Not out of the woods yet with the economy
The Economy
While the domestic economy is strengthening a bit, the recent unemployment numbers greatly overstate the improvement as most of the gains simply came from people leaving the workforce rather than actual employment gains. At Meritas, we mostly ignore the unemployment numbers and look simply at Civilian Employment as a Percentage of the Population. This number remained unchanged from December and has only increased 0.2% from January of 2011 and is currently 58.5% after having bottomed out at 58.2% Dec of 2009. We are only up 0.3% since the bottom of the employment market! Employment numbers alone don’t tell the whole story – we have to also look at income levels. Real household income, meaning income adjusted for inflation, was $55,962 in January 2000. At the end of the recession it had fallen to $53,638. It is now $50,876. In twelve years it has fallen over 9%. On top of that households are saddled with unprecedented levels of debt. For decades the average household income to debt ratio was about 65%. It peaked at 140% in 2007 and is now just below 120%. Falling incomes and the need to reduce debt don’t make for much of an economic tailwind.
As for Commodities
The price for commodities is really a function of two things: the supply vs. demand for the commodity and the strength of the dollar. Most commodities, with the exception of natural gas and crude oil are over-bought today, we believe on the false assumption that the European situation is going to be well controlled and that we are economically out of the woods. The Baltic Dry Index, which is a measure of commodity shipping costs, advanced from a 25 year low for the first time since Dec 12th, after falling rates boosted the number of dry-bulk owners dropping anchor and refusing to hire. Rates are near or below cash break-even for every vessel class, so we are starting to see more ships anchoring and refusing to trade. The index is down 62.8% YTD and 38.1% Year-over-Year. We just saw how little pricing power there is in the market as P&G was forced to roll back prices after an 8% increase cost them 7% of market share.
Gold is trading more as a currency than a commodity these days. It is a hedge against the loose monetary policy arising from pressures caused by too much debt. Gold isn’t really going up so much as fiat currencies are being devalued. Speculators have increased their holdings of gold for four consecutive weeks. Possibly in response to the European sovereign debt crisis and indications from the Fed to expect continued loose monetary policy. During the last reporting period net purchases were over 33k, brining the net long position to 188k contracts. Non -commercial energy product accounts failed to increase their holdings of oil after the Fed conference, selling 4,500 contracts on a net basis, reducing the net long positions to just over 300k positions. This is just 0.1 Standard Deviation below the one-year average. Copper is clearly driven by what happens in China and there are a lot of concerns about what could happen there this year. The IMF reported that China’s growth would be cut in half from a projected 8.2% in 2012 if Europe’s debt crisis worsens. In defense against this, China will likely continue to ease up on their monetary policy, which will push the Shanghai Stock market index up and provide a tailwind to copper.
Food commodities down YoY
- Corn down 4.5% up 0.2% YTD
- Coffee down 13.9% down 5.3% YTD
- Sugar down 25.9% up 3.9% YTD
Metals
- Aluminum down 12.0% up 10.8% YTD
- Copper down 15.7%% up 12.4% YTD
- Gold up 27.4% up 9.6%
- Silver up 15% up 19.9%
Energy
-
- Brent up 14.1% up 6.1% YTD
- Gasoline up 19%% up 7.9% YTD
- Natural Gas up 19% up 7.9% YTD
- Natural Gas down 41.1% down 15%
