Tuesday, February 15, 2011

Morning Update/ Market Thread 2/15 – Inflation Tsunami or Transitory Blip?

Good Morning,

Equities are lower this morning. The dollar is down, the Yen is down, Euro higher, bonds are down slightly, oil & gold higher, and most food commodities are lower with rice substantially lower. Of note is that Brent crude, at over $103 per barrel, is now roughly $18 higher than NYMEX crude.

Retail Sales, remember measured in dollars, rose .3% in January, that is down from .6% reported in December, and is below consensus that was looking for a .5% gain. Not only are Retail Sales measured in inflated dollars, but this report is subject to large errors due to substitution bias. Here’s Econoday:
The consumer appears to be pausing after a robust early holiday season. Headline sales in January posted a moderate gain but it was largely due to higher gasoline prices. Overall retail sales gained 0.3 percent, following a 0.5 percent boost in December and 0.8 percent jump in November. The latest figure fell short of the median forecast for a 0.5 percent rise. Excluding autos, sales printed a 0.3 percent improvement, matching the increase the month before. Analysts' expected a 0.5 percent rise. A large gain in gasoline station sales boosted the ex autos figure. Sales excluding autos and gasoline rose only 0.2 percent after a 0.1 percent boost in December and 0.4 percent advance in November.

The latest sales gain was led by a 1.4 percent increase in gasoline sales with food & beverage stores up 1.3 percent and nonstore retailers up 1.2 percent. Other notable increases include a 0.8 percent advance for general merchandise (which includes department stores) and a 0.5 percent boost for motor vehicles and parts. The weakest components were building materials & garden equipment, down 2.9 percent, and sporting goods, hobby, book & music stores, down 1.3 percent. Food services & drinking places fell 0.7 percent.

Overall retail sales on a year-ago basis in January advanced to 7.8 percent from 7.6 percent the previous month. Excluding motor vehicles, sales were unchanged at a year-ago 6.2 percent.

Consumers are pausing after a robust November as holiday sales were front loaded due to early discounting by retailers. Also, sales in January likely were softened by severe winter weather in parts of the U.S. Still, the numbers were disappointing and equity futures were down.

Most of the gain is due to gasoline and things that people NEED. This gives them less discretionary money as incomes aren’t even close to keeping up with the rate of real inflation, not to mention the ridiculous and usurious interest rates that consumers are forced to pay on their debt hangovers from the mass commercial marketing season that used to be about a religious holiday.

Considering the amount of inflation, that Retail Sales report is extremely weak in my view.

And both Import and Export Prices jumped in January, even with our understated numbers. Still, as you read this report, compare the price jumps to that of the supposed increases in Retail Sales and you will see a large disconnect that is getting larger.

Import prices rose 1.5% in January, or 5.3% year over year. While Export prices rose 1.2% in January, or 6.8% year over year! That is HUGE, and yet it is understated. It is unconscionable that the “Fed” is still pumping hot money into the system with those types of figures, but they continue to pump billions every single day! The rate of growth in these numbers is advancing dramatically.

Here’s Econoday:
Import prices jumped 1.5 percent in January to extend a long string of similar gains. But inflation pressures continue to be isolated to energy and food where year-on-year rates are moving into the mid teens, at plus 14.3 percent for petroleum imports and at plus 14.8 percent for food/feed/beverages. These rates are up from December's 13 percent handles. The year-on-year rate for food/feed/beverages on the export side is at plus 18.0 percent. Monthly change shows a 2.6 percent rise for food/feed/beverage imports and a 3.6 percent gain for exports with petroleum imports at plus 3.4 percent.

All this pressure, however, remains confined to energy and food. Prices for finished goods remain subdued showing a second straight 0.1 percent monthly gain for capital-goods imports and a 0.2 percent gain on the export side. Year-on-year, capital-goods imports are up only 0.2 percent with consumer import prices at zero.

High energy and food costs are a serious burden to the public but these results won't shift expectations for low core readings in this week's producer and consumer price reports.

“Subdued… Isolated… low core readings…” WHAT NONSENSE! What is clear is that things that you need like energy and food are zooming, while all the other stuff that is still ridiculously fluffed up in price due to loose monetary policy are holding steady at best. Right now the only falling prices I can see is in real estate.

And this brings up probably the most important aspect of what’s wrong with the “Fed,” and again WHO controls the production of money. As they inflate and food prices zoom to all-time starvation levels, the proportion of money spent on food rises around the globe – and here in the U.S. too. Yet our measurements of inflation do not incrementally adjust to reflect that greater proportion of income spent on food. In fact the politicians do just the opposite in an attempt to make things look better than they actually are.

In China, for example, just yesterday it was reported that food prices for just a ten day period at the end of January rose by a stunning 4.6%! In just ten days! That’s a 416% rate of inflation for food! I don’t know about you, but for me that crosses the line between high and hyper inflation. Stunningly, the Chinese announced that they are LOWERING the ratio of food in their inflation statistics which will have the net effect of lowering their reported inflation rate! Again, if they don’t like the results, just message the statistics!

And just this morning the Chinese reported their annual inflation rate, minus food at 4.9%, citing rising rents! Food, according to them, “climbed 10.3 percent last month from a year earlier. Vegetable prices rose 2 percent, fruit prices surged 35 percent and grain rose 15 percent,” according to the statement.

The rising price of food is going parabolic, with the bulk of those increases occurring recently.

The Chinese report that their broadest measurement of money supply has risen 48% in the past two years! Is there any wonder food prices are zooming?

While the Chinese pump massive amounts of money, the Japanese pump trillions upon trillions of Yen. The “Fed” pumps trillions of dollars, and the ECB pumps hundreds of billions.

It’s being reported this morning that the Euro Zone has just bailed out the PIIGS (again) by DOUBLING the size of their bail out fund, this according to Business Insider:
“The new ESM, or European Stability Mechanism, will be able to lend up to €500 billion ($674 billion). The current fund can only lend €250 billion. This new, permanent fund will come into effect in 2013, so the eurozone needs to muddle through a little under another two years of uncertainty before this takes effect.”

Everywhere one looks, it’s hundreds of billions here, trillions there. Again, people on the margins suffer the most as the greatest percentage of their income is spent on food.

And the disinformation regarding the tsunami in food prices is at a fevered pitch. It’s the weather, global warming is changing the planet! Yes, there have been areas of locally harsh conditions for crops, but that is true every year. And even if this is an abnormal year, when you look at the charts of rising commodities, they began to go parabolic nearly 5 months ago! The charts fit the math of money pumping far more than they fit the weather pattern. The tsunami is in the supply of money – and the statistics don’t reflect the true height of the oncoming wave.

But the Empire State Survey grew… this is a survey of managers who measure their activity in dollars:
Activity remains strong in the New York manufacturing region. The Empire State index rose more than 3-1/2 points to 15.43 to indicate monthly growth in general activity at an accelerating rate. Details show less strength with new orders decelerating slightly but still showing strong growth at 11.80. Shipments slowed in half but again are strong at a reading of 11.31. One reading that isn't positive is a slowing in hiring to only 3.61.

Other details are mostly positive. The rate of inventory build doubled in the month to 9.64 while the draw in unfilled orders was half December's rate. Price data show increasing cost pressure for inputs and solid, steady pricing power for outputs. This report hints at another month of strength, though perhaps a little less strength, for the manufacturing sector at the national level.

The common thread is clear – rising input prices. And since when is rising inventories a good thing?

And while the data continues to get more distorted as the tsunami of debt backed money washes ashore, real people and governments who do not possess the power of the printing press become prisoners to their debt slave masters. Pat Quinn, the Illinois State Governor, looked like he’s on the verge of a hypertension meltdown when announcing yesterday that he was delaying the next Illinois bond issuance because he “wants time for investors to hear his budget speech.”

Evidently his game plan is to woo overseas investors for his junk debt. This is so sad! Wall Street completely milked the state and now leave them to wallow in their debt, begging for international lenders (who also print their money from nothing). The really sad part is that it doesn’t have to be like this at all! The State of Illinois should create their own state bank and lend money to themselves! Yes, they can do that and they would cut their interest expense in so doing in addition to cutting the strings to the mobsters both at home and abroad.

Meanwhile the Treasury continues to make up false reports about how much foreigners are buying our debts. I simply do not believe their data, the numbers do not add up and there is no transparency into the Treasury or into the “Fed.” Here's Econoday's report:
The nation's enormous national debt requires continued strong foreign buying of our financial securities. And foreigners were solid buyers in December, purchasing a net $65.9 billion in long term securities which is down from November but still right in trend. Foreign purchases of $76.8 billion in the month were offset by $10.9 billion in U.S. resident purchases of foreign securities. Foreign buying was concentrated where it needs to be most, in Treasuries. Foreigners were also solid buyers of equities and also agencies. Total net inflow, which includes short-term securities, rose to $48.2 billion in December from November's $35.6 billion inflow.

Isn’t it amazing how “solid buyers” show up just where they are needed? Turns out that it's the British buying while the Chinese are selling. So, I am left to wonder how much of the money coming from London is first funneled there by our own "Fed?"

Note in the report below that net "official" flows were negative $45.1 billion and that is up from November, while total flows were net positive by $48.2 billion:

TIC december

We need positive $40 billion plus each month just to finance our nation’s trade deficit. But none of that matters when you can just print a hundred billion per month!

There was another small movement in the McClelland Oscillator yesterday, be prepared for a large price move today or tomorrow.

There is a tsunami of inflation rolling ashore. It’s unconscionable that the world’s largest countries continue to pump money into such dramatically rising food and energy prices. It’s a desperate act, and now that the spiral is set into motion, it becomes very difficult, if not impossible, for a single country to stop. They are now completely dependent on the growth in numbers. Should they stop, the numbers will fall. This is life when lived inside of the central banker debt money box. It doesn’t have to be like this.