A Conundrum On Inflation and Recession.

I'm not the brightest bulb and may be seeing things wrong, but... the Just in Case inventory surplus may be coming to an end.

To clarify... we had all sorts of supply chain issues, which were originally shortages of goods, due to parts, etc. THEN the supply chain issues became a snarled supply chain which caused shortages AND was exacerbated by companies ordering heavy to ensure arrival of supply to meet demand. This is Just In Case inventory control. 

The reduction in inventories allowed companies to pocket some hefty profits and pep up stocks. Everything from reduction of Oil and oil product inventories to freezers, etc. I even noticed my local Walmart pulled in those shipping containers all over their back lot.  

Now companies, such as Walmart and Target are talking about reduced profits, due to excess inventory. Oops! Certain major companies that supply all those retail stores with products (excluding food) are now beginning to cancel components to make their products... from their suppliers.

Understand the mantra is how the consumer's spending habits are changing. Seriously, how many TVs and Freezers, etc. can people buy for stimulus money they were given. 

As these companies slow their ordering to reduce inventory... a potential recession is looming. Meaning their inventory is no where near where it should be. Should be a buyers market at some point... just not yet. Again, this will not really impact food... as we still gotta eat. 

So these companies that had slowly began reducing inventory will now need to speed up. With interest rates sharply climbing, financing the debt to hold excessive inventory climbs as well. Not a good scenario to be in. Think GM in 2008, with their excessive inventory wish mushroomed and sales slumped to where they could not pay vendors.

Which brings me to the other part of this diatribe. How many zombie companies are about to be flushed out of the system?

The consumer, which is solely holding the economy together, will at some point overcome the euphoria of post covid and slow down the spending. My guess is a reduction will begin around fall, with an uptick for the holidays... and then the gloom of January will hit us.

Let's hope those companies have shed their excess inventories by then. Or as I think of it.. the time of steep discounts.

At some point, this may also impact the workforce, as it is not difficult to foresee it finally rebalancing and all those help wanted signs being stored away.

It will be a difficult time, as energy costs may linger and food is certainly not going to go down. I would expect the overall inflation rate to slide.

I probably should stop reading the hysterical headlines and let my brilliant leaders tell me how I should think and feel.

Review of EIA Weekly Report for 6-15-2022

 

The EIA has released this week's report. 

Petroleum product movement from the Gulf Coast to the East Coast remains robust while exports reach record highs

That's what it says and yes, those exports keeps adding up.  102,309,000 barrels of crude and petroleum exports ABOVE what has been imported since first of March. Oh and 14,091,000 barrels of gasoline have been exported in that period, ABOVE imports.

I keep hearing how someone is threatening the refiners to do more. Do what... export? I really can't believe our dear leaders are that dumb, BUT... they think we are and can be easily misled. So in addition to the current heatwave baking the country, we must endure more hot air from D.C. 

Of course, it would be easy to see the futures market for gasoline was heading down sharply by as much as 25¢, then criticize refiners, at which point someone could then turn around and take credit... when gasoline prices drop at the pump. Just wait for it. Of course, it will serve as some kind of proof of skullduggery, the next time prices jump back up. 

Frankly, an angry electorate cannot think rationally and it is easy to trot out the usual bogeymen to deflect blame. 

The problems with Freeport has really rocked the LNG market...

Dutch is up 50% and the UK is nearly double last week. Of course, problems with Nord Stream and also the Norwegian pipeline is wreaking havoc.

That's their problem, which actually might provide some relief to U.S. Consumers as the natural gas slated for LNG export will stay at home... for awhile.

It really cannot hurt... or even over saturate our storage.

I think this is enough for awhile, as I am starting to get tired of the less than positive news. 

Retail Trade Report for May 2022

 

Another less than stellar report, as retail trade fell in May, without adjustments for inflationary prices. 

Here is May's Advance Retail Report from the Census Bureau.

Advance Estimates of U.S. Retail and Food Services

Advance estimates of U.S. retail and food services sales for May 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $672.9 billion, a decrease of 0.3 percent (±0.5 percent)* from the previous month, but 8.1 percent (±0.7 percent) above May 2021. Total sales for the March 2022 through May 2022 period were up 7.7 percent (±0.7 percent) from the same period a year ago. The March 2022 to April 2022 percent change was revised from up 0.9 percent (±0.5 percent) to up 0.7 percent (±0.2 percent).

Retail trade sales were down 0.4 percent (±0.4 percent)* from April 2022, but up 6.9 percent (±0.7 percent) above last year. Gasoline stations were up 43.2 percent (±1.6 percent) from May 2021, while food services and drinking places were up 17.5 percent (±4.0 percent) from last year.

Simply put... we have started to spend less and buy even less. Certainly the aforementioned items by the release come into play, but a few added comments from me. M/M and Y/Y.

• Motor vehicle & parts dealers …….……….. -3.52% -3.73%
• Electronics & appliance stores …………….. -1.33% -4.45%
• Nonstore retailers …………………..….……….. -0.98% +6.98%

It would be imprecise to deduct the 1.1% inflation from April or the 8.6% from May 2021, as the inflation rate varied across the many items. However, I did just that in the graph above. It shouldn't be taken as completely accurate, but does provide an indication of things as they stand. That is my opinion on the matter.

An example would be...

       Grocery stores …………………..………..……….. +1.23% +8.71%

The nearest in the CPI report was food at home, with +1.4% May over April and +11.9% Y/Y. It's almost as if people are purchasing less or at least... cheaper options. The thing about food is only so much budget cutting can take place, until you hit bone. 

An example of that would be the CPI decrease in beef and veal, with an upward spike in chicken and fish. It's not necessarily a healthier diet, as fruits and vegetables have hit a pause. 

The report calls out food services and drinking places on an annual basis, but what about monthly...

        Food services & drinking places ……….. +0.67% +17.47%

The monthly increase looks a bit shaky, once inflation is applied and the annual should be no surprise, as we were in the early stages a fully opening back up from Covid.

The bright spot is gasoline, which is not really a bright spot, in my opinion.

So another report into the dustbin. Which way is everything headed? I will wait for the smart people to tell me.

Producer Price Index for May 2022

 

Once again, it is time to browse through the BLS PPI Report for May. (Historical Page)

The Producer Price Index for final demand increased 0.8 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This rise followed advances of 0.4 percent in April and 1.6 percent in March. (See table A.) On an unadjusted basis, final demand prices moved up 10.8 percent for the 12 months ended in May.

In May, nearly two-thirds of the rise in the index for final demand was due to a 1.4-percent advance in prices for final demand goods. The index for final demand services increased 0.4 percent.

Prices for final demand less foods, energy, and trade services moved up 0.5 percent in May after increasing 0.4 percent in April. For the 12 months ended in May, the index for final demand less foods, energy, and trade services rose 6.8 percent.

Simple math... the index rose 10.8% in May and the index less foods, energy and trade services was up 6.8%. So guess what rose substantially faster than 10.8% overall... Yep, foods, energy and trade services. I suspect you already knew that, but remember this is PRODUCER prices, not retail. Can you guess what gets passed on to the consumer? Ouch! 

So it is no wonder that people much smarter I, have quickly revised the CPI forecast upward. There is "some" good news, although it can easily be explained away as a blip. Producer Food Prices did pause in May, which is not to say they fell very much. The easy explanation would be demand for cheaper foods may be in play. The beef and veal index, slipped 9.5%, but chickens rose. 

Still looking for that indication that the rapid upward trajectory of Inflation will pause... and it will happen. But when? However, it would be foolish to expect a reversal in pricing, especially in the food area. Demand destruction might come into play for all other items, but food is a tough one to cut back on. 

There seems to be a bit of turmoil in Natural Gas prices, as Freeport now suggests a much longer timeline for a full restart. That has significantly brought down the NatGas futures on the Henry Hub, but that drop is to levels not seen since April or May. Whoopee! 

On to the next report.

Let's brag about our firearms on Social Media

Guns are back in the headlines, so it is to be expected the discussion is on social media. I am not going to say which way I lean in the debate. I am curious about those bragging about their guns and what they would do IF needed.

First off is the need for someone to own a gun. I get the whole safety thing, but people bragging about their gun holdings and prowess of use, seems to dare a thief to pay a visit... say when you aren't home.

Certainly gun violence is at the forefront AND the discussion is about the ease of purchasing guns, lost is the number of mass shootings where illegal guns and/or ghost guns are used. No one seems able to address that... or maybe they don't want to. About the only thing that strengthening regulations for gun purchases would do... is reduce the number of mass killings with legally purchased hardware. 

Then there is the braggart, claiming they would do this or that, IF someone were to threaten them. I am not sure how that would stack up in a self defense claim. Probably not ending with the braggart being convicted of manslaughter, but the idea of being so scared as to use a weapon in self defense, would come under scrutiny if the social media brags, were to come into evidence.

I don't know how it would all end up, but I find it disturbing, as to how some people seem to think their bragging won't come around to bite them... at the end of the Day.

Would Keystone XL Have Helped?

That seems to be all the rage, now with gasoline prices topping the US $5 mark. It seems that everyone can agree, that it is the fault of one political party or the other. So it would seem that allowing the Keystone XL pipeline to be built... would have increased the volume of crude coming into the United States and thereby reduce the price of gasoline.

Except we are exporting crude and petroleum products at an enormous and historical rate. We have exported 920,255,000 barrels of oil and petroleum products since the beginning of March. Certainly we have imported a lot as well. 827,071,000 barrels of oil and petroleum products in that same period. Oh wait... that export number is nearly 100 million barrels higher than the import number.

What would the crude inventory look like... Note the gray area is the 5 year range, both top and bottom, with the blue line being where we actually are and the red line being those 100 million barrels. Note the 5 year is distorted by the sudden drop in consumer demand, due to covid, which would normally be in the 420 million barrel range. Even the past 5 years is distorted in comparison to 7 years ago. (If you struggle with the small print, just click on the image. 

It gets even better as we have exported 86,667,000 barrels of gasoline over that same period, while importing 74,508,000 barrels of gasoline. Oops!

This is why I am having a problem with the idea surrounding the failure to approve Keystone XL as having an impact on our current gasoline prices. 

To be sure, IF we could go back in time and retroactively approve Keystone XL it should reduce the global impact of crude and thereby the price of gasoline, IF everything else remained the same.

To do that, we would need to ignore the shale boom (drill baby drill) and our own Congress in December, 2015, lifted the oil export ban that had been in place for over 40 years and let's not forget the releases of the Strategic Petroleum Reserve (SPR).

Briefly, the Keystone XL was proposed back in 2008, just as U.S. gasoline prices roared past the $4 per gallon mark. Keystone XL was a proposal by what was then called Trans Canada, based in Calgary. It was the 4th phase of the project, which came under fire. Politics in Canada prevents pipelines of this scale from going to their coasts, thus it is almost captive to the U.S. Market. 

It should be noted that XL was struck down in November, 2015.

Here is the gasoline price chart, with some embedded notes from me. (Pardon the penmanship)

Here is the U.S. Production chart without my adding comments, so refer to above dates and times... (Note that dates may not line up and I probably should have marked each)

So while we can blame Obama (Democrat) for the Keystone cancellation, it should be pointed out the repeal of the crude oil export ban... was Republican led. So here is what transpired, regarding exports from the USA.

Then finally, the last part of the picture... crude oil historical inventory.

At that point in time, the drill baby drill people were under severe financial stress and really needed to unload crude via exports. Keystone XL would have added pressure as well, although the XL stood for export limited, which seems like the exports would be limited, but in American terms, Keystone XL (export limited) would have been branded Keystone XI (export inc.) Keystone was a Canadian venture. Granted it was being exported to the USA, but intent was points further. 

And it was clear the aim was to link up to Cushing Oklahoma and the new pipelines being put in place to the gulf coast AND thereby be further exported to parts unknown. Pipelines that had moved crude from the gulf to the interior were being reversed, as part of this plan. Yes, the refiners in the Gulf had established Foreign Trade Zone status, thereby exempting the Canadian crude from export ban. It was a pass through arrangement being planned.

Keystone XL was slated to add 850,000 barrels per day into the mix. Yes, it would have theoretically lowered global petroleum prices, but so would the release of 1,000,000 barrels a day from the SPR. Coupled together, the likelihood was prices being about the same as current, as the need to phase out Russian Crude would be pulled forward.

Just because XL was struck down, does not mean their crude is not making its way to the gulf and the U.S. refineries along the gulf. Remember all the problems with rail tanker explosions and fires? The result was new tanker requirements and the biggest makers of these new tankers were subsidiaries of Burlington Northern, which was owned by Berkshire Hathaway. A lot of money to be made by building these new rail tankers and hauling this crude. It would have been cheaper by pipeline, but politics is politics.

Striking down XL doesn't appear to have staunched the flow of crude oil from Canada...

Then there is this... 

CALGARY, Alberta, March 24 (Reuters) - Canada has capacity to increase oil and gas exports by up to 300,000 barrels per day (bpd) by the end of 2022 to help improve global energy security following Russia's invasion of Ukraine, Natural Resources Minister Jonathan Wilkinson on Thursday.

It would seem that existing flows were not at capacity, so how would XL have increased the flows?

I can't really see a way around the current price of gasoline at the pump. We may have seen prices lower than 1 year ago and may see prices come down quicker in the fall... but right now, it would likely be the same. 

As usual, there is plenty of blame to pass around and nothing will really be done to alleviate the rise in prices. 

Would Keystone XL have helped? ONLY IF  YOU BELIEVE NONE OF IT WOULD BE EXPORTED OR DISPLACE U.S. CRUDE TO BE EXPORTED. By the way, I have this beachfront property for sale in Death Valley... if you are interested.

If you feel the need to blame politicians, be sure to blame ALL, in my humble opinion. The finger prints of each party are all over the current situation. 

Breakdown of CPI DATA and Real Earnings, May 2022

Last month, I shot my mouth off and predicted the CPI for May would come in between 7.9%~8.2%. That was optimistic, as it came up as 8.58%, rounded to 8.6%.

The BLS report for May... (historical archives)

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.0 percent in May on a seasonally adjusted basis after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.6 percent before seasonal adjustment.

The increase was broad-based, with the indexes for shelter, gasoline, and food being the largest contributors. After declining in April, the energy index rose 3.9 percent over the month with the gasoline index rising 4.1 percent and the other major component indexes also increasing. The food index rose 1.2 percent in May as the food at home index increased 1.4 percent.

My own inflation report continues to see the onslaught of higher prices, and I am not happy😠...

Here is a compilation of various inflation reports for May to date. Note my price index jumped to 7.6%. This is not one of those happy increases. Food continues to bite, as those hoarding supplies are beginning to dwindle.

The BLS also released the May Real Earnings Report.

Real average hourly earnings for all employees decreased 0.6 percent from April to May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 0.3 percent in average hourly earnings combined with an increase of 1.0 percent in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings decreased 0.7 percent over the month due to the change in real average hourly earnings combined with no change in the average workweek.  

Real average hourly earnings decreased 3.0 percent, seasonally adjusted, from May 2021 to May 2022. The change in real average hourly earnings combined with a decrease of 0.9 percent in the average workweek resulted in a 3.9-percent decrease in real average weekly earnings over this period.

Since February 2020...

Based on real earnings, the workforce is back to February 2020 level. It is hard to imagine any improvement, with current inflation eroding earnings. 

The inflation report was a surprise, as it was above forecasts. However, the forecast was revised upward throughout the month. Obviously the forecasts were not raised fast enough. Don't worry (or maybe worry), the forecasts for June report, due out in July... calls for a range 8.64%~8.91%, at this time. With this past month at 8.58% and it already being near mid June, there is a near 100% chance that June's inflation rate will outpace May. The likely headline in July, will once again harken back to the December 1981 rate of 8.92%. Not much further back, as the November 1981 rate was 9.59%.

The PPI comes out Tuesday and we can see the future of inflation, in my opinion. I will be looking at the various groupings as well. We have the essentials, which fall into the food and shelter category; the things we complain about, but could possibly cut back on; the stuff we would like to have; and the stuff that dreams are made of.

The retail trade report is due out on Wednesday and will indicate something, although not sure of what. Several companies are stating they have an abundance of stuff, that we are no longer purchasing as if the world ends tomorrow. Which seems to indicate something related to the previous paragraph.

Still looking for that glimmer of hope, which might be in the CPI-W. As this is based on 3rd quarter, year over year average, the forecasts are indicating a possible 8.7%~9.0% increase. UNFORTUNATELY, that also indicates some serious inflation yet to come. It should be remembered that C.O.L.A. is based on 3rd quarter average, versus same period of a year earlier. While the CPI-U is the headline, the CPI-W was up 9.3% YoY. Which is odd, as years past had the CPI-U accelerating faster than the CPI-W. 

Hope you have a good weekend!!