Central Perk: Mish's Global Economic Trend Analysis

vineri, 21 ianuarie 2011

Mish's Global Economic Trend Analysis

Omaha Mayor Faces Recall Vote on January 25; Unbalancing Omaha's Budget; Time for Mayoral Boot
China Secretly Buying US Treasuries Via UK Accounts? Trade Deficit Math; "Hot Money" Math
Huge Margin Squeeze: Restaurants, Hotels, Cruise Lines Unable to Pass on Rising Food and Energy Prices; China's Role in Commodity Bubble

Omaha Mayor Faces Recall Vote on January 25; Unbalancing Omaha's Budget; Time for Mayoral Boot

Posted: 21 Jan 2011 06:00 PM PST

Taxpayers everywhere have had it with higher taxes. At an increasing pace, they have taken matters into their own hands.

Last summer an Omaha man, fed up with the Omaha's property tax hike, restaurant tax hike, and the mayor's public union pandering, launched a recall campaign. The vote is Tuesday, January 25. Mayor Jim Suttle is now whining (or do I mean begging) to stay in office.

Please consider Omaha mayor says city will suffer if he's recalled.

The mayor of Omaha said Friday the city's improving financial situation could be at risk if voters recall him in Tuesday's special election and create turmoil in the city's leadership.

Democratic Mayor Jim Suttle said in his State of the City address that he's turned Omaha's finances around, eliminating a projected $12.4 million shortfall to end 2010 with a $3.3 million surplus and restoring the city's AAA bond rating.

"Instability would hurt our chances for economic stability," he said in his speech before the City Council and business and community leaders.

The mayor's critics have accused him of financial mismanagement. In its recall petition, the Mayor Suttle Recall Committee cited "excessive taxes, broken promises and union deals that cost taxpayers millions and threaten Omaha's economic future."

Suttle said Friday that he did the responsible thing, even if that meant raising the city's property, wheel and restaurant taxes.

"Problems were pushed aside for decades, and some type of tax increase was needed no matter who was mayor," he said.

Mayor Suttle Is Mistaken

Mayor Sutttle lied about tax hikes and lies again now. He pandered to unions instead of cutting expenses and renegotiating contracts. Now he brags he "balanced the budget".

What he fails to point out is that he "unbalanced the budget", for business owners and the average taxpayer. Why? Because he did not have what it takes to deal with union salaries, excessive pensions, especially with police and firefighters.

Recall Campaign Background

Congratulations to Anthony FastHorse, who launched the recall campaign.

FastHorse said filling out the recall affidavit needed to begin a petition drive required just a few strokes of a pen, but he said his actions spoke volumes.

"I think the recall should open his eyes," said FastHorse. "If he really wants Omahans to work together, he needs input from the citizens."

FastHorse asserts Suttle is not listening to citizens right now. He points to the budget presented to the Omaha City Council on Tuesday.

That budget included a 4.44-cent property tax hike, a new 4 percent tax for tabs at restaurants, bars and on catering, and a 66 percent increase in the wheel tax, pushing it to $58.

FastHorse, who has worked construction, said the tax hikes are just too much.

You Can Help

If you live in Omaha, please vote and get your friends to vote. Talk to businesses and point out that if the mayor raised taxes once to bail out the public unions, that he will do it again and again.

Please visit the Mayor Suttle Recall site, and pledge time or money.

It's time for a boot.

Here's my recommendation for Omaha: Get someone to run who will outsource the entire police department to the local sheriff's association. That move alone will save enough money to roll back property tax hikes.

Good Luck Omaha!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

China Secretly Buying US Treasuries Via UK Accounts? Trade Deficit Math; "Hot Money" Math

Posted: 21 Jan 2011 01:04 PM PST

Floyd Norris at the Wall Street Journal thinks China May Be Masking Its Purchase of U.S. Securities

For eight years after the United States resumed running large budget deficits in 2002, China was the largest lender, buying a fifth of the new Treasury securities sold during that span — an expenditure of more than $900 billion. During 2006, China financed more than half the American deficit. When the financial crisis struck hardest, China spent more than $100 billion on Treasuries over the two-month period of September and October 2008.

But over the last year, China has been a net seller of Treasury securities, according to figures released this week by the American government. If that is true, it would be extraordinary, considering the size of the bilateral trade deficit, and there has been speculation that China has been purchasing Treasuries through accounts in other countries.

The Treasury Department estimated that China reduced its holdings of Treasuries by nearly $11 billion in November alone. For the 12 months through November, as the accompanying charts indicate, China reduced its holdings of Treasuries by more than $36 billion.

For the first 11 months of 2010, American banks, institutions and individuals bought about three-fifths of the $1.5 trillion of additional Treasury debt, while China sold some and other foreign jurisdictions bought the rest.

It is not easy to see how the Chinese government managed to keep its currency from rising more rapidly against the dollar if it did not continue buying Treasuries in 2010, and there has been speculation that it shifted purchases to accounts managed by British money managers.

If so, such purchases would show up as British purchases. As it turns out, Britain is estimated to have been the largest purchaser of Treasuries over the 12-month period, adding $356 billion to its holdings. That made it by far the largest buyer, followed by Japan. The only other major seller during the period was Russia, according to the government estimates.

If China has been buying through money managers, it may be easier at some point for it to begin selling Treasuries through the British channel without others understanding where the selling pressure is coming from.

Who Is Buying US Debt?

Here are two charts from the graphic: Who Buys U.S. Debt?

China

Foreign Buyers and Sellers

See the article for more charts including treasury purchases by US banks and other domestic buyers.

Trade Deficit Math

The two charts above are not believable for a mathematical reason that Norris did not explicitly state: When the US runs a deficit, some other nation must (as a function of pure math) accumulate US assets. Those assets could be dollar reserves, treasuries, investments in US companies, US property, or US equities.

Remember when China tried to buy Unocal, a petroleum producer, for $18.4 billion? The state department nixed the idea as a security concern. The same thing happened when Dubai tried to buy a US port.

Eventually those dollars will come home, they have to, as a function of math. In the meantime, passing the buck like a hot potato does not work.

Pro-Cyclical "Buy Commodities" Math

Some people suggest China should buy oil with those dollar reserves. They never bother to ask the next question: what would Saudi Arabia do with the dollars?

If instead, China bought copper from Australia, what would Australia do with the US dollars?

Another aspect of the "buy commodities" trade is that it would put upward pressure on commodities at a time China is already overheating. Trade math aside, commodity buying would be a pro-cyclical mistake by China leading to bigger booms and bigger busts.

One humorous aspect of all this alleged selloff of US treasuries by China is the hyperinflationist rant "China is Dumping Treasuries" when the reality is that China is likely accumulating US dollars or US treasuries a function of trade deficit math.

My one quibble with Norris' article is his statement "If China has been buying through money managers, it may be easier at some point for it to begin selling Treasuries through the British channel without others understanding where the selling pressure is coming from."

While technically true, please remember the math. Were the US to start running trade surpluses with China, then China certainly would be an outright seller of treasuries or US$ reserves. How likely is that?

"Hot Money" Math

Consider "hot money" accumulating in China. Hedge funds and others are betting in size on an appreciation of the Yaun. That requires China to hold dollar reserves for when the trade unwinds.

When hedge funds do bail on the trade, that would cause China to dip into its dollar reserves and buy Yuan. However, the current state of affairs (inflows betting on Yuan appreciation) is not consistent with falling treasury reserves in China.

For an analysis of the "hot money" trade and bets on Yuan appreciation, please see "Consensus Nonsense"; Is the Yuan Undervalued? Who Wins a Currency War?

Property Math

In regards to toll roads, bridges or US properties, such offers by China would be as noticeable as its failed attempt to buy Unocal.

However, buying shares of IBM, Apple, or other US corporations is certainly possible and could be masked, at least up to the point where position sizes required SEC notification. The risk is in buying overvalued assets in a pro-cyclical setup.

All things considered, one look at an implausible $356 billion in treasuries sitting in the UK likely tells the real story of what is happening: China is masking purchases of US treasuries.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Huge Margin Squeeze: Restaurants, Hotels, Cruise Lines Unable to Pass on Rising Food and Energy Prices; China's Role in Commodity Bubble

Posted: 21 Jan 2011 10:15 AM PST

Energy, meat, vegetable and coffee prices are up. Pricing power is not. The result is a huge margin squeeze that affects profits at restaurants, hotels, cruise lines, and travel-related businesses in general. The Wall Street Journal picks up the story in As Food Prices Soar, Eateries Scramble

Soaring global food prices, particularly for meat, sugar and coffee, are putting pressure on the restaurant, travel and hotel sectors as they pursue a fragile recovery. In a bid to offset added costs without passing them on to price-sensitive consumers, many companies are scrambling to renegotiate contracts, find cheaper suppliers and reconfigure menus.

Marriott International Inc. has been coping with higher prices for beef, fish and chicken over the past six months, says Brad Nelson, a vice president andthe global corporate chef for the hotel chain. The company is also paying higher prices for sugar and arabica coffee beans, which have both soared over the last year. "It's a global challenge," says Mr. Nelson.

The company swung to a profit in the third quarter but, like many of its peers, struggled to raise room rates, doing so for the first time in two years in the second quarter. So far, it has ruled out raising food prices at its restaurants, instead re-engineering its menus to offer alternatives to popular and pricey cuts of beef such as filet mignon and New York strip.

Restaurant chain Johnny Rockets, known for its burgers, uses about eight million pounds of ground beef a year, and its prices have risen 20 cents a pound over the last two months, says Ray Masters, senior vice president of purchasing and distribution. To offset part of the increase, the privately held company has renegotiated its poultry costs, cutting them 5% for 2011, and its ice-cream prices are down 4%. Still, this won't offset the higher beef costs, Mr. Masters says.

While cruise operator Royal Caribbean Cruises Ltd. hedges against increases in cattle prices, that hasn't fully offset its rising costs for beef, says Chief Executive Richard Fain. Since the fall, meat prices have risen steadily for the cruise operator, which serves about 53 million pounds of beef, poultry, lamb, veal and pork a year. The most popular restaurants on the ships are steakhouses, Mr. Fain says.

"Meat is important to our guests," Mr. Fain adds. "We aren't prepared to sacrifice the quality and we can't raise prices enough to reflect it, so it ends up being a cost we have to absorb." Royal Caribbean is also paying more for citrus fruits and fish, particularly shrimp, another popular dish on its cruises.

Norwegian Cruise Line began using e-auctioning last year to find better food prices as commodity costs rose, says Chief Executive Kevin Sheehan. The company, which uses 34 million pounds of meat and 9.5 million pounds of seafood a year, has had higher costs for dairy items, meat and fish, he says.

Through e-auctioning, the cruise operator can specify what food items it needs and accept bids from suppliers. The competition keeps prices lower, says Mr.Sheehan.

PPI Index Up Again

Please consider the Producer Price Index Report for December 2010.

The Producer Price Index for Finished Goods rose 1.1 percent in December, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.8 percent in November and 0.4 percent in October and marks the sixth straight rise in finished goods prices.

Finished Goods

About three-fourths of the December rise in the finished goods index can be traced to prices for energy goods, which increased 3.7 percent. Also contributing to the broad-based advance in the finished goods index, prices for consumer foods and for goods other than foods and energy moved up 0.8 percent and 0.2 percent, respectively.

Finished Energy

The index for finished energy goods climbed 3.7 percent in December, its third consecutive monthly advance. Roughly sixty percent of the December rise is attributable to a 6.4-percent jump in gasoline prices. Increases in the indexes for home heating oil and liquefied petroleum gas also contributed to higher prices for finished energy goods.

Finished Foods

The index for finished consumer foods rose 0.8 percent in December after moving up
1.0 percent in November. Over three-fourths of the December advance can be linked to prices for fresh and dry vegetables, which surged 22.8 percent. Higher prices for meats also were a major factor in the increase in the finished consumer foods index.

At the Crude Goods Level, producer prices are up 15.5%
At the Intermediate Goods Level, producer prices are up 6.5%
At the Finished Goods Level, producer prices are up 4.0%

Every step of the way, a decreasing portion of costs are passed on. Even less passes through to consumer prices. This is why those screaming about "rampant inflation" always point to raw commodity prices.

Those prices, as I continue to point out, are primarily a reflection of unsustainable credit expansion in China, not a falling US dollar.

US Dollar Weekly Chart

click on chart for sharper image

For all the paranoid screaming, hyperventilation, and hyperinflationist nonsense concerning the US dollar, the chart shows the US dollar to be almost exactly where it was a year ago, and higher than it was three years ago.

Amusingly, a monthly chart shows the US dollar index is where it was in 1990, 1992, and 1995.

US$ Monthly Chart

click on chart for sharper image

To be fair, the US$ index was at 164.72 in 1984. It is half that today. In that sense, the dollar has already crashed. However, from the point of view of 1990 on, it is at a point it has touched in 8 different years.

Hyperinflation? Please be serious.

To understand commodity prices and the PPI, one needs to look at China. Here are a couple of posts to consider

Is the Yuan Undervalued?

"Consensus Nonsense"; Is the Yuan Undervalued? Who Wins a Currency War?

Vacant China City Stories