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Five Things You Need to Know: PPI, Where's the Power?, Cost of Homogeneity, No Static at All, There's a Riot Goin' On


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


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

1. Producer Price Index

The Producer Price Index came in with a headline number well below expectations. Looks like inflation has been successfully tamed.

  • According to the Labor Department, prices of raw materials rose just 0.1% in August.
  • Most economists expected a gain of 0.2%.
  • Excluding Food and Energy, the core PPI fell 0.4%.
  • Most economists expected a gain of 0.2%.
  • The overall market consensus is that this seals the deal for no Fed action at tomorrow's meeting, though ahead of the PPI release Fed Funds futures were pricing in just a 5% chance of a 25 basis point increase anyway.

2. Where's the Power?

Meanwhile, some (by "some" we mean "us") are still wondering where the pricing power has gone? Actually, we're not so much "wondering" as "pointing it out" because that's what vanishes first when credit begins contracting following a sustained period of credit-induced demand.

  • The drop in PPI core prices today is the biggest drop since April 2003, which was the height of the previous deflation scare.
  • A year later, on April 20, 2004, then Fed Chairman Alan Greenspan declared deflation dead: "Threats of deflation, which were a significant concern last year, by all indications are no longer an issue before us."
  • Is deflation still dead? Let's look at pricing power through the PPI lens.
  • Last month the price index for finished goods other than energy and foods declined 0.3%.
  • This month the price index for finished goods declined even more, by 0.4%, the second consecutive month of declines.
  • What about at the earlier stages of processing?
  • Last month the prices for intermediate goods in the earlier stages of production rose 0.5%.
  • This month, they rose 0.4%.
  • The prices across the board are nowhere near the negative levels they were in 2001.
  • So that's what deflation in the PPI looks like when everybody sees it.
  • We don't see that kind of red in today's PPI report, but we see something interesting: the continued large spread between the decline in finished good versus the rise in intermediate goods.
  • Today's PPI finished goods table shows that finished goods (excl. food and energy) price changes have risen less than intermediate goods for 11 of the past 13 months and have now turned sharply negative.
  • This shows the continued inability to pass through costs, which is ultimately deflationary.
  • If you were to express this in real estate terms, then you would say it's a "buyers market." Except in this case the buyers don't have any money.

Personal Saving Rate Graph

3. The Cost of Homogeneity

Meanwhile, new construction on U.S. homes fell 6% in August to a seasonally adjusted annual rate of 1.665 million, the lowest since April 2003, according to the Commerce Department.

  • Most economists expected a decline to 1.75 million units.
  • Year-on-year housing starts were down a shocking 19.8 percent.
  • And what about the Midwest, which was never as hot as the "speculative" coastal regions?
  • Single-family permits in the Midwest were at their lowest pace since May 1993.
  • What was that former Chairman Greenspan said last September about the unique nature of United States real estate?
  • "The housing market in the United States is quite heterogeneous, and it does not facilitate the easy diffusion of local excesses. Instead, we have a collection of local markets only loosely connected by such factors as mortgage interest rates and, over the longer term, migration and construction capacity. As a consequence, the behavior of home prices varies widely across the nation."
  • Sure looks like a national problem to me.

4. FM, No Static at All

According to the trade magazine Automotive News, senior executives at Ford and GM earlier this summer discussed a possible merger or alliance.

  • According to the Financial Times, Ford and GM executives earlier this summer held "one discussion" on a potential deal between the two companies.
  • Fritz Henderson, chief financial officer of GM, discussed a possible alliance or co-operation with Don Leclair, his counterpart at Ford.
  • The discussion apparently did not lead anywhere and the FT reported, "There is nothing going on," citing an insider.
  • The Ford/GM negotiations were part of attempts by both carmakers to look for radical solutions to the crisis besetting the Detroit motor industry, according to the newspaper.
  • Meanwhile, GM is continuing to pursue a potential alliance with Renault SA and Nissan.
  • Did Ford and GM spend too much time with the Barry Schwartz book "The Paradox of Choice" or something?
  • Breaking down the financials of those two companies about the only possible profitable outcome of a Ford/GM alliance would be something along these lines:

The FM Volga: One people, one car company, one car.

5. There's a Riot Goin' On

Riots have erupted in Hungary after the Prime Minister Ferenc Gyurcsany allegedly admitted lying to secure votes in the last election, according to

  • Teargas and water cannon were used on protesters who turned violent in the capital Budapest, storming the headquarters of state television and setting fire to several cars.
  • The demonstrations were held in response to a leaked recording of Mr Gyurcsany saying his government "lied morning, evening and night" about the economy to secure re-election, according to the article.
  • The question is: Why riot now?
  • In all the pages of history the total of lies told by some of those seeking election to political office is probably incalculable.
  • Jokes, satire and general cynicism, about political motives and lies have been around for centuries.
  • From Aristophanes to Montiagne to Swift, Mencken and Twain.
  • Political lies and deception were not invented in Hungary.
  • The old model of human behavior maintains that the lying by the politician in Hungary caused the change in social mood that in turn caused a riot.
  • A different, albeit controversial, model called socionomics, says that changes in social mood motivate changes in social action.
  • A darkening social mood created the right conditions for a riot. The lying by a politician simply served as a trigger.
  • Socionomics takes the hypothesis that humans' unconscious impulses to herd lead to the emergence of social mood trends, which in turn shape the tone and character of social action.
  • This affects and influences all forms of of social activity: economics, financial, political and cultural.
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