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Five Things You Need to Know: PPI (Plummeting Price Index), The Fed Agenda, Hey, Labor Costs, Japan Growth Surges, Can We All Now Finally Admit That We Have a Serious Problem?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. PPI (Plummeting Price Index)

The Producer Price Index for Finished Goods fell a seasonally adjusted 1.6 percent in October, according to the Department of Labor, equaling the largest monthly decline on record. Expectations had been for a decline of 0.5%.

  • The PPI excluding food and energy, also known as the "core rate," fell 0.9 percent, the largest decline since 1993.
  • Just last month core PPI rose 0.6%, the largest monthly increase since January 2005.
  • As we noted at the time in Five Things, however, that was due almost exclusively to a one-time surge in passenger cars and light trucks.
  • Remember, last month passenger cars showed the largest gain in prices in 16 years and light trucks showed the largest increase since 1985.
  • Today? Back to reality. Prices for passenger cars fell 2.3 percent. Prices for light trucks fell 9.7 percent.
  • The year-over-year price index for passenger cars is down 3.2 percent, light trucks is down 12.4 percent.
  • Meanwhile, how about producer pricing power? Fortunately, since at virtually no point during this "inflationary" cycle have producers had any pricing power (see chart below), prices at the earlier stages of processing moved down 1.1 percent in October after falling 1.4 percent in September.
  • The crude goods index, an index of prices for raw materials, dropped 10.5 percent following a 3.4-percent decrease in the previous month, while excluding food and energy, intermediate prices were unchanged.

Does this look inflationary to you?
PPI Finished Goods less Intermediate Goods
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2. The Fed Agenda

As Federal Reserve Chairman Ben Bernanke said in his 2002 speech, "Deflation: Making Sure "It" Doesn't Happen Here," when it comes to deflation, a pound of prevention is worth an ounce of cure. Understanding the Bernanke-mantra: "Prevention of deflation is preferable to cure," is crucial to understanding the Fed agenda and why they say what they say and do what they do.

  • First, how does the Bernanke Fed define deflation? Going back to Bernanke's 2002 speech, deflation only occurs when price declines are so widespread that broad-based indexes of prices, such as the producer and consumer price indexes, register ongoing declines.
  • According to Bernanke, the source of inflation is not a mystery. In almost all cases, deflation is a side effect of a collapse in aggregate demand, a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.
  • How does the Fed prevent deflation? According to Bernanke, the answer is straightforward: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation.
  • That's some tightrope.
  • Go back to the PPI chart above for a moment. Finished goods less intermediate goods. Producers have enjoyed little if any pricing power throughout the Fed's "tightening" campaign.
  • Consumers, meanwhile, have done more than their part... thanks to the Fed's willingness to stimulating aggregate spending... but at a cost. (See chart below).
  • As Minyanville Professor Jeff Macke noted this morning on the buzz with respect to Retail Sales, "The consumer may be in trouble. He may be over-levered, running on fumes and stiffing his newspaper delivery people on a weekly basis. Be that as it may, he's still shopping enough to allow retailers hitting on all cylinders to meet and raise estimates."
  • So, next up for the Fed? A new inflation bogeyman to keep the consumer worried about spending today, saving tomorrow.

Personal Saving Rate Graph

3. Hey, Labor Costs

Hey, The Fed hasn't mentioned labor costs in a while. In fact, we have to go back to 1998 and 1999 to revisit the horror that rising labor costs may fan the flames of inflation. Yeah. That episode of inflation-fanning labor costs worked out real well.

  • Federal Reserve Bank of Dallas President Richard Fisher said on Monday that U.S. employers were witnessing a clear shortage of certain types of workers, according to Reuters.
  • Fisher, not a voting member of the Fed's interest rate setting committee this year, said hourly wages for some types of workers in Texas were up sharply and employers were now having to pay bonuses just to get people to show up for work.
  • "Throughout this nation and especially in the state of Texas ... (companies are) suffering from a shortage of skilled and semi-skilled labor," Fisher told the Texas Lyceum, an economic think-tank, at its annual meeting.
  • Fisher specifically mentioned welders, plumbers, truck drivers, and workers in the hospitality industry as jobs which are going begging nationwide, Reuters said.
  • That sounds familiar.
  • Last Friday, in its monthly Fed Views piece, the San Francisco Fed noted that "the labor market continues to tighten, and the unemployment rate fell to 4.4 percent in October, the lowest level since May 2001."

4. Japan Growth Surges

Japanese economic growth in the third quarter was much faster than expected, according to XFN-Asia.

  • The Japanese government said GDP was 0.5 pct bigger in real terms in the third quarter than in the second, growing at an annual rate of 2.0 pct - a faster rate than the market had forecast, XFN-Asia reported.
  • Two things to consider about Japan's economy: export-led growth balanced with continued stagnation in consumer spending.
  • Net exports were the main driving force behind the third-quarter growth in GDP, the government said.
  • Net exports are the difference between exports and imports. Japan net exports contributed 0.4 percentage point to real GDP growth in the third quarter, helped by increased shipments of fuel-efficient cars to the US.
  • The bottom line is that the Bank of Japan may now increase interest rates this year or early next year as the economy begins to awaken thanks to exports; the feeling appears to be that consumer spending will follow next year.

5. Can We All Now Finally Admit That We Have a Serious Problem?

According to USA Today, some folks are dressing up their cars by picking up luxury hood ornaments, lettering and emblems from Ebay and affixing them to their cars to try and masquerade as higher-priced luxury vehicles.

  • Officials at Kelley Blue Book, an auto-buying service, told the newspaper they've seen Mercedes eight-cylinder coupes rebadged as 12-cylinder versions, a sedan with emblems that would make it a coupe, and fake high-performance AMG or Brabus models.
  • Occasionally, cars will change brands altogether. "We saw a Ford badged as an Acura. We were dying," says Kelley Blue Book spokeswoman Robyn Eckard.
  • Online auction service eBay says it sells about 15,000 items a month in the automotive emblem category.
  • "It happens all the time," says Myles Kovacs, president of Dub magazine, which follows car-customization trends.
  • "People want to live outside their means," Kovacs said.

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