Archive for April, 2012

Blame the Weather

Monday, April 30th, 2012

Do you ever get the feeling that things may not be heading in exactly the direction you wish?  If so, you are mirroring recent responses to various monthly polls we track here at Atlas which are designed to determine the attitudes of Americans.  Economists tell us we are in the third year of a recovery, a period which historically is marked by fast growth, low unemployment, and very positive feelings about the future.  Instead we are getting some numbers lower than those typically reserved for the depths of a recession.  What gives?

Do we blame the media?  The speed with which news can be conveyed these days has certainly led to a virtual shrinking of our planet.  We are told Israel may bomb Iran at any time.  Or that Iran may cut off a major portion of our oil supply.  North Korea rattles its saber, threatening neighbors with annihilation.  Europe’s currency seems to be melting down.  Any of these dire possibilities might happen, but they haven’t as of yet, may not, and seem somewhat far removed from our daily lives.  So again, what gives?

Is our government out of touch with the people it should be representing?  Have big banks and big bucks corrupted our leaders?  Why have the powers that be found it necessary to add trillions of dollars of debt to the taxpayer’s balance sheet in just the past handful of years?  Is it possible we will really see Medicare and some of our country’s biggest pension plans go bust possibly this decade?  Is our entire social safety net on the ropes?  These are tough questions, questions we need to answer yet fear to examine carefully lest they prove true.

Dylan said you don’t need a weatherman to know which way the wind blows.  Last year’s demonstrations by the Occupy Wall Street movement are scheduled to begin again soon.  They want to end what is seen as global income inequality and corporate abuse.  According to the director of global risk at Pinkerton, the world’s biggest banks are working in concert with police agencies to pull together available intelligence about these anticipated protests.  He likens their efforts to a herd of elks trying to defend themselves against wolves.  These “wolves” to which he refers include labor unions and community groups carrying legal permits to march.

Maybe there is really nothing wrong with our world today.  Perhaps any fleeting feeling of dread or despair can be blamed on the unusual weather we have been having.  Whether or not the events scheduled to begin unfolding very soon are a result of El Nino or some other fluke phenomenon, it’s better safe than sorry I’m told.  I would suggest you get prepared for a storm as the coming hot months of summer arrive.

Physical Finances

Friday, April 27th, 2012

The funkiness of black holes cannot be exaggerated.  When physicists add in their ruminations about string theory to discuss quantum gravity, it’s easy to see how they can get all knotted up.  Lisa Randall, one of that very group involved in these matters, caused a stir when suggesting that big collider in Europe might generate black holes.  In her recent tome Knocking on Heaven’s Door, she discusses the risks involved.  Further, she develops the concept of risk as it applies to large systems.  Interestingly, she uses the current global financial system as an example of a large operation capable of experiencing unforeseen–and possibly cataclysmic–changes.

She makes a compelling comparison between our current banks and black holes, saying that for both “large ones are essentially too big to fail.”  Running a parallel between what goes into black holes versus what goes into banks leads her to conclude, “Information–plus debts and derivatives–that went into banks became trapped and was transformed into indecipherable, complicated assets.  And after that, information–and everything else that went in–was only slowly released.”  A specific example she uses in this regard were the credit default swaps which lead to Lehman’s demise and the laborious process of untangling them after the debacle.  Her conclusion in this regard suggests the rules involving current finances are much easier to revise than are those governing physics and such should be done so post haste.

Ms. Randall also takes on the issue of high frequency trading based on a discussion she had with a trader involved in these types of transactions.  This is the process where banks buy and sell shares of stock within seconds to generate quick trading profits instead of seeing them as a way to enjoying long-term business success.  Her conclusion?  “Such trades create more profits for bankers and their institutions in the short term, but they aggravate existing weaknesses in the financial sector in the long term.”  Like us here at Atlas, she thinks abandoning such devices would prove beneficial for society at large but admits, “Of course, the banker I mentioned made $2 billion for his institution in a single year, so his employers might not agree on the wisdom of my suggestion.  But anyone who ultimately pays for this profit might.”  That anyone to whom she refers is you the taxpayer who gets the final bill when something is deemed too big to fail.

While we might dabble in quantum physics here at Atlas as a welcome diversion from more arcane financial matters, we will not argue against employing the European collider in an attempt to expand man’s understanding of the universe.  We do however strongly feel the use of derivatives and high frequency trading are creating a financial black hole of sorts which will ultimately result in further unfortunate events until they are either stringently controlled or even banned.  As to the LHC creating a black hole which eats the earth, monitor that by going to http://hasthelargehadroncolliderdestroyedtheworldyet.com

Industrial Production

Thursday, April 26th, 2012

After stagnating in February, the Federal Reserve’s measure of industrial production put in its second consecutive month of no growth in March.  Nonetheless, America’s physical production improved at an annualized rate of 5.4 percent, and its year-over-year increase was 3.8 percent in the first quarter.

Underneath the headline figures, we see a split in the performance of the different components of industrial production.  Manufacturing contracted 0.2 percent for the month but still had a decent quarter in which auto making surged nearly 40 percent.  Even without the large influence of vehicles, the manufacturing output increased at an annualized 8.3 percent rate.  After slipping 4.0 percent in February, mining managed to increase 0.2 percent.  Keeping this indicator from falling into negative territory for the month was the output from the utilities; they managed a 1.5 percent gain after only improving by 0.1 percent the month before.

Also included in the Fed’s report is capacity utilization.  This attempts to quantify the proportion of capacity being used by the country’s physical producers.  March’s ratio fell slightly to 78.6 from 78.7 in February.  Year-over-year, capacity utilization has only improved by 1 percent, and despite being out of recession for close to three years, it has yet to reach its long-term average of 80.3 percent.  In a slight digression, this helps inform Atlas’ view on inflation.  Producers can still increase output without needing to drastically increase capital expenditures or payrolls.

The recent stagnation in industrial production is something Atlas is monitoring.  The one area that may continue to support this indicator as the year matures is the utilities sector.  If the country continues to experience record temperatures, it will be a windfall for of the up-line energy producers as air conditioners are turned on.  The corollary to added cooling costs is fewer discretionary dollars to be spent in other areas of the economy.  When suppressed consumption is combined with the seasonal smoothing techniques that will begin to restrain the headline figures of the indicators we watch, the thermometer may not be the only gauge with readings in the red.   (by C Cox)

March Leading Indicators

Wednesday, April 25th, 2012

When the Conference Board reported their Leading Economic Indicators index (LEI) rose 0.3% in March, you might have thought the world’s economists burst in unison into song.  Commentators suggested that, while the rate of increase was hardly stellar, it was at least possibly sustainable.  Well whoop-dee-do.

As usual, the main driver came from the yield curve which will most likely continue to exert a strong positive influence so long as the Federal Reserve keeps short-term rates pegged close to zero.  Also providing a positive benefit was the rising stock market.  While here at Atlas we won’t quibble too vociferously with these elements of good news, something of more substance remains to be desired.

An uptick in building permits recorded in this report does provide a positive into which we can sink our teeth.  After all, construction is one crucial economic segment currently on its heels.  If it should begin to rebound we would join the others in song, but our fear is that exceptionally warm weather in the first quarter may have skewed this data upward.  Employment also showed a positive wiggle but more recent reports suggest this trend may be attenuating as well.

Okay, I’ll admit we are sounding somewhat crabby here.  There really is much in a positive vein to be taken from this report.  It has, for instance, now increased for six consecutive months. This March report saw seven of its ten components trend to the upside. As an excuse for acting the curmudgeon I can only offer up an old saw: Once burned, twice shy.  We saw similar behavior in the general marketplace this same time last year and the year before that, only to have hopes dashed by a correction of consequence which began soon after both times.  We’ll keep our chin up but head down for a while yet, if that’s actually possible.

March Consumer Prices

Tuesday, April 24th, 2012

According to the latest reading from the Bureau of Labor Statistics, the Consumer Price Index (CPI) increased 0.3 percent in the month of March.  Over the last 12 months, the costs of goods and services measured in the CPI are 2.6 percent more expensive. This is a hefty downtick from February’s increase of 2.9 percent.

Food and energy combined to put pressure on this measure of inflation.  The cost of energy rose 0.9 percent; this latest price increase comes after the surge consumers felt in February of 3.2 percent.  Prices were 0.2 percent more expensive for food in March after no change in February.  Outside of the most volatile components, the cost of living still managed to increase by 0.2 percent following the tame 0.1 percent increase in February.  Notable price increases came from used vehicles, apparel, and shelter. After sliding for six consecutive months, used vehicles increased by 1.3 percent.  The cost of clothes pushed higher by 0.5 percent and shelter costs were up 0.2 percent for the sixth months in a row.

With the prices of so many items Americans buy growing, it is hard to establish an argument against being in an inflationary environment.  Atlas will attempt such an explanation nonetheless.  As the year grinds on, there are many challenges our economy faces that will impact the demand for goods. Without marginally higher consumption, it becomes difficult for retailers to push prices higher.  One of the most persistent issues constraining demand since the recession ended in June of 2009 is the labor market. With unemployment still relatively high, wages are not experiencing the type of upward pressure that accompanies a fully employed labor force; the acceleration in consumption needed to coax prices higher is less likely to materialize when there is so much labor market slack.  Simultaneously, Americans are still in the process of digging themselves out of the debt hole, so a smaller portion of their income is going to actual consumption.  In other words, Americans are using today’s income to pay for consumption that occurred in the past.  The evidence of these phenomena influencing prices may be manifesting in the declining year-over-year inflation rates.  The current cycle’s year-over-year CPI peak occurred in August 2011 when the reading was 3.6 percent. The year-over-year measure of CPI has now declined over 27 percent from the peak 12-month change that happened last year.   (by C. Cox)

March Retail Sales

Monday, April 23rd, 2012

Retail sales improved in March according to the Census Bureau.  Versus February, Americans spent $411.1 billion more to end the first quarter.  This is an increase of 0.8 percent for the month and a 6.5 percent positive change in the last year for an important component of the country’s output.  February’s gain was revised slightly lower to 1 percent from an initial reading of 1.1 percent.

Many underlying components had strong readings.  Building materials improved 3 percent for the month and are up 14.1 percent year-over-year.  Auto dealers saw a 1.1 percent improvement in March and have improved by 8.8 percent since the same month in 2011.  Finally, it comes as no surprise to see more money was spent on gasoline in March as the petrol price pressure persisted; gas stations saw 1.1 percent more dollars spent in the final 31 days of the first quarter and enjoyed a 7.6 percent surge in the year ending March 31st.

This indicator has put in a solid month to end the first quarter of 2012.  It will prove to be an ally of the gross domestic product (GDP) figures due later this week as retail sales comprise a significant portion of its largest component, personal consumption expenditures.  Only time will tell if the types of gains seen recently can continue as income growth is needed to support spending improvements, and it is currently not clear that, after taxes, Americans are making the types of gains needed to endorse future consumption advances.     (by C. Cox)

March Producer Prices

Friday, April 20th, 2012

The costs paid by manufacturers and wholesalers for finished goods did not change in March after climbing 0.4 percent in February according to the Bureau of Labor Statistics’ (BLS) latest release of the Producer Price Index (PPI).  Year-over-year, there has been an increase of 2.8 percent which is a slower rate of change from a month ago when it was 3.3 percent. Producer prices appear to have put in a peak in their yearly percent changes back in July 2011 when the non-seasonally adjusted count was 7.1 percent.

This indicator includes volatile components like food and energy, so it is constructive to look at core PPI which excludes these fickle components.  Core PPI increased 0.3 percent in March after ticking up 0.2 percent in February.  Looking at the year-over-year change in core shows a trend that is much less dramatic than the fall off seen in the headline figure.  Year-over-year, the change in core prices remained the same as February at 2.9 percent.  This is only slightly off of the recent 3.0 percent peak that occurred in November, December, and January.

Being able to see the different stages of manufacturing is one advantage of the producer price index.  When looking at the intermediate stage of production (if bread is a finished product, flour would be an intermediate good) there has been 0.7 percent increases in each of the last two months.  This may seem steep, but it was increasing at 1.2 percent a year ago, and the trend of the year-over-year change has been steadily down to its current reading 2.9 percent after peaking at 11.5 percent in July 2011. Looking further down the pike, we can see prices of raw goods (think wheat) contracting by 2.5 percent in March, and the year-over-year change virtually disappearing as it read 0.1 percent.  To put this in perspective, the year-over-year change was 26.1 percent in June 2011.

This slowing trend may very well be why the Federal Reserve is not overly concerned about the accommodative policy it is currently administering.  If the pipeline of inflation is suggesting a lower growth rate, Ben Bernanke and his cohorts can concentrate on their second mandate, the election jobs market.  (by C. Cox)