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Big Macro Discusses QE2 Impact On Pricing Power, Corporate Margins And Exporting Inflation Via The Renminbi Peg
Our friends over at Big Macro have put together the latest issue of their periodic newsletter. In this issue they look at the at seemingly inexplicable divergence between the VIX and the EURUSD 3 month implied correlation (never a good sign), the increasing delinquency rates across all consumer loan classes (as in buying but not paying, leading to companies like Netflix which made $7 million in cash in the quarter to have a market cap of over $8 billion), but most notably at the differential between commodity prices and the CPI, superimposed against inflation. What is uncovered is that while when unemployment is below 6% companies can increase prices faster than commodity prices can go up, at current levels of joblessness, it will be impossible to pass through surging input costs (whether these be in wheat, cotton, or rare earth minerals). This leads to the conclusion: "What does this mean for the inflation/deflation debate? If the FEDs QE program will continue to push up prices, companies can only squeeze their margins so much. The reason we are not seeing inflation today is that there is a lag in the feed trough from commodity prices to consumer prices, partly because companies have been able to temporarily save their margins by aggressive cost cutting. I think we are potentially set up for a big decline in returns for equity investors." The last statement has a linear severity with the amount of free money that Bernanke floods in the market in two weeks.
Full Big Macro observations (pdf)
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Everybody see Chinese GDP?
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aiJ_G_vYx9fo&pos=1
Better than expected. The march continues.
Did you read the link? Actually: a. It was in line b. futures are not reflecting "better than expected" c. attention now pointed at asset bubbles and inflation (read: allowing currency to rise... in baby steps)
If you believe the march continues, why did you sell AAPL?
Yes, that -1 point drop on the futures was really something.
Those without very strong faith, and long NFLX, should not look at this chart: http://www.bloomberg.com/apps/quote?ticker=BLOAQ:US.
But a P/E of 66 for any video rental business can make sense when our Stock-Broker-In-Chief has said things like, “On the other hand, what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”
It's ok El Presidente no comprende P/E (price/earnings) ratios and still gives investment advice to the entire country. He's just like any other salesman, a regular guy. Folks, most of our leaders are just regular people. Unfortunately, our world's problems appear to be well beyond the grasp of regular people. Therefore, I do not expect our leaders to come up with any real solutions. Honestly, do you?
Plan accordingly, friends.
--------------------------------------------------------
And while I am at it, is it any wonder that we see such low prices as the gas pump?
Pentagon plans $60 billion weapons sale to Saudi Arabia.http://www.washingtonpost.com/wp-dyn/content/article/2010/10/20/AR2010102006518.html
They aren't demanding increasing amounts of our fiat in exchange for KSA's only asset, but they sure seem to want even more weapons. Maybe my fellow worshipers of the God of Abraham* know something I don't? Act accordingly.
*http://www.brucefeiler.com/books/abraham.html
I hear McCain singing but do believe that he is tone deaf ...
NFLX, AAPL, PCLN, BIDU, etc.
No different than the hottest of the European lingerie supermodels.
No price is high enough.
And all that MBS happy crappy bring discussed looked AAA, at least to many finance fools to begin with as well. Can never tell a book by its cover seems to be the lesson thus far
Robo, the French take great care and pride in their undergarments. It makes the USA euqiv (Victoria, Fredricks, etc) look like trash. You want high quality, sexy quality garment for your girlfriends (yes plural), try LaPearla.
All gentlemen, US centric or not, should know where to go. If not there is always that charmingly over helpful & attentive sales staff. Even if we are raiders, of one sort or another at heart, that know where where we like to shop.
http://www.youtube.com/watch?v=W3ZHPJT2Kp4
Hi Robo,
99.9% of us respect your posts, it is the childern who don't like to be told they are playing with fire that are sticking their tongues out at you. Bad childern...
They prefer make up facts to the truth.
Please stop posting my home videos of mrs_horseman.
Right now, exponential rates of inflation in agricultural products is causing outsized moves in certain equity prices...CAT, DE, CF, POT, LNN, etc.
And speaking of "Animal Spirits" regarding NFLX
Italian Lotto Riverboaters are now betting $700,000/hr. for a chance to win a $235,000,000 jackpot.
Odds of winning are 1 in 600 million.....
Cannot stop the gambling fever when prices get outrageous....
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aIqUwAXgVamE
Robo~ Cat is loaded with orders in mining div. they just started outsourcing again to vendors 2 weeks ago. Expect big numbers the next few quarters ....
I mortgaged that pad to go all in long equities. And now THIS! I swear to God I thought someone was watching me when I was mowing the lawn before the refi guy came...and now you're telling me "it was a movie without me!" Money...the sacrifices we don't even know we make. In my next life I want to be a cubist...passionate...about cubism.
on a factual note "prices stay down because employment has remained stagnant." simple as that. once that turns around in a meaningful way (as i think it is in the process of doing right now) you will see prices firm. Singapore and Mainland China are anticipating this and that is why they have preemptively raised rates. As we enter into "the age of natural gas" along with "the Cloud" and "air logistics" I think you will see a flood of foreign investment into the United States as sovreign wealth funds realize "all those crazy expensive investments in weird oil projects were a collossal waste of money that will never be seen again." three words: "logistics, logistics, logistics."
"on a factual note "prices stay down because employment has remained stagnant." simple as that. once that turns around in a meaningful way (as i think it is in the process of doing right now) you will see prices firm."
Are you in a parallel universe? I see nothing 'factual' re your take on what is coming. In fact, I believe that you are dead wrong. Government workers and their higher than private sector pay is now levitating spending in the private sector. When 30+ % of public sector jobs are whacked by state/local governments we will see what a real recession/depression looks like....but, perhaps you think that more job losses will be long term positive for equities? To see the future of the US public sector employment simply take a look at what is going on in GB today.
Take note of what is happening in one state, Oregon, and extrapolate to the remaining 49 states. Here is a bit from Mish:
"Severe, Life Changing, and Consciousness Altering State Budget Cuts Coming"
"Oregon total payroll employment has not grown in 11 years, which is not unlike most of the rest of the US.
However, adjusting for OR population growth, payroll employment is back to the level of the early '90s.
But it's worse than that. Private payrolls are back to the level of '97, and adjusting for population there are fewer private payroll jobs per capita than the late '80s to early '90s.
And gov't payrolls over the past two decades have grown at twice the population/labor force growth rate.
Total OR employment is back to the levels of '04-'05 and '99-'00; however, adjusted for population/labor force growth, employment is down 10% from '00 and down 3.1% from '90."
and down the page:
"Now that local and state employment is necessarily being cut along with no growth or continuing contraction of private payrolls, and were OR gov't payrolls to converge with the differential rate of growth to private payrolls and population/labor force growth, OR gov't payrolls will be cut by 30-31% over the coming decade, implying further a similar cut in local and state budgets.
Extrapolating further at the trend rate of population growth, the per-capita reduction in gov't payrolls and spending will be around 40%, matching what is likely to be the same decline per capita in oil production/consumption, bank lending (and overall value of US assets), and US GDP (and states' GSP) that otherwise would have occurred from the '00 peak rate had the long-term trend rate occurred."
Link here: http://globaleconomicanalysis.blogspot.com/2010/10/severe-life-changing-and-consciousness.html
At one point it time I owned the oldest employment agency in Washington D.C.
ALWAYS, I repeat ALWAYS the government secton wages were 20% or more LOWER that Private sector. WHY???? Because the civil service had worker protection (all you anti labor union folks grab that one) that the private sector could/would not give. It was a trade, and everyone went along with that.... better pay or protection from job loss.
Well, something went very wrong somehwere in a plan that for a long time worked and now government workers make as much or more that private sector...have better benefits, better retirement, job security, etc...and private sector can not compete.
How can a 4th grade school teacher make as much as 60% of the corporation CEO's in the USA? How can a mid-level government agency manager make as much as a the VP of a fortune 500 company?
The box is upside down. Now, who is going to make this right and get the system to function equitably? The Republicans...the Democrats, Please..don't hold your breath.
When civil servants vote to keep their saleries rather that take a 5% pay cut and see 10% of their brother get the can as a result, it tells you clearly about the 'winner takes all' attitude that America breasts feeds daily and why you have not seen the worst yet.
Indeed, experience has once again proven wise words true:
"Democracy is often described as two wolves and a lamb voting on what to have for dinner. Democracy is mob rule. Democracy collapses when the majority discovers it can vote for itself treasure from the public coffers. Democracy is the last plateau of social order before anarchy."
Henry Lamb
Does anyone know what the lag period is between commodity prices and the impact on consumer prices? I'm a commodities trader, and my general perception is that it's 6-8 months. But I'm curious is any studies have been done.
Companies that are faced with higher input costs must eventually raise prices or lose money. In the past, when inflation hit businesses, especially small/med sized businesses, and they didn't have pricing power, they were eventually forced to go out of business. This led to even more people losing their jobs and increased the unemployment rate.
Thus the Fed's policy of creating inflation ultimately is counterproductive.
BOY O BOY did you come along at the right time! Ever heard of dominos?
You think it is just the FED? Just what is it you do as a commodities trader, plan to loose money on each trade so my company can stay in business?
You seem to have the picture flow chart down pretty accurate about what it does to business. So here is an ear full for you, since you seem to not know what you do to Main Street with each press of the button.
Our company supplied goods to 22 stores in nine states. Each store employed an average of 10 people. Our products alone took up an average area of 10 sf per store, and on average those 10 sf generated $8,000 per store per year. Not bad!
Then you traders crashed stabliity and drove up copper, you drove it up so high that we had to pass on that cost. That ingot price got doubled by the smelter, the drawing/forming company doubled that, so when we got it the price had raised tripple in 3 months. Add to that the OIL speculation that made transportation costs jump 30%, and suddenly we saw our production costs jump 30%++ in two months. Being the good American company we are, we discussed how much we could pass on ( or move to China, no joke). Turns out or retailers could not absorb more than a 5% increase with the retail sector under pressure and everything else they were buying going thru the roof as well as utilities and taxes. We passed on that 5% and ate the rest. That 5% increase from us had to be doubled by the retailer ( to cover business costs) and that became a 10% shelf price increase for our goods which sent sales to the dog house. All this in your magic 6 month time frame.
One year later, and 22 stores are now 3 stores. Over 220 employes are now 15. Now multiply that effect by the dollars that are no longer moving around, taxes not paid, mortgages not paid, tuition unafforable, cars not bought, no Friday night dinner and movie, etc. and the damage is unimaginable, unmeasurable.
So let me bring you up to date on the last 24 hours of driving up commodity prices. TIN...what at a record high? Again, in 60 days time our costs for this commodity has gone up 30%. Now Mr. Commodity trader, please tell me just what you think the effect will be.
Let me tell you. My partner and I are throwing in the towel...we won't be buying copper, tin, lead, wire, glass, cardboard, tape, ink, chemicals...nada. You win. The other stores will close, the rest of the employees will go on unemployment, the landlord can go to hell, the taxes don't have to be paid anymore, the accounts can go fish. And my partner and I...well we are applying for Social Security and going to let you figure out who is going to be buying all those commodities in 6 months from now. Good luck, hope you don't get downsized from no business.
best regards
blindfaith
Its not so much that the stock market goes up, its just that the US dollar is steadily devalued. The stock market just gets its dose of hot money first. Then the gov't gets their dose of hot money, and thats where you see the only wage inflation, the only capital expenditure, increases in spending, the only ones increasing their debt load, the public sector.
So we know where the psychos are, for the most part, in the Fed, Treasury, Wall St. banks, and in charge of the gov't!
Check out the new project! PsychoNews http://bit.ly/aPAuzS
Guess what ... General Mills is announcing price increases to offset rising commodity costs and Kraft will do the same. The squeeze on middle Americas wallets is beginning.
Maybe they will start to make wage payments in-kind....
But....there are no "equity investors" left are there???
I'm here... but ready to hibernate or something like that. The others are:
a) in Ben's helicopter or
b) under a bridge in fetal position
c) take your pick...
O/T: just highlighting that Sterling has regained the post of #1 whipping boy in the world of fiat. Great. The south of England will be overrun with grubby European tourists and the terrestrial martians, aka the Japanese. Can't wait.
Music to my ears:
Ronald E. Hermance, Jr., Chairman, President and Chief Executive Officer commented, "The continued low interest rate environment further negatively impacted our net interest margin in the third quarter. We believe that these historically-low market interest rates coupled with the expected second round of quantitative easing by the Federal Reserve Board will continue to place pressure on our net interest margin for the remainder of 2010. Asset growth in this environment is just not prudent. As a result, our total assets at September 30, 2010 remained virtually unchanged from December 31, 2009. Our loan portfolio has decreased slightly in 2010, not only due to our strategy to maintain a near-zero growth rate, but also due to the unprecedented involvement of the government-sponsored enterprises (the "GSEs") in the mortgage market. We believe that when rates eventually begin to increase and the GSEs lessen their involvement in the secondary markets, we will be well positioned to increase our loan production."
How the hell the Pension funds are NOT railing against the FED in opposition to QE2 is beyond me.... At the expense of the many, the parasites are saved.
Probably because they are connected and don't care. They big boys get their salaries and bonuses anyway. It's only the pensioners that lose, not the managers.
I also find it funny (not) that an honest bank (rejected TARP, really does try to responsibly serve the community by competitively lending to those that are worthy) is taking on the chin so the criminals can profit.
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.
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