LilBob

Oil Weakness Could Intensify

Time to drag out the Threshold of Elasticity and Burnt Finger Effect arguments again. The Threshold of Elasticity for any given good is the price point at which a good which was initially thought to have inelastic demand characteristics begins to show signs of significantly increased demand elasticity. For a long time demand for oil was considered to be inelastic. In the summer of 2008 we saw that at a price point of around $3.85 USD/gallon of 87 octane unleaded demand for oil products fell off sharply. We also have an occurrence of a "Burnt Finger Effect" wherein consumers-having been burned by high oil prices in the past-bear some resentment against oil companies and have begun to change their behaviors; either by simply driving less, or, in more extreme cases, purchasing smaller vehicles or hybrid vehicles to reduce consumption. Retail inventories of used recreational boats have also spiked dramatically as many are seeking to rid themselves of these gas guzzlers.

We may have reached the point where the market has worked it's pricing magic and fuel prices have reached a plateau, $20/gallon oil will never happen as we've reached the price point where people are getting hit badly enough at the pump to start thinking about how to change their consumption habits. As high unemployment continues to exert downward pressure on wages-and this effect will be long-term; likely lasting for the next 5 to 10 years cumulatively-we can expect oil prices to remain relatively constant over that same 5 to 10 year period regardless of inflation in other components of the CPI.

Velocity of U.S. Money Supply Is Finally Edging Up

And my point about the fed...I'd like to think the Fed is in line with the thinking that significant inflation as reflected in the CPI won't become a major issue until we see unemployment fall back down to the "normal" range of 5 to 7%.


On Nov 20 07:22 PM LilBob wrote:

>
> On Nov 20 09:49 AM enigmaman wrote:
>
> ...the Fed has to consider when to start to reduce

Velocity of U.S. Money Supply Is Finally Edging Up

On Nov 20 09:49 AM enigmaman wrote:

...the Fed has to consider when to start to reduce
> liquidity so that inflation can be controlled, start to early and
> we fall into a double dip recession, to late and we face the problems
> of higher inflation for the foreseeable future, It seems like we
> are approaching the economic tipping point and all eyes will be on
> the Fed.

It's sort of like a Mexican standoff Enigma. Banks won't start lending capital for new ventures utnil we see an upswing in consumer spending, which isn't going to happen until we see an improvement in employment figures, which won't happen until we see employers start hiring again, employers aren't going to start hiring again until banks start lending so it's less difficult and less costly to get short term payroll financing...

Christmas Comes Early: Key Retailer CDS / Equity Relationships

If this article had focused on specialty discount stores such as Dollar Tree, Dollar General, Hills, TJ Maxx, etc., I would agree 100%, but GAP and Best Buy? You've got to be kidding me. These people really think it's a good idea to bet on a retailer of over-priced plastic box gadgets that a growing number of people have stopped bothering to replace and a retailer of over-priced tee shirts this holiday season?

Some more realistic advice, and personal observations lately seem to be bearing out this prediction: focus on discount retailers-such as those I've named above-that get a lot of their stock from other retailers' closeouts. The quality of items in these stores is surprisingly good this season because with so many retailers going out of business they've been able to pick up enormous quantities of high quality stock. Those companies that are positioned to profit from the wreckage of others' failed business plans are the ones to watch right now.

Marc Faber Doesn't Think Gold Will Go Below $1,000

"Never" is a very strong word to use, and one that I'm skeptical of in any discussion of valuation. It is undisputable that given recent increases in the money supply we will see significant inflation of prices if the money supply isn't reined in significantly once unemployment returns to a "normal" range of 5 to 7%. That being said, if we do see massive economic policy blunders resulting in a failure to adequately rein in the money supply for fear of slowing down the economy too much as employment picks up then Faber may in fact be correct-but the real issue is if we were to use inflation adjusted dollars does that $1000+ price point still translate into a worthwhile asset vehicle.

I'm also convinced that the increasing stock market is largely a result of millions of retail investors who've cut back on personal spending and-having few other options-are sinking a greater portion of their income into equities based retirement plans. I predict limited growth in equities value as growth in employment and consumer-spending is complemented by an increased willingness by consumers to spend a little more freely. With a bit of luck there is the possibility that recent growth will plateau rather than fall as this phenomenon occurs.

Is Jeff Matthews' Call for a Growth Surprise Mistaken or Early?

I side with those saying that Buffet is looking at the long term. There's an ad running right now for one of the railroads (I honestly forget which one right at the moment) which touts their ability to move 1 ton of freight 120 miles on one gallon of fuel. That kind of efficiency makes a fleet of semis look like hopeless gas guzzlers. Buffet is betting on a return to rail traffic as the potential for a falling dollar and rising fuel prices imperil future growth in the fuel-hungry air and highway shipping sectors.

Time for the U.S. Economy to Reindustrialize

You are spot on in stating that the US needs to reindustrialize. The out-sourcing of production in this country was basically a gravy train that brought about the opportunity to sell to developed world consumers without having to pay developed world wage rates. Unfortunately, once the wealth that had accumulated over the years in the bank accounts of the WWII generation was largely spent, the method resorted to for continued economic growth was to pretend that credit was a creator of economic demand-rather than a vehicle of existing and pending economic demand-and to leverage away. The end result is an economy that is not sustainable in the long term because those "higher paying and more productive jobs" that were promised via various media outlets when out-sourcing began turned out to be imaginary and you can't continue to increase consumer spending when growing numbers of Americans are being transitioned out of "Old Economy" union jobs that payed living wages into service and retail sector jobs that rarely pay more than ten dollars an hour.

The Real Reasons Behind Our 'Stupidity Economy'

Spot on Kimball. I've been getting a lot of "thumbs down" lately for suggesting in my comments that the real problem with our economy is a deterioration of the consumer base and suggesting that what really brought the US out of the Depression was not WWII itself but GI Pay, Rosie the Riveter wages and interest on War Bonds. Unfortunately, with this recession we don't have those functions to provide some opportunity for recovery.

The real source of this recession-as I see it-is (as you mention) the concentration of wealth in the hands of too few families; and this is largely a result of too many Americans buying into the "be a team player" and "keeping up with the Joneses" mentalities that have permeated American culture for years. We have been trained as a subservient people and are instructed to think that American Business is all-knowing and all powerful and you shouldn't worry too much about starting your own business because "anything you can think of "The big guys" have already thought of and if they aren't doing it there's probably no money there anyways."

We in this nation are going to have to pull ourselves out of this recession by our boot-straps. If the government were really interested in fixing our economy we'd see a lot more anti-trust legislation aimed at fostering free-market competition, and a lot less of these massive government programs that appear to do little but provide an excuse for distributing more tax money to institutional interests.

What we really need at this point is a modern day version of the French Revolution, only this time we'll do it with sustainable business practices and free-market competition rather than angry mobs and guillotines.

Japan Parallels Are Too Close for Comfort

I actually see this article as a positive sign. For some time we've seen a lot of resistance to the notion of a long slow "L" shaped recovery; with the most ridiculous being prections of a euphoric snap-back "V" shaped "jobless" recovery (which is basically a prediction of a "W" shaped recovery with a healthy dose of denial regarding unemployment and missed earnings projections thrown in).

Entrepreneurs are needed to bring us out of our current economic malaise. And until there is a general understanding that the bearers of the status quo probably aren't the ones we should be looking to for guidance then we aren't going to see any real change or improvement. Alternative energy has the potential to bring us a good ways towards prosperity but until we start to see more (like myself) who are assembling business plans and working through those SBA tutorials and less of existing corporate entities whining to the government for corporate welfare subsidies we aren't likely to see any real or permanent improvement.

Consumer Sentiment Continues to Falter

On Nov 13 04:59 PM robert.b.ferguson wrote:

> While I'm as baffled as David Fry is about consumer indexes the Dollar
> General (DG) and Rue21 (RUE) IPOs from Friday are up 6% and 26% respectively.
> Consumer discretionary any one?

I'm surprised those IPO figures aren't the other way around RBF. The Dollar General near me is second only to the Dollar Tree and Salvation Army stores in customer traffic.

Analyzing U.S. Economy in Terms of Housing

I still feel part of the problem with real estate is that there is too much talk of the market as a whole, without a lot of real focus on what types of homes are selling. Very small homes in the sub 150k market are selling well right now-especially homes which have had significant energy efficiency upgrades and are relatively cheap to heat and cool; prices have stabilized and the first time home-buyers tax credit appears to have pushed prices up considerably in this portion of the market.

It also appears that the top of the real estate market-homes over 1 million are beginning to stabilize. Buyers of these homes are obviously wealthier individuals who are seeing some of the value returning to their investment portfolios, although many homes in this part of the market have lost hundreds of thousands and sometimes even millions in market value over the course of the last three years.

The big losers right now are those stuck with suburban McMansions which originally sold for anywhere from $350k to 600k. Literally thousands of homes in this price range were thrown up during the real estate boom and purchased by individuals who didn't seem to realize that they were buying more home than they could afford. Add to that, many of these homes were built by unscrupulous developers and it's not uncommon in neighborhoods in this price range to see literally pathetic examples of poor quality materials and workmanship on full display. There are some neighborhoods right near where I live and it's not uncommon to see paint falling off of homes in large flakes because boards weren't properly primed, sides of homes being dug up because basement walls have collapsed or improperly placed landscaping has caused foundation problems, sagging and cracking brickwork, etc. There is no bottom for many of these homes which were built by fly-by-night developers with no sense of integrity or quality. These homes will likely end up being purchased by the municipalities where they reside and bulldozed.

Don't Believe Long-Term Oil Forecasts: Part II

I agree with all here regarding energy efficiency and alternative energy sources. As with all things, market prices will eventually dictate when Americans begin conserving energy and looking for alternative energy sources. In the summer of 2008 we observed that the Threshold of Elasticity for 87 octane unleaded was around $3.85 USD/gallon. National oil consumption dropped by around 4% and pump prices fell by almost a dollar a gallon before they started inching back up again. With the economy being so weak there appears to be a "Burnt Finger Effect" which is a lingering consumer resentment that results in a decline in the Threshold of Elasticity price point at the pump. As pump prices and the monthly utility bill begin going higher we'll see increased sales of small and hybrid vehicles, more car-pooling and bus-riding, and greater interest in renewable energy sources. Unfortunately, as we all know, American consumers have to get burned pretty badly, then work through the five stages of grief with Media encouragement and support before they'll actually do anything.

U.S. Wages Are Out of Balance, As We Well Know

I agree with Tom's comment, and I'll also note that part of the problem with wages and retail sales growth in this country was that outsourcing of jobs was used as a means of selling to developed world consumers without having to pay developed world wage rates.

Right now there seems to be a growing mass of business leaders and investors out there who are convinced that we need to do two things to get the economy on track:

1. Get American consumers to start spending again.

2. Get American workers to accept lower wages-including elimination of the minimum wage laws.

We all know that Wall Street and Political types are perfectly willing to enage in a seperation from reality when it suits their political or financial interests, but to anyone who lives on planet earth, it should be obvious that trying to reconcile the two goals listed above makes about as much sense as trying to take the cure by having a shot of whiskey with your bowl of bran flakes every morning.

The real solution to America's competitiveness problem is to have a greater number of entrepreneurs to challenge the oligopolistic market structures of the US and eat the lunch of the overgrown, over-leveraged corporate dinosaurs that have bought up lobbyists and Congressman and are dragging this country into the gutter.

Bonds Signal Inflation Is Coming

On Nov 10 01:32 AM Northern Dancer wrote:

>
> LilBob, I have to respectfully disagree with you about inflation
> being "ultimately a consumer driven phenomena". That isn't the case
> at all, although it appears to be. Inflation is caused by too many
> dollars chasing too few goods. Let's take grains for example. When
> the price of grains is driven up by too many dollars chasing too
> little grain, the price of flour is going to rise whether the baker
> likes it or not...

We seem to be arguing both sides of the same coin Dancer. You are absolutely right about too many dollars chasing too few goods. But also, any good ultimately has to have a consumer to purchase it, or that good is inherently worthless. The use of aggressive leveraging of capital to drive up futures shares can temporarily increase costs, but if consumers revolt and reduce their consumption of goods significantly then prices will eventually fall back down again. That's why I often mention the (much hated by some) Threshold of Elasticity concept-which refers to the price point at which a good which was initially thought to have inelastic demand characteristics begins to show significant signs of increased demand elasticity. Just look at what happened to gas prices in the summer of 2008, after pump prices reached a nationwide average of around 3.85 a gallon, consumers turned to car-pooling and park and ride lots and nationwide fuel consumption dropped by around 4%-which eventually resulted in gas prices falling by around a dollar a gallon. Aggressive leveraging and futures-trading can only push prices up for so long before customer revolt annihilates asset values. We also have to contend with what I call the "Burnt-Finger Effect", which refers to when a run up in prices leads to lingering consumer resentments agains producers that results in a steady decline of the Threshold of Elasticity price point for a given good. American consumers are angry right now and we really are living in an age which bears significant similarities to the "Trust-Busting" age of the early 20th century and the first Roosevelt administration. The notion that market prices are independent of consumer behavior is a potentially dangerous one, and contributes to the formation, and spectacular destruction of market bubbles.

Bonds Signal Inflation Is Coming

I have to side with WD regarding inflation. Inflation is ultimately a consumer driven phenomena. If consumers are not willing or able to pay higher prices for goods, then the cost/price/return structures based on hopes and expectations of those higher prices simply collapse, and you have goods sitting on retailers' shelves, and service sector employees getting laid off for lack of work. I don't believe we are likely to see significant inflation in the CPI until unemployment returns to the 5 to 7% range. What you're describing in bond market prices is basically just a by-product of the cost of economic stimulus efforts and an attempt to extend the repayment period for those new debts to a point in the future when Obama-if he is reelected-will be a lame duck president in the latter half of his second term.