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Wednesday, June 13, 2012

Gravity Still Operational

Today's retail sales report shows the source of US economic weakness - poor household incomes. The prior month was revised from a small gain to a small drop, and retail sales dropped again in May. 

May car sales were reported down, but with the magic of seasonal adjustments, in May's retail report they show a strong 1% month over month gain. Make of that what you will. The weakness in today's report is squarely on the backs of household spending, with groceries, pharmacies, restaurants, sporting/hobby, general merchandise and Lowe's-type retail showing drops.

The early Easter shifted some spending into April, so May was always expected to be a bit weak. The revision of April sales to a small loss is therefore significant. 

Ex-MV, May's month over month change is -0.4. April's revised ex-MV is -0.3.

Producer prices showed a nice trend in intermediate and crude goods, but core finished (ex food and energy) prices increased 0.2% on the month in May. This is lagged pricing increases from earlier cut margins. 

The pattern of pricing in grocery stores that I see indicates a very weak US economy and the need for a much greater drop in pricing on the materials side to restore the consumer's ability to buy. This didn't come about quickly and it won't redress quickly. 

Anyway, all the nonsense about Europe's problems hurting the US is grating. Our economic problems are internal, not external. It is very possible that the net effect so far of Europe's problems has been strongly positive for the US economy, and it is certain that it is weakly positive for the US. The collapse in mortgage rates is helping us and will continue to help us. Thirty-year fixed mortgage rates below 4% are a central banker's stimulative wet dream. They are having mass orgasms at the Fed.

Yesterday's three-year Treasury auction wasn't that hot (most of it at dealers, yields a bit higher than expected), so today's 10-year auction should be interesting, albeit strongly supported by today's retail report. The six-month auction on Monday had coverage over 5 - very strong - and a low yield. So panic money.

NFIB was okay on Tuesday. There's nothing better it could be, and much waits until the election. 

Eventually, Europe will hurt us. But not today. Not next month. What is hurting us now are fundamentals, and price drops are the only cure. 

Italy is currently being sandbagged by Mr. Market - it paid close to 4% to sell one year sovereigns at the auction today. OUCH! Note that most of the reporting about Italy's debt position is badly off. They ended 2011 at 123% or 124% of GDP. Tax receipts have been lagging despite tax increases, and the economy has been contracting, both of which upset the debt cart. They'll end 2012 at around 127% or 128% of GDP, it appears. The jig is almost up there. 

Greece votes next week. Let's just say that the first reaction of the Greeks to the news of the apparently merciful Spanish bank bailout was fury, and a demand that the Greek terms be modified. This was met with harsh German rebuffs, so the political parties pushing for a renegotiation on debt terms have been strongly externally supported by recent events. 

It's interesting to see what is dropping and what isn't. I started making my own bagels after the price soared to $4.75 for a pack of six here in Canada (my cost is approx $1.50 with utils worked in).

Anyone stupid enough to own a Keurig coffee maker is paying about $0.90/cup retail. About $0.50 if you get them wholesale (about double the price from last year).

My local Walmart is trying to sell a 50 inch plasma flat screen for about $450. It's not moving. This same unit was about $3000 two years ago.

HD video camera prices are plummeting. I'd say about 80% over the past year.

Utility prices keep going up. Part of that is living in Alberta, Canada, where our local government is performing massive upgrades to our grid to export our surplus to the U.S. Of course, Americans don't want the cost of the upgrades worked into THEIR power bill so it's in ours. In the meantime the government is telling us how we have a power shortfall (not true -- we have 17% over capacity) and that we need to pay for these upgrades NOW.

We're feeling a bit stretched, to say the least.
Nonstore retail growth continues to exponentially explode higher. And yet, nonstore retailers are not hiring more employees. Go figure.

The Productivity Miracle of Nonstore Job Destruction (Musical Tribute)
We're going to Bern.
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