Before you ask, no the headline is not sensationalist. While one can question the long term effects of all the treasure China is throwing at their economy, [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?] they are at least spending money from a position of surplus.
Meanwhile, a country that is addicted to free money [Jun 3, 2009: A Country that Cannot Function Without Easy Money] continues the exact same policies that have gotten us to this very bad place, only at an even more steroid induced pace - all so no one of this generation should pay for the excesses we've enjoyed for the past few decades. Just layer more debt up for the grandchildren to take care of, it's their problem!
[Note the irony that much of our deficit spending is coming from borrowing our money back from China, while much of China's surplus spending is funded via American spending]
Anyhow, I digress - it just bothers me how easily "kick the can" is accepted, as cost-benefit analysis is considered archaic. While everyone focuses on flagrantly inaccurate government reports or how companies such as IBM are doing (with 70% of revenues overseas) as some sort of tell on the US economy, I like looking at the railroads. With Burlington Northern (BNI), CSX (NASDAQ:CSX), and Union Pacific (NYSE:UNP) all reporting their fourth quarters we can now pass judgement on the morphine filled US economy. Despite (literally) trillions of injections - it's limp as a dish rag. Don't even bother to ask what it would look like without the morphine - you'd be depressed. Don't think how the economy would work with a 3-5% interest rate, or the lack of now annual stimulus.
For those few who wish to leave the Matrix, let us look at what we are seeing from the railroad sector (keep in mind, these are partially "international" tells as well, as American exports also are loaded on these rail cars)
- The nation's railroad operators expect a tepid recovery for the U.S. economy in 2010, as both businesses and consumers continue to wrestle with the effects of the recession. The severe economic slump cut shipping demand for the railroads because American consumers and industries have been buying fewer of the cars, chemicals, crops, lumber and containers of imported goods the railroads carry.
- Union Pacific Corp., Burlington Northern Santa Fe Corp. and CSX Corp. -- the nation's top three railroad companies -- all say demand for coal, once a lucrative segment, is slumping as U.S. factories and homeowners use less electricity. (As much as I am a coal bull in the long run, the performance of the coal stocks smack of people going to the investing playbook and saying "these stocks should move up ahead of a recovery, therefore I will buy them anticipating such," rather than actually observing what is happening in the US economy.) And as people continue to spend sparingly, shipments of consumer goods will show a slight increase at best.
- The companies reported lower fourth-quarter profits this week and said results won't improve until they see a firm turnaround in the economy. (I've been told we've had genetically alterered green shoots everywhere? I believe they cost about $18 million a shoot. Is that not a firm turnaround?)
- "Until employment shows some signs of improvement, you're going to have consumers stay on the sideline, and I think it's going to be pretty tough to see any kind of a strong recovery," Union Pacific Chairman and CEO Jim Young said in an interview with The Associated Press on Thursday. (Not to worry - that's where the government providing 1 of every 6 dollars of income comes in; employment is highly overrated. Oh yes, also a lagging indicator. I assume we'll be cheering the market in a year under the same thesis... ignore those employment figures folks... they're lagging! Might be lagging for years - buy stocks!)
- Economists are forecasting U.S. gross domestic product to rise a little over 3%, modest growth for an economy coming out of recession. (In the past when economies fall as drastically as ours has, they start pushing out 6-8% type of GDP quarters organically; this "recovery" we're enjoying was originally quoted at 3.5% last quarter - then revised down twice to 2.2%, of which almost entirely was cash for clunkers)
- Many economists are hoping the U.S. manufacturing sector is beginning to rebound as the economy struggles to emerge from the worst recession since the 1930s. (uh, has anyone told said economists how much of the labor force is now involved in manufacturing versus even a decade ago? Two decades ago? Note to ivory tower: we are in the new paradigm service economy.) Manufacturing activity has expanded for five straight months, according to the Institute for Supply Management, a trade group.
- But construction activity remains weak, reflected in the steep drop reported by Union Pacific and Burlington Northern in shipments of industrial products, a category that includes lumber. (Well, we are over built in housing, commercial real estate, malls, retail - what exactly do we need to build? The easy money policies used to get us out of the last recession created massive misallocations of capital - unfortunately there is a price to pay for that... we've built too much of everything- Alan Greenspan says "you're welcome")
- CSX CEO Michael Ward said the railroad expects better results in all of its business segments in 2010, except coal. But CSX, like all the major railroads, will be comparing this year's results with 2009's weak performance.
- Coal shipments have been hit hard. As industrial production slowed and jobs vanished, plants closed and consumers reduced their electricity consumption. That, combined with mild weather last summer, resulted in large coal stockpiles at many power plants.
- Automotive shipments should be a bright spot in railroad earnings reports during the first half of 2010. U.S. auto sales were solid in December and should improve from last year's total of 10.4 million, a 27-year low. (Again, these 2nd derivative improvements we are celebrating are off such incredibly low bases it is almost comical to read statements like this one - the population of the US versus 27 years is much higher so all these figures should be adjusted for population. Another misallocation of capital as people overbought cars based on their house ATM - another Greenspan special. Do you notice a theme here? A certain institution which has created massive dysfunction in the entire US economy... and continues to?)
- Agriculture shipments offer another opportunity for growth. (I agree this is one export area where the United States is a powerhouse) Already, Union Pacific said its ethanol shipments are up because ethanol plants that used to be owned by bankrupt VeraSun Energy have reopened under new owners. (But really, did you have to ruin this blurb with the return of corn ethanol? A pox on our society; talk about inefficient wastes) Troy said in a research note that sustained improvement in grain traffic could be a bright spot in early 2010.
- When consumers start buying more goods and retailers have to replace them, railroads will benefit. That's because many imported shipping containers are carried inland from ports on trains before being delivered to their final destinations by truck. Union Pacific actually hauled 5 percent more of those intermodal containers in the fourth quarter although revenue for that sector was still down 3 percent. (Again all these comparisons are versus Q4 2008 when the United States was in a virtual shut down mode as we wondered what our financial oligarchs had done to the economy)
So that's the story in railroads, some talk of weak growth over horrific Q4 2008 levels, with "hope" (and change?) in the future but just vague generalizations; little concrete outside of agriculture.
The other, once very useful but now less so, economic tell was copper - or Dr. Copper, as it is called in economic circles. It gave us some warning in late 2007 [Nov 23, 2007: Is Copper Signaling a Slowing Global Economy?] when the "very efficient stock market" was galloping along at all time highs (October 2007) forecasting "great things to come as it looked forward 6 months" (more dogma to ignore - the efficient market hypothesis). Unfortunately, the giant that has become China has completely altered just about every commodity price mechanism - so much of the pricing in said commodities only tells us if China is interesting in buying that week or month, rather than if the world economy is doing better or worse. Hence that 2007 weakness most likely marked China slowing down as much as anything. Remember, it's China's commodity world, we just live in it. [May 13, 2009: Commodities - It's China's World: We Just Live in It] Specific to copper, despite an economy a fraction the size of America's, China did 40% of all copper purchases in 2009.
So with copper prices roughly doubling in a year all must be right in the world, right? Well go back to paragraph one of this piece and see the massive flood of Chinese loans - which has been filtering through the entire Chinese economy. [Mar 23, 2009: FT.com - Chinese Stockpiling Spurs Copper Price Rally] And just as Greenspan (and now Bernanke) in the US, creating misallocations of capital throughout the East... such as an empty city named Ordos for example. I point this out because as the world's largest econony you'd think the rebound in copper said a lot about the US economy - but again, China has become the world's marginal buyer in almost everything so readers in the States need to leave their American exceptionalism mind behind (which we are trained to believe from birth) and realize there are other players who matter now - it's a new age. Freeport McMoran & Gold (NYSE:FCX) reported earnings yesterday and they had an interesting blurb which really looks not at all different than the railroads above.
- We still need to wait to see the fundamental numbers improve in the U.S. Copper demand in the U.S. is highly correlated to industrial production," he said, noting weakness in the housing and construction sector.
- "We're going to need to see some fundamental industrial production growth in the United States to justify going out and starting major projects or restarting curtailed production."
So as we review the views of companies which are integral to the domestic economy, it is not quite so rosy as the increasingly "we can't handle the truth" government economic reports [May 10, 2008: Finally Some Mainstream Reports are Figuring Out the Spin from Government] [May 22, 2008: Bill Gross - Inflation Underplayed by Government] celebrated as gospel on financial entertainment TeeVee. I'll stick to listening to the companies who represent the meat of the economy.
Meanwhile, next Monday CNBC can celebrate how significantly awesome the US economy is because iPhones are flying off the shelves... in between worshiping at the alter of government data. Err, at least the data that is still convenient to report [Apr 23, 2008: Barry Ritholtz on Disappearing Economic Indicators].