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Wednesday, August 08, 2012

Next It's Soap

I posted recently a link referring to McDonald's "value" menu attempts in China. Like it or not, fast food is a pretty good leading indicator for consumer-level economic impetus.

Well, today McDonald's released disappointing numbers for July:
In the U.S., the company said its promotions failed to drive growth, and revenue at restaurant open at least 13 months dipped 0.1 percent. The Oak Brook, Ill.-based company also says it faced a tough comparison from a year ago, when it launched the mango pineapple smoothie. 

The figure dipped 0.6 percent in Europe because of weakness in Germany and several Southern European markets. It fell 1.5 percent in the Asia Pacific, Middle East and Africa region — a key growth area for McDonald's. Sales in Latin America and Canada, which are not reported separately, helped pull overall results even with last year.
So the value menus aren't able to draw enough customers in to offset smaller profits, although US results, relatively, aren't that bad. These numbers are probably a pretty accurate representation of relative strength in growth trends. Canada is doing pretty well; China is not, no matter how many attempts there are to claim that it is. No economy accelerates into services when these types of sales are impacted. When looking at these growth figures you have to offset for more store building; same store sales are key.

Oil continues its run up the wall. This is not going to be pretty, because my reading of the US economy is that we have nearly reached the comic book phase of slap-boom-bang when the dominoes start falling. US gas demand is too weak to continue this much longer, and diesel sales are surprisingly low also. US net imports are down 12.8% on the YTD and 13% on the four-week:
Over the last four weeks, motor gasoline product supplied has averaged 8.7 million barrels per day, down by 4.2 percent from the same period last year. Distillate fuel product supplied has averaged 3.6 million barrels per day over the last four weeks, down by 2.8 percent from the same period last year. Jet fuel product supplied is 3.6 percent lower over the last four weeks compared to the same four-week period last year. 
As we head into the fall period, the YTD comparisons get much harder and the underlying weakness is going to start popping out from the figures.  Propane production is way up, and this is sustaining overall supply figures, but propane is nearing a glut. This can't continue without prices collapsing.

Obviously there's no help in Europe. Germany's economy is slowly but surely folding up. In particular, the construction PMI is a bad indicator showing that internally generated demand is insufficient to overcome the export drag. JPM Global PMI shows just what a tough road we have ahead - look at the employment and new orders indices. Brazil is now reproducing last year's slump in a dedicated manner, and this has not much further to run.

A word on recessions. A lot of people are referring to our impending joy as a double dip. Instead it is more in line with traditional business cycle frequencies, which were basically set on inventory cycles. Very traditional. 

Look at NBER's recession dating page for the US. You see that recent decades were the exception. In the table shown above, the second column is the length of time for expansions. The US is between three and four years once you take out recent decades. It's August. We are more than three years in. This is right on schedule.

Why have things changed? Because we cannot support our economic expansion with the net aggregation of new debt, which returns us to the classic inventory cycle. Mind you, this is occurring even while the federal government and some of the states continue to rack up more debt, so there's a nasty snap-back in the works. The only question is when it occurs.

There are several reasons why we cannot accumulate more debt. 
Just to be clear about this - in the early phases of the 2007/2008 shock, when returns on debt were still high for investors, shoving down interest rates tended to rapidly increase the rate of new investment compared to what it would have been. Now the reverse is true - the Fed is almost certainly generating a net negative by suppressing long-term interest rates. Doing so is magnifying the IMPLICIT debt accumulated in pension and retirement medical obligations, because the return on pools of assets already accumulated must be discounted to compensate. 

What I am asserting is that the Fed is shoving us into a Japanese style deflation. Fortunately, the US does have a way out of it. We have the capacity to expand internal production massively if we were to remove our structural (largely regulatory) barriers to it. But right now those barriers get higher every day, so don't expect anything good in the near term. 

This recent rally is built on nothing more than speculation that the Fed, ECB, etc, will print. I guess they haven't figured out that QE 3 will have only 2 effects: lifting the S&P, and goosing oil prices. The first may help sales at Tiffany's, but the latter will crush the other 99% who aren't brokers and I-bankers.
I spent some time in supermarkets this week, watching food prices rise. Over the last month, the trend has been dire indeed for those on small incomes.

Pasta, eggs, all that stuff. Not even meat. Just the basics. It kind of makes me want to cry - there are a lot of people for whom this is going to be a terribly rough winter.

In the meantime, Payless is advertising $14 shoes. The economy is weakening right before my eyes.

Oil prices are going to collapse, but I think it's going to be be too late to prevent a more rapid downward trend.
The Prepper lists I'm on seem to think it's going to be a long slide to the bottom, rather than a quick crash. And yes, it's going to be very grim. During the Great Depression, you had people used to making do and budgeting to get through hard times. Now we have people that don't even know how to cook. And we've weakened the idea of personal responsibility, so we have people that put their own self interest before that of their children. There's a lot of things that need to be changed in the country. At the very least, we need to start to dismantle all of these regulations and put some effort into getting people back to work.
In the meantime, Payless is advertising $14 shoes.

As long as they're leather shoes. When it gets real bad you can eat them.
MOM - I watched chili prices. Nalley's usually dips to 68 cents per can in summer sales; it never got below 86 cents per can this year. That says bad things about food prices.
This confirms what I have been saying for years now. Energy exploration and production is a major way to increase the economy.

The dems who are shilling for Agenda 21: http://www.youtube.com/watch?v=TzEEgtOFFlM
don't get how their actions are crushing economic activity.
Agenda 21, if carried out, will propel us to a becoming Kenya or worse.

It's going to get ugly before things can change.
It could get REALLY ugly, Jimmy. Really, really ugly.

Things can lock up a lot harder than people now realize.

For example, we are now in the first real round of municipal defaults, led by some CA innovators. This is going to begin to weaken the bond insurers, and there is the potential that losses can shove through and show up in other insured sales of less-weak authorities.

Now that would really blow up the game, as the flow of money to public authorities cut more deeply into spending and investment.

It's not just CA places. You have the publicly funded housing projects, etc, that are going to return deep losses.

The insurers never reserved or charged for the types of losses we are beginning to see, so they are going to run out of $$ quickly, and then their returns on invested funds are lower along with everyone else's.

Lastly, the muni bond market overlaps with the pension fund space, so when things weaken there you have a harder job funding pensions. Recent legislation to let companies underfund their pensions on theory that all this will be temporary is going to throw a spanner in the works later.
Agreed with most in the post; certainly there is nothing fundamental to support oil prices.
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