Monday, April 27, 2009

Sunday Night Economic Assessment

The Consumption Index eased back off in the latest week, as scheduled natural gas flows into paperboard facilities (on which the index is based) pulled back sharply in the first business week following Easter/Spring Break. That brought the 28-day moving average (see chart) down somewhat, though still above year-ago levels.

The Production Index set its fourth recession-low in as many weeks, though it was off only slightly. Much of the Year-over-year weakness in industrial gas-flows (68%) comes from the steel sector group (See "Part 8" post on Investor Village CWEI Board), which is off better than 75% from year-ago levels. Nearly three-fourths (74%) of the YOY industrial weakness comes from the metals group (which includes steel).

The new Inventory Index suggested (if both the Production and Consumption Indexes are right) that industry has been using the recent spurt in consumption to clear out inventory-clogged supply channels, as opposed to increasing production. I am, however, leery that a rising dollar combined with lowered shipping costs might also provide an alternate explanation to the recent weakness in industrial & steel gas-flows. Waves of steel-imports have decimated the US steel industry in past periods of recessions and oil-price weakness. The same could be happening today.

Of greatest concern will be consumption. Gut feeling is the recent uptick in consumption was fueled more from "Free-Market-Based Stimulus" (falling gasoline & home-heating costs, falling commodities pricing, rising stock-market valuations, etc) than government stimulus.

That "Free-Market-Based Stimulus" could reverse (Markets will be brutal when they have to be). The energy markets could re-tighten at any time (Natgas fundamentals are hinting at the beginning of that right now on last weeks dailies... though Mondays weeklies and the EIA will have to confirm) and OPEC is apt to be getting antsy. The stock market could roll-over on emotional whim at any time. A couple of dry months could spike food & agriculture.

Providing vast sums of money to banks (so that they can lend more to already-tapped-out consumers) and vast sums of money for infrastructure (so states can repave with 12 inches of concrete rather than 4 inches of Asphalt) might make for happy bankers and lower road repair-costs ten years from now. But is that really going to re-invigorate the consumer to go out and spend more, so that stores can order more, so that factories can produce more, so that employees can be rehired?

Believe me, as a trader I can make a lot of bucks off of 12 inch concrete, but it will not make my kids a more economically-secure country. As a Christian, I would prefer to take the more economically secure country. It will make for happier kids, neighbors and friends.

I would really like to see something more direct... perhaps a payroll tax "holiday" aimed at the lower to lower-middle class (where the most spending bang-for-the-buck is to be had. At least on a short-term (and immediate basis). We are doing too-much tinkering in here... not enough genuine problem-solving.


Monday, April 20, 2009

Sunday Night Economic Assessment

Am playing around with another indicator, adding it into the mix with tonights report. This came about from a PM from one of our wiser board members, that thought that a measure of business inventories could be seen in the difference between the Production Index and the Consumption Index.

The theory here is that the difference between production and consumption is "banked" in inventories, and that a measure of business inventories can be gleaned by adding up successive weeks of production and consumption, much the way that a measure of ones bank account might be gleaned (with no knowledge of its beginning balance) by adding up successive weeks of deposits and withdrawals over time.

This should (in theory) have a shot at working fairly well because the "Production" and "Consumption" are both equally weighted (to eachother), and both seasonally adjusted... meaning the new business "Inventories" estimate should reflect the accuracy of the matching of the other two models, and should also naturally inherit the seasonal-adjusted nature of the Production and Consumption models as well.

The paperboard-based Consumption Index (in the latest week) continues to say the recession (in terms of consumers) is over, as it continues to extended its recovery above year-ago levels, as stock markets continued to recover. The Consumption Index is now approaching its national-election-convention highs, when America's Republicans and Democrats both put on their respective rose-colored glasses to view their futures under their respective parties candidates (and spent accordingly). Too bad the conventions couldn't have gone on for an extra year or two... it would have been prosperity for everyone!

The Production Index, as it has done for the previous three weeks, balked at the trend and slid to a new recession low.

The new business "Inventories" modeling gives a possible explanation for the discrepancy between increasing consumption and decreasing consumption... bloated business inventories. Following the close of last summers national political conventions, consumption collapsed at a faster rate than production, suggesting an accumulation of "unconsumed production" in business inventories. This excess of inventories would match well the stories that have been told both on the CWEI board and in the press, and may have to be worked off before the Production Index can come back to life.

Next week should also prove interesting... we are in the lull of Easter week, when some industrial facilities are down. Will be interesting to see if the Industrial gas flows on the CWEI board start to snap back as the new week progresses.

Need to keep those spenders spending...


Monday, April 13, 2009

Sunday Night Economic Assessment

The paperboard-based Consumption Index says the recession (in terms of consumers) is over, as it has now extended its recovery to just above year-ago levels, as stock markets continued to recover.

The Production Index, as it has done for the previous two weeks, balked at the trend and slid to a new recession low. We now have a serious discrepancy between these two indexes to consider.

Within the Production index (which is based upon pipeline-scheduled natural gas flows into many key industrial plants across the US), steel-plant flows are the main culprit... collapsing 75 % from year-ago levels, and off sharply from month-ago levels as well. Whether the problem is simply temporary plant shut-downs (we are now into the Easter holiday week) or something more serious for the steels (ie a wave of foreign dumping) remains to be seen.

The suggested weakness of the Industrial Index is well-supported by both electrical-generation flows (which are influenced by industrial activity) and the EIA's weekly storage reports (roughly a third of US gas-flows are for industry). The magnitude of the steel-plant weakness in the gas-flows is now adding probably 3-4 BCF per week to EIA-reported injections, and I would not touch a steel-stock as 1st-quarter earnings roll out (unless closely connected to concrete roadway construction, in which case it might be time to back up the truck).

Within the Consumption Index, I very much like the dynamics of the day-to-day scheduling (though I very much wish there were more paperboard plants reported by the pipelines), and I want to believe them to be accurate as well.

Seasonally, it is the norm for cardboard plants to draw more gas-flows in March than April (In preparation for Easter & Spring-break sales), then tail off starting in April. But April this year has remained strong, perhaps indicative of a strong Easter period for the retailers (as opposed to Christmas... which the gas-flows correctly represented as a disaster).

What I don't like is the divergence between the Production Index and the Consumption Index. Something looks off. But is it simply Easter-related industrial shut-downs, or a hint of something more serious? Right now (in this weekends model runs) I am unsure. And given that the upcoming week is Easter week, next weekends runs may be similarly inconclusive.

The consumer, though, appears to be doing OK.


Monday, April 6, 2009

Sunday Night Economic Assessment

Continued gains in consumer confidence were implied again last week as the paperboard-based Consumption Index pushed further above its Dec-2008 bottom to its highest levels since late September 2008.

The Production Index, as it did last week, balked at the trend... and slumped toward its February 13th bottom. Within the gas-flows (on which the production index is based) flows into steel plants were extremely week, perhaps representing easter-related or temporary resession-related shut-downs, or perhaps (more frearfully) representing increased foreign imports.

The combination of a stronger dollar (pushing down foreign goods pricing) and lower oil prices (ratcheting down shipping costs) could prompt a flood of imports into the US, further depressing industry in spite of strengthening consumer spending. If that were to happen, visions of the US consumer having to lift the whole world out of recession (to avoid a US industrial depression) would be realized. Once past Easter, we need to see both consumer spending hold, and industrial production to uptick, to continue this weak, fragile recovery.

This week I have included a bit of a mystery in the above chart. Take a look at the light blue line. Can you guess what it is?

Note the succession of lower-lows and lower highs. For the TA folks on board, what would a chart like this tell you? Would you invest in a stock with a chart like this? Or does this resemble a company in bankruptcy. No, it isn't Bear Sterns or Leahman or General Motors. It isn't even a stock. (Clue, the time-frame is compressed and the price exaggerated to fit the chart. The actual indicator starts at 12.81 on October 1980, peaks at 19.10, and ends at 0.22 on February 2009.

The above blue-line kind of reminds me of my grandmothers heart-monitor (when I was young) when she was in the hospital. We lost her the next day. But in this case, that blue-line could be said to be the heart-monitor of our countries financial health. It is the Federal Reserves "Discount Window", the Federal Funds Overnight Monthly Published Rate.

The problem behind this "US Heart-Monitor" is it is indicative of a need from the economy for ever lower-and-lower interest levels to stave-off recession. Like a drug addict needs higher-and-higher doses of his drug to "get high", the economy needs higher-and-higher doses of it's drug (Interest rate relief) to get its high (economic recovery). Some of us have been watching the Fed-Funds rate for a very long time, wondering what happens when zero-percent gets hit, and it's not enough. I believe this is why the Fed/Treasury are in panick mode right now... they sence that zero may not be enough, and are flailing around trying to find something else that might work... in fear of depression.

All this started back in the late 70's (when I first started trading) when US inflation was a really big problem. A man named Paul Volker (very respected at the time) was brought in to chair the Federal Reserve to fight inflation. Interest rates were tightened to restrict the growth of the United States' core money supply (M1) to halt inflation.

Since then, the means to stimulate the economy (get more money into the hands of spenders) has been to coax them to borrow to spend... through progressively lower-and lower interest rates with each recession or economic slow-down.

The result... consumers borrow and spend... the money goes to businesses & savers... who deposit the money back into the bank... for consumers to re-borrow and spend... the money goes to businesses & savers... who deposit the money back into the bank... for consumers to re-borrow and spend...

The government even joined the fun... engaging in deficit spending... the money went to businesses & savers... who bought government debt... issued for the purposes of deficit spending... sending the money to businesses and savers...

All this culminated in both a growing debt bubble (IOU's) and a growing asset-bubble (UOI's)... as both personal debts and money supply (M2) pumped eachother up. All worked well as long as growing IOU's equalled growing UOI's... though the inflation-hawks worried about the rapid growth of M2 & M3 (until the Federal Reserve got too scared to continue to publicly release its M3 measure), and the credit-hawks worried about the rapid growth of debt of all kinds.

Then came the credit crisis of 2008, and the dreaded "Mark-to-market".

As housing values plunged and the US sank into recession in 2008, loan-delinquencies shot up, and markets for mortgage-securities seized up as values plunged. Under mark-to-market rules, hundreds-of-billions, then trillions of bank assets had to be written off, while the homeowners (on the other side of the loans) retained the obligations of their mortgages. The result was that bank assets (UOI's) disappeared much faster than mortgage obligations (IOU's), creating a situation where (as I understand) the asset-bubble began deflating faster than the debt-bubble (in the eyes of thier respective holders), creating a negative balance (or charge against) the actual (M1) money supply.

As I understand it, it is concievable that the net temporary effect of this is that we may actually have little if any real net money supply, maybe even an effectively negative money supply, given the discrepancy between the unwinding of the two pools, and that may be behind the seeming panick of the Fed & treasury in their attempt at quantitative easing. It would also be behind the rise in the US dollar.

Given the growth in US population, and the growth of world use of the US dollar, the money supply growth (M1) should parrallel the growth of the share of the worlds population that uses it. We may be a long, long way below that.

Hence the use of lower interest rates to spur spending, with all its disasterous consequences.

Using low interest rates to entice spenders further into debt is a poor way to attempt to exit a recession. As is giving trillions to banks and special-interests and waiting for it to trickle down to the consumer. In reality wealth tends to trickle up (to the saver) rather than down (to the spender). As the saying goes, the rich get richer, and the poor get poorer.

The US has prospered throughout its history through stimulation of both ends of society... saver and spender. In reality, spenders cannot prosper without savers to fund the ventures productive of the goods they wish to buy, and savers cannot prosper without spenders to buy the goods produced by their productive ventures. The spender needs the saver, and the saver needs the spender. Both need a wise, wholistic government.