Tuesday, 18 January 2011

Nightmare on Main Street - The impact of the rise of energy and food prices on US Households

Where is US M1 Velocity of Money heading in 2011? Is a double-dip on the horizon?

In past crisis when Velocity dropped significantly, recession occurred. We have to keep a close eye on the evolution of velocity in the US.

US Business Inventories are still rising:

US Inventories from 1992 to 2010:

But as the title of this post states, storms are gathering as indicated in the latest publication from David Rosenberg, Chief Economist at Gluskin Sheff.


It is the fith time in modern history we have seen both food and energy prices rising in double-digits annual rate: 1979, 1980, 1996 and 2008.
In those five times we experienced two recessions, 2008 was a lead to a major recession. At this rate it is estimated that energy bill is going to amount to 60 billions USD for the US Household and the Food bill by 40 billions USD. Add to this end of debt service, it is another 100 billions USD headwind.
Bye bye Federal Fiscal stimulus...

Gasoline prices since last August in the US have gone from 2.65 USD per gallon to over 3.00 USD per gallon. 50 Billions USD hit for the already struggling US consumers.
John Mauldin (JohnMauldin@InvestorsInsight.com.) in his most recent message, provided the latest letter from Van Hoisington and Dr. Lacy Hunt from the Hoisington Fourth-Quarter Report. They tell us the following:
(Hoisington Investment Management Company: http://www.blogger.com/www.hoisingtonmgt.com)

"For example, in late 2010 consumer fuel expenditures amounted to 9.1% of wage and salary income. In the past year, the S&P GSCI Energy Index advanced by 14.6%. Since energy demand is highly price inelastic, it seems there is little alternative to purchasing these energy items. Thus, with median family income at approximately $50,000, annual fuel expenditures rose by about $660 for the typical family. In late 2010, consumer food expenditures were 12.6% of wage and salary income. In the past year, the S&P GSCI Agricultural and Livestock Commodity Price Index rose by 40%. If we conservatively assume that just one quarter of these raw material costs are ultimately passed through to consumers, higher priced foods will have added another roughly $626 per year of essential costs to the median household budget. These increased costs could be considered inflationary, however, with wage income stagnant, higher food and fuel prices will act like a tax increase. Indeed, the approximately $1300 increase in food and fuel prices is equal to 2.6% of median family income, an amount that more than offsets the 2% reduction in the social security tax for 2011."

Van Hoisington and Dr. Lacy Hunt go on:

"Reflecting the inflationary psychology of the higher stock and commodity prices, mortgage rates and municipal bond yields have risen significantly since QE2 was first proposed by the Fed chairman, increasing the cost and decreasing the availability of credit for two sectors with serious underlying problems. Also, Fed policy has pushed most consumer time, money market, and saving deposit rates to 1% or less, thereby reducing the principal source of investment income for most households. Clearly the early read on QE2 is negative for the economy."

Thank you Dr Ben Bernanke, QE2 is a complete failure.

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