PPI Whopper

[Finster]

Re: PPI Whopper

Thanks, I needed that.

Where would you put the start date of the recession?

El Bartos, you are making this tooo easy. How about where your real GDP line dives below zero?

Do you have any feel for how deep and long it will be?

Your guess is as good as mine. For sure, housing looks to be in the dog house for not merely weeks or months, but years.

The only bright spot that I really have a view on is that I don't think we're going to see as high unemployment as some might. Consider that this whole mess has its genesis in the trade deficit and the long overdue correction of excess US consumption relative to production. That imbalance is unsustainable, and for it to be reversed consumption has to decline more than production. So it seems reasonable for the decline to be felt less on the production side. At worst, employment has to decline less than overall standards of living.

[Finster]

Re: PPI Whopper

Something's got to give:

Percent changes in import price index
November 2005-06 1.3%
November 2006-07 11.4%

The Six Questions are:

1. Who?

2. What?

3. Where?

4. How?

5. When?

6. With what impact on what asset classes?

Do tell!

I know what I think, but I've been wrong before. FWIW, I think stocks have yet to price in (on the downside) what's going on in the credit markets. For one thing, they sit at the bottom of the corporate capital structure, and as such are the limiting case of contingent credit. Yet nominal stock prices can be made whatever our stewards of the dollar want them to be, if the latter is sufficiently debased. So it would appear one would want cash and/or gold, depending on one's view of how much real dollar depreciation will be countenanced and what one's time frame is. And by the looks of it, quite a bit of dollar depreciation has been countenanced already ...

Am I close?

[jk]

Re: PPI Whopper

this is a great discussion. and finster, i really appreciated your stocks-gold chart back to the 30's.

one point about now versus the 70's: i agree that we're likely to play out somewhat like the 70's. but at the end of the 70's you could say the market was down a certain amount in inflation adjusted terms although nominally unchanged over the decade, albeit unchanged after having taken a really exciting course over the intervening years.

now, with official inflation figures much manipulated, there is no consensus number with which to replace it. yes, around here and in a variety of similar, contrarian websites, i see many references to shadow stats. around here we're used to bart's cpi+lies and finster's fdi. but i still feel a shock of surprise when economists whom i respect, like paul mcculley of pimco, write about low inflation.

we have truly entered the realm of big brother and the big lie - we have no common language to refer to phenomena that officialdom want off-limits.

[The Outback Oracle]

Re: PPI Whopper

So we have stagflation....in spades....It seems to be a particularly difficult investment environment.
I assume we are looking at Consumer inflation and a deflation of asset prices? Hence as per Finster hold Gold and cash.

So what type of cash?
Anyone got any ideas as to wither the carry trade?

[The Outback Oracle]

Re: PPI Whopper

Fred

Just from a bloke getting shot at in the front lines and as per my posts in "China prices rising" ....re import price increases...you ain't see nuthin yet!

[WDCRob]

Re: PPI Whopper

What a great conversation.

Part of my original question had to do with the GDP numbers being reported by (as Finster kindly pointed me towards) BEA. If you believe the inflation number is being manipulated, why should you accept this one as legit?

[Finster]

Re: PPI Whopper

What a great conversation.

Part of my original question had to do with the GDP numbers being reported by (as Finster kindly pointed me towards) BEA. If you believe the inflation number is being manipulated, why should you accept this one as legit?

Another good question, WDC. It not so much that we have compelling reasons to accept the nominal GDP figures as it is that we have compelling reasons to reject the CPI numbers. Nominal GDP is fairly straightforward, conceptually, at least. CPI, on the other hand, is known to have been dorked around with. For one, there's the substitution of "equivalent rent" for actual prices cited by Younes. Then there's the "hedonics" introduced by the Boskin Commission. Maybe even more significantly, the goverment has powerful incentives to understate consumer price inflation. Social Security paymments, along with numerous others, are indexed to the CPI. Tax brackets are indexed to the CPI. Not to mention that inflation is one of its key means of taxation to begin with. To make a long story short, the government routinely spends far in excess of what it takes in in taxes. Where does the rest come from? Ostensibly it's borrowed, but that "borrowed" money never seems to get paid back, does it? The federal debt just keeps on growing. The difference, in essence, comes from expansion of the money supply, which dilutes the value of the money, which causes prices to rise. So we pay the difference at the gas pump, in our utility bills, grocery bills, etceteras. Being a clandestine form of tax, naturally the government wants to make inflation appear as low as it can.

[Finster]

Re: PPI Whopper

the second set of conditions- economy growing, money supply steady- has been called "good deflation." it characterized a lot of the 19th century. basically it's a scenario in which growth and productivity drives down costs while increasing incomes. i would think equities would be attractive in that context. tbonds would be a more conservative but attractive investment as well.

the first scenario is "bad deflation." investment choices- cash, tbonds, sell short other assets.

That the US economy was characterized by "good deflation" - or any kind of deflation, for that matter - in the 19th century is a common misconception. It's based on the assumption that consumer prices wholly define inflation and deflation. Since consumer prices generally fell during the 1800s, the conclusion is that we therefore experienced "deflation", the logic goes. But the underlying assumption equating consumer prices and inflation is never justified to begin with. The conclusion cannot be justified if all the premises are not.

To the contrary, in the absense of either inflation or deflation, technological and economic progress should result in declining consumer prices. They allow each unit of production to be created with less labor. Real costs of production decline. In the absense of inflation, then, nominal consumer prices should also decline, in proportion to the decline in real cost of economic production.

[Finster]

Re: PPI Whopper

this is a great discussion. and finster, i really appreciated your stocks-gold chart back to the 30's.

one point about now versus the 70's: i agree that we're likely to play out somewhat like the 70's. but at the end of the 70's you could say the market was down a certain amount in inflation adjusted terms although nominally unchanged over the decade, albeit unchanged after having taken a really exciting course over the intervening years.

You can say that again. Inflation is destabilizing. It can take years for the original inflationary actions to filter into consumer prices. First to respond are prices that adjust in real time, conspicuously the stock averages. So in the early stages, inflation is fun. It feels like prosperity, and the positive feedback is powerful. Later, when the prices of things we need to live on start rising in earnest, it's not so fun, and the authorities begin to feel pressured for restraint. By this time, the economy has made adjustments to the inflationary trend; becoming addicted to it. Only further acceleration of the inflation will bring back the high, at the very time when the need to cut back on the dose is becoming obvious. At some point, you either endure the pain of withdrawal - as we did around 1980 when the Volcker Fed tightened policy - or you keep upping the dose until it kills the patient via hyperinflation. The spasms of alternating inflation and deflation are graphically illustrated in EJ's Ka-Poom.

now, with official inflation figures much manipulated, there is no consensus number with which to replace it. yes, around here and in a variety of similar, contrarian websites, i see many references to shadow stats. around here we're used to bart's cpi+lies and finster's fdi. but i still feel a shock of surprise when economists whom i respect, like paul mcculley of pimco, write about low inflation.

we have truly entered the realm of big brother and the big lie - we have no common language to refer to phenomena that officialdom want off-limits.

I share your bemusement at hearing the claims of low inflation that permeate the mass financial media. Especially when they so starkly contrast with our own personal experience. Is it our own eyes and ears that are deceiving us, or is there perhaps some systematic bias on Wall Street and in Washington?

The Washington part is pretty easy to explain. Since we just covered that a couple posts back in our reply to WDC, no need to rehash it here. The Wall Street bias is a little more complicated, but in a nutshell, it's clear that Wall Street likes low interest rates. And since interest rates tend to reflect inflation, to the extent it can promote the perception that inflation is low, then it can likewise promote low interest rates. To expand on that a bit, bond investors (like McCulley) reap capital gains when rates fall, and capital losses when they rise. Corporate America is profoundly biased in favor of low real interest rates; the higher inflation is and the lower rates are, the better for our captains of industry. Why? The lower the real rate of interest, the less fruitful tradition saving is. At the margin, money that once might have gone into interest-bearing accounts is driven into the stock market. This both reduces the cost of capital for corporations and gives corporate managements a coterie of relatively unsophisticated and undiscriminating overseers. If most of their stock holders were guys like Henry Potter of It's A Wonderful Life, do you think their stock option gravy train would be running at such high speed?

[Finster]

Re: PPI Whopper

Thanks, I needed that.



Where would you put the start date of the recession?

...

We may get some ammunition from this. With this morning's BLS announcement, year-over-year CPI is up 4.6%. Based on the official nominal GDP from BEA, year-over-year nominal GDP is up 5.28% (from the third quarter of 2006 to the third quarter of 2007). That nets out to a mere 0.93% real GDP growth over a full year even using official CPI inflation figures.

Doesn't seem much of a stretch to conclude that based on a more realistic inflation rate we are already well into recession, huh?

[c1ue]

Re: PPI Whopper

The only bright spot that I really have a view on is that I don't think we're going to see as high unemployment as some might. Consider that this whole mess has its genesis in the trade deficit and the long overdue correction of excess US consumption relative to production. That imbalance is unsustainable, and for it to be reversed consumption has to decline more than production. So it seems reasonable for the decline to be felt less on the production side. At worst, employment has to decline less than overall standards of living.

Finster,

Given the level of service jobs in the economy - can a reduction in consumption really not impact jobs?

I would think that restaurants, stores, entertainment, dry cleaning, you name it will all suffer should the American people tighten their collective belts. Not to mention real estate, sports, etc.

[Finster]

Re: PPI Whopper

Finster,

Given the level of service jobs in the economy - can a reduction in consumption really not impact jobs?

I would think that restaurants, stores, entertainment, dry cleaning, you name it will all suffer should the American people tighten their collective belts. Not to mention real estate, sports, etc.

I'm not suggesting jobs would be completely unscathed, C1ue. Just less so than overall consumption and living standards. To put it another way, if Americans have been living beyond their means, and they both fall, the living has to fall more than the means.

[bart]

Re: PPI Whopper

Buy and hold? You must have me confused with the old Finster ...;)

http://www.nowandfutures.com/grins/rimshot.mp3
I know you know this, but for anyone else - I've never considered you a buy & holder.

Meanwhile, especially in an environment like this, it makes sense to use whatever tools you have at your disposal. People can make rational arguments for stocks on valuation grounds. On the other hand, they can argue the opposite on valuation grounds! A Dow Theorist might say the a bear market is in progress, but it wouldn't be the first time they did only to see the market rise. An eVangelist might say anything having to do with the US is going down ...

Bingo... especially on eVangelists and similar folk who think the earth is still flat. ;)

[bart]

Re: PPI Whopper

El Bartos, you are making this tooo easy. How about where your real GDP line dives below zero?

Ouch... that arm twisting is persuasive... ;)

I just winged it and added a dot for it starting in March 2007, even though the actual cross below zero occurred in Aug/Sept 2006. My best guess is that the NBER will actually call it as having started much later though - perhaps August 2007? Time will tell, and as usual they'll probably call it right around the time that it's over.

Your guess is as good as mine. For sure, housing looks to be in the dog house for not merely weeks or months, but years.

The only bright spot that I really have a view on is that I don't think we're going to see as high unemployment as some might. Consider that this whole mess has its genesis in the trade deficit and the long overdue correction of excess US consumption relative to production. That imbalance is unsustainable, and for it to be reversed consumption has to decline more than production. So it seems reasonable for the decline to be felt less on the production side. At worst, employment has to decline less than overall standards of living.

Excellent points.

Using history as a guide, housing should bottom around late 2009 since bears last around 5 years. We should start to hear about problems in commercial real estate in the mainstream press within a few months too.

I think Kasriel noted something similar on unemployment and. if memory serves, doesn't think it'll go over 5.7% or so using the BLS U3 measure... which would put the BLS U6 unemployment measure at around 10%.
For those who may be unaware of the U6 measure, it's the one to use when comparing unemployment rates with other countries.

[bart]

Re: PPI Whopper

we have truly entered the realm of big brother and the big lie - we have no common language to refer to phenomena that officialdom want off-limits.

Double speak still works... *sigh*


"Winston worked in the RECORDS DEPARTMENT (a single branch of the Ministry of Truth) editing and writing for The Times. He dictated into a machine called a Speakwrite. Winston would receive articles or news-items which for one reason or another it was thought necessary to alter, or, in Newspeak, rectify. If, for example, the Ministry of Plenty forecast a surplus, and in reality the result was grossly less, Winston’s job was to change previous versions so the old version would agree with the new one."
-- George Orwell, 1984