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PPI shows Enormous Squeeze On Profits
http://globaleconomicanalysis.blogspot.com/2008/05/ppi-shows-enormous-squeeze-on-profits.html ^

Posted on 05/21/2008 1:45:31 PM PDT by newbie2008

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Mr. Practical was commenting on the variance between the crude goods PPI and the finished goods PPI. This is what Mr. P has to say:

I sent this chart of the Producer Price Index out to a few friends. I began getting calls from people I barely knew. Apparently, the chart really made the rounds and astounded people. I've talked about this before. I'm surprised people still don't get this. They look at the headline statistics the government puts out and don't bother to think about the real information embedded in the numbers.

The crush on profits is beginning to take full force as companies are having more and more difficulty passing higher input costs on to consumers, as they're getting squeezed too.

This is the most important statistical relationship to stock prices by far.

The charts show there is virtually no ability to pass on rising input costs. This will translate into declining profits. Declining profits are never good for stock prices. There is simply no other rational way of looking at this.


TOPICS: Business/Economy
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1 posted on 05/21/2008 1:45:32 PM PDT by newbie2008
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To: newbie2008

This is why my money is in cash. Yes, there is inflation and yes, the return is low but once earning reports start coming out in after July 1st for Q4 then in October for Q4 I see a Dow around 10,000 and a NASDAQ under 2,000.

However, a nice rebound is possible later next year and I will likely start to go back into the market then.


2 posted on 05/21/2008 1:54:25 PM PDT by misterrob (Obama-Does America Need Another Jimmy Carter?)
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To: newbie2008
In a word, deflation.

There has been enormous decline in available credit, because banks won't or can't loan you money except under the best of terms because they have lost huge sums this last year, with more losses not yet accounted for.

This credit collapse, in the trillions, exceeds by one or two orders of magnitude what currency inflation the central banks (such as the Fed, lowering the prime rate or bailing out Bear Stearns) or congress (with their tax rebate) can inject.

What little inflation has been injected has helped weaken the dollar. This weakened dollar, along with the continued accumulating affect of thirty years of no-growth in our domestic energy supplies (oil drilling or nuclear power plants) along with rising energy needs of most nations and the misplaced ethenol mandates have forced up the dollar denominated costs of foods and energy. The enormous deflationary strains being imposed on the economy from the credit collapse are removing our ability to hide these strains in a rising flood of capital.

The huge piles of debt and unfunded mandates (Social Security, Medicare, ...) accumulated by governments and people who took out subprime mortgages and banks who invested in all those financial shenanigans need to be worked through.

There may well be a period of serious inflation, resembling those of the Carter years or worse, but first we will be seeing a period of deflation.

Avoid depending on being able to borrow money anytime the next few years, pay off debt, reduce cash flow needs, and don't invest in companies or governments that will be depending on debt financing.

The dislocations caused by these changes in the economy are causing some highly visible increases in the more essential expendables, such as food and gas, but are causing at the same time substantially larger declines in prices of major items such as houses and investments, and are forcing retailers of non-essential goods out of business or into hard times.

If we really were entering, in the short term, a period of rampant inflation, then I'd recommend piling up the debt, with the expectation of paying it off in cheaper dollars a few years down the road. Don't do that. You will be bankrupt before the inflationary times arrive.

3 posted on 05/21/2008 2:32:15 PM PDT by ThePythonicCow (By their false faith in Man as God, the left would destroy us. They call this faith change.)
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To: misterrob
You're more optimistic than I am.

There may be, in my view, some bear market rally's in the next few years, but I'm not expecting a serious bull market to begin until either 2012 or 2016.

4 posted on 05/21/2008 2:34:07 PM PDT by ThePythonicCow (By their false faith in Man as God, the left would destroy us. They call this faith change.)
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