Energy Prices - Inflation... Denial ?
From Tomas's Financial Times post:
<<"It is really becoming serious," says Eric Chaney of Morgan Stanley Dean Witter. "We are in a situation maybe not so different from the oil shocks of the 1970s." Oil-consuming nations have bitter experience of what that could mean. Prices rise and real incomes fall as resources are lost to oil producers. If unions and companies try to restore real wages and profits by pushing up pay and prices, inflation can start to spiral upwards. >>
...this amazes me. Once again; when we choose to ignore history - we are destined to repeat it.
History has taught us that virtually EVERY time that Oil/Energy prices reach these levels that it leads to an inflationary led recession.(not to mention the past relationship to Gold prices & Oil spikes...).
Inflation and the following recession will "pop" this New Paradigm - Market Multiple "Bubble" - guaranteed.
How anyone does not see the pure "BS" in the BLS & other government stats is laughable. That "food & energy" don't matter ? C'Mon ? - Upcoming NE winter heating bills may rise for many consumers to an equivalent level of "doubling their car payments" - as one recent article stated. The savings cushion for the average American consumer is at a near record low - if not nearly non-existant. The explosion of non-conforming -subprime consumer & mortgage lending coincided with this near record domestic economic expansion.
Obviously all tree's don't grow straight to the sky & the US economy can not perpetually expand at this rate & productivity can not & will not either.
Let a few Old Economy Co's miss their numbers - given the tough market top "comps" they are facing; "missing" earnings & revenue estimates is a near market given in the coming quarters for many industries. Let us enter a period of corporate cutbacks, downsizing & belt-tightening and those cutbacks will add to Greenspan's "soft-landing" by easing the employment squeeze; but it will snowball into the pin that pricks the consumer debt crisis that's brewing due to a historic near reckless expansion of subprime lending.
Consumer spending rates are allready at the same historic levels as we saw in the inflationary late 1970's-early 80,81 level. Consumer debt as a percentage of income is at record highs. We have Billions of dollars in subprime debt that can & will never be repaid by hundreds of thousands of consumers who would have never otherwise found themselves as primary catalysts to this over-heated economy.
They will become the first casualites of any recession - unpaid debts, missed mortgages, car payments, credit card defaults - bankruptcies. All of this bleeds to the rest of the economy - retail, auto's, etc.
Add to this the $100-$400+ pe mo increases in Winter Heating costs, perhaps another $50-$100 per month at the gas pump potentially - all just pure energy related... let alone; the added costs as these Energy costs bleed their way into the rest of the economy.
We've allready seen "sur-charges" for Fed Ex, Taxi Fares, Airline Tickets etc. Local Trucking Co's, School Systems, are also feeling the added fuel cost pinch. So much of our industrial product is delivered via truck, or airline that these temporary surcharges will soon become permanent price increases.
That article also mentioned a real sleeper to this economy. I mentioned earlier that I have some contacts within the National Teamsters Union. There is an unquestionable, dramatic amount of union contract turnover that will see very substantial wage & benefit costs increases in the coming year. We've just seen communications & airline workers on strike - wage pressure is literally being held back by a finger in the dike here... What I see is one final surge of wage & benefit costs led by consumers who are hard pressed to meet current debt obligations.
When that "last gasp" wage & benefit spike hits - it will soon lead to Corporate America having to react to higher energy & labor costs and also facing nearly impossible "comps" of this present market top. That will then soon lead to the cycle of cutbacks, cost controls, personnel reductions etc.
That no one see's huge underlying inflaitonary pressure's from nearly every area in our economy is THE story of this market. That they are not looking forward & seeing how all of these inflationary pressure's will lead to a recession is simply amazing to me.
Denial is NOT a river in Egypt - as they say...
Everyone keeps looking at "lagging" economic indicators for inflation - this is THE great "spin-job" of alltime imho. If anyone dared look "forward" - it would obviously be a different story.
Ps - "Bullsky" - you questioned some links & comments I had on Money supply; specifically "M3" a while back in my comments about inflation & the positive expectations I have for Gold Stocks: here is a great article on M3 to Grants Investor:
grantsinvestor.com
READ THIS PEOPLE !
<<A few weeks ago, we noted that the slowdown in M-2 growth could presage sluggishness in consumer spending. Since then, M-2 has picked up again, and one of the other “Ms” -- the less widely followed M-3 -- has grown even faster. In the 13 weeks ended August 7, M-3 has been growing at a brisk 9.2% annualized rate (A brief money primer: M-1 comprises mostly currency and demand deposits, M-2 adds savings accounts and retail money market funds and M-3, broad money, adds institutional money-market funds and large time deposits, among other components.).
Doug Noland, market strategist at David Tice & Associates, argues that many analysts are missing critical developments by focusing only on narrow money (M-1 and M-2). “Increasingly, the major, and often very aggressive, consumer lenders are being financed by ‘institutional’ funding sources captured in M-3 components,” he says. Noland offers an example of a consumer who uses a credit card financed by a credit-card company that securitizes a pool of credit-card receivables. These can be purchased by a “funding corporation,” which in turn issues asset-backed commercial paper to an institutional money fund. Though complicated, this transaction has become a standard practice. “Suffice it to say that there is today a strong relationship between M-3 and spending,” says Noland.
In the year to the end of July, institutional money funds have increased at a 25% annualized rate. The asset-backed commercial paper market has grown from $50 billion in 1994 to more than $570 billion recently, expanding by $19 billion in June alone. “The financial sector is putting the pedal to the metal,” Noland says. “All the consumer lenders that I follow are lending aggressively. I have a hard time believing we’re going to have a real slowdown.” Growth in M-3 tends to lead consumer spending -- both on stocks and on consumer goods. “There’s a strong correlation between M-3 and liquidity in the credit market and, generally, that is highly correlated with the stock market. The last few months may be the exception,” Noland observes. The growth in M-3 preceded the explosive stock market rallies in late 1998 and again earlier this year (note the Y2K-induced spike in M-3 on the first graph). The second graph shows M-3 as a leading indicator of personal consumption expenditures. Although we don’t want to read too much into short-term blips in the money supply, or to play favorites among the monetary aggregates (we love them all equally), it might be premature to bet on a nice, soft landing. >>
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..."it might be premature to bet on a nice, soft landing" - now that is an understatement.
I firmly belive that we've got an unsustainble market & economic bubble - we can not maintain present market multiples as the rate of growth is unsustainble - and if it were; it would surely be strongly inflationary.
We've got a "subprime" consumer debt crisis that is a "tip of the iceberg" for this economy. Few people realize what a huge portion of this latest cycle was built upon a literal explosion in the record expansion of suprime mortage, consumer, auto & credit card debt in this country. - the subprime customer unlike many "conforming" consumers - virtually recycles all of these debt proceeds back into the consumer marketplace. - trust me; this "bubble" is also about to pop.
- anyone remember Cityscape financial (SargeK, Michael Price surely does ?), how about The Money Store ? - remember all those Jim Palmer TV commercials every morning on the Today Show ? - The Money Store was on TV more than Ford, or GM auto commercials were . Also of late; First Union Bank has nearly been brought to their knee's by the Money Store acquisition and the resulting problems with their subprime loan portfolio's.
And then there is the posterchild - Conseco. Conseco was brought to their knee's by their subprime acquisition of GreenTree Finaicial. Anyone rember GreenTree ? It was Wall Street's fiancial darling in the mid-late 90's. Their CEO was on many business magazine cover stories - I beleive he became the highest paid CEO in America. - well; the entire group of subprime lenders has basically crashed & burned. But ! - where the tip of the iceberg lies; is that a substantial amount of America's banks - soon followed the GreenTree's, the Money Store's & the Cityscape Finaancial's into this subprime abyss & their stories have been kept under the rug; because of the size & strength of their other asset bases.
Let this economy slow even just a bit. Let employment fall just a bit & this "Subprime House of Cards" - will come crashing down & when it does - it will make the S&L crisis look like a walk in the park.
Trust me on this; it is a nightmare waiting to happen and the dam is broke (Cityscape, GreenTree/Conseco & First Union/The Money Store.
I think we are in a state of denial; as we are in the final stages of both a Market Bubble and a consumer spending bubble - that led to a consumer debt bubble - that led greedy banks into a subprime lending bubble & now; that consumer is feeling the pinch given all of these Energy related cost increases to a monthly budget that allready has no cash savings cushion - this same consumer is going to be a huge wage & beneifit cost increase catalyst right here at this still hot stage of the economic cycle. But; once these wage & benefit increases get absorbed into the system & the traditional corporate cutbacks soon ensue... the bubble breaks ....and the downward cycle has it's birth.
I graduated & entered the workforce at the end of the Jimmy Carter - beginning of the Regan era - saw 19% Prime Rates, double digit mortgages, 20% Auto Loans and remmber $750+ Gold as well as a prior Energy crisis & recession...
We are once again about to enter a vicious cycle and the writing is clearly on the wall imho.
- we are now entering the final stage of a market & economic top blow off in my opinion. We will see strong wage & benefit increases lead to one final consumer spending top - of which this present environment politically & economically leading into the Presidential Elections has staged perfectly.
Then those "impossible comps" that much of Wall Street faces - along with all of this wage & benefit pressure will lead to a series of necessary & appplauded by Wall Street - cutbacks & corporate restructuring & cutback's.
That will lead to rising unemployment & will unleash the recessionary downward cycle of the economy - which is going to burst the subprime lending/debt bubble as well.
How soon we forget.
I honestly think we have perhaps a 9 month window to exit this "bubble" imho. The exodus, or non-participation in the bubble by Buffet, Robertson, Soros etc has been ridiculed, or ignored. Their exit/non-participation is ominous - when investors of this stature see "irrational exhuberance" as Greenspan did; it does not matter if their timing is wrong as they are allways historically among the first to exit; it is merely a last call- wake up call to the rest of us that we should heed.
There is a tremendous opportunity for those who do want to try to stay in the game during the final "two minute warning" here - in essence trying to time their exit - as I am; but you definitely do want to be on the sidelines (and in Gold Stocks) when the whistle blows on this one...
Mr. Bear has merely been in hibernation - he's not extinct & contrary to popular opinion; he's not a myth.
Yes; history is about to teach all of those in "denial" a powerfull lesson...but; I am sure that this lesson - just like the one's of a mere 20 years ago; will also - soon be forgotten...
PS - I wonder if those who rode Gold to $800 an oz & the Gold mining stocks to 10 baggers, were called Gold Bugs; or just plain lucky - back then (VBG) ? |
