Bubble Bubble Toilet Troubles Again?

Earlier this week we spent some time analyzing key performance indicators as they relate to specific steel end market segments. Each end market has its own set of indicators. But at the same time, we need to look up and out of specific metal segments and gauge the overall economy as these trends also impact metals markets. Earlier this week, my colleague Stuart wrote a piece discussing Goldman Sachs calling “top to many commodity markets. And of course, many came out with critical pieces on Goldman’s pronouncement though some believe they (Goldman) may have [inadvertently] created a buying opportunity. But no matter your viewpoint on Goldman Sachs (this month’s Vanity Fair has an interesting piece on their leadership struggles back in the 90s), clearly some view certain economic indicators as troublesome.

Take for example the CPI, otherwise known as a key measure of inflation. According to a Fast Money piece that appeared on CNBC, using the 1979 CPI methodology would have yielded a 9.6 percent annual inflation rate based on February’s numbers, according to the Shadow Government Statistics newsletter. In addition, the CNBC piece stated, “Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. the iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site, Shadowstats.com. Our friends from the Consumer Metrics Institute would concur to wit, their weekly newsletter released this week stated, “Household income has stagnated in the face of price inflation in household staple commodities: corn prices are up 103%, oil prices rose 122% and cotton spot prices quadrupled.

Another economic tea leaf not looking as rosy as it has in prior months involves the trade deficit. Both imports and exports declined in February. But before we get excited about declining imports, we should point out that both an import and export decline (the first export decline after five months of increases) suggests economic weakness. This prompted RBS to cut their GDP forecast from 2.0 percent to 1.7 percent for Q1, according to a recent Reuters article. Unfortunately, RBS does not stand alone. Both Morgan Stanley and Macroeconomic Advisors lowered their first quarter GDP forecasts (in the case of Morgan Stanley, lowered to 1.5 percent vs. 1.9 percent earlier and for Macroeconomic Advisors to 1.5 percent from 2.3 percent). The global GDP outlook has also seen a downward revision as Gerdau Market Update reports: “World real GDP growth is forecast to be about 4 ½% in 2011 and 2012, down modestly from 5% in 2010. The NAFTA forecast also shows GDP declines moving forward.

On top of all this we have a Fed policy that acts in response to its read of the economic environment. Lately there appears no shortage of commentary about or criticism of the Fed. Some, like the Consumer Metrics Institute, believe we have a bubble in financial assets and commodity prices, despite real estate declines. “This has been largely due to the mechanism used for the injection of the liquidity — increasing the excess bank reserves of money-center banks. Those banks, in turn, deployed the excess reserves in the ways that they felt would generate (for them) the greatest profits — speculating on financial assets and commodities (and certainly not real estate or mortgages),” the Institute writes.

This week’s Economist points to an internal conflict within the Fed between the “conventionally Keynesian point of view (Bernanke) who “looks to core inflation as a proxy of where things end up once commodity prices stop rising, and with inflation at less than 2 percent (using conventional methods, this blog post notwithstanding), the target appears too low vs. the “hawks who “are also more likely to see inflationary implications from rising commodity prices. But as the article points out, the “hawks don’t run the Fed. And though some of the hawks within the Fed claim interest rates may have to increase to curtail inflation, Bernanke likely worries more about unemployment, hence interest rates will not increase anytime in the near future.

And we all know what long-term low interest rates yield more bubbles.

–Lisa Reisman

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