through the roof back in the 70s. When thetrend reverses they all sell, sell, sell which is the reason oil fell so precipitously in 2008.

Where am I going wrong, MOM?
 
shtove,

I'm sittin' pretty. What would MacGyver do?

I'm thinking his solution would involve a paper clip, a rubber band, and some leftover parts from a vacuum cleaner.

I'm more into prevention, lol.

But in all seriousness, look at the 5-Year TIPS yielding 0.94% *below* inflation. That's nearly a 5% loss in real purchasing power if held to maturity *and* you have to pay tax on the inflationary gain each year. That's at least one reason why we've had a commodity bull market.

Compare that to toilet paper. You will more than likely keep up with inflation overall *and* you don't have to pay tax on toilet paper's inflationary gains if you hold it to maturity (meaning you used it, lol).

Put another way, I'm a saver. Ben Bernanke wanted savers to buy things to stop this country from falling into a Great Depression. He got me to spend more money but what good did it really do? I bought more toilet paper in recent years. I'll be buying less toilet paper in future years though. All it did, at least for me, was bring future purchases forward.

So what happens the next time he tries to get me to spend? Not much. I've already done it. I bought toilet paper, canned goods, extra clothes, everything else I could personally use that I could think of, and long-term TIPS and I-Bonds (yielding in excess of 1.7% over inflation on average).

I'm locked in and hunkered (not quite bunkered, my home does have windows ;)).
 
Jimmy J,

Much more pressure can be exerted - IMO, it's somewhat like the Hunt brothers when they tried to drive silver through the roof back in the 70s. When thetrend reverses they all sell, sell, sell which is the reason oil fell so precipitously in 2008.

International Bullion Exchange: Control up to $100,000 of Gold or Silver for as Little as $20,000

Purchase with as little as $5,000 down
Finance up to 80% of your purchase


Experienced investors know that the potential results of their investments can be amplified by using financial leverage.

For some strange reason, I feel the need to pass.
 
Stagflationary Mark: "For some strange reason, I feel the need to pass."

I guess you forgot that "greed is good!:>p
 
Jimmy J,

Speaking of movies, it's A Simple Plan. What could possibly go wrong? ;)
 
An alternate solution is domestic job creation and wage growth. That would require tariffs on imports or redirecting fiscal policy from propping up the rotten financial sector to industrial/energy investment
 
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