Tuesday, May 13, 2008

What is going on?

I have been busy with other things, but I sense that the government statistics coming out have been cooked. The Fed keeps funding more and more liquidity toward entities that are illiquid and the market takes it as new money. No, it is cashing bad checks already written. The latest thing seems to be the retail statistics, which I believe to be down significantly instead of being as reported. For one, auto sales reveal more about what is going on than about any other item in the news. We are now down to normal, after being in a bubble for a decade. Next we will fall to depression levels and at some point we are going to see trouble in the retail commercial real estate sector.

I am getting a conflict and I just posted something about it on the Prudent Bear board. I saw where imported goods were up in price 6.8% for everything and 15% if you include metals and energy. What does Wal-Mart sell that isn't imported? I am having a hard time with this one because I doubt when you exclude food and candy that 10% of what they sell is domestic. 3% adjusted by fictional US CPI numbers would be a significant decline. Also, I just calculated the US oil bill to have increased by $21 billion a month roughly, using 14 million barrels a day and a $50 increase, which isn't that exaggerated. Why isn't our trade deficit worse? It isn't that big an increase in sales to overseas, as it is clearly a decline in imports other than oil and minerals. Someone ate a $21 billion slice taken by one product, oil. Maybe we are looking at 12 million barrels and $18 billion or maybe 12 million barrels and $40 a barrel times 30 for $14.4 billion, but there is a magical $15 to $20 billion missing a month which in retail means $500 billion a year once it is marked up or maybe 5% to 8% of all sales. The figures are a lie. In any event, the financial picture of the American consumer isn't that pretty at all.

Getting back to the consumer, it really amazes me that we have reached the point that either we attempt to spend our way to prosperity or we go broke trying. In any event, we are broke if we don't and broke if we do and the rest of the world goes down the drain with us. Why is a good question?

Lets take oil demand. If speculators are really running this market, they had better be hoarding their profit in the good they are trading. There is no way this is going on other than them taking delivery and running a corner on the surplus supply of oil by holding enough contracts to take delivery on the surplus. There is a problem if this is financed, as oil is a very inelastic good on the short run and just a minor surplus could cause the price to collapse. 5% of 80 million barrels a day is 4 million barrels a day, which is $400 million a day or $12 billion a month. It wouldn't take long for a corner to collapse, as it would run out of where to put this much oil together with the fact that it would take a huge position to squeeze the market. To carry such a position they would have to have enough cash to threaten delivery.

What I am saying is a 5% surplus in oil would cause the market to collapse in time. The US constitutes probably 30% of the consumer goods demand in the world. We are reaching a point where the US could temporarily collapse, which in a matter of weeks would cause the price of everything to collapse because the rest of the world doesn't have the interest, much less the income to consume this amount of goods. It would provide a domino effect in layoffs world wide that would cause a deflationary spiral beyond comprehension. I don't think we can avoid it.

Next is this banking mess. I have noticed the M-2 figures for the past 4 weeks and 3 of the 4 weeks have shown significant declines. We are in trouble here, as the Fed loans to the banks are for checks already written, not for lending purposes. The US credit machine is broken, which means the credit machine for the world is broken. When is China going to line up to buy more CDO's full of subprime mortgages? If there is no real subprime market to even approach the one we saw the past few years, how are consumers going to get cash out of their homes? It is the subprime demand that created the appreciation that allowed for cash out refinances and for cash producing sales. There is a lot more here, as this financing was piling up in accounts of corporations and speculators. Throw an extra trillion in free cash out there and see how sweet it gets. It won't ever be this sweet again for people my age. How is a consumer dependent economy going to get across the next street without the free money of the past? It won't and the boom in Asia will go down with it.

There are 2 camps out there and the first has to either be morons or lucky, the short or no recession camp. The really brilliant people are calling for a big mess. I am talking about Volker, Buffet, Soros and even Greenie. How can we not have a mess when the financial machine has lost its wheels? Maybe the government checks give us a bump, but the more likely thing is we just let it pass.

There is something besides normal inflation here. Inflation works when the money produced actually creates an additional demand, but when it only allows for the purchase of something at a higher price, the reason for financing goes out the window. I think that is what occurred in the late 1970's, and when this occurs, something is done to stop it. I think it will stop itself, as the wherewithal to pay isn't going up with the prices and credit this time.

1 comment:

skip sievert said...

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