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I am no fan of Core Inflation measures; Stripping out inflationary items because they are volatile is not helpful.

In today’s NYT, however, Floyd Norris makes the argument that comparing the US with Japan’s battle with inflation, then disinflation than deflation might be instructive. It is a rather compelling counterpoint to John Mauldin’s O Deflation, Where is Thy Sting?.

Excerpt:

“Since the collapse of the housing market in the United States and the beginning of the global financial crisis, the Federal Reserve has made avoiding deflation a major priority, recalling the experience of Japan after its bubble burst in the early 1990s. The Fed has set an annual inflation target of 2 percent or a little lower, but is not getting it.

The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate — excluding food and energy — rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.

The core inflation figures are charting a path roughly similar to one shown in Japan 15 years earlier. That has been true despite a much stronger reaction by the American central bank, which was determined not to make the same mistakes the Japanese made.”

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Inflation?

click for large graphic

chart courtesy of NYT

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Source:
After the Fed’s Action, Watching Inflation’s Trajectory
FLOYD NORRIS
NYT, November 19, 2010

http://www.nytimes.com/2010/11/20/business/economy/20charts.html

O Deflation, Where is Thy Sting?
November 19, 2010
By John Mauldin

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The Sputtering Economy
Old and Outmoded
We Have Deflation Exactly Where?
O Deflation, Where is Thy Sting?
Mexico, High Noon, and Thanksgiving

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The CPI was out this week, and it showed a continued drop in inflation. There were those who immediately pointed out that this vindicated the Fed’s move to QE2. We have to get ahead of this deflation thing, don’t we? Well, maybe, depending on how you measure inflation/deflation. This week we look deep into the BLS website on inflation to see just exactly what it is we are measuring, and then take a walk down Nostalgia Lane. But first we look at what I think we can call The Sputtering Economy, because that will tie into our inflation discussion.

The Sputtering Economy

My father, who would be 100 this summer, would hitch up the wagon on a farm in Castleberry, Texas, about 6 miles from downtown Fort Worth, to drive to church or to the Big City for supplies. He was 57 when they put a man on the moon. It was hard for me as a kid to relate to wagons and outhouses, although we grew up rather poor on the outskirts of a very small town on the edge of West Texas, living as country kids. It was a great life. We were all poor and didn’t know it.

My kids have some of the same issues about understanding my early era. I grew up as we were first starting to get power lawn mowers, a dream for me, as I hated push mowers and slings. But you had to constantly tinker with them. Neglect them for too long and they would start to sputter. When that happened, you first looked at the spark plugs, then the carburetor and the gas/air mix, filters, etc. And as I got older, that helped with my transition to taking care of my car. I was not a great mechanic but, as nearly everyone was, I was adequate.

Today? I can’t even figure out what is under the hood. No clue. And my tools back in 1967? Not designed for a 2010 model, let alone a hybrid.

Same with our old black and white TV of the late ’50s. As a ten-year-old kid, when the TV went out I would take off the back of the set, take out every one of the 20 or so vacuum tubes, and test them all. You wanted to test them all because if more than one was bad it was two miles to the store on my bike, and it was uphill at least one way. Those old tubes went out all the time. Just part of the price of watching TV.

Our economy today is like that old lawn mower engine. We get one piece of economic data that is good to very good, and the next day we get some bad news. Let’s look at some of the data for the past few weeks.

Last week we got the New York Fed Empire Index. It was simply ugly. It fell from 15.7 to a -11.4. But then this week we get the Philly Fed Index, and it’s shockingly high. The consensus saw a mild increase to an index level of 5, but it jumped 21 points to 22.5. And all the underlying components were very solid. It is hard to square such a difference when the cities that spawned these reports are about an hour train ride apart.

Capacity utilization is slowly rising, but is still at a recession level 72.7%, up 4 points from 12 months ago and the highest since over two years ago. So are we getting better or are we still mired in the doldrums? I think the answer depends on how many hours you are working.

The surveys from the National Federation of Independent Business continue to indicate that small businesses are not out of the woods. Hiring is at a virtual standstill but is at least not falling, as it was most of this year and last year. Business conditions are mixed. The survey is better than it was but still shows a sputtering economy.

The latest establishment employment survey shows job growth, though not at a level that can bring down the unemployment level. And if you look at the household survey, two things leap out. First, there is a significant rise in the number of people employed part-time. The rise in employment is not of a sort that prompts a sigh of relief. Part-time work, while better than none, does not inspire consumer confidence. It is not the fabric of a solid recovery.

Second, there are not many small business start-ups, which are the source, the feedstock if you will, of job growth. Whether because it is harder than ever to find money (it is) or because entrepreneurs are uncertain about what the future holds (they are), or for whatever reason, that is a very troubling metric. And the household survey showed a large decrease in the numbers of jobs and people working, a different story than the establishment survey.

What it all suggests is an economy growing between one and two percent. That is better than recession but not good enough to really bite into the unemployment rate.

Old and Outmoded

And that could mean trouble, as there are millions of people who are coming to the end of their 99-week extended unemployment benefits this next year. Although Congress rejected an extension this week, it was on a vote that required a 2/3 majority. That bill will be back as one that only needs a simple majority, and then it will be up to the Senate. Even so, as I understand it, benefits will only get extended for three months. At least that is the current plan.

Already, people are running out of their extended benefits. Earlier this year there were 12 million people on the extended and regular unemployment rolls. That is dropping each week and is now down to 8,854,206 people, according to the DOL. Since the regular continuing claims number is not really changing all that much, much of it is from people dropping off the rolls.

And the number of people on food stamps continues to rise. As of the end of August, when continuing benefits were running over 10M, a total of 42,389,619 people were receiving food stamps under the SNAP program. This was an increase of 553,379 people over July’s number, or an increase month-over-month of 1.32%. The year-over-year increase was 6,147,762 people or 17%. In July the increase was 17.51%.

Now here’s an interesting thing my friend John Vogel noticed. Households on food stamps are growing even faster than the number of individuals on food stamps. In August, 19,720,255 households were on food stamps, an increase of 284,877 households over the July numbers. This was a percentage increase of 1.47%. In terms of a yearly increase, the number of households grew by 3,159,502 or 19.1%, versus 19.53% recorded in July. As John wrote me:

“So, the numbers keep growing strongly, with households growing more rapidly than people. This still signifies more childless couples or single people being affected lately.

“I cannot figure this out yet, but I feel that we are going through a very significant change in household formation, in the type and quantity of available jobs, in small business stability and formation – and we are applying old, outmoded macroeconomic solutions to problems that will not and cannot respond.”

We’ll come back to that thought, but first we have to look at the definition of deflation.

Read the rest of this entry »

November 18, 2010

Daily Show: George Soros Plans to Overthrow America
Glenn Beck concludes that the only explanation for George Soros’ relationships with various liberal media and charity non-profits is to overthrow America.

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Jon isn’t saying Glenn Beck is a saboteur sent to destroy Fox News, he’s merely asking why he’s doing George Soros’ work for him.

Succinct summation of week’s events:

Positives

1)Ireland getting bank bailout, fire put out for now 2)China, Hong Kong and South Korea all take steps to battle rising inflation 3)Philly Fed much better than expected and at best level since Dec ’09 4)Initial Claims fall below 440k for 2nd straight week 5)US Retail Sales show upside surprise 6)Germany Nov ZEW unexpectedly rises 7)From contrarian view, bulls in AAII fall to 40 from 57.6 which was highest since Jan ’07

Negatives

1)Ireland getting bank bailout, debt paydown avoids another day 2)China, Hong Kong and South Korea all take steps to slow things down 3)Multi family housing starts fall sharply 4)NY manufacturing much weaker than expected (but 6 mo outlook rises) 5)NAHB housing figure remains punk 6)Interest rates move higher, average 30 yr mortgage rate at 2 mo high 7)Refi’s fall 17%, purchases down 5% 8)Muni’s under pressure 9)From contrarian view, bulls in II highest since Dec ’07.

Positives

1) Ireland getting bank bailout, fire put out for now
2) China, Hong Kong and South Korea all take steps to battle rising inflation
3) Philly Fed much better than expected and at best level since Dec ’09
4) Initial Claims fall below 440k for 2nd straight week
5) US Retail Sales show upside surprise
6) Germany Nov ZEW unexpectedly rises
7) From contrarian view, bulls in AAII fall to 40 from 57.6 which was highest since Jan ’07

Negatives

1) Ireland getting bank bailout, debt paydown avoids another day
2) China, Hong Kong and South Korea all take steps to slow things down
3) Multi family housing starts fall sharply
4) NY mfr’g much weaker than expected (but 6 mo outlook rises)
5) NAHB housing figure remains punk
6) Interest rates move higher, avg 30 yr mortgage rate at 2 mo high
7) Refi’s fall 17%, purchases down 5%
8) Muni’s under pressure
9) From contrarian view, bulls in II highest since Dec ’07.

Yves directs us towards the MSNBC show Last Word on servicer abuses in foreclosures:

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Visit msnbc.com for breaking news, world news, and news about the economy

The parade of illegality, corruption and fraud seems to be never ending. Here is the latest nonsense coming to light: Phoney process fees 10-20X what they should be.

Tampa Tribune:

“Pasco County Circuit Judge Susan Gardner decided to take a closer look at her foreclosure cases after law firms were accused recently of overbilling and forging documents.

She doesn’t like what she’s finding – a mountain of fees to serve notice of foreclosure lawsuits to homeowners and to people who don’t exist.

“Routinely, routinely, I’m seeing charges of $1,600, $1,800, $1,000, $800, any of those are ridiculous, and there had better be a good reason for it,” Gardner said, noting that these fees should typically be $45 to a couple hundred bucks.

The judge chose 12 random files and said she found 11 of them had what she says appear to be inflated charges to serve homeowners with lawsuits. Some of the lawyers who submitted affidavits to the court saying the fees are “reasonable” often sign their names and bar numbers in an illegible scribble, court records show.

“I used to think this was just sloppy work, but I truly have begun to wonder if it’s not concealment,” Gardner said.

Funny what happens when Judges get pissed off . . .

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Source:
Judge wants answers to foreclosure document fees
SHANNON BEHNKEN
The Tampa Tribune, November 18, 2010  
http://www2.tbo.com/content/2010/nov/18/190741/judge-wants-answers-to-foreclosure-document-fees/news-breaking/

by James Bianco
Bianco Research
November 18, 2010

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The Wall Street Journal – GM Stock Sale in High Gear
General Motors Co. is on pace to sell $18.1 billion in shares in what likely will be the second-largest U.S. initial public offering ever, capping a remarkable two-year turnaround in which the car maker went from begging for a government bailout to posting its first steady profits in more than six years. GM sold about 478 million shares Wednesday at $33 each, a price higher than the company and its bankers thought was possible just days ago. An additional 71.7 million shares are expected to be sold by GM’s bankers as part of an “overallotment” allowed when sales are stronger than expected. And it sold $4.35 billion in preferred shares…The proceeds will help pay back the U.S. government for the $49.5 billion it spent on its controversial rescue of GM, which has gone from losing billions of dollars a year to making $4.07 billion so far in 2010…The U.S. Treasury will cut its ownership stake in GM to about 26% from 61% through the stock sale, including the overallotments. That could ease the “Government Motors” taint that had turned off some car shoppers as well as potential GM investors…Investors and analysts watch for the size of the first-day “pop” of an IPO. If the shares rise more than the usual 10% to 20%, some observers may say GM and the U.S. charged too little and left money on the table. If the shares falter, it will mean some investors still question GM’s future.

Comment:

The job of the seller in an IPO is to receive as high a price as possible. The job of the buyer is to receive as low a price as possible. Who does a better job?

See the table below. It shows the Conrail IPO (then a record size) and the 10 largest deals done since then. Many of the largest IPOs were done right before a market peak and just as the market was coming under stress (rushed out?). The average return of the S&P 500 over the 6 months following these blockbuster IPOs is -2.41.

The table below suggests that the sellers of the largest IPOs are often excellent market timers. The majority of the time the S&P 500 is lower 6 months later.

<Click on table for larger image>

Similarly, as the monthly chart of IPO flows shows below, when IPO volume peaks, the market often struggles over the next 6 months. Again, if you’re the seller and doing your job correctly, this is what you want.

<Click on table for larger image>

Academic studies of M&A deals show that the seller often gets the better deal even though the buyer gets all the positive press and accolades. The same appears to be true of IPOs.

How well did Tim Geithner do his job? If he received as good a price as possible, then the market should be near or at a peak. If the bull market is still intact GM has further upside, then he did not do as good a job.

Trading started yesterday morning.

“He truly is the cheapest man alive.”

-A Wedbush employee, who spoke on condition of anonymity, citing a fear of retaliation from Mr. Wedbush

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Within the financial industry, there is this tendency to draw the wrong conclusion from a specific data point. Whether it is the nature of Buy & Hold, or misapplying info in the the wrong context, it seems to be an occupational hazard on Wall Street.

But away from market observations and asset management, there is an especially idiotic belief circulating amongst some firm’s management. It has found fertile soil amongst a handful of ill informed executives and business managers. Their new mantra: Being ultra cheap is somehow a virtue.

We’ve seen this most famously with Ace Greenberg of Bear Stearns, who used to lambaste employees for mailing documents with paper clips (hey, those things add up!). The great irony is that while Ace was busy counting pennies, the rest of the firm was assuming massive and ill advised risks, which ultimately led the firm to hemorrhage billions of dollars. (Way to keep your eye on the ball.)

Our boy Buffett famously lives in the same tiny house for 25 years. I have long suspected Berkshire bought NetJets so that Warren could fly private without giving up that aww shucks persona. “Hey, I’m not jetting around in a G5, this is due diligence!”

Its not as if these things are what make a firm successful or not. The counter example is Bloomberg LLC — they are exceedingly generous with their staff — lots of free food, soda, coffee, cappuccino — and it hasn’t prevented the firm from becoming worth tens of billions of dollars. The same can be said for Google, and half of silicon valley.

One can even argue they are silly distractions when running a sizable business. Perhaps it would be best if Chief Executives spent less time obsessing over the tiny things and more time focusing on the big items — you know, like the firm’s survival.

The latest adherent in this virtue of cheapness is Edward Wedbush. A rather amusing man-in-the-news piece is in the LA Times. It reveals him, despite being worth about $150 million, as some0one who is “compulsively frugal.”

Excerpt:

“He refuses to issue company credit cards to his employees. He personally signs expense-reimbursement checks, just to remind subordinates that he’s watching every dime they spend traveling or entertaining clients. He brings his lunch from home and drives a 1992 Lincoln Town Car.”

Its not the pennies that allowed the firm to prosper, it was avoiding the heavy leverage, speculating in risky investments, and sticking to their core competency –  namely, brokerage and investment banking businesses. It wasn’t the $500 a month they saved by eliminating a monthly pizza lunch for employees — it is that the company is debt-free.

Speak to people who use Wedbush as a clearing firm, and you will hear stories of mediocre technology generations away from the cutting edge. What the hell, it works, and its priced right.

I find this worldview perplexing. I grew up hardscrabble, put myself thru college and grad school, and once I came into a little coin, never hesitated to enjoy it. I cannot imagine looking back from one’s death bed, and gratefully remembering the nickels and dimes that were saved by eating brown bag tuna brought from home:

“I am about to shuffle off this mortal coil, but at least I never wasted any money on a flashy car.”

The full article, about an odd, eclectic, cheap man who built a solid firm over half a century with billions under management, is worth a few minutes of your time to read . . .

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Source:
Edward Wedbush’s roof leaks, but his wallet doesn’t
Walter Hamilton
Los Angeles Times November 16, 2010  
http://www.latimes.com/business/la-fi-wedbush-20101116,0,3710239,full.story

On Monday, I mentioned the restraint against bad Beatle puns in light of the Apple / iTunes announcement (WSJ: Beatles to Launch on iTunes).

Apparently, I spoke way to soon.

Jacob Goldstein of NPR followed up and collected the full list, in a delightfully pun-free post titled: Everybody’s Got Something To Hide Except Me And My Monkey:

• Working It Out, iTunes to Sell Beatles Titles

• Apple, Beatles Work It Out

• The Long And Winding Road: Beatles Are Finally Coming To iTunes

• Apple reaches end of long and winding road

• Beatles and iTunes come together

• Apple, Beatles Finally Come Together?

• Beatles finally send all their loving — online

• Hello, Goodbye! The Beatles Come to iTunes, and Now We Can All Move On

• Do You Want To Know A Secret? Beatles Set To Debut On iTunes

• Can’t Buy Me Love, But Can Buy Me On iTunes: The Beatles

• EMI Says ‘Good Day Sunshine’ to Apple-Beatles Agreement

• Beatles on iTunes: Magical mystery revealed?

Woof . . .