Category: Inflation

Economics Update

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CNN is reporting that Consumer spending was flat relative to inflation, which really is not true, since the CPI is crap, and because consumer spending includes food and energy, which are going through the roof, so everything else was down.

It looks like there will be more downward pressure on the dollar, as Euro-zone inflation is at 3.6%, which means that the ECB will definitely not cut rates, and might raise them, though the dollar strengthened slightly today.

BTW, the report of the improved growth in the intermediate report on US GDP? It’s really a contraction, as Barry Righoltz notes, the gains weredefense spending, inventory builds, and exports, with the rest of the economy at -0.4%.

Go to his site for the chart pr0n.

In energy, oil rebounded a bit from yesterday’s fall to $127.35/bbl, and retail gasoline hit a record yet again.

Economics Update

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The economy grew more than previously estimated in Q1 of 2008, at an 0.9% annual rate adjusted for CPI, as opposed to the previously reported 0.6%. Note that this still a contraction, as inflation, even the official bogus CPI understates true inflation by well over 1%.

Not surprisingly, treasuries fell, as the revised numbers show more potential for inflation.

New jobless claims rose +4000 to 372,000, just above the estimate of 370,000, which, to me at least, reinforces my thoughts on the trajectory of the economy.

Crude oil prices fell to $126.62/bbl, but retail gasoline hit another record. That’s 22 straight days.

The FDIC issues a very grim report on banks, with bank profits falling by more than 50% and “problem” banks on the rise.

This is, of course, largely tied into the real estate bubble, which appears to be popping in Britain (yet again), with prices falling 2.5% over the last month, and 4.7% year over year.

In the US, I think that those people expecting a turn around will be disappointed, as 30 year fixed mortgage just topped 6%, with indications of more to come, particularly since selling the loans will become harder, as S&P just lowered the ratings on 1,326 Alt-A residential mortgage back securities (RMBS).

Economics Update

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Well, the Oracle of Omaha very bearish on the economy. Warren Buffett is predicting a long and deep recessions.

This is not all that surprising a conclusion seeing as how consumer confidence index fell to 57.2, well below the prediction of 60, and the lowest number since October 1992.

On the brighter side, the dollar has strengthened a bit, and crude prices have fallen, though Gas prices hit a new all time high for the 20th time in 20 days.

Even if oil prices moderate, the bond prices are falling because of inflation fears.

Basically, if you expect inflation, you don’t want to hold a bond with a fixed interest rate, and so if you want to sell your bond, the buyer wants a bigger discount.

In real estate, we have home prices falling an eye popping 14.1% year over year:

The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2 percent in March from February and plummeted a record 14.4 percent from March 2007.

Economists expected prices for the 20-city index to fall 2.0 percent on month and 14.0 percent from a year earlier, according to the median forecast in a Reuters survey.

This is ugly for anyone who wants to buy a home, and the fact that we are seeing skyrocketing property tax delinquencies means that people who want to stay in their houses may find that municipal services are shrinking.

In banking, we have UBS saying that the mortgage bloodletting is not over, and US savings & loans setting aside $7.6 billion against potential losses in the home market, so if anyone is telling you that this has bottomed out, don’t believe them.

Completely Bogus Government Statistics: Seasonal Adjustments to Inflation Edition

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I point you to some good work by Barry Ritholtz, who notes:

For example, crude energy materials “only” advanced 4.1% in April, with crude petroleum gaining 4.5 % and natural gas prices rising 4.3%. After the seasonal adjustments, these prices appeared rather odd: They showed energy prices falling by 0.2%, while gasoline costs dropping 4.6%.

It turns out that this all goes back into the numbers in July.

According to this article, if prices were flat, we would still see a 16.3% increase in July….Not pretty.

Another Financial Bigwig Says US is Goosing Inflation Statistics

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This time, it’s Pacific Investment Management Co.’s Bill Gross, who has been called, ” Called “the nation’s most prominent bond investor” by the New York Times.”

You can read his essay here:

The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.

Me, I’d argue that he’s conservative in his estimates, and place the error closer to 3% than to 1%.

Note that as a bond trader, he is in a segment of the market most effected by these aberrations, and by virtue of being Bill Gross, the financial press will cover this.

Lieberman Proposes Commodities Restrictions

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Joe Lieberman is saying that he is, “considering legislation to place limits on large institutional investors in commodities markets“.

Even if he weren’t a complete asshat, nothing would come of this, because he is from Connecticut, and with New York City being the world’s capital for such activities, and with many of the people who make a living on the trade living in Southern Connecticut, there is no way that he would really press this.

While I believe that one of the problems with any market today is excessive speculative capital in and out flows, Lieberman’s proposal is rather limited, directed at limiting pension funds and closing a few loopholes, and won’t do much good, because there is already an industry full of people who find ways of ignoring such restrictions.

Instead, I suggest a transaction trading tax on financial instruments. It’s easily implemented, hard to avoid, and penalizes those who trade the most.

More Detail on What the PPI Numbers Mean

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Here is the more detail on the PPI that I promised in an earlier post:

I would note that of the news networks, I find that CNN is the most breathlessly optimistic, and their take on the PPI numbers is simply wrong, but even they got it a bit right about the seasonal adjustment for the end of the heating season:

The overall moderation in prices primarily reflected how the government adjusts its data to compensate for seasonal changes. Those adjustments showed gasoline prices falling last month even though motorists were seeing prices soar.

When CNN starts questioning official inflation numbers, it’s game over.

You will note that they scream to the high heavens that it’s down to 0.2%, of course the core rate is twice that, 0.4%, and the 0.2% is an artifact of already suspect seasonal adjustments.

When the total number is bad, they report core, when the core number is bad, they report total numbers, with a little caveat slipped in. CNN’s financial reporting sucked.

Barry Ritholtz puts this in some perspective:

Follow this if you will: Each year in the Spring, we get a fairly large seasonal adjustment. If memory serves, its about a ~7% increase in Energy for April. This year, however, energy prices are up so much in advance of April, that we only got a ‘modest’ one month energy increase of 5.2%. In other words, the market ran up in advance of the usual seasonal gains. Hence, a 5.2% increase looks like a reduction after seasonal adjustments. (Note: I need to double check the precise #s).

So does Dean Baker:

The core finished goods index rose by 0.4 percent in April. It has now risen at a 5.0 percent annual rate over the last quarter. The core intermediate goods index rose by 1.2 percent in April and has risen at a 12.4 percent annual rate over the last quarter. With productivity growth having slowed sharply, it is difficult to believe that these higher costs won’t be passed on at the consumer level. This is big news.

So we are looking at some very real, and very troubling inflation numbers. Barry Ritholtz has some nice graphs that I recommend.

Economics Update

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In inflation, it appears that producer prices may be a problem (also here), with the overall rate going up by .2%, and the core rate going up by 0.4%.

Of interest is that the first link, from Bloomberg, basically casts it as a “low inflation” story, and the second link casts it as a “high inflation” story. I’ll explain why the latter is wrong in a bit.

In any case, the market saw the rate as low, which drove the dollar down in expectation of further rate cuts in the US, and the expectation of rate hikes in the Euro zone.

In energy, we have crude hitting another record, above $129/bbl, and gas prices at the pump hitting a new record for the 13th straight day.

More on the Inanity of US Inflation Statistics

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Barry Ritholtz notes that in addition to all the various hedonic ajustments, the CPI says that the average US consumer spends only 7.66% of income on food, as opposed to the numbers of 10% for the UK, 15% for the rest of Europe, and 18% for Japan, which is patently absurd.

Ritholtz states that the 4 bottom quintiles spend closer to 20%, which sounds about right.

According to Wiki, the median family income in the US in 2006 was 48,201.00, so let’s round to 50K.

8% of 50K would be $4,000, 20% of 50K would be $10,000. Assuming 3 meals a day and a 4 menber family over 50 weeks, we get $0.95 and $2.38 per meal respectively. The former is living exclusively on Kraft Macaroni and Cheese.

The fact is that when things like snacks, fresh vegetables, etc. are factored in, the per food cost probably gets closer to $5.00/meal for total food cost for a family of 4.

Federal Reserve Repudiates Alan “Bubbles” Greenspan

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The Fed has decided that it will begin to examine ways of dealing with asset bubbles.

This contradicts with Alan “Bubbles” Greenspan’s dictum that, “it was in practice impossible to identify bubbles before they burst, and attempts to prick them by raising rates were likely to do more harm than good.”

Another well deserved nail in the coffin of Ayn Rand’s buddy’s reputation.

Economics Update

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The CPI rose less than expected 0.2%, though there was a huge delta in food, about 0.9%, 2.5% and 11% annually rates.

Look at my earlier posts on this issue, and you’ll see that the real inflation is far closer to 11% than it is 2.5%.

This has, for reasons unclear to me, led to the UD dollar strengthening in overseas markets.

Year over year foreclosures in the US are up 65%, and between the banks discounting these properties, and the builders discounting new homes, we have a way to go to bottom.

In investing, the dispute between Clear Channel, which had a deal to sell itself to a private equity firm, and the banks, who were trying to get out because they had no expectation of being able to resell the debt, has been settled. The buyout is now at 36$/share, as opposed to the earlier $39.20/share, so both sides took a haircut to get the deal done.

Still this indicates that the credit markets are still frozen.

Finally, we are back to the monoliner insurers. with MBIA and Ambac’s losses making the ratings agencies nevous.

If the ratings process was an honest one, they would have lost their AAA status over 6 months ago.

Economics Update

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The numbers are out for March pending home sales, and they are very grim, with the pending home sales index falling to it’s lowest level since its founding in 2001, a 1% one month and 20% year over year drop. Of course the NAR is seeing a turnaround in the next few months, like they always do.

We are also seeing increasing signs of inflation, with Federal Reserve Bank of Kansas City President Thomas Hoenig suggesting that inflation pressures may lead to rate hikes soon, and Toyota to raising prices on their cars, largely as a result of the falling dollar.

On the plus side, however, productivity increased by 2.2% in the first quarter, more than the 1.5% predicted, which should moderate inflation some.

On a more general, “we in a recession” note, retail imports fell 4.8% in March, yet another indicator of a slowdown, that the retailers are cutting back.

Oil hit another record today too.

For Europe’s Middle-Class, Stagnant Wages Stunt Lifestyle – New York Times

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The New York times has an article about how the European middle class is seeing its wages stagnate and the standard of living plateau or decrease.

They don’t bother to give a reason, but strongly imply that it’s Europe’s stultified economy, as opposed to those dynamic Anglo-Saxon ones, even though one of the examples given is in the UK.

That’s the standard line, too much regulation causes wages to stagnate.

But if one looks at Europe, and the US, median wages have stagnated because of deregulation.

Simply put, when an executive gets over a billion dollars in remuneration, this is money that does not go toward other people’s wages and benefits, and deregulation and reductions in marginal tax rates increase wage disparities.

This is not happening because Reaganomimics has not been adopted at some level, this is happening it has been adopted at some level.

Economics Update

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The big news, as it is on any day when the fed meets, is the decision, which was to cut the federal funds rate by 25 basis points. Of note that that they are no signaling no more cuts.

Of course, with the rate at 2%, it’s not like they can really cut much further.

Then we got the GDP numbers for the first quarter of 2008. The number is that U.S.GDP increased at an 0.6% annual pace, though this will likely drop when a final reading is released.

I will provide more detail, but the spin that this is not a contraction is false” initial reading, will fall. Also, we’ve already had 0.6% so far this year, we will likely see 3-4% inflation even with the bogus government data, it would be closer to 10% with honest data, and 0.6%-3%=-2.4% that’s a recession.

I, with the aid of the good doctor Roubini, will provide more detail in a later post.

Oil prices have dropped, which should come as no surprise. The spikes of the past few days were as the result of short term news, though the trend still seems to be up.

In real estate, we have
ortgage application volume falling 11.25% last week, and we have an analysis from Barclays Capital that upwards of half of Alt-A and subprime mortgages will be under water by year’s end, and they are predicting a fair amount of “jingle mail” as a result.

More Signs (and Pictures) that Official Government Inflation Stats are BS

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We are starting to see more articles, like this at San Diego Union Tribune, noting that official government inflation statistics are a crock.

I will note that the changes in 1983 to a large degree took housing out of the picture, which is why Alan “Bubbles” Greenspan was so bullish on real estate*, and those in 1998 used hedonic mumbo-jumbo to create the illusion of low inflation.

If you assume that inflation is 2% more than official numbers over the past 35 years, prices have doubled relative to official inflation at 3¼% more, it’s triples, and at 4%, it quadruples.

We may be seeing a tremendous drop in the standard of living of the average American over that time that has been deliberately masked by our government.

*It allowed him to call inflation in a necessity, housing, an increase in wealth. If memory serves, Greenspan was at the center of both adjustments

Economics Update

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Unemployment claims fell again, note my standard caveat about noisy measures though.

Note also that new-home sales are unbelievably grim. An 8.5% drop month to month is falling off a cliff, but this is following the numbers being revised downward for the month of February.

If that doesn’t scare you, there is a Credit Suisse research report that suggests that there will be 6.5 million foreclosures by 2012:

The foreclosures could put 12.7 percent of all residential borrowers out of their homes, Credit Suisse analysts, led by Rod Dubitsky, said in the report. That compares with a foreclosure rate of 2.04 percent in the last quarter of 2007, they said, citing Mortgage Bankers Association data.

That is one out of 8 residential borrowers.

That’s too bearish for even me, and I’m the biggest bear out there.

In terms of non-residential real estate measures, we have the Architecture Billings Index (ABI) dropping to its lowest level ever, suggesting that commercial real estate’s about to tank too, and orders for durable goods, items expected to last 3 or more years, fell 0.3% from February, worse than expected.

The drop in unemployment claims triggered a drop in treasuries and a strengthening of the dollar, because it makes it less likely that the Fed will cut rates at its next meeting.

Truth be told, the Fed cutting rates won’t do much anyway, as is shown by mortgage rates continued upward path.

The Fed has lowered rates below the effective inflation rate, and so their rates have decoupled from the commercial rates.

Food Crisis Update

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I guess the part of the story we expect is this:

The rising prices are “threatening to plunge more than 100 million people on every continent into hunger,” Josette Sheeran, executive director of the United Nations’ World Food Program, said on the agency’s Web site Tuesday.

Foreign starvation, hand wringing over biofuels, etc.

Nothing to worry about here, we’re Americans…right???

WRONG

We are seeing severe shortages of rye flour, with no domestic supplies being available around July, and there are currently only 27 days wheat supply.

Additionally, we are seeing panic buying, which is forcing big box retailers to restrict bulk purchases of rice, so that they don’t run out.

We already have hunger in the US, just look at our overburdened food pantries, and it is going to get worse.

Economics Update

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Today, since they’ve been off the update for a while, I’d like to welcome back a monoliner insurer, specifically AMBAC which lost even more money than forecast, $3.6 billion.

However, they are looking to turning things around. Specifically, they have their “lawyers and forensic experts”looking at 17 big money losing contracts, targeting (it appears) Bear Stearns and First Franklin. The max losses were originally seen at 10-12%, and now they are staring down the barrels of over 80%, so they may have a good case.

We’ll be seeing a lot more of this, and insurers won’t be paying out in the near term without this sort of teardown of the contract and investment looking for evidence of deception of some sort.

In related news, bondholders recovery on bankruptcy has plunged, with B+ bonds going from around 42¢ on the dollar to less than 10¢.

This is not a liquidity crisis. It is an insolvency crisis.

The Fed, however, is still treating this as a liquidity crisis, because there is no cure for an insolvency crisis but the dissolution of the entities involved, and it will auction another $75 billion in Treasuries in exchange for pieces of the big sh%$pile.

Speaking of the sh%$pile Moody’s just downgraded 1,923 residential mortgage backed securities in the past to days.

It’s likely to get worse. Robert Shiller, who is one of the creators of Case-Shiller housing index, believes that house prices will fall more than 30% from their high, and likens this to the slump associated with the Great Depression.

In terms of the more general economy, we have UPS saying that it’s seeing a dramatic slowing in the U.S. economy, and in its business, and Target’s write offs on its credit card sales are soaring. They are at an annualized rate of 8.1% for March (ouch) up from a rate of 6.8% in February (ouch x2).

In currency, we already know about the Dollar cracking the $1.60 barrier, but now we are seeing a price hike driven by this, with Airbus raising prices on its planes.

We’re going to see a lot more currency driven inflation.