Reply #1: Market WrapUp: Disco Balls, Donna Summer, Pipeline Pressures & the Great Housing Collapse

[ozymandius]

BY FRANK BARBERA, CMT

In a session packed with a great deal of economic data, the latest thermometer readings for the US economy continue to show a patient seriously laid up in the intensive care ward. To begin with, prices continue to soar with May Wholesale prices moving ahead at the fastest pace in six months for a single month period, and with a year-over-year rate of change still running at 7.24%, the PPI remains near a multi-decade high. Entirely unreported and with the most serious implications for where things are headed next, two measures of pipeline inflation continue to remain in long term high inflation territory. To start with, if we compare Wholesale prices to Consumer Prices, the PPI less the CPI, we find that with PPI now running at 7.24% annualized and (excuse me while I cough) CPI running at 4.08%, the spread between PPI less CPI widened out this month to 2.99%, near the highest levels since the late 1980’s. A measure of Pipeline Inflation, the new highs in this gauge continue to suggest that Stagflation will be with us all for some time.

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In addition to the PPI and CPI comparison, we can also examine the pipeline ‘pass thru’ within the Wholesale price chain. To this end, the forward view is quite dim indeed as Crude Materials, the first wrung in the pipeline, are moving up at an annualized (hope you are sitting down) rate of 34.15% through today’s report, compared with the 7.24% for PPI for Finished Goods. That’s a whopping 27.74% percent of forward upside pricing pressure in the pipeline more powerful than anything seen in quite some time and confirming beyond question that the late 1970’s have returned. With Donna Summer about to start a new tour in the summer months ahead, we can only wonder, will Disco balls be next?

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Of course, we always marvel at how the media manages to focus on the one grain of potential good news in any economic story, while managing to ignore the other 99% of bad news. So much gets swept right past the harried US public. Take for example the Retail Sales report issued just last week. On Thursday of last week, the Department of Commerce announced that Retail Sales for May 2008 grew by 1% versus April, and grew by 2.5% compared with year earlier (May 2007) data. At first blush, many economists heralded the better than expected data as a sign that US Consumers, freshly in receipt of some $41 Billion in government stimulus payment checks, were dutifully spending their new found riches at the stores and malls of the United States. This report came on the back of a reported surge of 1.80% in retail sales in April, leading some to wonder, if Retail Sales are doing so well, how could the United States possibly be in a recession?

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Now before going on, I want to be exceptionally clear. Over the years both myself and others have written about the utterly ridiculous process of reporting inflation known as ‘Core’ Inflation, which excludes Food and Energy. Originally designed to supposedly ‘smooth out’ and detect the underlying trend of inflation, the over focus on ‘Core Inflation’ has become perhaps the most absurd concept that has ever besieged the ‘science’ of economics. After all, we all have to eat and we all have to get around, so if Food and Energy prices are spiking, in the real world this is where we all live and this affects us all in a profound way.

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