Wednesday, April 30, 2008

Dead Cat Bounce Economy (Musical Tribute)

Dead I am the rat
Feast upon the cat
Tender is the fur

Dying as you purr

No offense intended to cat lovers. We have one. His name is Tigger and he's quite the actor.

Dead I am the sky
Watching angels cry
While they slowly turn
Conquering the worm

For inflation acts as a gigantic corporate tapeworm. That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Whatever the level of reported profits (even if nil), more dollars for receivables, inventory and fixed assets are continuously required by the business in order to merely match the unit volume of the previous year. The less prosperous the enterprise, the greater the proportion of available sustenance claimed by the tapeworm. - Warren Buffett, Shareholder Letter - 1981

Tuesday, April 29, 2008

Commodity Booms

This picture is worth at least a thousand words.

The current interest rate on the three month treasury bill in the secondary market is 1.42%. If the annual inflation rate is above 1.42% the hoarding of hard goods will continue and/or accelerate one would think.

Petrol rationed to stop hoarding as supplies dwindle on the forecourts

Ministers and petrol suppliers insisted it was "business as usual", with no danger of shortages as long as nobody panicked.

Sounds like a bank robbery. I don't know about you, but I'm most likely to panic when I'm told not to panic. Further, as long as nobody panics? What a horrible disclaimer that is. Somebody, somewhere is bound to panic. I guess that means there is a danger of shortages.

The Secretary of State for Business, John Hutton, said: "The advice that I have received is that there is plenty of fuel in Scotland for a significant period."

Whose advice? Significant to whom? Yeah, well, last night I was told that the sky would turn green and would stay that way for a significant period. I'm not at liberty to name my sources.

Despite these reassurances, several garages reported that they had already sold out of fuel or were running low on supplies.

Perhaps the reassurances aren't adequate. The assumption seems to be that people are hoarding fuel because they think it will run out. I'm hoarding toilet paper. It isn't because I think we'll run out. I'm confident toilet paper will always be available. Call me an optimist. I just tend to think it won't be getting any cheaper.

I go round and round on the inflation vs. deflation debate. I can say that had I embraced deflation wholeheartedly in 2004 when I first turned bearish I'd have lost a lot of money by now. Embracing inflation on the other hand has been rather kind to me.

Source Data:
FRB: Selected Interest Rates
St. Louis Fed: CPI

Fear Minus Greed v.2

This is an update to a chart I did last fall. For a description of what it means please refer to Close Encounters of the Fear Kind.

I'm not sure what will happen next. The yield on the three month treasury bill is pathetic (less than 1.5%). It can't really go all that much lower.

It is probably time to stick a fork in this chart and begin staring more at the unemployment chart instead.

I'm thinking the trend isn't our friend. Does that look like we're in the eighth inning to you? Here's a look at previous games.

Consumers’ reduced spending habits affect retail, restaurant industries

But don’t blame all the closings on the downturn, retail experts say. After years of economic expansion and a consumer boom fed in part by growing household debt, America is simply overstored.

About 25,000 specialty stores have opened since 2000, and restaurant offerings now exceed demand, according to Technomic, a Chicago-based industry consultant.

Changing consumer trends also have led to closings.

Income earned by women who were joining the workforce drove sales for several decades. But that trend has leveled off, which may be more of a long-term issue for the industry than the current economic situation, said Bonnie Riggs, author of the new NPD report, “Why This Downturn Will Be Different for Restaurants.”

Here's a summary of the report.

The NPD Group Reports on Why This Economic Downturn Will Be Different for Restaurants

While each recessionary period had its own unique characteristics, NPD found that current conditions are most similar to those experienced in 1979 and 1980 when the industry experienced it steepest traffic losses.

Well, knock me over with a feather.

See Also:
Fear Minus Greed
Close Encounters of the Fear Kind

Source Data:
FRB: Selected Interest Rates
St. Louis Fed: The Employment Situation

The Sarcasm Report v.22

As inflation squeezes middle-class Europe, anxiety about the future

"The problem," said Julián Cubero, chief economist for Spain for BBVA, a leading Spanish bank, "is that if your salary rises more slowly than the cost of products you buy on a daily basis, you feel poorer every day."

This seems mighty controversial. Surely he must have known that the blogging universe would be all over his questionable claim.

On the other hand, I'm drawing a blank when attempting to shoot holes in his argument. Maybe he's onto something there.

The Three Little Pigs Global Economy


Decrease of demand in the rich countries will be followed in the near future by scaling back production. We know from practice that just as the economic growth sustains itself, the decline exacerbates itself. Deterioration in demand triggers job cuts, which in its turn leads to further deterioration in demand – the jobless usually don’t have much money to spend. The crisis comes in waves, one after another. And every time that people hope they are over the hardest moments they find that the worst is yet to come.

The less the Americans and the Western Europeans buy, the less the Chinese and the Indians produce. But when the real economy is in depression, the information economies won’t be able to develop, for they are based on processing information about the real economy.
For over dozen years the Western societies have been living to the illusion that it is possible to live from purely financial manipulations and computer programming. Alas, they have to accept that high cost-effectiveness of these marketrs was provided by low payments and technological inferiority in the production sector. And that couldn’t last forever. The production sector no longer can afford high pace of development, this will ultimately result in landslide of prices on raw materials. This is when the energy superpower will have to admit its ultimate weakness: under production crisis, nobody needs the energy.

Back and forth I go on the inflation vs. deflation debate. It never ends. I can say I am very sympathetic to his arguments both as a former computer programmer and as a firm believer in illusion theories.

Spain's Economy Revisited

Spain weighs converting unsold homes to public housing

MADRID — Spain's housing ministry on Monday said it was studying ways to convert some of the 500,000 to 600,000 new, unsold homes on the market into public housing to counter a property slowdown.

Spain slashes growth forecasts as unemployment soars

"The downturn is spreading very rapidly from the construction sector to all sectors of the economy, and it's happening more quickly than expected," said Gilles Moec at Bank of America in London.

Gosh, that's surprising. It seems only yesterday we were told this couldn't happen.

September 17, 2007

David Taguas vs. Vizzini

October 19, 2007
Rafael Pacheco vs. Ash

October 29, 2007
Spain's Pending Deconstruction Boom!

1970s Style Dancin' (Musical Tribute)

May 5, 2000
Soros withdrawal: a sign of things to come

“We will be more conservative, have less exposure to the market and accept lower returns because we want to lower the risk profile. ... Markets are extremely risky, and in some ways I think the music has stopped—only most people are still dancing.”

April 28, 2008
Carlyle exec sees only U.S. economy woes this year

"Ultimately, the music kind of stopped and people would not lend us money any more," he said. "The debt terms were so favorable that (debt buyers) ultimately had buyers' remorse."

May 6, 1980
A More Severe Slump

The relative employment optimism among economists is based on the current moderate levels of business inventories and the expectation that the recession will end by early next year. Unlike 1973, when businesses started the recession with large stocks of unsold goods, they now have modest inventories. This economic downturn has been predicted for so long that companies have kept a tighter grip on production and not amassed excessive backlogs. A drop in customers thus will not result in immediate widespread firings. Says a Capitol Hill economist: "In certain industries inventories are getting out of line with demand, but we're still avoiding the speculative buildup we had in 1974."

Unlike 2000, when businesses started the recession with large stocks of unsold goods, they now have modest inventories. This economic downturn has been predicted for so long that companies have kept a tighter grip on production and not amassed excessive backlogs. Right?

As long as it appears that the recession will not be extremely long, companies will be slow to fire too many workers. Because of the high costs of hiring and training new employees, some managers will keep underemployed, unproductive workers on the payroll during a short recession in anticipation of a quick economic upswing. People working in banks or insurance companies are thus less likely to be laid off now than are auto assembly line employees. But if companies believe that the recession will last longer than expected, that situation could change very rapidly.

The recession will be short and shallow. That's what we're told. Right? So get out on the dance floor!

Early 1980s recession

The recession was not only unexpected but was the most serious recession since the Great Depression.

Deflation Revisited

Watching Ringside for Round Two

We've now observed a dot-com bubble, a techology bubble, a general bubble in equities ending in 2000 but "echoing" to rich valuations in recent years (especially on the basis of normalized profit margins), a bubble in housing, a bubble in private equity and low-grade debt, a mini-bubble in Shanghai (which has lost about half its value in recent months), and now a bubble in commodities that is well underway. When, when will we learn to recognize these for what they are?

He makes a good point. I would also point out that I finally capitulated on my short-term deflation stance. Meanwhile, gold and silver are losing their luster lately. I have also argued that hoarding toilet paper seems a much better plan than hoarding goods that have increased four fold or more.

In case we need a red herring to suggest that the end is nigh, last week saw the debut of a little Denver fertilizer company, which promptly jumped 58% above its IPO price on its first day of trading. The company: Intrepid Potash (IPI). Hand in hand with the surge in grain prices has been a surge in the price of this fertilizer (basically water-soluble potassium), and the frenzy for potash has increased in step with the speculative hoarding of foodstuffs. Clearly the company is a direct “play” on potash prices. But this is interesting – according to the company's own prospectus, “ Fertecon Limited, a fertilizer industry consultant, expects global potash fertilizer consumption to grow 3.7% annually from 2007 to 2011.” On that growth rate, and on the basis of elevated earnings due to high potash prices, the companies in this group are selling at P/E multiples of 40-60.

Perhaps the end is nigh. As he points out in the rest of the article, that does not mean the days of economic pain are behind us though.

Hussman Funds

That Rose, Fannie Mae (Musical Tribute)

U.S. Foreclosure Filings Double in First Quarter, Led by Nevada

April 29 (Bloomberg) -- U.S. foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages and falling home prices left property owners unable to sell or refinance without losing money.

Special thanks to the people at Versus.

Monday, April 28, 2008

The Sarcasm Report v.21

The Bank of Canada needs to get with the program.

April 24, 2008

Economy stalling, Bank says

OTTAWA–Canada’s economy has nearly stalled and won’t get fully back on its feet until 2010 as a result of the unexpectedly steep decline in business conditions in the United States, the Bank of Canada said today.

The US Economy is poised to rebound in the second half of 2008. That's what we are told.

"Growth in the global economy has weakened" since January, Bank of Canada Governor Mark Carney remarked at a news conference. He said this deterioration reflects "the effects of a sharp slowdown in the U.S. economy and ongoing dislocations in global financial markets.

The global economy is booming (ex-food and ex-energy). That's what we are told.

"The U.S. economic slowdown is projected to be deeper and more protracted" than the bank expected earlier this year, Carney said.

Short and shallow is what we are told. Short and shallow.

Have they not visited the legendary state of North Dakota recently? Surely if that is factored in we have nothing to worry about.

North Dakota Tourism: North Dakota TV and Videos

From the fertile farmland and bustling cities of the east, to the rivers, lakes, hills and prairies of central North Dakota, and on to the rugged Badlands of the west, North Dakota is a land of Legendary adventure for everyone.

There's even a free nine minute training video to help potential tourists. Was the Bank of Canada even aware of that? I think not!

What can Canada possibly due to counter our future prosperity due to a tanking US Dollar combined with free Internet tourist training videos from the legendary state of North Dakota? Mwuhahaha!!

Bank of Canada trying to get loonie down, says U.S. think-tank

OTTAWA - The Bank of Canada will aggressively cut interest rates to bring down the Canadian dollar that is being held aloft by Canada's relatively high interest rates and world oil prices, which hit a new record high of nearly $120 US a barrel Monday, a U.S. based economic think-tank says.

"While the bank will not say this, we continue to believe that it seeks to cheapen the loonie against the U.S. dollar," Carl Weinberg, economist and head of High Frequency Economics, said in an analysis. "This requires aggressive rate cuts to catch up with the Fed."

Oh. Nevermind. As a side note, does this mean that the one-way, can't lose, sure thing Canadian Dollar fiat bet is getting long in the tooth?

Canadian Dollar

Oh well, there's always the paper fiat Euro. It still always goes up. Further, the one-way, can't lose, sure thing technical chart analysis says she's goin' from 160 to 246! That's like having money then getting 50% free money! Woohoo! Forget hoardin' toilet paper. Time to start filling pillowcases with Euros!


Prelim. Bullish Price Obj. (Rev.): 246.0

EU says economy in 'inflationary shock' as prices surge and growth slows

The weaker dollar will likely hit European exporters harder in the future, the EU said, steering away from an earlier line that Europe has not seen any ill-effects of a strong euro.

Sounds like a stagflationary shock. Gotta get me some of that! Let's see. What do I need? A forex account! Free forex training! I suppose that's a start but I also need something extra.

Forex Trading USA

A margin requirement as low as 0.5% (200 to 1 leverage) is a lot lower (higher leverage) than that of stocks and futures (increasing leverage increases risk).

Sweet! Oh yeah, that's what I'm talking about. That combined with a credit card with a generous credit limit should get me all I deserve, and more! Baby needs a trillion new shoes!

Economic Joke Failure

June 5, 2007
China's college graduate glut

The joke floating around college Internet chat rooms is that college students nowadays are like cabbages: There's an abundant supply of them and their price never goes up.

The cabbage joke is wearing thin.

April 17, 2008

China's Rising Food Prices Cause Pain

In Beijing's largest wholesale food market, Xinfadi Primary Product Market, even the price of cabbage has risen 50% in the past two months alone.

At least one economic joke appears to be holding up well (and the joke appears to be on us).

February 6, 2007

Bernanke: Education can help with income gap

Bernanke, in prepared remarks delivered to the Omaha Chamber of Commerce, said disparities in education and training is “likely the single greatest source of the long-term increase in inequality.”

For example, a typical robotic arm is SO much smarter than the factory worker of yesteryear. Want really smart though? Look at a recent Chinese college graduate hand assembling plastic toys for Wal-Mart. That's genius I tell you.

More Americans are going to college than ever before. Meanwhile, the inequality gap continues to increase. Perhaps Bernanke's solution is that we all have PhDs.

April 2, 1973

The Ph.D. Glut

In recent years, universities have been graduating far more students with doctorates—a record 32,000 last year—than there are jobs for them.

January 24, 2006
The Ph.D. Glut Revisited

The Ph.D. glut has existed ever since the fall of 1969. The number of entry-level full-time professorial positions has remained stagnant. Few new universities have been constructed. Legislatures have resisted additional funding.

This has led to a reduction of the number of tenure-level positions. Universities and community colleges have been able to staff their entry-level positions with inexpensive instructors.

The Sarcasm Report v.20

What US Stagflation Means for Asian Markets

This nervousness translates into a dampened shopping mood, which stems primarily from the female subconscious.

This dangerous mentality is clearly being offset by the hoarding behavior of men as we stock our pantries and bunkers. Woohoo!

I am no longer in the numbers game, but I expect the data to be particularly weak due to the sagging stock market and slumping housing market taking their tolls on consumer sentiment - which is very much driven by women!

In sharp contrast, the men who helped get us into this mess are still out telling us how great things are! Woohoo!

K&C Quotables

The futures markets are now looking at three rate hikes out a year from now. That strengthens the dollar; it weakens gold; it weakens oil. It’s great for stocks because it means that the Fed is going to stop fueling the inflation machine. And that there’s confidence that the credit crisis has been mastered. This is just fantastic news. - Donald Luskin

When you narrow risk premiums, stock markets soar....The process is finally working. - David Kotok

Bush says rebates going out Monday will boost economy

Bush has suggested the rebates could trigger a spending spree.

Spending spree! Woohoo!

Thinking of Changing My Name

High inflation and slow growth forecast in euro zone

BRUSSELS: Euro zone growth will be slower than expected in 2008 and 2009 while inflation will stay above target, the European Commission said Monday.

The Great Inflationary and Grand Growth Easing Mark the Second?

What do you think? Too long-winded?

It is just that there now seems to be a stigma attached to stagflation these days. Note how this article avoided the word entirely.

The commission assumes that the euro will appreciate 13 percent in 2008 against the dollar.

If they get higher inflation with a euro appreciating 13% vs. the dollar in just one year, I wonder what we'll be getting? Don't answer that. I think I have another name in mind.

Rhetorical Mark?

Too pompous? Before you answer keep in mind that I am an American, at the very center of the known financial universe meltdown.

This name thing sure is hard.

A Sign of the Times

Chinese top oil companies post weaker Q1 earnings on record-high crude price

'They will continue to post refining losses unless crude oil prices go down or the government provides huge subsidies. There is no relief for them unless the government lifts the control on oil prices, which is unlikely due to higher inflation.'

First it was commodities AND stocks. They were going up together, both in America and China.

Now it appears to be commodities OR stocks. Better be sure you pick correctly.

At some point the natural progression may be NEITHER commodities NOR stocks. It wouldn't be the first time in history (if the Great Depression is any indicator).

Further, even peak oil doesn't necessarily mean investing in oil companies is a great plan. What happens when oil/gas field/plants either run dry or are no longer needed? How much money will be made converting them into historical parks?

We've got a nice one in downtown Seattle on prime waterfront real estate no less. Go figure.

Gas Works Park

Friday, April 25, 2008

Broken Inflation Expectations?

Bernanke likes to look at the difference in yields between TIPS (treasury inflation protected securities) and normal treasuries.

I see a major problem with the theory behind it though and I want to discuss that here.

If you KNEW severe deflation was coming then there is no better bet than normal treasuries. You lock in 3% say and then watch the value of your investment rise during the deflation. Things get cheaper and yet your money still grows. It is a perfect situation for you. You will get richer. No doubt about it.

If you KNEW severe inflation was coming there are many better bets than TIPS though. When investors get scared of inflation they often run to gold, silver, food, and energy. That's exactly what we are seeing right now. Further, TIPS cannot protect you against hyperinflation. There's simply too much lag and taxes inherent in them for that.

TIPS are therefore a wimpy bet. They are for people such as myself who KNOW that we don't know (and there doesn't seem to be that many of us). I'm scared of inflation but I'm also scared of yet another bubble (commodities?). I KNOW how sure I would have been in the late 1970s stocking up on gold and silver. I also KNOW, using hindsight, that I would have been dead wrong.

So here's my thinking. If you take the difference in yield between TIPS and their non-inflation protected counterparts you do not necessarily have an accurate gauge of inflation expectations. Those who are sure inflation is coming are mostly off hoarding hard goods (which I'm doing too to some degree since there is very little downside in hoarding something you know you will someday use). They aren't buying TIPS. Heck, they probably aren't just hoarding either. They're leveraging up (not me). This casino mentality we have says that "sure things" need massive leverage in order to maximize returns.

Since hard goods have been skyrocketing in price, I therefore submit that inflation expectations are higher than TIPS would suggest. Heck, for all we know some TIPS holders are actually defecting in this game. Let's say you own TIPS and your inflation expectations rise considerably. Do you buy more TIPS or do you sell what you have and start hoarding hard goods in earnest? If you do the latter you will actually be forcing DOWN the derived TIPS/treasury inflation expectations that Bernanke likes to follow. As you are off hoarding hard goods instead, Bernanke will see inflation expectations even more contained. Now that's a conundrum!

So what does this all mean? Well, if inflation expectations are actually much higher than the TIPS derivation implies, that would also mean that TIPS are a much better bargain than the market is expecting (inflation running hotter than expected would mean TIPS would pay more than expected).

Long-term non-inflation protected treasuries are at the very bottom of my wish list. TIPS and I-Bonds are near the top. They meet my personal risk/reward requirements in this environment. Barring hyperinflation, I won't lose my shirt. Everything is risky though. Everything. I've quoted the following in the past and I'll no doubt quote it again.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966

Without further adieu here are some VERY stable inflation expectation charts (starting from the point the credit crisis struck last August, when oil was ~$70 a barrel). It sure looks like an illusion to me, but what do I know?

Source Data:
U.S. Treasury: Daily Treasury Yield Curve Rates

The Food Crisis of the Early 1970s Repeats

The new face of hunger

“We are the canary in the mine,” says Josette Sheeran, the head of the UN's World Food Programme, the largest distributor of food aid. Usually, a food crisis is clear and localised. The harvest fails, often because of war or strife, and the burden in the affected region falls heavily on the poorest. This crisis is different. It is occurring in many countries simultaneously, the first time that has happened since the early 1970s. And it is affecting people not usually hit by famines. “For the middle classes,” says Ms Sheeran, “it means cutting out medical care. For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals. And for those on 50 cents a day, it means total disaster.” The poorest are selling their animals, tools, the tin roof over their heads—making recovery, when it comes, much harder.

Hoarding Advice Turns Mainstream

Load Up the Pantry

I don't want to alarm anybody, but maybe it's time for Americans to start stockpiling food.


I am no longer in a short-term deflationary mood. This is full blown stagflation we're talking now, if not worse.

Feeling Lucky?

Here's stimulus: What you need to know

The last 2 digits of your Social Security number apparently determines the date it will be sent to you (assuming you don't have direct deposit).

00-09 May 16
10-18 May 23
19-25 May 30
26-38 June 6
39-51 June 13
52-63 June 20
64-75 June 27
76-87 July 4
88-99 July 11

Not that I believe in luck, but my FREE money is being sent May 16th. Talk about lucky!! That means that my gasoline tank will be filled sooner than yours more than likely. That will also mean that the price of gasoline should be higher for you. Sorry about that!

However, there's still hope for you. If you borrow the money now, you can fill your tank before me. Good for you!

Or can you? Now that I know you might consider filling your tank before me, I suspect you'll do it on May 15th. That would be very smart. Very smart indeed. Yeah, so here's what I'm thinking now. I'm going to fill my tank on the 14th just to be safe.

Of course, now you know the 14th is looking pretty good to me. You weren't born yesterday. The 13th. That's what you are thinking now, isn't it? Well, I'm already starting to like the looks of the 12th! Mwuhahahaha!

The 11th you say? Let's just cut to the chase [scene]. Race you there!!!

Isn't the inflationary game fun? I'm having a hoot!

This should probably be yet another sarcasm report, huh?

The Sarcasm Report v.19

Stimulus Payments to Go Out Ahead of Schedule

The federal government, eager to boost the flagging economy, will start distributing special stimulus payments Monday—four days earlier than expected.

The economy is strong and there is absolutely no need to "save your money instead of spend it."

"Beginning Monday, the effects of the stimulus will begin to reach households," President Bush said Friday. "This money is going to help Americans offset the high prices we're seeing at the gas pump and at the grocery store."

The core economy is strong ex-food and ex-energy.

The payments will go out ahead of schedule because of a new computer program that updates records daily—faster than an older program that updates weekly, according to Andrew DeSouza, a Treasury spokesman.

The new computer program is at least as strong as Vista.

The checks are the centerpiece of an economic stimulus program signed into law by President Bush in February.

The stimulus program is as strong as our president.

The aim is to boost consumer spending and help mitigate problems caused by the slowing economy.

Aha! The slowing economy is the problem. Now we finally know the cause. So what caused the slowing economy? Was it hemlines? Quick, distract me with a question lest I ask where those hemlines were actually manufactured.

What do you plan to do with your check?

Cash it quick, before the next guy starts hoarding gasoline!

The Sarcasm Report v.18

U.S. Notes Decline, Headed for Biggest Two-Week Loss Since 2001

April 25 (Bloomberg) -- Treasuries fell, with two-year notes headed for the biggest two-week decline since November 2001, as traders increased bets the Federal Reserve will stop cutting interest rates at its policy meeting next week.

Because we all know how smart the "traders" were in November 2001. The rate on the two-year note hit 3.22% on November 26, 2001. It peaked at 3.78% on March 25, 2002.

Would it be in bad taste to point out that the rate on the two-year note bottomed at 1.10% on June 13, 2003? Apparently "traders" didn't realize that the economy wasn't done tanking yet.

For what it is worth, the Nasdaq put in its final bottom on October 9, 2002. The bottom was 43% lower than it was on November 26, 2001.

Oh well, I'm sure these rising rates will be just what the housing market needs to recover though.

Source Data:

FRB: Historical Two-Year Treasury Yields
Yahoo Finance: Historical Nasdaq

Thursday, April 24, 2008

US Consumer Tapped Out

This first chart shows the combined inbound cargo containers into Los Angeles and Long Beach.

The following chart is an attempt to seasonally adjust the data using the X-12-ARIMA Seasonal Adjustment Program.

This last chart adjusts the data in the previous chart by the US population in an effort to see how each individual consumer is doing.

Tapped out. That's my story and I'm sticking to it. Further, this data gives us a small glimpse of what the future brings. March's data point is included. This merchandise was last seen on the docks. There wasn't much of it.

Railroads maintain pricing power despite lower volumes

In a recent Reuters report, Andrew Meister, a portfolio manager at Thrivent Investment Management, theorized that "On the face of it, it doesn't make sense that freight volumes are going down but prices are going up as that contradicts the theory of supply and demand. But I'm beginning to think the railroads experience 20-year cycles and that regardless of the economy right now, customers will end up paying more even if they move less freight."

I think he's missing the point. Prices are going up thanks to higher fuel costs. Railroads can move stuff cheaper than trucks now. He's got the consequences down though: customers will end up paying more.

Truckers hit hard by $4 cost of diesel


Noel said he has trucker friends who have parked their big rigs because they can't afford to keep operating them.

"They're parking them right and left," he said.

Source Data:
Port of Long Beach: Statistics
Port of Los Angeles: Statistics
The X-12-ARIMA Seasonal Adjustment Program
St. Louis Fed: Population: Mid-Month

Tuesday, April 22, 2008

Food for Fuel (Thought)

Technical Characteristics -- Boeing 747-400ER

Typical 3-class configuration 416

Maximum Fuel Capacity** 63,705 U.S. gal (241,140 L)

Maximum Range 7,670 nautical miles (14,205 km)

New York to Hong Kong Range Map

As can be seen in the range map, a trip from New York to Hong Kong would use up most of the fuel.

That's about 150 gallons of fuel per passenger. Let's also assume the passengers wish to come back home. That's another 150 gallons of fuel per passenger.

I guess there's a reason
airlines are back in the dumpster again.

So how does this relate to food? One wonders how many calories of food 300 gallons of fuel might produce. I would assume that jet fuel has more energy (per gallon to be burned) than gasoline but let's say it is the same for the sake of argument. We're just doing crude back of envelope calculations anyway.

Bicycling Wastes Gas?

0.0015 gallons of fossil energy per lb. of potatoes

When I spoke with Dr. Pimentel by telephone on April 8 to confirm my calculation above he said that I should double my result to include fossil-based fertilizers, so let's call it 0.0030 gallons.

Let's assume that math is correct. I don't see any glaring errors in the theory anyway. 300 gallons of fossil fuel is therefore enough to produce 100,000 pounds of potatoes.

Now let's summarize and simplify. One round trip ticket from New York to Hong Kong uses up roughly the energy equivalent of producing 50 tons of potatoes. Let me say that once again for dramatic effect: FIFTY TONS OF POTATOES.

Let them eat dirt?

With food prices up as much as 45 per cent since the end of 2006, El Salvador's poor eat about half as much food as they did a year ago. In Haiti, a destitute population is turning increasingly to mud patties made of dirt, oil and sugar, which at least quieten the stomach.

Is it any wonder the poorest among us are starting to get more than a bit upset?

This post was inspired by a comment from MAB who pointed out the mud diet to me.

Rents and the CPI

Remember that part where the CPI is not tied to housing prices but instead to rental prices and owner equivalent rent? It was claimed by some (the CPI being seriously cooked conspiracy theorists?) that it was therefore dramatically understating consumer inflation. I argued that it was just a short-term situation. Rents would either rise to match housing prices eventually, housing prices would fall, OR they would meet in the middle. This was the entire reason the government uses rents instead of home prices. It doesn't want the CPI tied to bubbles. I am and have been fine with that line of thinking.

Times are a changin'. Housing prices are falling. Rental prices are rising.

Renters can't escape housing foreclosure crisis

The most brutal real estate slump in decades is reverberating through the rental market. Renters in properties that are being foreclosed on are being evicted. Homeowners forced into foreclosure are becoming tenants again and driving up rents. And renters not yet ready to buy a home — shut out by stricter lending rules or hoping to buy after prices fall still further — are creating a dynamic shift: Even as real estate is sputtering, the rental market is surging.

Keep in mind this puts additional stress on the CPI (in addition to the obvious stress of $119.90 oil and rising import prices in general due to a falling dollar). Also keep in mind that TIPS (treasury inflation protected securities) are tied to the CPI.

Consumer Price Indexes for Rent and Rental Equivalence

Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.

In other words, "investment reasons" often lead to bubbles.

Run Away!

Bill Gross to Investors: Run Away!

Gross said on CNBC, "I think Treasuries are the most overvalued asset in the world, bar none." He went on to say that he and his team were moving out further on the credit spectrum and buying AA- and A-rated bonds, although it was too soon to move into the high-yield arena. He argued that it was difficult to justify investing in Treasuries, given expected levels of inflation.

Look how little respect TIPS (treasuries with actual inflation protection) are given. You will note that they were the last ones to be mentioned in the article.

Investors who want a longer-term focus might want to consider the iShares Lehman 10-20 Year Treasury Bond ETF (NYSE: TLH). And for folks who want protection from inflation, the iShares Lehman TIPS Bond ETF (NYSE: TIP) fits the bill.

It would seem that I would want inflation protection, since Treasuries are the most overvalued asset in the world, bar none ... given expected levels of inflation. But hey, maybe that's just me.

As a side note, thanks for recommending the 10-20 year non-inflation treasury bond fund first though (the very asset that Bill Gross is telling us to run away from), just in case I want the most overvalued asset in the world, bar none without any inflation protection whatsoever.

I'm wearing my sarcasm hat today and it is quite heavy. I'm also using it as a cushion when I beat my forehead against the top of my desk out of frustration and despair. Sigh.

Seriously. I think I might get a welt from this.

What You Would Expect to See in a Developing Country

Life span shorter in parts of U.S.

For the first time since the 1918 Spanish flu pandemic, life expectancy for a significant proportion of the United States is on the decline largely because of an increase in chronic diseases related to obesity, smoking and high blood pressure.

That doesn't sound good. I'm going to add stress to the list. It isn't easy to watch a prosperity bubble deflate.

"It is what you would expect to see in a developing country, not here," said Dr. Majid Ezzati, a Harvard professor and lead author of a study published in the open-access journal Public Library of Science Medicine.

Emphasis added.

Nothing like this trend has been observed in this country since the massive deaths caused by the 1918 flu pandemic, Murray said, and nothing like it appears to be happening in any of the other industrialized nations around the world.

I guess that means we are a developing country now. If nothing else, we've got a banana republic trade deficit.

America, the Next Great Banana Republic

After 30 years trying to defy economic gravity, the US is well on the way to becoming the world's largest banana republic. If the current level of government mismanagement continues, within 20 years the US economy will be comparable to that of Mexico. With a more modest level of mismanagement, this will occur in less than 10 years but under much better economic circumstances.

Perhaps the Great Wall of Mexico isn't really needed long-term then.

There are basically only three ways to remedy a current account deficit. One is to impose trade barriers in order to force a balance between exports and imports. This is what the IMF and US government have discouraged Mexico from doing. The IMF and US government are committed to "free trade" and are advising all countries to do likewise. In many cases this is not in the best interest of these less-developed countries because they will continue to need protection for their infant industries if they are to survive.

The second way to remedy a current account deficit is to allow a devaluation of the currency making it more costly for its citizens to buy foreign products and making its exports more competitive overseas. The third way is adopt economic policies designed to create recession, which undermines the public's ability to buy foreign-made goods. Unfortunately, if this is done when a country in already in recession, it simply creates a depression with widespread unemployment instead of simply less purchasing power.

The first way is 1970s thinking. I can't even begin to imagine how broken the global economy would become if we turned protectionist. The good news is that we wouldn't have to choose between deflation and inflation though. Inflation would win big time! Hurray! *cough* *gag* *sputter*

The second way is being tried now. Unfortunately, there are at least three problems. First, as our currency declines the price of oil rises. Paying more for oil makes the trade deficit worse. Second, we're addicted to oil. Our consumption of oil isn't falling nearly as fast as the value of the dollar is. Third, one of our major exports is food. Don't we kind of want to eat it ourselves or is that just me?

I'm seeing a major problem with the third way. Perhaps it is that "if this is done when a country is already in a recession" part? Or perhaps it is the "depression with widespread unemployment" part? Who knows?

There's also a fourth way I believe. It is called war. This might have worked (if you can call massive bloodshed working) in the past, but the following quote comes to mind.

I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones. - Albert Einstein

Sunday, April 20, 2008

Dire Signs

Amid strong farm economy, some dire signs

Observers see similar situation — too much debt — to crash of late 1970s

This is why I am sympathetic to the short-term deflationary argument. Had I been investing in the late 1970s I probably would have been way too long gold, silver, and other hard assets. Using the power of hindsight, I clearly would have been wrong to do so. Real yields spiked higher at the end. We're seeing some of that now. The 20 year TIPS is now yielding 1.96% vs. the 1.8% I got in January. That bet has not gone in my favor. I'm not complaining though. Since I'm holding until maturity it is only hurting me from an opportunity cost standpoint. Further, if inflation really does remain tame for the next 20 years I'll be far better off than I fear(ed).

"We're in a very risky time, and yet we don't seem concerned about that risk nearly as much as we should be," said Barry L. Flinchbaugh, an agricultural economist at Kansas State University.

Isn't that the truth. Oil just hit $117 a barrel. This parabolic rise is most likely not sustainable. If nothing else, something is bound to break.

Farm economists question whether the federal backing for ethanol will continue in the face of complaints that soaring corn prices are increasing food costs. Corn is used in most animal feed and is a key ingredient in myriad other products.

How could we possibly think we could afford to burn our food?

Harl, who has written extensively on the 1980s farm crisis, said the key is how much debt farmers take on, and it appears that amount is increasing significantly.

For what it is worth, it was the debt bubble that originally turned me bearish in 2004. Oil was an afterthought.

Harl said the current farm economy reminds him of about 1974 or 1975 — several years before the boom went bust.

There's that 1974 word again. Go figure. If Harl is right, then we've got a few more years left before things really implode. It would also explain why Soros thinks the commodity bubble is still in the growth phase. That being said, investing in bubbles once they are bubbles might not be the best plan. In my opinion, the low lying fruit has already been picked. You've got to have nerves of steel to go reaching for the fruit towards the top of the pyramid (scheme), um, I mean tree.

Saturday, April 19, 2008

The Coming Collapse of the Middle Class

MAB pointed this video out in the comments. She does a fantastic job connecting the economic dots and there is plenty of fact based information to back her points.

Wednesday, April 16, 2008

Retail Ghost Town Sales

How to Boost Retail Sales

Q. I have a retail store and sales are down. It is like a ghost town in here. No one is buying anything off of my website either. What should I be focused on to get more sales right now?

Cater to ghosts?

The following is a national chart updated with March's retail sales and CPI data. It excludes food and beverage stores, food service and drinking places, and gasoline station sales in order to strip out the ever popular "food and energy" that is all the rage these days. The trend line is a 4th order polynomial.

Behold the miracle of monetary printing presses to prop up the economy. Once you adjust for the inflation, it is almost like printing more money doesn't really do much. Yeah, almost exactly like that. Go figure.

See Also:
Trend Line Disclaimer

Source Data:
St. Louis Fed: Consumer Price Index For All Urban Consumers: All Items
St. Louis Fed: Population: Mid-Month
U.S. Census Bureau: Monthly Retail Sales

Friday, April 11, 2008

GE Then and Now

From July, 2004 headlines...

GE's Immelt 'feeling good'...

The glass is half-full for Jeffrey Immelt. And then some. The General Electric (nyse: GE - news - people ) chairman and chief executive crowed, "This is the best economy we've seen in years."

We feel like this is a great point in time for the company, and again, we're feeling good about the economy, but more importantly we're feeling good about the strategy and the positioning of the company.

Stock price then: $32.17

From today's headlines...

GE's finance units weigh on industrial giant

GE Chief Executive Jeff Immelt stressed that the company still has a AAA rating on Friday, but some experts questioned that top rating.

GE is "failing the duck test," Egan-Jones, a ratings agency that's paid by investors rather than issuers, wrote in a note to clients. "The company does not look, sound or act like a AAA credit and therefore, probably is not a real AAA."

Stock price now: $32.05

Lookin' good!

For what it is worth, I sold my GE stock in July of 2004 (a week after Immelt told us how good things were). That's when I first turned stagflationary (bearish). Since then, the stock has truly stagnated. Bulls did not make money. Bears did not make money. That has been my worst case scenario all along. The average investment stagnates while inflation robs the purchasing power. I expect more of the same.

I don't think it is a coincidence that the stock market was flat during the entire 1970s. I think it was being managed (using inflation) by the powers that be to offer a little hope that things would get better.

Homage to the Optimists

US April consumer confidence slumps to 26-year low

"There have only been a dozen other surveys that have recorded a lower level of consumer sentiment in the more than 50-year history of the survey."

The Illusion of Prosperity is fading. Pay no attention to the man behind the curtain! There's no place like home! There's no place like home! There's no place like home!

The herd is not always wrong. I just want to point that out to the optimistic contrarians. Sometimes the forest really is on fire. Sometimes the herd's best defense is to run away.


It's always darkest just before it goes pitch black.

Perfect for: Unrelenting Optimists

Thursday, April 10, 2008

Soros Weighs In

Soros Says Credit Crisis Will Worsen Before Improving (Update4)

Soros said the crisis will last longer than authorities predict.

``They claim that there will be a pickup in the second half of the year,'' he said. ``I cannot believe that.''

I'm still waiting for one rational explanation why there will be a pickup in the second half of the year. Will things suddenly become cheaper for the American consumer? If so, what made things suddenly cheaper?

Note that an unexpectedly severe global recession/depression might make things suddenly cheaper, but would hardly be a reason to turn bullish. But hey, maybe that's just me.

Dry Retirement?

Don't Let Your Retirement Well Run Dry

Want to be sure you won't run out of money in retirement? The standard advice that you'll hear from planners (or find on the pages of Money Magazine) is to follow the 4% rule: Withdraw no more than 4% of your portfolio the first year of retirement and then increase that amount for inflation each year. And indeed, if you do this, there will be roughly a 90% chance that your money will last at least 30 years.

By comparison, Russian Roulette offers an 83% chance of not being slaughtered. There's only one bullet so five of the six chambers are empty.

Note that the 4% rule and the 90% chance don't care about the current state of real interest rates, the current state of the stock market, the current state of the trade deficit, the current state of the war, the current state of commodity prices, the current state of the housing market, the current state of employment, or in a nutshell the current state of the union. One wonders how the odds would be altered given such external risks to one's portfolio. Russian Roulette might be even less risky, in theory.

Here's a crazy thought. What if your portfolio merely keeps up with inflation? There have been many eras when that goal alone was a worthy one (stagflationary eras come to mind). At 4%, your money would be gone in 25 years. It would be almost like you saved your money and then spent it. Would that really be so bad? There was a time when a penny saved was a penny earned. Maybe that's all it is supposed to be. Maybe a penny was never intended to expenentially grow at 10% per year, thereby allowing us to both have our savings and spend them too. Maybe this era of "overleverage" was and is not sustainable.

Something for nothing attitudes are still alive and well though it seems. Unfortunately, we've spent so much time (and energy apparently, based on current oil prices) in recent years both having our cake and eating it too. We could very well be due for a prolonged period of neither having cake nor being able to eat it. It is called reverting to the mean. I wonder what history would say about that?

Wednesday, April 9, 2008

Putrid Growth and the Monetary Spigot

GE consumer finance unit gives up on U.S. consumer

Putrid economic growth at home has sparked a search for growth opportunities around the globe

Stagflation requires slowing growth. I'm fairly sure putrid qualifies.

Fisher says Fed has more liquidity options

Fisher said the Fed had opened the monetary 'spigot' by lowering its benchmark overnight federal funds rate to shield the economy from a housing and financial market crisis.

Stagflation also requires stubborn inflation. The monetary spigot is currently open.

"If we turn the spigot up too forcefully, we will flood and kill the grass (of the economy) with inflation," he told a Dallas Fed community forum.

Since printing too much money and credit was part of the problem, it seems unlikely to me that printing even more money and credit will act as the solution. I will agree that there is an extreme risk it might flood and kill the grass though.

Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve

Rogers: Historically, nations that have gotten themselves into this kind of situation have only gotten out following a crisis or a semi-crisis, or some gigantic stroke of luck.

I have a hard time betting on the gigantic stroke of luck option. I guess that means I'm not an optimist.

Light At the End of the Tunnel (Musical Tribute)

Money managers remain optimistic

Whether we’re really at the bottom yet only time will tell, but investment managers seem to be saying we at least may be able to see it from here.

No Leaf Clover - Metallica

Don't it feel right like this?
All the pieces fall to his wish
“Sucker for that quick reward, boy
Sucker for that quick reward,” they say

Then it comes to be that the soothing light at the end of your tunnel
Was just a freight train coming your way
Then it comes to be that the soothing light at the end of your tunnel
Was just a freight train coming your way
It's coming your way
It's coming your way
Here it comes

Tuesday, April 8, 2008

Inflation Is Magic (Musical Tribute)

High food prices seen leading to strikes, protests in Asia

SINGAPORE (AFP) — Asia's governments face strikes, protests and hoarding in response to the spiralling cost of food and other essentials that threatens to damage them at the polls, observers say.

Oh, oh, oh.

"There could now be serious discontent, violence and food riots due to the soaring food price spikes," said Rahman.

Oh, oh, oh.

It also ordered police to arrest rice hoarders as part of efforts to pre-empt the "impact on peace and order" of rises in basic commodity prices, the police said.

Oh, oh, oh.

"I think what is decisive is whether or not the population feels that the government is competent and uncorrupted," Ooi said.

Oh, oh, oh.