Sunday, June 29, 2008

Worrying about inflation...It's not oil it's CHINA

If we look back at past episodes when inflation got out of control in the US in the past 25 years or so the culprit really was not oil. As hard as that is to believe it is true. Oil was contributing but it's hard to argue that it was casual.

Past oil shocks simply caught the US economy at inopportune times when inflation already was troublesome..

Oil shocks Compared
Shock Size Period Before Peak Change Before Peak Change
222.5% 73-75 5.7 12.2 6.5 3.2 11.9 8.7
164.2% 78-80 8.9 14.6 5.7 8.4 13.1 4.7
473.8% 03-08 2.4 4.1 1.7 1.3 2.3 1.0

The table above tells a version of that story. It shows CPI inflation and core inflation rates before the oil shocks and then at their peaks, after the 'shock'. What is clear is that in 1973 and in 1978 as oil prices went up sharply (by 222% and 164%, respectively) inflation already was elevated ahead of the shock itself. In 1973 it ran a 5.7% pace and in 1978 it already was knocking down nearly 9% per year before oil prices went up. Neither was core inflation well behaved at 3.2% in 1973 and 8.4% in 1978. On top of those starting marks, inflation rose sharply after the shock for both core and headline inflation- see the table.

In this episode that is not so. The oil price shock came with inflation at about 2.4% driving it up to 4.1% currently The post shock rate (that comes five or so years after the shock - a 'shock that has been more gradual in some ways) is still lower than it was BEFORE the previous shocks hit in earlier times. The same is true of core inflation.

Not only are the current inflation rates low compared to past pre-shock rates, but the amount by which prices have risen is much less. In the case of headline inflation in particular there may still more inflation in the pipeline so it's too early to count our 'chickens' as the saying goes. But there is NOTHING at all in these figures that is scary. The Fed is doing an excellent job - even worrying too much.

What is different is that in the aftermath of the second oil shock special factors brought oil demand and prices to heel. The second shock added to the previous one so there was more conservation in progress already. The high inflation meant that the Fed was tightening and a deep recession helped to cut oil demand and drop oil prices. Since prices had gone up sharply in 1973 there was also time for a supply response. Alaska oil (for one example) came on line.

As a result oil prices were routed.

In 2008 India's and China's rapid economic development will keep the pressure on as their demands continue to grow even if the US and world economies slow. Still, oil prices have been rising for some time. There is conservation afoot. There will be some supply responses. Alternative fuels at least are being explored. I think that the India and China cards are being being overplayed. History suggests that we can cope with these sorts of things much better than people fear. I would not discount either the conservation or supply responses to this shock especially given the height that prices have achieved. The prospects for a global recession to cool things off is not exactly remote even if it is not apt to be caused by spiking interest rates. High oil prices spread that same depressing effect. Beware.

Friday, June 27, 2008

'Fed' up with dumb forecasts?

Have you heard that the S&P 500 is so weak it will be renamed the S&P 250?

There is proposal afoot to call the DOW JONES industrial average the DOWN JONES average when ever it finishes lower in a session.

The DJIA is so weak that the old expression is being changed to 'keeping down' with the Joneses...

Treasury note yields are getting so low they are going be known as 'memos' instead of as 'notes'.

With stocks now down by over 20% from their recent highs can anyone tell me exactly what it is about spending firming that companies are seeing?

They are seeing it aren't they? The Fed said 'so'.

I may be still behind the times but I am reading the Fed's statement from its JUNE meeting and there is this language about spending firming? Was this a joke by Ben&Co?

Did Fisher really dissent because he wanted HIGHER RATES??

No risk of inflation in STOCK prices
No risk of inflation in corporate earnings
No risk of consumers having much discretionary income to spend...

Risk of higher OIL PRICES is that stock prices are even weaker, economy weaker

We have nothing to FEAR BUT THE FED ITSELF!!

There doesn't that make you feel better?

Ain't nothin' like the real thing, baby

News headlines are hopping with nominal income growth up at a 23.4% annualized rate in May. But this is what economists call 'money illusion'. It is the illusion of having more to spend when in fact what you have to spend will buy less than you think because of the ravages of INFLATION!

INFLATION SUCKS the life out of nominal income gains...
This month, two factors are at work distributing distortion over data trends: one is the distorting effects of inflation that make spending look stronger than it is. The second is that, for income, tax rebates have boosted income in the month. Even so the net impact does not produce the out-sized bulge that many have looked for form consumer spending.

Is that a bulge in your spending or are you just happy to see me?
Core nominal income components already are faltering: look at what makes up about 53% of income: wages and salaries. Nominal growth over 12-months is at an annual rate of 4.6%, over six months that drops to 4.1% and over three-months that drops to 2.7%. But in real terms it is much worse. These same figures, deflated by trends in the PCE deflator, shrink more. Over 12-months the annual pace of wages and salaries is 1.2%; over 6-months it's 0.8%; over 3-months it is -0.5%. With that as the fundamental trend for your income, how strong do you think spending is going to get? Yeah, spend a chunk of the rebate, then what?

Spend spend spend..or save?
Spending makes sense if it is supported by income gains and right now it is not supported by income fundamentals. In May REAL consumption spending rose in the month at a strong 4.4% annual rate. The real rate over three-months is 3.1%. The real rate at the two month mark of of the second quarter is only 2.3%. This is not a huge boost from the gigantic slug of tax rebates.

Whence goes the stimulus?
The GOOD news is that consumers are spending in May in a way to keep a chunk of the stimulus at home. Spending on services spurted in May at a 4.9% pace. Services dollars are most likely to be spent on domestically provided stuff, helping US growth the most. Non durable goods spending grew at a 4.5% pace and a lot of those items from clothes to gasoline are imported. That stimulus leaks out and does not help the US. It helps the foreign producers that made the goods that US consumers purchased. Durable goods spending was up at just a weak 1.4% pace in May.

The score in Q2...
But the picture in Q2 is different from May. Real services spending in 2008-Q2 so far is up at just a 1.8% annual rate. Real non-durable goods spending is up at a 5.2% rate. Durable goods spending is down at a 2.2% rate. It is not clear that we are getting a strong shot of stimulus to the economy just yet. But Q2 still has one month's worth of data outstanding. Things could improve. In the meantime MFG trends are worsening and housing is continuing to fade. The Q2 outlook remains a challenging one.

Thursday, June 26, 2008

Does the Fed's dual objective breed duplicity?

This past week BOE head, Mervyn King, said something that the Fed Chairman would never say. He said that to control inflation growth was going to have to slow down. Since Barney Frank has pushed this real-time view of the dual objective onto the Fed, the Fed has lost the ability to be candid with us over such matters.

Wishful forecasting? Honest assessments?
This raises the question of whether the Fed is currently 'telling us the truth.' It seems a bit odd that the Fed at its meeting this month warned of (1) risk with inflation and inflation expectations, (2) talked of a firming in domestic spending, (3) gave up its forecast of oil prices flattening or declining, but (4) held to the view that inflation would drop in the period ahead. How is all that going to happen? What makes it happen?

A new way to look at the Fed?
If there is a risk in crimping the Fed's autonomy this way- and that is exactly How I look at Barney Frank's behavior - it is that it will force the Fed to move even farther from the path of transparency to the dark world of duplicity. The Fed will have to tell us the way it needs things to be in order for it to run the policy that is correct for the times. This may mean that it will have to mis-characterize the economy from time to time.

Is the Fed really out on a limb?
I know that some looked for the Fed to hike rates at its last meeting. Still I am surprised since the economy has been spinning off so many weak signals. It hardly seems able to take much in the way of rate hikes. I think of lot of this controversy depends on whether headline or core inflation is the right series to watch - a matter of no small controversy.

Fed Skeptic
I remain skeptical of the Fed's characterization of the economy in the face of such weak consumer confidence and amid such poor signs that tax rebates are spurring anything. Labor market signals are deteriorating and the stock market has been giving up ground fast. In short very little in the economy is acting as though the Fed is right. Those who side with the Fed do so not because of conviction over growth but over fear of inflation mostly headline inflation. Is it worth that level of importance? Headline inflation has not been at the center of the Fed's target and, as I keep saying, the higher that oil prices go, the lower they are going to become since high prices will collapse the US and other economies and take future oil prices down along with them. Oil prices have gone to or past the tipping point. The economy is what's at risk not inflation. But the Fed does not seem to see it that way or at least does not admit so.

Wednesday, June 25, 2008

Fed stands pat:..surprise, like the sun coming up

Ignore that man behind the curtain...ignore him I say...
Let's get kooky. Let's ask WHY the Fed has a statement after each meeting. IF we can figure that out it will be easier to understand what they are saying in the statement.

FED as Aristotle or as Uncle Remus?
Ostensibly the Fed is trying to help us to understand what it is doing through a systematic method of scientific discovery so we can understand how it sees the policy risks. But talk to any Fed guy/gal and they first thing they will say is how 17 people write that statement-thing and how hard it is to get agreement on it (17 when the Fed is fully staffed, of course). So the Fed may not be teaching us as much as it is telling us a story...and leaving us to our own personal brier patches.

Tripping over its own 34 feet
You have undoubtedly noticed that what happens after each Fed meeting is that the Fed does NOT write a new statement. It takes the previous one and tortures it ever so slightly to carry a fresh nuance. It does this because it is too hard to make more sweeping changes with 34 hands editing it and 34 eyes sweeping over each edit.

Zipitty do-dah
So in the end we can conclude that while the Fed began by writing a statement to give US guidance, the Fed actually does not force a consensus view on members so it can write a clear statement of policy and of the Fed's perceived risks. It writes instead from the point of view of collective disagreement. So what the statement reveals is what members disagree about the least. There is probably something for everybody hidden in the prose of that densely worded little post-meeting nugget...of fool's gold.

Consensus lost, pair-a-dice gained
The statement does not reflect what the Fed 'thinks' since the Fed has not forced any consensus on its members to think any particular way. Instead, it reflects the breadth of issues various members are concerned about. For some it's inflation or inflation expectations. For others it is economic weakness. And sometimes one view seems to hold sway over the others but rarely is a Fed statement crisp, clear and to only one point. This June statement is a perfect example of that. And now its a crap shoot for the markets to untangle what the real risks are

Whoa Nelly
It is said that the camel is a what a horse would be it it were designed by a committee. If so then the FOMC statement is similarly a thoroughbred of statement operated on and genetically engineered by 17 different doctors.

Same old, same old, same old...
Despite the fact that the Fed was doing its all too frequent communication via journalists after its last meeting and telling us market types that we must be crazy to think that the Fed would actually hike rates so soon with economic conditions as they are - in this meeting the Fed laid down that same warning again. I don't know why the Fed warns about risks to inflation and inflation expectations if it does not want us to get worried. Don't you cry WOLF to warn people of the danger, so they can be prepared? Didn't the Boy-Who-Cried-Wolf get punished for sending a false signal and scaring people unduly? And didn't that false warning come back to haunt him? What sort of warning is this: Wolf/never-mind? And what are the consequences?

Jumpin' Jack flash, oh its just the gas...
The Fed spent time issuing these warnings then dumping on the market for building in a Fed rate hike after heeding them. Now, given the chance to amend this approach the Fed did not. Indeed, in the Fed's statement, it glommed onto any news of spending strength while shunting aside the preponderant news of weakness we have seen. Bad economic news has driven the stock market lower over the past three weeks (the DJIA is lower by 6% over these THREE weeks- HELLO? Anybody home there at the Fed???). Are the empty Fed governor chairs the ones assigned to market-watching? Apparently so. The Fed can only seem to remember back to the strong retail sales report while it low-balls the deteriorated labor market and other signs of economic erosion. Oh consumer confidence? That's gas! Maybe it is, but gas matters.

Too smart by one-three hundred and sixty fifth
So we are left to ponder if the Fed is leading us in this direction out of conviction? Is it getting us to think it sees conditions as robust so that we will view it as more likely to hike rates than to cut them? Or is is the Fed just saying that to get the same response? Do we really believe that after after all these weak numbers THIS is what the Fed thinks? Or it is this just what it could get a consenus on? this some odd variant of the mini-max strategy where you figure that the worst mistake would be to lead the market lower if rates should be higher so you try to lead them higher, regardless?

Help needed from the Vatican
Obviously this job requires someone from the Vatican. The guy who has been trying to sort out how many angels can stand on the head of a pin is just the one for this job.

It's neither a breath mint nor a candy mint so spit it out
In the end it does not matter and that is what is so funny. The statement does not have to be digested and understood. It is neither truth nor fiction. Nor is it a communication device. The Fed will not act in a fashion contrary to the data. So watch the numbers and see. Where is the greater risk? Is the Fed right and is the economy firming? Or is it beginning to careen out of control as consumer budgets develop holes that make the gash in the side of the Titanic look small. Time will tell even if the Fed won't. And the Fed will do what it needs to do regardless of how people split hairs over what this statement really meant.

Housing sales and prices drop but homebuilders show resilience

Housing sales dropped in May as prices plunged

New home sales dropped sharply in May. Prices also fell. In May median home prices fell month to month which not so unusual. But prices in May also fell Yr/Yr for the first time in at least 12 years. The weakness in housing is real and is continuing unabated. The increase in home prices in April was a false sign of hope. The homebuilding sector is again in trouble.

Even so the homebuilders stocks as of noon were up on the day for the most part. Far from capitulating, they rose and were prospering on the day. They stand just short of the 24th percentile of their respective 52-week ranges. Meritage, Toll Brothers and NVR are the relative strongest in the group each is near its 52-week range midpoint.

Homebuilders stocks
Data from June 25, 2008

% ch % of
Company today 52Wk Range
Toll Brothers 4.70% 45.0%
KB Homes 4.20% 14.7%
Centex 4.90% 7.0%
Pulte Homes 4.90% 18.5%
Lennar 1.00% 7.9%
NVR 2.60% 40.9%
Hovnian Enterprises -3.60% 7.9%
Meritage Homes 5.20% 50.0%
Average 2.99% 24.0%

Durable goods in May: Best to put optimism on hold

WAR! What is it good For? MFG!
The durable goods report is leaning heavily on the defense sector. Over three months shipments are off by 0.9% but are bolstered by defense shipments rising at a 28.3% annual rate. Defense orders have slowed over three months but are still up 32% over 12months. Defense is making the report look better.

Ex defense orders are lower in SEVEN of the past 10 months for a net drop of four percentage points. Over that same period new orders ex-defense are net lower by three percentage points.

Still, non-defense capital goods excluding the volatile aircraft component show strong shipments trends, firm orders and strong growth in unfilled orders. But the consumer sector shows withering results.

Since foreign economies are slowing we have to wonder how long before this industrial strength, derived in part from exports, holds up...

Meanwhile in the new quarter (two months into 2008-Q2), the growth rates for shipments and orders overall are negative, and are negative for orders and shipments excluding defense. But there is a persistent strength in unfilled orders that is reassuring. Let's not get too excited over the report but it is holding up quite well in the face of all the shocks... see table below

Durables Trends in new Quarter
Durable Goods (A-M)/Q1
Shipments -0.1%
New Orders -3.4%
Unfilled Orders 12.4%
Inventories 8.0%
Excluding Transportation
Shipments 8.2%
New Orders 11.6%
Unfilled Orders 9.9%
Inventories 5.9%
Excluding Defense
Shipments -2.4%
New Orders -4.1%
Unfilled Orders 15.5%
Inventories 7.7%
NonDefense Capital Goods
Shipments 3.6%
New Orders -3.9%
Unfilled Orders 19.8%
Inventories 13.6%
Growth rates Saar

On balance Q2 looks like a decent one for the factory sector. There still are a lot of irregularities. Sector trends could still turn lower and with a weakening global economy we should be wary of that. And also wary since a good amount that strength depends on defense sector activity. But for now the sector is holding up better than current industrial production and MFG surveys would suggest. Since those sources are a bit fresher than this report we should put the optimism on hold....

Tuesday, June 24, 2008

How does inflation spiral out of control if neither wages nor prices will spiral?

Confusion marks the outlook
It's not only the Fed that seems confused about policy. I am surprised to find out how economists' views are still so split over inflation prospects. Many are still worried about inflation. Many aren't. Why?

Worried about inflation?

I'm not.

I was.

But I'm not.

What changed?

The economy, stupid.

It's tottering like a 98 pound beach weakling getting sand kicked in his face. And the big economist guys are afraid its going to beat them up. I don't get it.

This week's news
On Tuesday consumer expectations hit an all time low in the Conference Board report. The current conditions index was very weak. The component readings were so weak as to be distressing. The Richmond Fed MFG index fell sharply. Case-Shiller's house prices are still falling sharply.

Why worry about a weak Conference Board report?
The Conference Board employment readings are closely correlated with the rate of unemployment. So weak Conference Board readings and the spiking rate of unemployment are on the same page. Those are authentic signals... and signals of extreme weakness.

The corporate sector signal
UPS posted poor earnings because it COULD NOT pass through energy prices fully. Airlines are laying off pilots and cutting flights. These are not inflationary actions these are deflationary actions... and results.

What is different this time?
Look at the last oil cycle. Plot the CPI Vs its core... Do it for this cycle and for the one from 1973 - 1981 or so. What is different? Core inflation is lagging headline inflation badly this time. Last time they ran neck and neck. This is not read universally as a sign that the Fed is winning. Pessimists are waiting for the core to catch-up. Why? This is economics in action. Fed does not accommodate oil price increase as it did in the early 1970s so core inflation is held back. The rise in nominal oil prices becomes a rise in real oil prices. Consumer incomes are not kicked higher by accommodation (inflation) so the hike in oil does MAXIMUM DAMAGE to consumer spending as monies are diverted from discretionary spending to survival spending (oil). That slows the economy for sure but keeps inflation in check and allows the Fed to keep rates lower.

Look at markets: what are they saying?
Why did stocks hit a stone wall and drop last week after being encouraged the weak before by 'strong' retail sales? The reason is that it is becoming clear that there is no bounce in sales from rebates. Energy prices have simply risen too much and taken the punch out of the rebates. Store sales this week (Tuesday) rose by 2.2% Yr/Yr up from 2.1% the week before. These are not very good numbers. Consumer discretionary stocks fell hard last week- even consumer staples fell. These are not markets reacting like there are inflationary forces at work.

The un-thought, thought experiment
For those who are not convinced by the drum beat of incoming data - just consider how high oil/gasoline prices are. Pass-through is simply not occurring into the core rate. The weak dollar is not affecting (non oil) import prices by very much. With headline inflation pressured, what is getting through to the core is just a trickle. Firms are reluctant to hike prices. If oil moves much higher there will be a recession and that will stop any inflation COLD, right in its tracks. We may already have passed though that barrier in fact and we may be headed for recession now, even if oil prices do not rise that much more. So for those who believe in inflation, one question: how do we get there from here? It seems unlikely.

Lower core than headline inflation IS GOOD NEWS
The controversy is not that headline inflation is higher than core. That is a measure of Fed success. The Fed aims to keep that gap in place until such time that OIL PRICES FALL back to normal levels and that will squeeze or invert the headline to core price inflation gap. LOWER CORE THAN HEADLINE INFLATION is a SIGNAL of Fed success.

Not much risk of or from higher oil prices any time soon
At this point higher oil prices are not much of a threat to inflation, they are are a threat to growth. They are slowing consumer spending and eroding corporate earnings. These developments are not classical inflation signals. The gold market can tell that and that is why it has stalled. Airlines are laying off pilots. UPS, a very energy conscious, company was not able to pass on its rising costs with price increases so its earnings disappointed. Consumer discretionary stocks are not lagging badly because investors think rebates are going to drive the economy though its oil troubles. Go face to face with the new reality. The face of growth is grim... not the face of expected inflation.

Wag the dog?
So, tell me what in these stories is inflationary. What will become so? Why is inflation such a fear? And don't revert to saying India and China, please; they are far too small and will be themselves crippled by the coming slowdown evident in the US, Europe and Japan. The tail does not wag the dog.

Circular illogic
I sure don't get it. The fear is an irrational one. Higher energy prices will not beget higher energy prices and headline prices forever. At some point the illogic of this circle shows through. I think there is plenty of evidence that we have reached that point. Any higher, and energy prices will undermine themselves even more by undercutting economic growth and overall demand not just energy demand. Oil has done this before. It's in another bubble. I take this truth to be self evident. It's why I have no fear of inflation.

But neither wages nor prices are spiraling...BAD FORECASTS ARE
Inflation? You can't get there from here because the Fed is in the way and because of an ongoing market dynamic that exists on a global scale: firms are reluctant to hike prices - even for good reasons. Europeans were not demonstrating, clogging roads and ports because they COULD pass though energy price increases, now were they?
Wages are not part of a wage-price spiral. Prices are not part of a wage-price spiral. Its only oil and food. And they rob other prices of their ability to spiral. They do help to elevate headline inflation because of their importance and their gross inelasticity (e.g. you do not substitute away from food when prices rise; or walk to work because gas prices go up, etc). You do have less 'money' left over to spend on other things, hence deflation. So what is spinning out of control? I mean what besides BAD FORECASTS?

Do-ality duality and dual mandates duel at the Fed

Dueling mandates
Under Bernanke we have come to know (if we did not before) that the Fed has a dual mandate - a responsibility to maintain growth and to contain inflation. It's a little tougher than walking and chewing gum at the same time. With Barney Frank heading the House Financial Services Committee, Bernanke has been reminded of this constantly and we hear a number of Fed speeches remind us of this goal at their start. This has been a NEW development since Greenspan left.

But that goal, that mandate, has always been there. It lies like a snake under a rock and only occasionally slithers out to bite someone. As it is now.

Why oil problems are so slick...
Oil has a dual a nature. Higher prices create some headline inflation (incipient inflation) and at the same time they depress the economy by siphoning off spending power from the consumer. Its the perfect thing to drive the Fed mad. And it is doing so now, cranking headline inflation up and ratcheting growth lower.

This bring us to the Fed's dilemma its do-ality: what's it to do? It is on the spot again this week with an FOMC meeting on tap. Up to this point it has cut rates but more for the banking system's problems. Still, those rate cuts have helped the economy deal with its oil shock. But in the last few weeks the Fed has been making noises that inflation was the bigger risk. It made these noises loudly enough and often enough that the market took them seriously. Rates began to back up and futures prices began to embody the notion of a rate hike and the Fed began to wonder what the market was so worried about.

Wrong bedtime story
So the Fed climbed up into its bully pulpit and began to preach the sermon of anti-inflationism to the faithful who took it to heart. That sermon changed their behavior and that was not what the Fed had wanted. It did not want market rates to go up. It did not want markets pricing in a rate hike. It wanted to reassure us it was on guard. And it was misguided- like a mother wanting to read a soothing tale to a child at bed time, but then choosing to a short story by Edgar Allen Poe. "Oh, here honey we'll read 'The Tell Tale Heart' before bedtime"... maybe not.

Rebate checks: a flash-in-the-pan-acea
So now the Fed has to deal with what it is. It has a dual mandate. Oil's dual nature is stalking the Fed every minute. The Fed's own do-ality has come back to bite it on the bottom and it does not know what to do. One thing is for sure it can't undo what it has done. Some in the markets are afraid of inflation and the Fed has stoked their fears. But palpable risk still challenge the economy. The Rebate checks do not seem to have been much of a panacea- more like a flash-in-the-pan-acea. The Fed is really unsure-as is the market -what's next. The Fed is clear on its destination (no inflation) but not its path to get there.

A leaky pipeline
In putting this fear of of God (actually, fear of of inflation) into the markets the Fed has even undone some of its past stimulus. Bank lending has tightened and taken some more pressure out of the pipeline as sure as a leaky hose robs the nozzle of pressure.

Frankly speaking: Maximum unsustainable farce
For all of its good work on liquidity facilities the Fed has squandered part of it though the old Fed bug-a-boo, bad communication. Partly it gets back to that dual mandate that Barney Frank made the Fed dredge up. Under Volcker and Greenspan we did not have this problem. The Fed went for price stability alone. Why? Because it could. It argued that IF it kept prices stable the economy would grow at its maximum sustainable rate. And it was right. Frank forced the Fed to bring up growth and re-inserted the quandary at the head of the line into a process that had worked so well without it. So you can blame the Fed and Bernanke for this failing but blame Frank too. He has put the Fed in an untenable position.

Unwelcome distraction
When push comes to shove we know what the Fed will do. It will protect against inflation. That is why Bernanke's warning was unneeded. There will always be Fed doubters. Contrarians are a constant. But the Fed must focus on doing what's right. I think Bernanke's heart was in the right place but he still managed to get it wrong. The economy is very weak and the Fed may yet be forced to cut rates before it raises them. The rebates may not have provided as much support as he thought. The Fed's warning that boosted market rates and especially mortgage rates was an unwelcome distraction. Still it's real.

Monday, June 23, 2008

The world is getting larger again- policy clothes no longer a fit?

Open borders, fewer capital controls, the WTO and harmonized trade rules, floating (well fluctuating) exchange rates, cyberspace, yes all these things made the world smaller. But one factor is making it LARGER again.


Having higher oil prices is as if things are farther apart since they make it more expensive to get from here to there and back again. And, a lot of goods go that route before they hit their final markets. Because of this added expense we are going to see more low value items made at home instead of shipped and re-shipped. The price of low-value high-weight items is greatly affected when shipped over long distances as transport costs rise and become a higher proportion of getting goods to the end consumer.

It's not a problem for high value goods since transportation will be small part of the final price. Still, it's a problem for some trade flows that could have a silver lining and BOOST jobs in the US for these so-called low unit-value items.

Now we may get a real test of cyberspace. Can internet meetings and cyber-discourse substitute for in-person meetings? Will we see... Is travel to be reduced in favor of web meetings? After 9/11 this was talked about, but since then, more and more have gone back to their old in-person ways.

High transport costs more completely ISOLATE the US
In truth this makes our own domestic COST STRUCTURE relatively more important in setting prices. Transport costs drive a wedge between US based and foreign based costs. So with higher transportation costs EACH central bank will have to be more careful to control its own domestic cost structure. Of course oil does not just affect overseas shipments of goods. And oil is a direct input into a wide variety of products, not just as a cost-of-transit line item. This a new wrinkle in central bank policymaking.

A new game in town
We now know that internationalization does not just cut costs by giving access to cheaper labor; it changes the game in many other ways - FX rates, energy costs, geopolitical balances etc. It's a new world and a new game.

This week we may get a taste of how the Fed wants to play it. While the OPEC/OCIC meeting (OPEC: Oil producing exporting countries; OCIC: Oil consuming importing countries) got agreement on oil prices being 'too high'. In the aftermath of the meeting prices, contrarily, moved even higher (...remind you of Greenspan and 'irrational exuberance?')

The OPEC/OCIC countries have no clue WHY prices are so high but there are 1,000 hypotheses. Mostly they involve blaming someone else. The trouble is always done by a person called 'Not Me'. Hmmm. 'Not Me' that sounds Asian doesn't it?

Monetary policy under the Macroscope
Monetary policy around the world WILL be conducted differently if central banks come to regard HIGH oil prices as here to stay. Well - NEWS FLASH! - high prices are here to stay, but 'how high?'

That is the question: how high... As to the Fed's new-found concern on the dollar and Bernanke's recent anti-inflation spew- will any of this come up for reappraisal at the Fed's upcoming meeting? With MTG rates higher and MTG applications off, the housing market is still weakening rapidly. COULD THE FED REALLY HIKE RATES in this environment?

With inflation high and well over any notion of acceptability or above any comfort zone and with inflation expectations in soft surveys rising and some in harder surveys being pressured CAN THE FED AFFORD TO STAND PAT?

Love it don't you? Irresistible force meets immovable object. One of my favorite themes. FOMC meets this week. Don't miss it. And don't expect much because for all its successes the Fed is still REALLY LOUSY on communication.

Friday, June 20, 2008

How Now Down Dow?

Elocution lessons aside...
Thursday's dropping oil prices were supposed to be the markets' salvation. We said that the big news on Thursday was that OIL held above $130/bbl for the tenth day in a row not that it fell by $5/bbl intra-day. Today, guess what? Yesterday's 'watershed' intra-daily drop is just that- a drop- a drop in the bucket... and if you bought into it you are today kicking the bucket, or your position is.

The closing DOW is below 12,000 for the first time since March 17th 2008.

Still the 10-Yr note yield is above 4% at 4.19%, not at the 3.34% it carried when the DOW was last below 12,000, making this trip below 12,000 more ominous.

The IMF is forecasting recession in the US (though not in so many words) and the Fed is running around behind the scenes whispering into journalists ears, as it is trying to undo all that talk about maybe tightening.

Maybe tightening? Is that like maybe inflation fighting??
The Fed seems surprised that the markets were so quick to believe it when it talked about shifting risks. I think that while we can give the Bernanke Fed good marks for a lot of things communications is not one of them. The Fed is no Marconi, No Bell. But The Fed did this when markets already were having inflation worries and so to them the warning had resonance... and that reverberated in markets through the yield curve and in Fed funds futures. Over the river and through the woods - even granny got the message. You can't say what you don't mean just to soothe. It may work with children, but not sophisticated markets. That is one lesson that by now should have been learned.

Market Die-Nam-Icks
Markets are tired of being batted to and fro by the Fed and oil prices. Their resilience may finally have been stretched too far. Bye bye 12,000. Bye Bye love. Bye, bye happiness... etc. the Neverly brothers...

She loves me, she loves me not... What? She HATES ME?
Looks like the Dow has settled on the notion of 'Not.' Things are 'not' great and it's 'not' all financial stocks. When 'they' don't buy consumer discretionary stocks or staples its time to throw in the towel. In this case it just could be the baby with the bath water.

Sell 'em all and let God sort 'em out?

2 Much 2 little
Too many negatives are being stacked up by too many different prognosticators and too many markets are too beleaguered to hold onto too much hope. Can the oil market producer/consumer meeting conjure any good news? OPEC already has declared it would not pump more oil (Remember Jakarta! they cry- it was their Alamo. They pumped too much at their Jakarta summit years ago and unglued a tight oil market. Now it's the Edgar Allen Poe strategy...nevermore.)

The Dow: Once 12,000 is gone what's next?

Reminder- not gloating...
Last Saturday in 'Bonds and Stocks Technically Speaking' we made the case for pessimism No point in changing that view now (see this Blog for last Saturday 'Stocks and bonds technically speaking').

So, how now down Dow?

I don't know the answer but they always say this in adventure movies:
JUST don't look down!

Why IMF is a four-letter word

Flat growth Q4/Q4 is bad news and...

The IMF is looking for US growth to be essentially flat on a Q4 to Q4 basis in 2008.

In terms of the arithmetic, with 0.9% growth in hand (annual rate) in Q1 the IMF looks for declines in US GDP through the rest of the year in order to hit ZERO Q4/Q4.

Arguably... GDP could be flat through the rest of the year and that would leave a Q4/Q4 result of +0.2% - close enough to 'flat' to be taken as an apt description of growth by the IMF.

But anyway you slice it this is essentially a recession forecast from the IMF. ZERO growth for three quarters is pretty bad -arguably that is a recession anyway- even though GDP does not decline.

If Q2 GDP grows by 2% (saar) on the back of rebate checks then the Q3 and Q4 declines will have to be even bigger to hit a zero Q4/Q4 forecast.

Take no solace from the IMF's numbers. They are not good news.

And the rest of the IMF's discussion of the US situation makes bleak reading on its own.

Thursday, June 19, 2008

The Day's BIG Story

Markets are up and US bond yields are down because oil prices have fallen sharply this session. But is that the real news? Or is the real news that even after the sharp fall in oil prices crude oil will spend its tenth day in a row with prices above $130/bbl?

The Saudis have announced a small increase in output. There is an upcoming oil producer/consumer meeting. and in the face of that oil prices are still holding above $130/bbl. The hurricane season still awaits us. Nigeria is still unstable. China's hike in consumer prices for fuel seemed to dominate headlines in a world where so much is still unchanged.

Is the oil price falling the big news or is it the fact that prices still held so high?

What is the day's BIG Story?

The Arte Johnson Crisis...

Arte Johnson is a comedian who was famous for falling in slow motion. Dressed in a black overcoat as a 'dirty old man' he would fall off a tricycle or a park bench in such slow motion that it defied gravity in its own way.

This financial crisis reminds me of Arte's work.

In the US we are familiar with a new warning from Citibank about potential losses. But the day started with the Swiss National Bank reminding us that its large financial institutions had made a great deal of progress but still were fighting off problems. The BNS points out that many institutions are still trying to to reduce the amount of RISK on their balance sheets. It's ongoing, not over.

Now we are even seeing more articles wondering if the Fed did TOO MUCH. Others suggest that had the Fed been more aggressive even earlier all of 'this' would not have happened. Bear Stearns has said much the same of its fate. But is preventing crisis the Fed's job? Especially when the crisis comes to the financial institutions that created it; should the Fed stop that? This is little more than Wall Street crying for a bailout before the crisis comes.

We can propose many counter-factual scenarios and presuppose what good they might have done. But for what purpose?

One interesting wrinkle is the notion that bond insures have NOT been called on make good on their guarantees because that would set firm prices for distressed merchandise that everyone would then have to mark to, creating other losses. We are in a real Catch 22 world.

Ambac has just terminated its deal with Fitch as Ambac desires to no longer be rated.

And as we are trying to deal with the here and now we are dogged by the problems of the past that just won't go away... meanwhile new issues for the future are cropping up.

If you think that the economy is almost out of the woods you just aren't paying attention. It's unraveling in slow motion. It's the Arte Johnson Crisis... and there are no more enchanted Walnettos to hand out.

Wednesday, June 18, 2008

Reefer Madness; central bank version

Learning by their undoing...
It's not as if central bankers really are smoking anything or need to in order to explain their current actions. As a group they blew it so badly in in the '73-74 and '78-79 oil price spikes that they are doing the opposite this time around.

But are they overdoing it? Does an excess of one type breed another?

Three-Stooges in action?
One thing seems clear and that is that the ECB is not the Fed. The second is that ECB is not the Bundesbank. With inflation ridiculously over its target ceiling of 2% at 3.7%, the ECB is only now losing patience with inflation. It is almost reminiscent of a Three-Stooges routine where they dare a bully who already has done so nine times before, to step across 'this line' one more time... So why is 3.7% so much worse than 3.6% or 3.5% when 2% was the 'top'?

Mis-fire and brimstone?
The ECB stood aside for the financial crisis and now with Jurgen Stark saying that the latest upward revision in inflation (from 3.6% to 3.7%) is alarming, the rate-hike die is seemingly cast. But just a week ago Stark was saying that no series of rate hikes is planned. Italy's Bini Smaghi says one 25bp dollop of rate hiking might be enough. So what kind of fire and brimstone is this? Something to roast marshmallows by and eat smores?

Killing us softly with their songs...instead of using firearms
For all the rhetoric central banks are really being more kind and gentle than you would think. I could not see the Bundesbank of old acting this way. The BOE that embarked on a rate-cutting path, has shocked markets with the revelation that at its last meeting it discussed a rate hike - a HIKE! In the US, Bernanke is talking about it but no one knows if he has the guts to do it.

Teach your children well
It seems that there is a lot more central bank muscle flexing than mud-wresting. They are hoping to get out of this episode with minimal action and hope to salvage their reputations by anchoring expectations with scotch tape and staples instead of welds and rivets. Interestingly, so far it even seems to be working. So much for spare the rod, spoil the child. Words can be enough if they carry weight... In the end the central banks are being more passive and understanding of the complexity of oil prices than their rhetoric would have you think... prompting the question of who is smoking what?

Monday, June 16, 2008

Inch by inch, step by step

No good news when news has been bad is bad news...
We build up our knowledge of the economy one report at a time. The June MFG index from the NY Fed is another inch along the road to understanding MFG trends. Aside from the report's details for June, there is evidence from it's broader trends that there is a small a bounce in the recent three months compared to six months. But it's nothing to get excited over. June itself backtracked from May.

Inflation influenza is building
New weakness has cropped up in unfilled orders. Prices paid are soaring and now the prices received index- not available in all of the regional MFG surveys and not present at all in the national ISM - shows that price increases are being passed through and are expected to be passed through with even more vigor in the future. Employment conditions in NY MFG are sort of mid range.

The news in this report is that conditions are still poor. The outlook is middling even with the current reading at such a depressed level. That is a bad sign.

NY is not THE litmus test for MFG but is a litmus test
New York's signal does not assure us of how MFG is or will be but it's another step along the path to finding out; according to NY MFG businesses, conditions are not really improving in June.

Beyond plastic surgery: homebuilders index sags

Homebuilders wither
It's not just the sag in the NAHB index in June that weakens our knees. It's the fact that just as home affordability had risen, mortgage rates have shot up so strongly that housing is facing another huge hurdle at a time it hardly needs new challenges. The mortgage rate spreads to treasuries are holding in, but treasury yields have risen and pushed up mortgage rates undermining what had been a steady gain in house affordability as rates dropped and house prices cheapened as incomes grew. Affordability in April climbed back above its 10Yr average and to the top 30th percentile of its range. But since then, 30Yr mortgage rates are up by nearly 80bp. ARM rates are up by even more.

Needless to say this new shifting about is not going to be good for housing or for homebuilders. The set back in the NAHB index for June largely reflects activity that had predated much of the recent spike up up mortgage rates.

Banks dither
Banks are under pressure. They want to lend for real estate less than they did before things blew up their face. The sector is now so much more risky - even for 'good' borrowers. Still banks need to figure out where they do want to lend. Securitization is no longer a growth industry. LBOs are risky. There has been a pull-back from new and exotic ABS lending. Securities firms and banks are both being cautious. Banks don't as easily lend to one other either, implying that there has been some loss of interbank liquidity as well.

We are still trying to figure out what business banks and securities firms really want to be in. This remains an important issue for the economy. Where they decide to lend will be where growth can bloom. Where they cut back growth will be harder to get. Real estate is in the cut back zone and the commercial sector may be next on the block.

Sunday, June 15, 2008

From Asses to Pachyderms and Dodd is not Godd

I guess Senate privilege is something special. But is it good for the country or just for the Senators?

Denigrating the Fed
Senator Dodd continues to hold up Fed appointments as he has procrastinated hearings on Fed appointees for nearly a year. Still, he took time to make a really feeble run for Presidency. Aren't you glad he didn't make it? This is not the kind of leadership we want is it? We hear that some deal may be in the works regarding a Fed appointment but who knows? Dodd already has soiled that process and denigrated Fed independence.

Special favors too
What we have recently learned is how Countrywide Bank (when headed by Angelo Mozilo) extended special treatment to Dodd and others because of their positions. Dodd, a Connecticut Democrat is the chairman of the Senate banking committee. He was designated as a "Friend of Angelo,'' along with former Cabinet member Donna Shalala and other high-profile Washington insiders. Let me point out that these are FOA's not FAO's...

Still Chris has not had time to vet Fed appointees to plug the huge hole on the Board of Governors, as members have left and are not being replaced. While governor's terms are long, few serve them to the end. Moreover, Fed appointments are staggered, to spread out the appointments across administrations. When a governor leaves early whomever takes that place serves the remainder of the vacated term, not a new full term.

Tit for Tat - what's wrong with that?
Dodd's trying to wait until a 'democrat' is President to make the appointments sends all the wrong signals about Fed independence. Of course if the Fed could arrange a nice mortgage for him things might be different, eh?

Of course the Fed does no such thing.

Maybe Dodd's being under pressure and in the spot light for potential misuse of his position will open his eyes as to his duty. Or in political terms make hi vulnerable...

Ignorance of the flaw is no excuse.
It is possible that Dodd and others were unwitting in the receipt of benefits and that Mozilo did this all on his own to curry favor. But if that is so, it is all the more reason that when public officials deal for contracts or in their personal business they are assured that they are dealing on the same terms as the public at large. Dodd's saying that he would never use his position for personal gain seems pretty lame after the fact and since that is exactly the result of his action. Ignorance of the flaw is no excuse.

This caveat is especially true if a political figure is dealing with an institution that the a official could hold sway over.

Dodd is simply not a very sympathetic character in any of this.

Asses and pachyderms are the problem not the solution
Dodd is a prime example why I say I that I hate partisanship, I hate the electoral college The strangleholds that parties and their rules or tricks hold over us need to be abolished. The two-party system is called that because they are the only ones who get to party. Three's a crowd. In NY as a nonaligned voter I cannot vote in democrat or republican primary but my tax dollars pay for BOTH of them? Huh? Oh, yeah! Time for some kind of tea party don't you think?

Under current rules we have the 'tweedle dee' and 'tweedle dum' parties keeping potential competitors like Ross Perot and Michael Bloomberg off the map. Perot won nearly one-third of the popular vote in his presidential election and won NO STATES due to the electoral college. Bloomberg has been smart enough to not even run (despite rumors of his interest) because it is clear that partisan rules would shut him out.

Appointment blocking is not just good clean partisan fun...
Understand also that angry democrats, thinking that the republicans stole the election once before held up Bush appointees in much the same way after losing in Florida. They did just as Dodd is now doing. That left us as a country - not just a republican administration - more vulnerable to the attacks we actually suffered at 9/11. Key policy positions for national security were unfilled at the time of the attacks because appointees were being held up by angry senators. Democrats did that. Hate republicans for the war if you like, but the democrats played a role in this too. Partisanship is not good for this country. Dodd is just a good recent example of why.

When will we ever learn?

When will we fix the rules that trap us in political mediocrity?

Saturday, June 14, 2008

Bonds and Stocks -Technically speaking....

While bonds are approaching their value level they may not be quite there yet. The 10-Yr note at a 4.27% yield (Constant Maturity Treasury) seems to have formed an inverted head and shoulders pattern. As required there is a pre-existing down trend to the formation of the pattern and high volume on the right shoulder portion. This past week the the yield chart tested the right shoulder and the pattern held as yields catapulted higher off resistance. So now the 10-Yr note's objective is a yield of about 4.50%.

As for stocks... in the past few weeks the DJIA, which is below its 200 day moving average, moved up twice to kiss that average and to head back lower each time. Yes, it's ground hog's day for equities. That action does not seem very constructive for the future. In mid May the S&P also hit is 200-day moving average and moved lower. Both those charts are looking like they have seen better days, despite ongoing bullishness we still seem to get from many market commentators.

Future paths
Both the 10-Yr note and the S&P 500 charts have seen their 200-day moving averages drop out of the trading channels they had been in. That signal usually means a new channel in a new direction. These signals imply that the 10Yr note is probably still forming a move lower in yields and that the S&P is going to see lower levels ahead since it is leaving its bullish channel behind.

As such, both of these charts are consistent with the idea that the economy has weaker days ahead.

The 10-Yr note gives us two opposite signals, but they may not be as much inconsistent and they are inter temporally distinct. The longer term signal says the dropping yield trend is still the major trend. The head and shoulders patterns says there is still more upside before yields turn back lower.

These notions are consistent with what the Fed is doing since the Fed is threatening to hike rates if the economy is too strong and if that results in an inflation build. If the Fed does not need to hike rates it will be because weak growth has relieved it of inflation pressures.

Bullishness on stocks and true bearishness on bonds are views that are the same as trying to trying to draw to an inside straight in poker- low probability bets. While those events could happen it is looking increasing like a weaker economic result is brewing, either due to Fed inducement or due to the economy's own loss in momentum.

If you like the inside straight scenario you must believe that the tax rebates will work but that they will still permit inflation pressures to abate. it will take an improbable tender balancing of forces to get there from here.

What S&P segments are telling us...6/13/08

If we look at S&P sector performance there is some small evidence of rotation and changing bets. The energy sector that is so much in the news has ranked as the best performing sector over the last 52-weeks, 26-weeks and 13-weeks. but over the last FOUR weeks and the in the current week it has slipped back to fourth or fifth best despite high and rising world market prices for oil. Energy is rotating lower.

Ranking of Sectors over various horizons

Mater- Indus- Serv- Discre- Sta- Ener- Health Tech Utili- Finan-

ials trials ices tionary ples gy Care
ities cials
Wk/Wk 3 7 10 2 4 5 9 6 1 8
4-Wks 6 8 9 7 2 4 3 5 1 10
13Wks 4 9 5 6 7 1 8 2 3 10
26Wks 2 7 9 5 3 1 8 6 4 10
52Wks 2 6 8 9 4 1 7 5 3 10

The table above shows the various sector rankings. It ranks sector growth across sectors by period. While there has been some talking about the financial sector stirring, that sector ranks a consistent dead last except for the current week where it 'climbed' to 8th best. There is no evidence of optimism in play for financials. For the other sectors there is some shifting in relative performance but nothing like a clear trend change.

As energy prices have ratcheted higher Gold futures prices stand only in the lower third of their 52-week range. This hardly looks like a market vote for inflation and a bet on risk. This is despite the fact that 10-Yr T-notes saw their yield rise by 33bp in the current week. That sort of move is looking excessive, unless markets shift more to the view that growth is picking up. Right now that is a bit hard to conclude... Bonds either do, or will soon, offer value.

The major US stock indices are up on balance over three-months but over six months and over the past year they are still lower. The DJIA is doing the relative worst and the NASDAQ is doing the relative best with the S&P 500 and Russell 3000 filling in the middle ground. Tech, a sector that is not as cyclical and is relatively more plugged into foreign growth, fares best.

The dollar has risen for three weeks in a row Vs the euro and the yen. Not bad...

All this suggests markets are less worried about US policy and inflation (quite different from the Fed) . The relatively weaker DJIA suggests more concerns are over growth. It is only in the recent week (really) that consumer discretionary stocks are doing better than consumer staples - hardly a strong bet on growth. Markets still have to sort out how much they believe that May's retail sales have staying power.

Do they? Is it worth the bet?

Friday, June 13, 2008

Fed cred hammers consumer sentiment

No one writes it this way or seems to see it this way. But... the Fed's inflation fighting credibility is wreaking havoc with the economy. The FED is afraid it is losing its grip on inflation meanwhile the CPI headline spurts by 0.6% in one month and yet the core putters along at 0.2%. The core rate is up by just 2.3% Yr/Y and that is WITHIN the Fed's Comfort Zone while the headline gain of 4.2% Y/Y is just fine since it is not 'targeted.' Still the Fed COMPLAINS about inflation and getting expectations anchored.

The Fed has put an informal ceiling on the PCE core inflation rate of 2% but that translates into a 2.4% Core CPI and we are below that in May. So inflation is not leaking from the headline into the core. That's good news or maybe not...depends on how you see it...

...and U of M sentiment is STILL NOT rising even though this highly topical index comes as most consumers have gotten their rebate checks. Why no glee?

This is the 'Fed Cred as Woodshed' story.
Consumers are glad to get their checks. But they know the Fed is keeping inflation down and that headline prices are up by 4.2% Yr/Yr and that wages will not come close to it. High oil prices are taking them out to the wood shed and the Fed will not inflate away the pain. Consumers see what they are paying for gas and see their rebate check going to the local service station..yeah, fill'er up check the oil and try give me change on my rebate check please....

With tank fills easily at $80/per how far does a check for $600 go? Guess what! Consumers are not stupid. That's why the U of M sentiment index, weak as it was, fell again to an even more ridiculously low level. The housing market is in shambles, jobs losses continue, jobless claims are rising and announced corporate layoffs spiked last month. But hey here take $600 bucks - just once! And VOTE FOR ME IN NOVEMBER! OK???

Its not good time to be a 'consumer'. Housing prices are still falling, and the poor Iowans now have houses, not just mortgages, under water. This is a worrying set of reports on the economy we got today on... what do you know... Friday the 13th! They are worrisome reports and NOT for the reasons people thought when the day began. Consumers are feeling the stress. The Fed's tough love may be too gritty for a warm embrace. It may be what the economy needs, but the economy seems to be bearing up poorly. I remain a SKEPTIC about how much stimulus we will get from this mass mailing of the increase in the fiscal deficit called REBATE CHECKS.

How about you?

Thursday, June 12, 2008

The downside of the upside

It's a little early for markets to start getting second thoughts about rebate checks but then there you are. The stimulus is a fleeting source of growth that will come and go and will not stimulate to the full extent of the spending due to international leakages (see Rebate Checks posting on June 12).

The DJIA, once up strongly intra-day, is sickly as the close approaches. Maybe the disappointment about the Microsoft-Yahoo pulled offer overcame rebate check fever. If so, its not much of a fever, is it? Oil prices once down are back up. The market is having a hard time doing well on good news and that is not a good sign, is it? Is it?

The day's reports were at odds. Rising jobless claims now make last week's claims drop look like seasonal adjustment troubles and that makes the economy look like the job market at least is still weakening. It raises the opposite concerns from orderly inventory building and spurting retail sales. But with the CPI on tap for Friday and the Fed's hackles up over inflation risks, maybe its better to hold optimistic sentiment off for another day.

M&A is not dead with Mircrosoft having second thoughts about the Yahoos. There is a new bid for Bud by the Belgians. Lehman made some moves that the markets did not have a much reaction to. Financial stocks did stir for a bit.

Is this marking time or an outright marking down of optimism? We may find out when we get the CPI out of the way on Friday.

Inventories in April

Inventories grew by a robust 0.5% in April. But sales generally grew faster. As a result inventory to sales ratios generally fell. The exception to this was the motor vehicles sector where inventory growth outpaced - and has been outpacing - sales growth to the consternation of producers.

It was not a bad report at all for the economy at all. Some inventory growth will augment GDP yet I-to-S ratios are tamed.

rebate checks...

Retail sales in May loomed larger than life when the actual report hit the tape. While the monthly Chain Department store sales did not show a great deal of life except for discounters and the Fed Beige Book, out just one day before, was silent on the issue, rebate spending seems to have been a large factor in May.

Two caveats to this optimism: Motor vehicle sales were stronger than expected in this report. (1) Retail sales include USED car sales and they are not part of the month end PCE report or of GDP. (2) To the extent the consumer spent on imported items that stimulus will be lost to the US, boost imports and subtract from GDP sending its stimulus effect overseas.

Spending in Q2 by the consumer right now is only running at about a 1% annual rate in real terms through two months.

The spending of rebate checks remain an important trend to follow...