April 30, 2005
Fed Shocker--Greenspan Caught Manipulating Currency
While Washington officials give speeches accusing the chinese government of accumulating vast reserves to manipulate their currency, the real culprit is just down the street at the Federal Reserve. According to the April 28 issue of the Fed's report H.4.1, Factors Affecting Reserve Balances, on Wednesday, April 27, the Fed owned $718.6 billion of U.S. treasury securities, considerable above the $659.1 billion in reserves owned by China at the end of March.
Manipulator!
The Fed would say, of course, that they don't own the securities to manipulate the dollar, they own then to manipulate bank reserves. It is how they control the growth in the supply of credit and various measures of the money supply for the U.S economy. They are correct. It is also correct that China does so for exactly the same reason.
This is all moot. U.S. pressure has already forced Chinese policy to change. The yuan actually broke through the fixed band of +/- 0.3% for twenty minutes on Friday. A revaluation could come next week, a holiday period in both China (May holidays) and Japan (Golden Week.) I am just sure that George Soros is licking his chops waiting for this one.
There is a serious use for the Chinese resrerves. According to a Standard & Poors report released yesterday, the recapitalisation of the Industrial and Commercial Bank of China and the Agricultural Bank of China, two of the country's largest lenders, could cost Beijing up to $190B. They have used used capital injections from foreign exchange reserves before as a way to make banks more attractive to (foreign) strategic investors. (Last year, Beijing transferred $45bn from its foreign exchange reserves to BoC and CCB.)
There may come a day soon when we are very happy the Chinese central bank has all those reserves.
JR
Posted by John Rutledge at 3:07 AM | Comments (2)
India's Interest Rate Increase Won't Slow Growth
Today India raised its equivalent of the Fed funds rate by one-quarter percent to 5%. It won't slow the place much. Inflation has already slowed to 5% from 8-9% last year.
GDP will grow 7-8% this year, driven by huge increases in capital spending. And business borrowing is soaring. Borrowing by medium-sized and large Indian companies rose by Rs322bn ($7bn) between April 2004 and January this year, compared with only Rs17bn a year earlier.Non-food credit, which includes both retail and corporate borrowings, grew 26.5 per cent last year, against 18.4 per cent in the previous year its highest level in more than half a century, but for an aberrant year in the 1980s.
The credit boom comes alongside a burst in capital-raising on domestic markets, in which Indian companies are poised to raise record sums from initial public offerings. An estimated Rs400bn worth of IPOs is to be offered this year compared with Rs214bn in the 12 months to March.
Why are they investing? Because theie government understands that growth requires capital. They have done a number of things to reduce risk for foreign (U.S. and European) investors, including reducing foreign ownership limits on land and telecom companies. And they have invested heavily in telecom and technical education, both of which help their fast-growing professional service sector expand its business in the US.
Now if only our government would get the message and do the things to keep the capital here at home.
JR
Posted by John Rutledge at 2:39 AM
And We Thought U.S. Labor Markets Were Tough!
I love the information highway. This morning I was sitting in front of the 6 screens on my desk, bathing in real-time news from all over the world looking for factoids that might help make sense out of the organic jigsaw puzzle we call the global economy, when I ran across an interesting piece in the South China Morning Post titled "South African farmer convicted of throwing worker to lions."
JR
Posted by John Rutledge at 2:28 AM
I'm Not Making this Up
If you were the head of the National Pork Board, where would you choose to hold the 2005 World Pork Congress?
You guessed it. Today the porkers wound up their 2 day conference in Washington, DC. Was it merely a coincidence that both the House (214-211) and Senate (52-47) approved the $2.6 trillion budget the day their conference started? I don't think so.
JR
Posted by John Rutledge at 1:38 AM
April 29, 2005
Butt Ugly GDP Report
Thursday's advance GDP report for the first quarter sent a shock through the stock market, driving small cap stocks down by almost 2.5% in one day.
It wasn't just the number; it was lower than last quarter's 3.8% and 2004's 4.4%, but 3.1% is still respectable. It was what was underneath the numbers. Once you strip out the $82 billion inventory accumulation that added 1.2% to GDP, both real final sales of domestic product and disposable personal income only grew at 1.9% annual rates during the quarter.
After Wednesday's lousy March durable goods report (-2.8%) it's no surprise that Personal Consumption spending (3.5%) slowed from the previous quarter. Durable goods consumption didn't grow at all this quarter, with a decline in autos offsetting strong furniture and household equipment sales. Nondurables (4.9%) and services (3.6%) turned in decent numbers.
Gross private domestic investment grew at a strong 12.5%, but more than half of it was inventory increases; fixed investment, nonresidential investment, structures and equipment and software all slowed. Equipment and software investment growth, which averaged 18% over the last two quarters, slowed to 6.9%. Residential investment stayed strong, up 5.7%, reflecting the housing boom driven by cheap mortgage rates.
But the headline story is in the trade accounts. Real exports of goods and services grew 7.0%, making a 0.69% contribution to GDP. Imports (16.1%), however, grew more than twice as fast, a 2.19% drag on GDP. Most of the damage was in goods trade, reflecting the higher cost of oil imports, higher commodity prices, market share losses for domestic auto makers here and a strong market for imported electronic goods. This will intensify pressure on China to revalue their currency, running the risk of a slowdown in China's growth rate.
Prices rose at about a 3% annual rate for both GDP and domestic purchases. Worth noting, prices of durable goods are actually 10% lower this quarter than their average level in 2000, a result of rising productivity and increasing competition from companies in Asia.
This is not the end of the world. GDP this quarter was 3.6% higher than it was in the same quarter last year; investment spending is 11.6% higher. But the weakness of demand under the inventory numbers suggests that policy makers should be more concerned with keeping the economy growing than taking away the punch bowl at this time.
For stock markets it is also important to note that profits look strong. We don't have corporate profits numbers for the quarter yet, but proprietors' income (small business profits) was $961.8 billion, up from $934.9 billion in the fourth quarter and $902.9 the quarter before that. Corporate profits this quarter are coming in strong as well. As of today, with 359 out of the 500 companies in the S&P 500 reporting, first quarter profits have increased at an 18.5% annual rate, considerably higher than analysts had expected just two weeks ago. The increases were strong across most sectors, except for Consumer Discretionary (autos), Utilities (energy prices), and telecom services (outdated anti-capital regulations). Of these, it is important that we get the telecom sector back on track to build the high-speed networks we need to compete globaly. Ccongress has announced they will rewrite the telecom law this year. If they get it right we have a lot to gain.
I believe the strong profit growth will continue due to two fundamental drivers. The first, and most impolrtrant, is that there has been a permanent change in the terms of trade in the US between capital owners (stockholders and proprietors) and capital users (workers). Two decades ago it was difficult to move capital across national borders. Today it is cheap and easy to do so, and governments don't even know when you are doing it. That means capital is inexorably draining out of the US, Western Europe, and Japan, and into China, India, Vietnam, and other high-return emerging economies. Good for our stock market, bad for the guy left behind in Indiana with a wrench in his hand wondering where his factory went.
The second reason is important in the short-term. In the past year, banks and non-bank lenders, such as hedge funds, mutual funds, pension funds, and insurance companies, have turned on a firehose of lending to small private and public companies in the US. That increase in liquidity will show up as stronger performance and increased profits later this year. These profit gains will be increasingly visible in small companies, which rely on private lenders for their working capital. That's why today, when the prices fell, I bought a good sized chunk of call options on the Russell 2000 small caps.
JR
Posted by John Rutledge at 2:36 AM | Comments (1)
April 28, 2005
Japan March Industrial Production Down
Just spoke with my delightful daughter Jessica, who is up late working in Tokyo (moshi-moshi). Today's weak growth numbers to the contrary, she reports an increasing awareness among Japanese managers of cash-flow, asset management, dividend, and shareholder pressure issues that are all good long-term signs for Japanese equities.
We got more numbers today (well, actually tomorrow, given time zones and all) that show (showed, will show? I hate the time zone thing) March Industrial Production fell 0.3%, after -2.3% in February. Retail sales fell in March too, by 0.9%; the BOJ announced the Japanese CPI will fall again (0.1%) this year, the 8th year in a row. Apparently, they are trying for a personal best. Producer prices, however, increased, due to higher energy and commodity prices. Employment fell by 270K.
Korean Industrial Production in March was up 3.8% annual rate. The difference? Korea is relatively much more driven by demand in China, where consumers this year will buy 500 million new cell phones. Japan is more tied to US demand for cars and electronic goods.
The BOJ is a contributing factor in the Japanese slowdown. Although they kept rates flat at today's meeting, recent votes have not been unanimous and there is talk of ending the quantitative easing policy that has helped stabilize falling land prices since March 2001.
I am long Japanese equities today. Like the longer term story, not the short-term one. Hmmm. Stay tuned.
JR
Posted by John Rutledge at 1:49 PM
Private Equity Irony
Does anybody else see the irony in this story in today's WSJ about the prospect of private equity firms going public so widows and orphans can get in on the action?
In recent weeks, investment bankers from Morgan Stanley and Goldman Sachs Group Inc. have approached top private-equity firms including Carlyle Group, Texas Pacific Group and Kohlberg Kravis Roberts & Co. with a novel idea: taking their partnerships public.
I know these guys. They are very smart. These are great business--for them. They make great investments--for their partners. But rest assured, if they think it's a good idea to sell a piece of their own companies to you, it's a really bad idea to buy it.
It is evidence, though, that the markets have gotten silly again. Yield-starved investors have crammed tons of money into hedge funds (just wait; they'll be the next IPOs), who have been exhibiting the type of gaping behavior toward lenders that baby birds show mother birds returning to the nest with a worm. Only today, hedge funds are gobbling up anthing with current yield, most notable (relatively) high-coupon leveraged loans. Banks and mezzanine lenders are as aggressive today as they were in 1999.
This is great for short-term growth--today's wimpy GDP number notwithstanding. But it's loading the pipeline with paper that's not going to look so good in 2 years or so.
Warren Buffett tells us don't ask the barber if you need a haircut. Don't buy the barber shop either.
JR
Posted by John Rutledge at 11:12 AM
Bolton Correction
I just learned from a White House insider that later today the White house Press Secretary will hold a press conference to correct a typo in an earlier White House memo. Apparently, the President meant to appoint Michael Bolton, not Josh bolton, as U.S. Ambassador to the United Nations, thinking his terrific hair, soft-spoken manner, and great singing voice can help us win back key allies. Congressional insiders predict a quick approval in the Senate, where key members of the Committee on Foreign Relations, Barbara Boxer and John Kerry, think his music is sweet.
JR
Posted by John Rutledge at 10:19 AM
Suggestion to President; Appoint Spitzer Ambassador--to Anything.
Elliott Spitzer achieved his goal today for his new campaign to go after mortgage lenders. He landed the lead paragraph on page 1 of today's Wall Street Journal. For a man running for Governor, that's like winning the Trifecta. The road to Albany is paved with free advertising.
I have a better idea. Mr. Spitzer has so distinguished himself that I think the President should appoint him as Ambassador--to a small country with no political power, no natural resources, and no growth potential, where he can't hurt anything, like France or Germany. We should stop wasting our time on small things like social security reform. This Spitzer appointment alone could increase the U.S. growth rate by 1% per year.
Even better, Ambassador to the UN. They have no power at all. In a straight-up showdown for abrasive tongues, Josh Bolten wouldn't even get to draw his weapon.
His latest gambit (I always wanted to use that word) is brilliant, going after mortgage lenders. Everbody in America has just refinanced their house. The arithmetic of points, rates, yields, caps, floors, indexes, pre-payment penalties, and fixed/variable is utterly unintelligible. And nobody likes banks, not even bankers. This puts Mr. Spitzer about halfway between Robin Hood and Rasputin. It's a sure winner.
Except for the economy and stock prices. Rasputin is not so good for business. For every investigation, there are a dozen quiet conversations with CEOs of companies that might be investigated, not just about lawful behavior, but also about contractual matters like the level of your prices. This is not good.
Much more important, however, is why this is happening. McCarthyism was not created by Joe McCarthy, it was created by people's fears. He simply harvested the gains. Today people are still scared, about terrorism, about gas prices, about outsourcing, and a thousand more things. Just count the number of people who sniff your shoes and xray your pockets next time you go to the airport.
Those fears are a bigger risk to America than the terrorists. They are keeping us from living our lives. I'm going to let you in on a secret; you are going to die anyway. We need to quit whining and get back to work.
JR
Posted by John Rutledge at 9:09 AM | Comments (1)
April 25, 2005
Chinese Growth Risk
Today there were stories on my Bloomberg about Asia growth slowing to 6%, declining March job ads, retail sales and services demand in Japan, the BOJ deferring end of deflation forecast by a year, slowing growth in Germany, and the likely end of the commodity price run-up (The CRB index down 4.1% in the past month and shipping rates for dry, bulk commodities have fallen 29% sine their December 6 peak), US chest-thumping about China's need to revalue the yuan, and a signal from a Chinese official that they may actually to so...someday.
When you put the jigsaw pieces together, they tell one story. People are starting to worry about Chinese growth. Keeping the Chinese economy growing fast enough to contain the growing political pressures that erupted last week over Japan (see LA Times, Passions Could burn Beijing).
My friend Jim Flanigan, the Economics Editor of the LA Times, wrote an interesting piece this weekend, Globalization Is Doing a World of Good for U.S, and another recent piece on the misleading trade deficit data, both of which point out how US companies and workers benefit from trade.
As I discussed with Jijm last week, however, not everyone in the US benefits from trade with China, which is why there is such a strong political lobby pressing Congress to force China to revalue their currency. The worker left standing in Indiana with a wrench in his hand, wondering where his factory went, is not a happy camper.
A few thoughts on the subject I will write more about later.
1. China is pegging their currency to the dollar in order to attract foreign capital. Pegging effectively subcontracts Chinese inflation to the Fed and removes currency risk from the return calculations of foreign investors.
2. They should continue to peg. Attracting capital to grow fast enough to satisfy Chinese workers is the right thing to do.
3. Simple free trade arguments citing David Ricardo and comparative advantage are not convincing to people. If Ricardo were alive today he wouldn't even make them. More on this later.
4. US government pressure on China is driven by politics, not economics.
5. In the short-term, our main risk is doing something to inadvertently trip-up Chinese growth.
6. In the long-term, we are going to have to figure out whaqt to do when China and India are both larger than the US economy. Keep a special eye on Japan-China frictions over energy supplies, the issue I vote as most likely to lead to a serious clash in future.
JR
Posted by John Rutledge at 7:07 PM
Why Tax Reform is a Good Idea
A few facts about why tax reform is a good idea this year.
In 2006, the small business expensing limit for making investments in their businesses will shrink from $100,000 to $25,000. We need small business capital spending to raise productivity. Small business makes up more than half of GDP.
In 2009, the top tax rate on dividends will increase from 15 to 35 percent, while the tax on capital gains will climb from 15 to 20 percent. the stock market has increased in value by more than $3 trillion since the dividend tax cut was passed.
In 2011, tax rate relief, the new 10-percent tax bracket, death tax repeal, and the marriage penalty relief are all scheduled to go away. Tax rates will rise for everyone.
JR
Posted by John Rutledge at 7:01 PM | Comments (1)
Minimum Wage
Some interesting statistics on US workers earning the minimum wage from the Bureau of Labor Statistics, by way of my friends Bruce Bartlett and Jim Carter. A few factoids for you to chew on.
Minimum wage workers tend to be young. About half of all hourly-paid workers earning $5.15 or less were under age 25, and about one-fourth were age 16-19. Among teenagers, about 9 percent earned $5.15 or less. About 2 percent of workers age 25 and over earned the minimum wage or less. Among those age 65 and over, the proportion was 4 percent.
62% of minimum-wage workers work part-time. 7% of part-time workers earn minimum wage.
29% have less than a high school diploma.
60% are employed in the hospitality industry.
2.7% of all workers paid earn minimum wage today, down from 3.6% in 2000 and 8.4% in 1992 and 15.1% percent when the Gipper took office.
JR
Posted by John Rutledge at 6:44 PM | Comments (1)
German Economy Still Dead
The Ifo institute in Munich released a report today showing a further drop in business confidence to its lowest level in 19 months, pushing the Euro below $1.30 today. The report cites oil prices, but the real reason is the labor market. Unemployment benefits in Germany are higher than average wages in most countries in Europe; As a result, 12% of German workers are unemployed. Or should we say on vacation.
Germany will grow less than 1% this year, the EU just over 1%. There are only two horses left in the race the US (4%) and Asia (8%).
JR
Posted by John Rutledge at 6:31 PM
Existing Home Sales Up Again. Bubble Signs?
The March Existing Home Sales report released today by the National Association of Realtors shows big price increases. No bubble here, but the party is about over.
In March, 6.9 million homes changed hands at a median price of $195,000. To the delight of my real estate broker friends, that's +4.9% more transactions at an +11.9% higher price, than one year ago, which means real estate commissions increased by +17.4% in the past 12 months.
The biggest increases were in the West, +5.9% in March and +19.9% year over year ago. The Northeast, although +11.4% over last year, were down -3.2% in March. Guess the Wall Street bonuses aren't looking so good.
I am always more interested in existing home prioces than new home prices for three reasons. There are a lot more old houses than new ones, which makes the numbers more reliable. Existing home sales are less distorted by variations in lending terms in the fickle construction loan market. Finally, the total expected return on existing homes is a very important driver for the level of interest rates.
The key term above is expected. The expected capital gains yield (the expected increase in the price of a home the next year divided by its current price) plays the same role for investors managing wealth as does the expected capital gains yield on their stock portfolio.
What matters, of course, is comparisons of expected total returns on real estate, stocks, bonds, and the other assets people can own. These include estimates of their respective current yields; the service yield of the house (roughly the value of living in the house divided by today's price), the dividend yield of the stock, and the current interest yield of the bond. All sorts of other things matter too, including transactions costs (for fellow geeks, like my friend Paul Davis, transaction costs create a kind of arbitrage threshold for transactions, identical to the role played by Boltzmann's constant in the numerator of the exponent in Boltzmann distribution, which measures alternatively the probability of two particles crashing into each other or to a chemist the speed of a chemical reaction), tax rates on each asset, and liquidity.
Of these, expected price increases and changes in tax rates are the stars in the show. Not because they (analytically) matter more; because they happen more.
This is the analytical root of the link between expected inflation and interest rates, and explains why we should NOT measure that link using CPI inflation rates, as I wrote about the other day.
So why are interest rates so low today in the face of such huge home price increases? Mainly because the increases of last year don't imply they will go up gain next year. The big increases were caused by falling interest rates when owners capitalized future rental income streams at lower rates. Their behavior next year will depend on rates then too.
There are many people who think rates will rise a lot next year. They will be proven wrong. They get excited when they see a big CPI number, like the one we saw last week, and they sell the stock market. I think we will see very soft inflation numbers next year, which will keep long bond yields roughly where they are now. Stable bond yields should allow housing prices to come in for a gentle landing, maybe up 3-5% next year with slower increases after that, but still with huge variations across the country driven by income fundamentals.
The private equity market gives us another piece of evidence that the big price run-up is over. I have been seeing a big increase in the number of businesses for sale in the construction and building materials sectors. I saw a residential construction business for sale today, for example, with $10 million in profits last year on $30 million in revenues. That 30% pretax profit margin is too high for a construction business, reflecting the builder shortage in today's hot market.
JR
Posted by John Rutledge at 3:25 PM
Bulgarian Real Estate?
This is in the small world department. I received an email today in CT trying to sell me a sale-leaseback interest in a Bulgarian resort hotel on the Black Sea coast.
The interesting thing is the pricing, $150K-500K for a one-bedroom condo, and a 7-8% cash yield. The price is higher and the yield lower than you might expect.
The Internet has made communications and advertising so cheap and reduced transactions costs to the point where arbitrage is very fluid today. That's why multiples in the US, China, and the Arab markets are all within a club length.
The US is not a closed economy any more. Foreign investment risk is decreasing and capital is moving where it earns returns and is appreciated. This is an unstoppable force driving returns, prices, and wages closer together. So when the market gets worried about the return of inflation here, like they did last week, they are making a mistake; take their bet every time.
And no, I am not going to buy property in Bulgaria.
JR
Posted by John Rutledge at 1:47 PM
April 21, 2005
March CPI Spooked Stock Market; Bond Market Got it Right
Stock and bond market investors reached totally different conclusions today when they read the March CPI report released by the BLS.
Prices were up +0.6% in March, 3.1% over a year ago, a 4.3% annual rate of increase for the first quarter. The big number spooked the stock market; the DJIA (-115), S%P 500 (-15.9) and Nasdaq (-18.6 were all trashed. But the bond market yawned. The ten year treasury yield closed at 4.18% for the day, just where it opened, as did the 30 year Treasury at 4.55%. What gives?
In this case the bond market got it right. There is nothing in the CPI report to suggest that demon inflation is back. The big culprits were energy (+4.0% in March, +12.4% for the year), and Transportation (i.e., energy, +1.9% in March). Taken as a whole, it still looks like CPI inflation will remain 2-3% for some time.
Communication prices continued to fall (-0.2%) across the board, in spite of all the whining going on in Congress this week about mergers and too much concentration in the telecom sector. The communications and IT sectors are incredibly competitive today.
The reason people are continually spooked by the monthly price reports is they don't have a clear understanding about how and why inflation expectations impact interest rates. Too much textbook; not enough thinking.
I have been interested in this subject for 35 years. I wrote my Ph.D. dissertation on the subject. It was years later, after I had written a book on the subject as well, that I figured out I didn't have a clue how it worked.
The textbooks today all tell you the nominal interest rate is equal to the real interest rate plus the expected rate of inflation. They refer to this as the Fisher equation, after Irving Fisher, who supposedly invented it. Most economists believe Fisher meant that changes in inflation expectations drive nominal rates up and down, leaving real rates--hence the real economy--unchanged.
The truth is very different. In 1972, while writing my dissertation, I read every single work Irving Fisher had published, then I corresponded with his son and read his unpublished manuscripts and notes as well. (OK, call me anal.) What Irving Fisher actually believed was that changes in inflation expectations had an even bigger impact on real rates than on nominal rates, and that they had important effects on the real economy by creating credit cycles. In this sense Fisher's work was essentially Austrian, closely tied to Wicksell's natural rate and, somewhat later, Keynes own rate of interest.
I finally worked out the linkage between inflation expectations and interest rates on a train while travelling to give a lecture to the GE Pension Fund, run by my friend Dale Frey. Dale was so smart and such a perfectionist in his own work that I wanted to get it just right.
The connection between inflation expectations and interest rates works through the prices of storable tangible goods. If a person wants to transfer purchasing power from this period to next period, he must do so by holding something that lasts longer than one period. We call such things assets. The investor has a lot of choices. He can hold a stack of $20 bills. He can hold a bond (IOU) promising a fixed number of dollars next period. He can hold shares of stock. Or he can hold existing real goods, which he can sell or use next period.
Asset markets will force asset prices to the levels that make these alternative strategies for transferring wealth have roughly comparable results. In particular, abstracting from credit risk and tax considerations, the total return on holding the bond (the nominal interest rate) should be about equal to the total return on holding quantities of real goods, which is equal to the sum of their service value (you can live in a house or drive a car), less depreciation (goods wear out), plus appreciation, less storage and maintenance costs (rent on a garage). The appreciation term is where inflation expectations come in. If people expect the price of their holdings of houses, cars, and other tangible assets to increase by 10% next year, then the nominal interest rate must be that much higher for bondss to remain competitive with real goods as an asset.
Note that we are referring to the appreciation of the stock of existing goods, because that is what people can actually hold. The CPI does not measure this, nor does the PPI, the GDP deflator, or any other price index measuring the price of new products.
59.76% of the CPI is comprised of service prices--haircuts and guitar lessons. Services are inherently unstorable; their depreciation rate is too high. For that reason, real interest rates calculated from CPI data misrepresent inflation pressures on interest rates. For the same reason, the yield on TIPS, inflation-indexed Treasuries, tells us very little about inflation expectations or pressures on nominal rates, because the Treasury uses the CPI, not storable tangible goods prices, in their adjustments of principal.
What really matters for interest rates is sustained increases or decreases (think Japan) in the prices of land, commodities, and long-lived structures. Not one-time increases like we saw last year, sustained increases. This requires the support and cooperation of a central bank. That is not going to happen in the US today.
When the stock market gets spooked by a CPI report, like today, think of it as a going back to school sale and load up on the stocks of your favorite companies and sectors. That's what I did today.
JR
Posted by John Rutledge at 5:21 AM | Comments (1)
April 19, 2005
March PPI Report
I'll never figure people out. Stock market mavens decided that today's March PPI report from the Dept of Labor was great news because core inflation was so low. The Dow Industrials and S&P 500 both increased by 0.6% today, and the small caps bounced back 1.6% from the whipping they took last week.
Indeed, if you read all the way to page 14 you will see that prices for finished goods other than foods and energy edged up by only 0.1% in March. On pages 1-13, however, every other number rose a lot, mainly due to higher oil prices. Finished Goods rose 0.7% in March, 4.9% year over year (yoy). Intermediate Goods rose 1.0% (8.7% yoy), and prices for Crude Goods (no, not back issues of Penthouse magazine, this refers to commodities like oil) jumped 4.3% (10.8% yoy). Crude Energy Goods prices jumped 5.5%% in March, up 28.4% over the past twelve months.
I have even more exciting news. The PPI for Finished Goods Less All Goods Whose Prices Increased actually fell for the month.
Overall, the report was not very surprising. Basically, it showed an economy still trying to digest last year's huge oil price hikes. It shows the declining car and truck prices that have contributed to GM's credit quality problems. And it shows the softening of metals prices which accompanied the recent escalation in the rhetoric out of Washington over the trade deficit with China, Chinese growth, and US pressure on China to revalue their currency.
There are two additional things I want to point out in the report. Prices received by commercial bankers decreased 6.1% in March, after declining 3.3% in February. This was the manifestation of the dramatic shift in behavior among both bank and non-bank (mutual funds, hedge funds, insurance companies) lenders over the last 10 months. From December 2000 to May, 2004 banks collected $230 billion more from business customers than they loaned, which contributed to the jobless recovery phenomenon.
Since last May banks have reversed course, increasing business loans by more than $70 billion. Indeed, direct loans from non-bank lenders now make up about 75% of new business loans to middle market companies. Competition among lenders is fierce. Lenders have dramatically reduced credit standards, including fees; hence the number in the report.
Needless to say this has driven transaction prices up to silly levels and has already laid the eggs that are going to go bad in a year or two. But for now it means big growth and a strong stock market.
The socond observation is in the fine print. Prices for both Telecommunications Services and Telecommunications Equipment decreased by 0.3% in March, and are both down over the past year, a reflection of the dire situation in telecom capital spending in the US. Meanwhile capital spending in Asia is soaring, which is why the US has fallen from #1 to #14 in global telecom network speed.
Congress has announced they plan to rewrite the telecom law this year. They had better hurry while we still have a telecom capital goods sector that speaks English.
JR
Posted by John Rutledge at 11:47 PM
New Food Pyramid--It's About Time!
Good news. The Dept of HHS today released their new food pyramid. Hats off to Tommy Thompson on this enhanced version.
There are now only four food group; pizza, nachos, chicken wings, and beer. The new instructions are easier too. Pick any one of groups 1, 2, or 3, and consume with plenty of group 4, the only strict daily requirement.
HHS also found that we can skip that exercise stuff. Watching sporting events in person or on wide-screen TV or trading stocks generates all the stomach acid you need to eat away any fat that you may otherwise acquire from groups 1, 2, 3, and 4.
yours in fitness,
JR
Posted by John Rutledge at 11:31 PM
Computers for Kids
Life gives you bitter and sweet in the same mouthful.
In recent days I have tasted both. My mom passed away, gently in her sleep, at age 85. She was afflicted with Alzheimer's Disease, and was just at the point where she was having difficulty recognizing family. Broken hip, surgery, rehab, viral infection, and heart failure took her away at just the time I believe she would have chosen. On her last day she sang songs with a group of ladies after dinner; one of the ladies played the piano with the aid of a song list taped to the piano. The last song was God Bless America. My brother says that mom grinned from ear to ear when she sang it. That night she went to sleep and left us. Tom and I think she is dancing with dad now.
At mom's funeral services I met people I had never known, one of mom's childhood friends, someone she went to grade school with (mom was only able to go to school through the eight grade, which may be why she was so committed to educating kids later on), and a lovely, bent-over 90 year old man named Mario who told me mom was the maid of honor at his wedding.
I want to share another sweet moment with you. A man introduced himself as Principal of the local grade school. My mother wasn't exactly easy to get along with for adults, but she loved being with little kids. Five years ago my parents built computer centers for the 3 grade schools in their town so the kids could learn the things they need to get good jobs when they grow up.
I had been worried about how the schools would replace the computers when they fell apart from all the little fingers. In an Illinois town of 1000 people that had been abandoned by the factories long ago I knew money was tight. Turns out I didn't need to worry at all.
The principal told me the kids' parents had become so convinced their kids needed to learn that they have held bake sales and fund raisers to raise money for new machines, moving the old PCs into the classrooms. The parents have even been assembling PCs from components themseslves, which brings the cost of a new PC down to just $300. Now every classroom from K-5 has a PC in the room. The young ones use them to learn to read.
Mom would have loved knowing she had planted a seed for the school kids that took root and is still growing through the efforts of their parents. She knew that we can't afford to let our kids grow up to be unskilled workers today. So on behalf of mom I have to ask. Is there a school in your town where the kids need help too?
John
Posted by John Rutledge at 7:59 PM | Comments (1)
April 11, 2005
News Bits
Currency Meddling Won't Help Growth
China posted a $16.58 billion trade surplus for the first quarter, compared with an $8.43 billion trade deficit a year earlier, helped by a surge in the country's textile exports.
Chinese trade is going to be a lightning rod in Congress in the coming months. Last week the Senate voted 67-33 for an amendment aimed at Chinese currency policy that would slap a 27.5% tariff on Chinese goods if Beijing didn't revalue its yuan after six months. Senate Majority Leader Bill Frist, R-Tenn., agreed to a vote on a stand-alone currency bill no later than July 27. House members are also weighing in. Rep. Duncan Hunter, R-Calif., and Rep. Tim Ryan, D-Ohio, unveiled a bill Thursday defining foreign exchange manipulation as a prohibited export subsidy. It would set guidelines for U.S. agencies to sanction China and protect U.S. industries. China's currency peg has been 8.28 yuan to the dollar since the mid-'90s.The U.S.' 2004 trade deficit with China hit $162 billion. That's one-fourth of the U.S.' record $617 billion trade gap.
I think this push for Chinese revaluation is a big mistake, but that won't stop it from happening. China's fixed exchange rate is not currency manipulation; it is the method they have chosen to conduct their monetary policy. When china buys a dollar of T-bills, it issues a dollar's worth (8.3 yuan) of Chinese bank reserves, which shows up within a year or so as higher Chinese prices. If we force China to revalue, Chinese prices will fall. This will undermine efforts to make US goods cheaper. More importantly, it could bring Chinese growth to an abrupt halt, which would push commodity prices, and US growth and stock prices, lower. We don't have enough history to know what will happen if China tightens monetary policy.
The truth behind the numbers is that the US is losing its competitive advantage in technology and communications equipment. Congress and the FCC have regulated the US telecom industry out of capital spending, which has shifted the focus for R&D to Asian buyers. Congress has the chance to repair the damage this year by rewriting the obsolete Telecom Act of 1996. Let's hope they have the courage to do so.
German shootus footus strikes again
Germany's government wants to impose minimum wages to stop migrant workers from Eastern Europe from undercutting German pay levels.
And people wonder why the EU can't seem to grow as fast as the US and Asia! Migrant workers from the East are the only positive thing going.
It's the Oil Reserves, Stupid
China must protect Japanese, warns Koizumi as Chinese riot police guard Japanese embassy. Beijing has the responsibility to protect Japanese nationals in China and the weekend demonstrations were "extremely regrettable," Japanese Prime Minister Junichiro Koizumi said on Monday in his first reaction. Meanwhile the Japan times reported that Japanese East China Sea test-drilling would not to be swayed by unrest.
China's growth has created a voracious appetite for energy supplies, which has led to a confrontation with Japan over gas reserves in the East China Sea, otherwise known as the Sea of Japan. This has caused an abrupt change in Japanese attitudes toward defense policy; they are no longer content to trust the US to protect them. We need to keep an eye on this.
Breast Implants yes; Medicines no!
Spitzer issued subpoenas to at least two of the nation's three largest drug distributors in what appears to be a probe related to the pharmaceutical wholesale industry's secondary market.
The number of companies missing filing deadlines has jumped this year, with some blaming Sarbanes-Oxley compliance.
Meanwhile, the FDA is considering lifting a decade-plus ban on most silicone-gel breast implants.
Does any of this make sense to you? We need to end the witch hunt mentality before doctors are forced to go back to leeches and laudanum. No, I forgot, laudanum is outlawed too.
IP Law Getting Out of Hand?
A federal appeal court rejected an effort by J.M. Smucker to patent its process for making pocket-size peanut butter and jelly pastries called "Uncrustables."
Posted by John Rutledge at 10:11 PM