Five Things You Need to Know: Tale of an Insomnious Scofflaw
We may have fled the hideous tragedy perpetrated by our massive credit binge... for now... but the comedown and cleanup is going to be a jarring and nasty assignment.
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
Tale of an Insomnious Scofflaw... A Crucial Tipping Point... Osparie Losses Forge a Lesson for No One... Materialism Turns Raw... No Rolling Back the High-Price High-Watermark
1. Tale of an Insomnious Scofflaw
In certain parts of the South, mostly river cities and swamp villages, the summer heat in late August can rage with the choking intensity of a vacuum furnace. When I lived in Richmond, Va., I was forced to routinely endure these awful heat waves - temperatures in the upper 90s by 7:30 in the morning, humidity so thick you could carve it with a chainsaw. During one particularly grim stretch of weather, the rear view mirror of my Jeep Grand Cherokee literally melted off the windshield.
Like cocktail strainers and bullhorns, the rear view mirror is a vastly underrated piece of equipment. Not only does it prevent you from backing over things willy-nilly, it also lets you see who might be looming up behind you, a critical function whose utility I severely underestimated until accidentally leading the Richmond City Police Department on a five-block "chase." How was I to know they were there? I didn't have a rear view mirror.
Driving around in the early hours of the morning without a rear view mirror like some kind of reckless insomnious scofflaw is no way to pay law enforcement their proper respects. It was a dangerous and expensive lesson to learn, but learn it I did, and I've since applied it to all aspects of my life.
And yet today, it feels like we're all back in that mirrorless car, recklessly hurtling down the highway, the desperate urge to flee the scene outweighing our seemingly incurable denial about not only what's looming behind us but what is also giving us furious and relentless chase.
The bald-faced truth is hard to come by in these kinds of dire situations, but here it is: we may have fled the hideous tragedy perpetrated by our massive credit binge... for now... but the comedown and cleanup is going to be a jarring and nasty assignment.
2. A Crucial Tipping Point
Suburban decay is eagerly camouflaged by the dark interior of an aging stripmall bar. But shortly after last call the charade collapses when the lights come up and the music stops. It's then that the crucial tipping point between behavioral maintenance and sloppy degeneracy is straddled. We're still maintaining, but the threshold is blurring. At least that's the message I take away from this little-known and barely-watched Credit Manager's Index.
You have to dig around in odd nooks and crannies, like in the Springfield (Mo.) Business Journal, to get access to this kind of privileged information. Other, more "respectable" business reporters are too busy to bother with this stuff. But it's important. The index fell slightly in August, now barely straddling the line between expansion and contraction.
The money line from the press release is this one: "The data suggest that tough economic conditions are strangling buyers' cash flow. Buyers are stretching their payment terms beyond normal, and even after that, it appears that they still cannot pay their bills."
That, in a nutshell, is what's giving chase to us these days: consumer balance sheet repair amid ongoing credit deterioration. On some days, the stock market acts as if it couldn't care less about consumer credit, and when you consider that retail stock ownership is now at a record low 34% for all shares and 24% for the top 1,000 companies, maybe that's the "right" attitude. But consumer credit is still the next shoe to drop. Corporate credit directly affects stocks... and it's still out there... looming.
3. Osparie Losses Forge a Lesson for No One
This Osparie Management news, the closing of the firm's flagship fund after a nearly 30% loss in August, should be a stern warning for us all that. But it's not, mostly because the vast majority of us aren't burdened with the kind of ferocious appetite for risk required to take an eight-year old fund with a 15% average yearly return track record coming off a massive commodities bull market and close it down in less than four weeks.
4. Materialism Turns Raw
The Financial Times this morning chronicled the changing commodities bull market in the Deutsche Bank chart below:
5. No Rolling Back the High-Price Watermark
Speaking of the commodities bull market, the New York Times this morning took a look at the stickiness of price increases on the backs of higher crude. - price increases that aren't being rolled back even as crude itself has peeled back to near $100 a barrel from $147 a barrel in July.
According to the Times, Procter & Gamble (PG) is an example of a company that has raised prices on products derived from petroleum by 7 to 10%, with no plans to roll back those costs. Dow Chemical (DOW) raised prices this year by nearly 50% for oil-based raw materials that go into products like diapers and polystyrene, also with no immediate plans to roll back those costs.
I've argued since January that eventually, as slower growth and asset deflation erodes gains in soft commodities, staples companies - those with some degree of pricing power - will not roll back price increases, enlarge packages that have shrunk or be willing to give up the margin increases that will come with lower ingredient prices.
So that means inflation will remain elevated? No. Remember, only staples and energy-based producers and retailers have been able to pass along cost increases. Everywhere else, especially in the land of consumer discretionary products, there is pressure to competitively deflate prices.
Meanwhile, these price increases for staples should create a longstanding high-water mark for prices, one that remains for many years.
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