During the last four weeks, orders are below expectations for Whole Foods (WFMI), according to OTR Global Research, which tracks suppliers. Its research suggests the same trend is occurring for cruise lines and mobile hand sets. This merely confirms what should be apparent from looking at Gallup consumer tracking, that shows consumer confidence faded at the end of February. In late March, confidence tracked lower again and then in April, rolled over even harder and is now a full 14 percent lower than last year. The OTR revelation about WFMI suggests that wealthier people are being impacted by inflation on a lag from the average consumer.
For the condition of the average consumer, Walmart’s top management should be considered an authoritative source on inflation and consumer conditions. It was warning back on April 1 that consumers face serious inflation in the months ahead [USA Today]. A month later, WMT is even more direct in its observation stating, “Wal Mart’s core consumer is running out of money.” [Money]
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In February, farmers moved “to beat the price hikes” by purchasing their fertilizer far in advance, OTR Global commentary revealed. This is indicative of a classic inflationary environment, not a normal business cycle.
“Many US farmers are already buying nitrogen for applying in spring 2012, before this year’s spring crops have been sown,” OTR Global said. ”All sources said it is highly unusual for farmers to spend on next year’s crop before the current year’s crop is planted, but robust income and farmers’ desire to avoid higher fertilizer prices later is prompting the move,” the intelligence group said.
In response to the boom in orders, fertilizers producers like Potash are taking old facilities out of mothballs, misreading the market signals.
PotashCorp said it was to spend 8m over the next 18 months restarting anhydrous ammonia production at its Geismar plant in Louisiana, which has since 2003 been restricted to production of other nitrogen fertilizers.
The problem is that this inflationary response infects, maladjusts or badly distorts economic signals. Inflation psychology is driving and pulling forward short-term demand. Demand at some point becomes more of an inflation-coping strategy. Prices reach a tipping point that take some industrial producers literally out of business , leaving the remaining so-called demand in the hands of hedge funds, huge speculative pools, or wherever else Wall Street can suck investors in on the “sustained global commodity bull.” Meanwhile, the real economy is badly weakened and a bust ensues. The Chicago PMI report offers succinct comments that add color to this phenomena.
“Prices on plastic resin and cotton continue to press suppliers to the point where they are increasing prices or refusing business – first time I’ve seen this in years.”
People who are unaccustomed to big inflations or who drink the low-inflation kool-aid being dispensed by the Fed and U.S. government can confuse this development for real, sustained economic demand. Indeed, for a time, the numbers make it look so.
It has been particularly acute in China, where various product-buying panics have taken hold. Additionally, there has been an undetermined but considerable amount of hoarding taking place, literally as a money substitution strategy. Excessive monetary printing drives this psychology hard and I have frequently heard it described as a “can’t lose trade.”
Since China is the principal driver of pseudo economic demand, it is important to be fully aware of different products that may be infected or distorted. The second chart shows what China’s inflation exhausted consumers think about conditions in that country.
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The question then becomes a matter of tracking and timing the unfolding of the serious bust, or economic downturn, from these factors. Rather than focus on the utterances of asleep-at-the-switch central bankers like The Bernank, attention should be paid to independent non-governmental data, such as the Railfax railroad carloadings report released late each Wednesday. The supply disruption out of Japan is further adding to the dynamics that will lead to a bust. This, too, can be tracked by MIT’s Japanese product availability and online prices index, which currently shows little recovery and inflation taking off. If Japanese consumers aren’t getting product, neither are the markets they export to. The following charts show Japan’s supply chain is slow to recover.
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Any armchair investor can track a few data points to get a truer economic picture. I would be cautious of relying solely on management comments at this time. For instance, CSX’s transcript of April 20 says everything looks just fine to them, employing phrases like “positive economic backdrop” and “expectations of strong global coal shipments” (note that China consumes 47 percent of the world’s coal) and “continued growth in automotive.” It all seems based on a snapshot of April 9, when CSX reported a typical (in a boom) 7.3 percent increase in loadings. Looking over all the other data, everything looks normal; except for coal, which was already dropping.
April 9: Railfax
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Railfax total rail traffic April 9:
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On April 16, CSX traffic was up 2.6 percent and total rail traffic was dropped 3.9 percent from its previous level. April 23, overall rail traffic continued to fade to 1.4 percent, with a particularly large fall off in metals and autos. At this point, only grains are holding up.
The shutdowns in U.S.-based auto supply didn’t take hold until April 15. Intermodal is a proxy for imports and exports. Although down 6 percent, it’s still modestly positive. If it goes red, the weak-Dollar, multinational-export story gets trashed.
Railfax: April 23
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Seemingly on April 20, CSX management (like the stock markets) was not especially forward looking or even aware of recent trends in their business. Nonetheless, their rail traffic volume for the week of April 23 was down 3 percent. Not to pick on CSX, because I think complacency is widespread. But anyway you cut it, CSX so far is running well below the second quarter projections laid out by management. CSX stock hit a new high off of Norfolk Southern’s (NSC) beat in the March quarter. I am closely watching trends in chemicals that went negative in the April 23rd Railfax. Analysts have very robust projections for the big chemical companies.
Railfax: April 23
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The recent Railfax data suggests the inflationary boom is starting to devour itself and lose momentum. A significant downturn is getting underway for the cyclical economic players, emerging markets and consumer sector. In fact, if this data trend persists, which is my expectation, we will be looking at a full-scale, inflationary bust, bear market led by all the old boom favorites.
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