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Wednesday, December 01, 2010

I'm Thinking

Thinking really hard.

Thinking so hard that I may, to casual observers, appear to be in coma. Occasionally I take breaks to go play TSA Officer with the Chief, just to reassure him and keep the holiday spirit going.

What I am thinking about is our current real situation, for which we won't have November data until about the middle of December, and the combined effects of the Fed's Doom Dayz program with the Euro's Badda-boom Badda-bail mishaps.

The horrible thing is that the confluence pretty much forces the most basic commodities up because it is forcing the dollar up no matter how the Fed tries to bust it, and there is no longer much hope in Treasuries, and the muni-market overall is highly suspect, and really most stocks are overvalued. So now we are going to see the real pop up in gas and fuel, followed by a real surge of food inflation.

The early indications are that manufacturing is already beginning to wear away on lower profit margins.

If the Fed hadn't launched QE2, a lot of the money would have gone into T-bills, but now it really can't. Not for a while, anyway. So the net result is that bond yields are higher and that the structural price of loans should have increased, but demand for mortgages is so low, for example, that prices can't increase that much. Nor are you seeing much in commercial paper rates, because demand for short-term paper net is so low that it is a seller's market.

Four-week gasoline supply is down 0.5% now YoY. Distillate is high, but that is due almost certainly due to forward buying and not structural demand. Sooooooo..... Pricing is going substantially higher, but not on demand (four-week jet fuel is now down 3.6% YoY). Also there is some current speculation that ethanol subsidies will cut out, which is going to blow up Bill Gates' farmland portfolio in a major way. There is a huge ethanol glut, but right now it costs way more to produce it than it does gas. So without the subsidies, it's a crash, and even with the subsidy, we have huge oversupply. The ethanol crowd was trying to get Congress to force a 15% gas mix. Among other things, that would have effed up most people's lawn mowers, so I say "DIE ETHANOL LOBBY, DIE!". FRB helpfully added a "farmland" category to the RE section of delinquencies and charge-offs reports, aka the Al Gore Column.

On the consumer side, especially low-end consumer side, things are somewhat better due to increased current stability. I'm not sure that will hold for long.

Around these parts, Wisconsin, I can still find premium gas without ethanol. I don't know if that works everywhere.

The mileage is so much better that on a per mile basis premium is cheaper to use. I wonder about the math skilz of people buying gas when they automatically buy the regular unleaded ethanoled stuff.

I've made the ethanol problem mostly go away by getting a Diesel car. The tiller, mower, and chipper/slasher/amputater all get unethanoled premium gas.
The horrible thing is that the confluence pretty much forces the most basic commodities up because it is forcing the dollar up no matter how the Fed tries to bust it,....

Sorry, my head just exploded. So the idea is that commodities go up concurrently with (but more than) the dollar, because equities and securities are obviously not a deal? Whatever happened to just holding cash? Sounds like another parabolic blow-off top in the making.
Yeah, I'm going to have to job hunt if gas price go up. Can't do a 150 mile round trip commute at higher prices. I've shopped for a more fuel efficient car, but it's amazing how low the mileage is on most modern cars.

It's not going to be fun. Continued career deflation is leading to lower income for many folks, with no chance of ever getting a higher paying job. Housing prices continue to go down. If we have inflation in commodities, doesn't that mean we have stagflation?
Teri, I've been dismayed at the mileage on new cars, too. My well-maintained early-90's SUV gets about the same mileage as a new family sedan does, in mixed city/highway driving (on pure highway, the larger frontal area starts to hurt, of course). And does it on regular gas. The engines have gotten quite a bit more inherently efficient in the last ten years (you can get a 500HP V8 that's just as efficient as an older 120HP V6), but they're just barely keeping pace with the regulation equipment on new cars.

My slightly-informed opinion is that it's just weight of the safety and convenience equipment that's been added, plus some reduced efficiency due to new emissions equipment. Mostly it's the additional steel frame members required to pass side- and corner-impact safety tests. Then there's all the motors for self-adjusting memory seats, dual climate controls, plus video screens, surround sound, blah, blah, blah. New sedan curb-weights are almost 1000 pounds heavier than my SUV.

People who say we're going to meet the new mileage standards by making lighter cars just make me giggle.
HIgher fuel costs versus higher housing costs. Always
difficult to predict. Do you opt for a shorter commute
or a higher mortgage ? Oh yeah, throw taxes into the
equation. My guess is a lower paying job closer to
home may be the best short term decision. Cutting costs is the best decision and deflationary also.
To make things even worse...Obama is going to not allow offshore drilling. Gas prices should skyrocket.


And if that was not enough...we also get to bail out the EU. I wonder if the Chinese are going to cut off our line of credit anytime soon?


I just want to bang my head against the wall.

-- Army Mom
CFTC to announce position limits for commodities

"Commissioners with the CFTC had originally planned to consider a new rule on position limits at their December 1 meeting, but that rule likely will not be considered until either the December 9 or December 16 meeting, CFTC Chairman Gary Gensler said Friday [November 19, 2010]."


The new Frank-Dodd regulation law requires the new position limits to go into effect no later than 180 days from the date the law was signed. The law was signed on July 21, 2010. The date of January 17, 2011 is 180 days from the laws signing.

This will have major implications for ETF prices of various commodities, the major ones being oil and metals.
Neil - it's more a matter of needing to arbitrage, especially against possible Euro losses.

And then there is the off-shore drilling ban, etc. US production continues to go up, but that may not be true much longer, which gives oilies a boost.

Also, offshore drilling generates a lot of natgas, so you see prices there shooting up. Because it is the heating season, plenty of storage space should be available over the next months. I can really see people holding NG supply on the theory that it is a nice hedge.

If you believe that the Fed is trying to drive down the dollar, holding cash is not that attractive. But if you have significant exposure to the Euro, you may well need to lay off the relative risk against the dollar or some dollar-traded commodity.

We just aren't through the Euro crisis. We appear to be at best smack in the middle of it.

And quite aside from the Fed's buying plans, which really only somewhat offset selling off Treasury assets a la GM, the money leaving munis has got to go somewhere. The muni thing is going to be a long-term story, just like state and local spending cutbacks.

These slow steady trends have surprisingly strong net effects.

The extremely high cash home sales ratios of recent months show just how reluctant many are to be in stocks.
I am seeing a bifurcation in mortgage loans. First time buyers and low end buyers can get low or no down loans at low rates with unsustainable debt to income ratios. And their credit score and employment histories are...ok,for the most part. move up buyers and those buying above about $500k are going through the wringer when it comes to qualifying and from what I have seen it appears to be due to a lack of experienced underwriters ( the information demanded has little or no bearing on the 4 "C"'s ) and a lack of desire to lend on the part of banks. it is weird.
Higher commodity prices means higher costs for manufacturers. But it's hard for retailers to pass the costs on when unemployment is north of 9.5%. What happens then is profits get squeezed and more people get laid off.

There is a solution. Unfortunately, even though Obama is "working night and day to increase jobs," what he's doing cannot, will not increase jobs.

Extending the Bush tax rates for all. You want more jobs? It's a no brainer. But Obama/Reid/Pelosi fight it to the end. You want more jobs? Start producing more energy (Oil, gas, coal, nuclear, and hydro) right now. Open up ANWR, the offshore areas, and incentivize nuclear power the way solar and wind are being incentivized. Are you listening O/R/P? You want more jobs? Cut corporate taxes to 10%/20%/25%. Corporations don't pay taxes, their customers do. Are you there O/R/P? Want more jobs? Quit talking trash about our businesses and start easing the burden of regulation. Do you hear us, O/R/P?

Government does not create jobs, it sets the tone, the conditions for businesses to thrive. If that were done, this country would see a revival of investment, hiring, and prosperity that seems but a dream right now. But I'm preaching to the choir. Y'all know it. What is it going to take to get the gospel to where it's going to do some good? I write to Obama, Murray, and Cantwell. They don't listen. They believe government creates jobs. Aaaarrgghh!!
One of the things I've noticed in Minnesota is that the rural areas of the state are NOT in recession. There's money out there, and I suspect most of it is due to ethanol. You see it in the small regional trading center towns. There's fru-fru coffee shops, upscale restaurants, and traffic in the electronic toy stores.

Our soon-to-be-former governor Pawlenty is big, big on ethanol.
Commodity prices are high, so that helps rural areas. (Agriculture, mining.)

You do see the occasional factory in rural areas (to avoid union wage rates) but those have been doing bad for a couple decades and getting worse because overseas labor rates still beat rural US labor rates.
I've been listening to The Road to Serfdom by Hayek (well, ya gotta do something on long commutes!) It really is a great book. Explains a lot about the difference between socialism and what he calls liberalism.

I like to look at old pictures of places and it always amazes me how pictures from the 1800s will show such activity on the landscape. If you look at those same areas today, they look like architect's drawings. Everything is so tidied up. I'm starting to think of that chaos as a sign of relative freedom. When you can't do anything without butting into a regulation, you know you're not free.
Charles, if you want to see overseas labor, just visit one of the Jennie O turkey plants here in Minnesota. Bring a translator!

Teri, that chaos interpretation is a damn good one. I'll be thinking about that for a while.
I agree, Gordon. Teri gave me some food for thought there.
LOTS of good comments here.

Still, I think our regulation/energy problems are at the root of the problem.

It's not that people don't have good ideas and innovate. They still do. But when I think what it takes to start a business, or shudder, build any sort of plant, compared to what it was like when I was young, I realize that we have dug our own grave on the jobs.

I was talking to one of my cousins, who is a DoJ lawyer concentrating on environmental law, and he tells me that until we fundamentally restructure our environmental law that nothing will change.

Right now anyone can sue virtually anyone under our environmental laws. You could have gone right through the multi-year process to get the permits, and be halfway through the building process, and be held up for five more years, plus huge legal costs. And in the end, you'd basically have to pay the group suing off.

There has to be a way to avoid the extreme of China, which has wrecked its environment, and the extreme we are in where it is hard to even farm these days.

We would have much more small manufacturing if we streamlined a process and immunized it from ex-government suits.
Wasn't it the late Micheal Crichton who wrote that the environmental groups are now run by trial lawyers? They do get a significant portion of their operating income from lawsuits.
MOM, Your last comment is so spot on.

I've been harping on this environmental stuff ever since I became a victim of the Endangered Species Act and lost my irrigation water (1997). It is just a way for the Greenies to stop the industrial revolution. Most of the Greenies are trust fund babies who believe that the environment was so much better back in 1810. What they don't know/care is where their trust fund money came from. It sure wasn't saved up by their parents/grandparents shuttting down ranches, farms, sawmills, mines, and manufacturing plants.

Reagan's Secretary of Interior, James Watt, was the last government official who fought the Greenies. Since then, it's been pretty much downhill for industry in this country. Its bad that finance and healthcare are such large parts of our economy. The Greenies are one of the reasons.
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