Inflationary Pressures Building

The NY Fed has released its latest Empire State Manufacturing Survey. Here are the portions of greatest interest to me:

In response to a series of supplementary questions on prices, manufacturers estimated that the prices they paid for inputs rose by a little less than 6 percent, on average, over the past twelve months, while the median increase was a more subdued 3.0 percent (see Supplemental Reports tab). (The median and average increases differed so sharply because a few respondents reported price increases of 25 percent or more; these large increases boosted the average but had no effect on the median.) The median increase anticipated for the next twelve months was 4.0 percent, while the average expected rise was 4.6 percent. In assessing past changes in their selling prices, firms reported an average price increase of 2.9 percent and a median increase of 2.0 percent. Looking ahead to the next twelve months, firms predicted a 2.9 percent average increase in selling prices and a 3.0 percent median increase. Most of the price increases reported in this month’s survey were moderately higher than those reported in an identical survey conducted in May 2009. . .

Pricing pressures continued in May. The prices paid index inched up 3 points from last month’s elevated level, reaching 44.7, with 46 percent of respondents reporting that prices had risen over the month, and 1 percent reporting that prices had fallen. The prices received index, at 5.3, remained near the levels of the past several months.

As has been the case for quite some time, margin pressures on manufacturers have been intensifying. Stagflation is here. Meanwhile the U. S. government is spending vastly more than its income. This is creating a false sense of prosperity. If borrowing rates were to go to 5%, which is less than the average rise in input costs seen by the manufacturers in the above survey, what would happen to Federal debt service? How far are the Feds from the debt trap in which borrowing exists merely to service the debt?

Trying to put a "correct" price-earnings ratio on a stock market with this sort of existential threat to a government in what are more or less ordinary times -- no major war, plague, widespread drought, etc. -- is impossible. It is also necessary to look at real assets minus liabilities and then consider that AIG went under (more or less) despite a robust balance sheet. Neither the stock market nor the pricing of Federal securities has a margin of safety. The prices may rise but are speculative.

At least if one owns gold and silver, one owns durable assets that historically have always had a value, which has not been the case for paper "money".

Copyright (C) Long Lake LLC 2010

Inflation on the March

Markit's CMBX indices of commercial real estate securitized values has been soaring recently. Reflation is, more and more, here. Not to mention inflation. The NY Fed's Empire State Mfg Survey was out today, showing much more cost of goods price increases over selling price increases. Barring a big change in trend, the next step is business raising their selling prices to keep their margins up. Cash is, more and more, trash, but where it should be deployed is a very difficult decision.

For now, in addition to passive savers, the current losers are small businesses and much of labor.

Copyright (C) Long Lake LLC 2010

New York Fed Proves Lack of Lending Argument a Lie

From this week's New York Federal Reserve Board's "Empire State Manufacturing Survey":

Most respondents cited little or no difficulty obtaining financing for either long-term commitments (capital investment) or short-term needs (operating expenses). Moreover, fewer than 10 percent of those surveyed indicated that problems obtaining credit had adversely affected their production or sales.

A bigger surprise is that any manufacturing remains in New York State anymore!

In any case, the above but ignored statement by the New York Fed gives the lie to President Obama's argument that taxpayers need to subsidize Big Finance so that lending can resume. The truth is that the country overproduced beyond what it could afford in the last up-cycle. Let us be Green and use what we have rather than strain to satisfy the gods of output and employment, and just produce what we need and can afford, paying down debt and abjuring new debt along the way.


Copyright (C) Long Lake LLC 2009