You can fool some people some of the time

Posted by Ray on November 8, 2010 under Main | Be the First to Comment

I believe what the Federal Reserve has begun was completely idiotic and unnecessary which will ultimately hurt the majority of the American people. However, many economists disagree with what I just said. I guess you can fool the people sometimes, but economists can be fooled all of the time. Part of economist’s problem, and why they are so horrible at predicting things, is because they live inside of models and rarely look up. They are also way overpaid for what they do which adds more of a problem with their theories since higher prices do not impact them as fast as it impacts 80% of Americans who live paycheck to paycheck.

Paul Krugman is one of those people who has been far more wrong than right, but for some reason people still listen to him, odd, really, really odd. Mr. Krugman has taken aim at Jim Rogers recently claiming that inflationist’s have gotten the last few cycles’ dead wrong. Really? So, oil going from $50 to $147 never happened. Gold rising to new highs isn’t happening. Food prices going ballistic did not happen then and is not happening now, sure, whatever. The fact is that prices, including food and energy, have moved higher this year and before the collapse of 2008, but Krugman says that did not matter… why do people read him?

It is my opinion that higher food and energy prices helped collapse the system in 2008. As prices rose people diverted more money to the things they needed the most, food and heat which took away from our consumption oriented GDP. After the collapse began we saw these prices ease, a lot, and GDP did pick up after the crossing point was reached. Of course, government intervention helped and many people simply stopped paying much of their debt which has helped GDP since now one cannot pay their bills, not lose their home and now needed a new Kindle or iPad. Now we have rising commodity prices again, but no one seems to think this is bad news. Well, it is.

While mainstream economists talk about “sticky” CPI, excluding food and energy while concentrating on wage inflation as the sole indicator of inflation proves that most economists have lost their minds. Wage inflation does not have to come before food and energy inflation, I am not sure why anyone thinks this is always the case, and if we look back at 2008 we see a similar situation, rising commodities and flat to lower wages. This is a major red flag, but most mainstream economists don’t care. These economists look at me or a Jim Rogers and assume we do not have a clue about what we are talking about. The do not seem to understand that an economy can go from deflation/disinflation to inflation overnight, it happened in Germany. Maybe they are right, but at the same time they are so devoid of reality it is not even funny.

To think food and energy prices do not matter to people is idiotic. It is the same as saying fish can live fine out of water as long as they can hold their breath long enough. With money being diverted to $4 gas or $5 loaves of bread it is clear that we will continue to have deflation in color TV’s which means economists will not see any inflation, anywhere. This is a common sense issue which might fool Wall Street people into believing everything is fine, but Main Street, well, Main Street is not quite that stupid. They know $4 a gallon gas and $5 loaves of bread is bad news. They know that those iPads will be out of reach when a greater portion of their incomes are moving towards those unimportant things… like eating. This is bad news for the economy.

I have no illusions, the market will go up and economists will demand more QE because it is “working”, but this policy is not benefiting Main Street, it is killing it. More and more investors are moving out of stocks which negates the “wealth effect” of magical 9% S&P gains which are based on pure liquidity and not fundamentals. While stocks will move higher I am betting silver and gold will continue to outperform, along with other commodities. This is a catch 22 to the Fed because higher commodity prices is bad for the people, but good for GDP growth, even though it is imaginary growth, but that doesn’t seem to matter as long as the politicians are happy. So much for an independent Fed.

I think the recent views and writings of major economists have proven that they are completely worthless. To think intentionally driving the prices up for the basic essentials in life with high unemployment and flat incomes is barbaric. The worst part is economists all say this is a good thing, what world do they live in? We might get wage inflation out of this at some point, but it will be after price inflation is in full swing and major damage is done to the consumer. I also have no idea how the Fed can reverse this latest policy decision without blowing itself up, I actually believe this is now a permanent policy the Fed is following, just like Zimbabwe.
The biggest question is will Tim Geithner and Ben Bernanke be impeached for lying to Congress when they said they would not monetize the national debt? They should be, the last I checked lying to Congress was frowned upon, but we do now live in bizzaro world.

The Fed is doing everything I feared it would do and they are inflating the country out of its debt, they say they are not, but what credibility can they possibly carry with the people now? On top of that, their actions speak louder than words. When you are intentionally trying to create inflation and write an op-ed about it that makes it harder to say we are not trying to inflate our way out of our trillion’s in debt. Everyone can see what is happening and when Brazil is giving you a smack down, as well as Russia, man, you got problems.

As far as economists, perhaps they should be put on a salary that mirrors the national average in their respective areas so they can understand how higher commodity prices really impact the people. It is easy to say higher prices don’t natter when you make high 6 or 7 figure salaries for playing with computer models, but on a modest 5 figure salary I bet they will see things differently. I am not one of those ‘social justice’ people, but in this case I might make an exception since they are all being complacent in one of the greatest snow jobs ever given to the people. This will do nothing for the people other than create misery and it certainly will not improve the image of Wall Street. We are not a banana republic because we voted in Republican. We are a banana republic because we have idiots in charge of our monetary policy. Stay long commodities.

Deflation, a reality

Posted by Ray on July 15, 2010 under Main | Be the First to Comment

Deflation is more than a pipe dream, it is basically here and it is global in nature. We saw a whole slew of data points come out over the past 12 hours and none of it was very positive from my lens since it all pointed towards either a slowing of the economy or deflationary headwinds. There is just no question that the second half of 2010 is going to be vastly different than the first half for America and 2011 is going to be worse than expected. To be blunt, when the Federal Reserve is telling you things are bad, things are much worse than you think. We are talking about the same Fed that got everything wrong or underestimated every problem we have had over the past 30 years. In their notes yesterday, wow, there was just nothing positive. We will have quantitative easing and it will be spectacular since we have no idea how this will impact the U.S. long-term.

China released its GDP figures last night, some 10.3% GDP, but its CPI was 2.9% compared to expectations of 3.5%. Some would argue that is good news, but I would disagree. With rapid growth you would expect to see inflation higher than 2.9% and if they are paying lower prices that means they are having end demand problems as well. Some say this ‘planned’ slowdown is good and maybe it is, but if China is the engine for the global economy and it is fulfilling its goal of a slowdown how in the world can that be good news for the U.S. or Europe? I don’t see it. I also see a stronger RMB as a major problem for China and the rest of the world, but I have beat that horse to death by now. Just remember, manufacturers with 3-4% profit margins cannot pay their employees more while their currency is rising and other currencies are falling or staying flat, a best case scenario for the U.S. and the EU. Watch out below in China and I feel much more comfortable in India or Brazil than I do in China at this point maybe even in Indonesia.

Data in the U.S. was horrible and there is no way to deny that. The initial claims data is very noisy since the seasonally adjusted data is looking for retooling of the auto industry which is not happening right now, but it makes the weekly number look real nice. Unfortunately, it is not reality and to put everything into prospective, last week’s number was revised up, this number, 429,000, will also be revised up as well and take a look at the unadjusted data set. The unseasonal adjusted data is flat week over week at 513,347 which looks similar to last week’s figure and shows how the BLS is not seeing through the distortions of the auto industry retooling and makes the case that seasonally adjusting doesn’t always work. Either way, this figure is a head fake and even Steve Liesman admitted that so what does that tell you?

The CPI/PPI, what can I say? Disinflationary at best and this is what the Fed is worried about. This problem is global, not just a U.S. problem and, unfortunately, looks a lot like what happened in the 1930’s which was made worse by Europe’s debt problems I might add, sound familiar? The Fed also said we are looking at 5 to 6 years of this, ouch, and this means equity prices should be trading at what P/E exactly? Certainly not 20, maybe 10, 15? No one knows, but we are way overvalued that much we all know at this point. To make a point about deflation let’s take a look at Marriott’s earnings, they were good, but if you look at their room rates YoY they were down across the board from 2009, I thought we were in the midst of a fantastic recovery? If Marriott has to cut its rates by 4% all over the world, except in the UK, what does that tell you about pricing power? There is none, they have to discount to fill rooms. Also, their luxury brands were flat and their lower end brands were doing much better, staycations anyone. Don’t bet on global growth, you will get slaughtered.

The Empire State report, from 19 to what??!! To say that we are not having a slowdown with an Empire State report slipping 15 points, 19.57 to 5.08, on top of the ISM making lower highs, the Baltic Dry Index plummeting and unemployment hideously high is insane. This is just the icing on the cake, in my opinion, I am sure some people will claim it is a one off event, but there is a clear pattern here and it is down. All of this means a slowdown, good earnings or not. This is also not a case of more stimulus with the exception of extending unemployment benefits, we need to let this thing sort itself out at this stage of the game. Unfortunately, we will get it whether we want it or not starting with quantitative easing from the Fed which will do nothing to boost money velocity. The bottom line, the Empire State report was awful and will likely not be talked about much today or ever again. The other Fed reports will likely show a similar slowdown as well.

Painful, I think that is the word we are looking for as we look at the data today. How or why futures are not down bit time, who knows. I think you would be hard pressed to find anyone, myself included, who said that 2Q10 earnings would not be good, but forward earnings are the key and all forward looking data points look terrible. The ECRI comes out tomorrow and it is pushing closer and closer to that -10% mark, but I guess that indicator only matters when we are on our way up, not on the way down. Be very careful in this market as it is devoid of reality at this point. Valuations will matter and the fact that we are seeing deflationary pressures mount from China to room rates at Marriott means you have to treat valuations differently. You cannot look at a 19 P/E and consider that cheap in a deflationary environment and we have very little experience in these environments to boot, so think deep value, ultra low P/E’s and high dividends from strong companies that do not need to go to the capital markets to raise capital. Good luck.

Initial Claims

Posted by Ray on June 17, 2010 under Main | Be the First to Comment

Unreal, it is just unreal, here we are 2.5 years into this recession and we are still seeing initial claims well over 450K a week, how? The pundits told us that employment had turned the corner months ago and we are in a strong “V” shaped recovery, but employment is a lagging indicator and should show real strength by March 2010. Well, it is half way through June and the only sector showing strong job growth is temporary government jobs, some recovery.

The 4 week moving average of initial claims is at 464,000 people, this is unbelievable and is not a good sign. To put this into perspective every month 1,856,000 are filing for initial jobless claim benefits, that is twice the amount of people that live in the entire state of Montana or two thirds of the population of Las Vegas, three times the amount of people that live in Boston Ma, you get the picture now? That is a lot of people. This is not a sign of job creation or job growth so it is beyond me how the President could have stood on that podium a couple weeks ago and proclaimed there is proof that the economy is getting stronger everyday when so many people are losing their jobs every day, not getting jobs.

I may be bearish and all, but this is beyond what I would call bad news and downright scary. People are not leaving their jobs for greener pastures, they are being laid off because business stinks. The proof was n the CPI which shows clear lack of pricing power or deflation dropped .2%, even taking out energy prices were only higher by .1% which shows zero pricing power except for iPads. What this means is the market is severely overvalued as it deserves to be trading at much lower price multiples based on deflationary pressures. We are not in 1930’s type deflation, but we are certainly heading in that direction, especially with Europe in turmoil right now.

To say there was any strength in today’s figures is simply lying to yourself and trying to spin bad news. I am sure the market will head higher because, well, the market sees no bad news until it is sitting on its chest, but it is clear as day that GDP is rolling over and employment is worsening, not improving. Would I short the market? Yes, but if you do not want to go short sell into rallies and buy bonds or stay in cash because when the market realizes it needs to compress P/E multiples we will move from 1,100 on the S&P to 900 in the blink of an eye. The market is not the discounting mechanism everyone tells you it is, just remember September of 2007 we hit all time highs when the crisis was hitting full steam, so higher stock prices is not indicative of a healthy economy.

One final thing, the parade of bulls on CNBC are long only mutual fund asset managers, where is their bread buttered, by having your assets in cash or in their funds? Think about that when listening to them dish out their “timely advice.”

The biggest story they are not talking about, really at least

Posted by Ray on July 14, 2009 under Main | Be the First to Comment

The PPI came out much higher than expected and we went from a good position, deflation, to an inflationary situation. We knew this was going to happen, but us being right does not make us happy. Higher inflation is really bad for the US and it is clearly here.

They could not even hide the inflation from the “core rate” which excludes “volatile” food and energy. The core rate was way up at .5% which means the prices of everything will start to climb. I hate this top line and core rate on the CPI and PPI as it distorts the truth, IMHO. If you turn on a light and eat at least once a day you do use food and energy everyday, but it is unlikely you are buying a car or TV everyday. That is how they calculate the PPI and CPI, they assume you don’t eat or use energy which is absured, but they assume you buy consumer goods like TV’s everyday.

The whole deflationary “problem” isn’t really a problem if is a way for the market to sort out what is being used and what is not being used and prices rise or fall accordingly. However, deflation has been positioned as a bad thing, but it is not and why would you be against lower prices? A great example of deflation is the 1800′s to 1913 when we had ramped deflation over almost a century, but we also had growth that was unprecedented.

Another example is smart phone, like a blackberry, prices have fallen dramatically over the last 8 years. According to the Fed this is deflation and no one wants these products. Oh really? Isn’t the smart phone the most popular product in that sector? Demand has never been higher, but innovation drove prices down. I am not saying all deflation is good, but it is a hell of a lot better than most people think.

As far as inflation, I think this is just the beginning and it will get much worse. We have so much money in the system and the dollars value is continuing to decline which will ultimately lead to much higher inflation. Other countries want the reserve currency to change and they will get their wish. I do not know when, but it will happen.