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Today's PPI report ran hot. Nasty hot. The high price of oil is clearly starting to trickle in. I am still deflationary though.
PRODUCER PRICE INDEXES - NOVEMBER 2009
The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.
So why am I still deflationary? What would cause this madness? This insanity?
I turned deflationary on November 9, 2009.
I'm Deflationary
That doesn't mean that I think oil can't make it to $100. Who knows? I don't think it will stay there if it does though, any more than it could stay at $140 the last time.
WTI Cushing spot oil price then: $79.44
WTI Cushing spot oil price now: $70.69
It's been five weeks. Oil is 11% cheaper. I continue to believe that $80 is the mid-term ceiling. I might be wrong of course, but so far so good.
As seen in the PPI report, there are still some inflationary pressures in the pipeline. That doesn't mean they can all make it to the consumer though. Last night at 6:30pm I visited the largest mall in Washington State. It was quiet. I would not have guessed that it was Christmas season had I not seen the decorations. I was able to park very near the entrance. No circling required.
If I am right about oil's price going forward then right behind all those inflationary pipeline pressures is a rather large deflationary vacuum (just like there was the last time oil's price collapsed under its own weight). It's going to suck (if your entire nest egg is betting on inflation anyway).
Buy anything: 2010 should be a can't-lose year for investors
That would make it five for five: all asset classes are expected to move in parallel uptrends.
If something about that uniformity strikes you as questionable, it may be that history and common sense both stand against such parallel trends.
Profit Rises at Best Buy, but Margins Are a Worry
The Best Buy Company, the electronics retailer, reported a higher-than-expected quarterly profit on Tuesday, but its shares fell after it said its gross profit margins would decline in the holiday season.
Those who thought Best Buy was the best buy lost 8.5% today. Here's the interesting part to me. Circuit City (their largest competitor) closed last year. You'd think Best Buy was therefore a sure thing.
That brings me to Bed, Bath, and Beyond. Linens 'n Things closed last year too. Some therefore think Bed, Bath, and Beyond is a sure thing ("best idea").
Wedbush Adds Bed Bath & Beyond (BBBY) to 'Best Ideas' List, Removes PetSmart (PETM)
The firm sees Bed Bath & Beyond continuing "to benefit from industry consolidation, good visibility for cross merchandising opportunities and future growth potential for newer concepts, and strong balance sheet and cash flow."
Meanwhile, I see a stock trading at pre-bubble popping levels. I see a P/E (ttm) of 21.94. I also see Wal-Mart, online shopping cannibalization, and a poor holiday shopping season, which were the very things that Linens 'n Things could not survive long-term.
Here's a completely random item for sale. The "KitchenAid KSM150PSPK Komen Foundation Artisan Series 5-Quart Mixer, Pink" sells for $275.36 and ships for free at Amazon.com. It sells for $299.99 on Bed, Bath, and Beyond's website and also ships for free (during their limited time offer). The problem Bed, Bath, and Beyond has is that it just can't be competitive with Amazon.com.
Bed, Bath, and Beyond can't sell their goods much cheaper online than they do in their stores or they'd risk angering the customers who actually buy things in their stores. I would therefore argue that Amazon.com will always be able to sell goods cheaper online than they can. Further, Amazon.com does not have the added expense of "brick and mortar" overhead.
Online shopping continues to grow. In my opinion, brick and mortar retailers are pretending and extending. They are not alone.
U.S. Bureau of Labor Statistics: Retail Salespersons
Despite the growing popularity of electronic commerce, the impact of electronic commerce on employment of retail salespersons is expected to be minimal.
In related news, my local Safeway just installed some automated self-serve checkouts. I now have two grocery stores near me that use them.
Self checkout
The benefit to the retailer in providing self checkout machines is in reduced staffing requirements since one attendant is all that is required to run 4 to 6 checkout lanes at one time.
"Reduced staffing requirements" and "productivity miracles" are euphemisms for job destruction.
"The Financial Stability Implications of Digital Assets"
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An interesting paper from researchers at the NY Fed: The Financial
Stability Implications of Digital Assets Here is the overview:
• This article considers...
5 hours ago
18 comments:
"In related news, my local Safeway just installed some automated self-serve checkouts."
Won't be long till the robots show up, then you won't even have to bother going to the store!
Hooray robots!
And after the robots comes the Soma..
watchtower,
http://www.youtube.com/watch?v=kLGk9Q49y7k
More forwards please.
The fed has bought up around 1.3 trillion $ worth of securities.
1.3 trillion that was not written down by banks and now is cash sitting on the banks' books.
With prime foreclosures, strategic defaults and CRE, I wouldn't be surprised if they did another 1 trillion over the next year.
They are not letting the green stuff vanish.
Now Obama is telling the banks to lend. IMO, he's setting the stage for his next act... Of course, the banks won't lend and that will give him the right to send cheques wherever he needs to.
Over the last year, we've had zirp and this has helped many companies refinance. This probably gave them a year of reprieve.
But after that, it's finished. Unless they start receving cheques, they can't get lower rates. 20 years of that same interest rate game are over.
In 2010, I expect to see many small firms disappear and large ones turn cash flow negative.
I'm betting that somewhere in 2010capacity will start to shrink faster than the money supply.
Anonymous,
In 2010, I expect to see many small firms disappear and large ones turn cash flow negative.
I hear you. I would not take the other side of that bet. As an example, I continue to believe that we have way too many restaurants for what's coming.
I'm betting that somewhere in 2010capacity will start to shrink faster than the money supply.
What happens to demand though? That's the part I'm fuzzy about. Take Best Buy. Their largest competitor is now gone and they still don't have pricing power.
As capacity shrinks to meet demand, demand shrinks too. It's a deflationary spiral argument.
If you start with the premise that there are way too many restaurants, then the mind boggles at just how that resolves itself. This is what I think may happen.
1. The more restaurants that fail, the more the government prints.
2. The more the government prints, the more worried I become about the future.
3. The more worried I become about the future, the less I eat out.
4. The less I eat out, the more restaurants that fail.
5. Repeat.
There is nothing that the government can do to alter that thinking process in my head.
It's the Japan disease.
In any event, I'm not deflationary long-term. I still have stagflation in my name. I think I will be deflationary through the next downleg though, mainly because most seem to think the next downleg isn't coming.
They set up self-check out aisles at the Walmart Super-Center where I live. It didn't last long. These aisles have been idle for about two years now. Here's why.
http://www.theginblog.com/2007/12/hacking-the-grocery-store-self-checkout-3-ways-thieves-are-making-you-pay-for-what-they-dont/
Gotta love it!
Ed G.
Ed G.,
For what it is worth, my Wal-Mart still has the self-check out aisles.
Both expressed concern that this is just something you don’t talk about.
Oh oh! Here we are talking about it.
More from your link...
With our produce, some are missing labels. This is notorious with bananas. We only sell one type of banana so most people still enter everything correctly. As far as the rest.. If it looks like you’re scanning in medicine, detergent, or whatever. As long as the item scans and you don’t call suspicion to yourself I honestly can’t say I’d give you a second look. It’s more about obvious theft like leaving things in your cart, moving the lines along, and helping customers with the system.
Coming soon to a Wal-Mart near you... banana recognition software?
http://www.video-surveillance-guide.com/surveillance-video-camera-system.htm
A new company on the market called 3VR Security is creating innovative solutions in the facial recognition software market. They offer an application that can plug directly into an IP-based video surveillance system. The software scans images of individuals faces directly from the video feeds captured from video surveillance cameras. The software can then rapidly sift through millions of hours of video and cross-references those images against a database of suspects.
Suspects, fruit, DVD players, it's all the same. Is it 1984 yet?
Stag,
It seems that "extend and pretend" is very much a global phenomenon. One could even argue it is now the key driver of "growth".
http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20091216D16JF394.htm
The average joe has no chance against coordinated global financial fraud. They little people can accumulate debt, but not wealth.
I still don't foresee high inflation anytime soon. The system is set up to screw the debtors, not creditors. In any event, it would be very interesting to see the reaction of foreign dollar holders if a significant inflation does take hold.
As capacity shrinks to meet demand, demand shrinks too.
---------------
Right now, what government is mostly doing in the US is replacing bad assets with new cash. Obviously that new cash is not currently hitting the real economy. But it is still sitting get, increasing capital ratios.
So when you add up the cash that comes from the deficit + the cash that the Fed injected by picking up the bad loans, it's probably break even. I beleive the Fed will keep on doing it as things get worse. And they will get worse because we still have prime that is about to default and CRE.
I also believe there is oversupply of everything discretionary and this oversupply will diminish. But staples will still be in huge demand. And if there is one place where we have not invested enough over the last decade, it's in the essentials. My guess is that we're going to see government subsidizing essential services (utilities for example). And usually governement spending is inflationary.
Every time the US, prints China prints too to keep the peg. So at one point they will be exporting inflation.
Here in Canada, everywhere I go, there is a sign telling me how much governement is spending to stimulate the economy. I went sliding with the kids at a nearby park and a sign was there telling me that they were going to spend 75K to improve lighting. 1 km away, they redid our library for I don't know how much. The US might be propping up its financial system, but everone else is diluting its money to keep its exchange rate low vs. the US dollar!
I have no debt and lasting deflation for me would be a dream come true. But I just don't see how it could last. With more than 75% of the wealth so heavily concentrated in so little hands (55+), I just don't see how this concentration could get worse unless we go into Banada Republic territory.
I am optimistic and I believe a redistribution of wealth will occur, from the old to the young. And this will occur through inflation.
The difference between inflation and deflation is the willingness of governement to print.
I'm betting it will print because in that top 1%, there are a lot of debtors, government included.
It might not be hyperinflation but in our world of zirp, 8% on a mortgage in Canada would put a lot of people under.
mab,
"The system is set up to screw the debtors, not creditors."
The system protects its lifeblood.
http://tj.newsvine.com/_news/2009/01/08/2288410-credit-the-life-blood-of-the-american-economy
Deflation causes the debtors to go bankrupt and takes their pain away.
Heavy inflation lets the debtors inflate their pain away.
Pain removal will not be tolerated by the banking system. We'll be pretending and extending as long as humanly possible. It's going to be increasingly difficult to do though. As a saver and from a selfish perspective, maybe David Copperfield would be a good president.
The pretend and extend bulls sure are out in force today. The stock market rally continues to trump unemployment apparently.
Anonymous,
"I have no debt and lasting deflation for me would be a dream come true. But I just don't see how it could last."
I hear that. I keep expecting stagflation but it keeps being postponed.
The money is not finding its way to those who buy canned goods. I'm not seeing the mechanism that gets it there either, at least in the short-term.
I don't think we'll get lasting Japan style deflation, but another downleg may get us there temporarily.
Mark, are you the last person in the world without a BB&B 20% off coupon?
Charles Kiting,
LOL!
I am. Here's the sad part. I used to be a fan of those coupons. I just throw them away these days. There's nothing left in the store I'm interested in buying.
I tended to buy more new stuff every time I moved. I stopped moving 12 years ago though. If people are like me, then that's yet another reason to wonder about BB&B's prospects.
http://www.calculatedriskblog.com/2009/12/housing-bust-and-mobility.html
There is much more in Fitzgerald's story, but this bit on mobility is important - he can't sell, and he can't move to change jobs - and just like most Americans trapped underwater, he is trying to stick it out and hoping for the best.
That doesn't sound like a person ready to use the 20% coupons either.
Charles Kiting,
I forgot to mention that you made a great point. Those coupons do alter the math quite a bit and I should have factored them in. Oops!
WTI isn't a good measure for oil anymore, not since the Saudi Aramco mentioned they will decouple from that price.
Use the Argus Sour Crude Index, especially for anything near or after Jan 2010.
Doc Merlin,
Thanks for the info.
http://online.wsj.com/article/BT-CO-20091215-709351.html
"The WTI benchmark has suffered from fluctuations due to the rampant speculation on crude futures trading on the Nymex, the world's main platform for oil trading."
Why does that not surprise me? Sigh.
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