Maybe an economist can explain this

In trying to understand how we continue to get such freakishly low readings in the price indexes that come out with the reports on economic growth, this data was stumbled upon:
Can anyone explain to me how rising import prices cause the GDP price index to go down this much? I understand the basic principle of how imports/exports are accounted for in the GDP number, but these percent contributions look exceedingly large.

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Still almost childlike in his idealism

According to this report($) in the Financial Times from earlier in the week, it seems that former Fed chief Alan Greenspan remains, in the words of Bloomberg columnist Jonathan Weil, "almost childlike in his idealism" - at least when it comes to asset bubbles.

Some highlights:

Central banks should be wary of trying to deal more aggressively with future asset price bubbles in case they suppress innovation and growth, Alan Greenspan has warned.

"If we want rapid growth in productivity, innovation, standards of living, we may have to accept that there will be periods of turmoil," the former chairman of the US Federal Reserve told the Financial Times.

Rather than try to suppress bubbles, he said, policymakers should ensure that financial institutions were well enough capitalised to withstand the hit from bursting bubbles as well as other shocks.

Haven't we had enough innovation and turmoil in the last ten years?

After successive bubbles in stocks and then in housing, what we probably need now is a good "innovation holiday".

Bubbles, Mr Greenspan argued, were often the by-products of innovation - such as the commercialisation of the internet in the 1990s, or advances in housing finance in the 2000s.

To ask regulators to suppress bubbles would be to ask them either to prevent innovation or to second-guess the value the market puts on it.

"Micro-meddling undermines the basic function of a financial system - that is to direct the savings of society towards its most productive capital investments," he said.

So, in this childlike, idealized parallel world, "innovations" in mortgage finance are still considered a good thing and advances in housing finance that pushed the homeownership rate from 67 percent to over 70 percent was well worth the effort.

Does anyone believe that anymore?

As for second guessing the value assigned by markets, maybe more people should have second guessed home values in 2004 and 2005 - maybe we wouldn't have such a mess on our hands in 2008.

Financial crises "of necessity are unanticipated - if they are not, they are arbitraged away", he said. "We have many international financial stability forums and none of them anticipated the problems of August 9 2007."Mr Greenspan said the most sensible thing to do was "to increase the capacity of our financial institutions to absorb shocks in general. That means more capital".

He should talk to his new employer at Paulson & Co. who made a fortune betting on a subprime collapse last year.

Maybe the real problem is that we need more and smarter arbitragers.

And lastly, some good news - the era of bubbles is over...

In any event, Mr Greenspan said, "I think the probability of sparking another bubble in the next 10 years is very low."

Bubbles, he said, required low long-term interest rates, low inflation and macroeconomic stability. They were "a feature of the disinflationary period that followed the end of the cold war".

Mr Greenspan believes that period is over.

Well, one thing is sure, the Greenspan period is over.

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U.S. Q1 GDP improved - don't get too excited

The Department of Commerce released the "preliminary" estimate for first quarter GDP indicating an improvement to a seasonally adjusted annualized growth rate of 0.9 percent.
Don't get too excited.

The 0.3 percentage point gain from last month's "advance" reading of 0.6 percent was driven by a gain of 0.6 percentage points due to a lower trade deficit combined with a 0.3 percentage point decline in private domestic investment largely due to a change in inventories as shown below.
Today's report is the second of three reports for economic growth during the first quarter - the "final" estimate will be released at the end of June.

The GDP price deflator, used to adjust "nominal" GDP to "real" GDP was unchanged from the advance estimate at 2.6 percent.

With soaring prices for both food and energy during the first quarter of the year, does anyone really believe that a 2.6 percent annualized rate of inflation is the right number to be used to calculate "inflation adjusted" growth?

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More fun with the Michael Masters report

The post Fun with the Michael Masters report from earlier in the week attracted an interesting comment from one swrichmond when it appeared at Seeking Alpha the other day. This ended up saving me a good deal of time in gathering information in an attempt to ascertain the motivation of someone in making such a presentation to Congress.

Recall that last week Masters claimed institutional investors, also known as "index speculators", are "one of, if not the primary, factors affecting commodities prices today". He went on to suggest they be banned from investing in commodities in order to allow such things as oil to seek a more natural (read lower) price.

The misleading graphic below was provided to help make the case.
In the words of swrichmond (all emphasis mine):

Rising commodity prices indicate lessening of faith in paper assets. Paper assets are what the 40-something investor class has built its existence on. This same investor class has experienced nothing but rising stock markets for their entire adult lives and thinks they have a right to constantly rising stocks. Making money is easy when stocks only go one way, isn't it?

seekingalpha.com/artic...

So it is no surprise that the investor class will develop a theory about commodity prices, and send a representative to present that theory to cause them to be regulated. The goal here is to cause money to continue to flow into paper assets. Paper assets that are depreciating in real terms at a shocking pace.

One only need look at Master Capital Management's portfolio:

www.tickerspy.com/memb...

which includes such oil-gobbling winners as AMR, DAL, USAirways, and UAL to understand his motives.

A money bubble is being blown in an effort to reinflate. The trouble with blowing money bubbles is that you have little real control over where the money goes once you have printed it. Capital controls are needed to force the money to go....into paper assets.

Well put sw...

As in any other market, speculators are playing a role in setting prices, but there are many other more important (and less-easily remedied) forces at work here.

As for Masters Capital Management, now that a handy link has been provided, let's have a closer look at what's in the hedge fund.

While never having used TickerSpy, I can't vouch for its accuracy or timelinenss, but it looks legit enough for me to share the following screen shot when directed toward Masters Capital Management as instructed in swrichmond's comment above (note that a few columns such as Last Trade, Today's Change, Volume, etc. have been removed in order to get it to fit in the width below):
If this is indeed Mr. Masters' hedge fund, it's having a pretty tough year and if I were in his shoes, I'd be complaining to Congress too - it's got some big positions in airlines and, as I understand it, airlines don't do so well when energy prices surge.

Weighted as indicated in the Portfolio Comments column, you can calculate a Q1 loss of almost 25 percent paced by monstrous declines in the two large airline holdings - U.S. Airways (NYSE:LCC) and United Airlines (NYSE:UAUA).

U.S. Airways is down 72 percent in 2008 and United has plunged 78 percent.

He still gets his two percent, right? But, not the twenty?

While there is no way of knowing how many of these stocks are still in the fund and what the actual Q1 performance was, you can kind of get a feel for what's going on here.

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The "commodity speculators" - what's everyone worrying about?

Aside from the remarkable surety with which many analysts are now able to identify a "commodities bubble" in real-time, a feat that seemed impossible for both the stock market bubble and the housing bubble just a few year ago, the one part of the "commodities bubble" discussion that seems most ill-reasoned these days is the eagerness to pop it.

Most "popping " proponents cite the burden imposed on Americans, blaming "speculators" for the recent price increases of food and energy.

But, Americans have endured pain before - this is not the first time that gasoline and grocery prices have surged and we've all survived.

And besides, the government says inflation is only four percent - we've had much worse inflation in the past.

Some say a little adversity makes you stronger and if there's one thing we American's haven't had over the last ten years or so, it's adversity.

Where else could nearly half the country grow wealthy beyond their wildest dreams simply by owning a house? (Of course, that seems to be changing now.)

And at what other time could a nation fight a war abroad while its leaders at home slashed taxes and encouraged the masses to support the effort by spending more money?

Because of the soaring cost of food and energy, we've all had to cut back a little bit on a temporary basis but, like every other time in the past, prices should moderate in a little while and things should pretty much return to normal.

Those evil "pension fund speculators"

As for the commodity "speculators" - pension funds, hedge funds, endowment funds, and retail investors who purportedly just seek to maximize their investment gains during a time of meager returns for both stocks and bonds - why is there such concern to stop them from bidding prices higher?

Surely oil at $130 a barrel and gasoline at $4 a gallon can't last.

If oil at $130 is largely the result of a speculative frenzy, with the "fundamental value" of the black goo not much more than half that amount, when prices take their inevitable nose-dive, speculators will get their comeuppance and the entire nation can go back to driving gas-guzzling SUVs.

The nascent "commodities bubble popping" mania seems almost as if it's an attempt to "protect" the speculators from doing any more potential harm to themselves.

In recent decades, it has not been the role of the U.S. government to step in and protect speculators from doing harm to themselves.

Quite the opposite, actually.

Besides, think of all the teachers in California, Pennsylvania, and elsewhere whose pensions are more sound as a result of their fund managers diversifying their investment portfolios to better withstand the ups and downs from year to year.

Think of how the income stream of retired teachers may suffer as a result of heavy-handed action by the government to stop these "pension fund speculators" in their tracks.

If this "speculative bubble in commodities" is just like every other bubble over the last few decades, it will meet its pin and those who dabbled in natural resource investments will get their fingers burned just like those who bought Pets.com in 1999 and Miami condos in 2005.

What's everyone worrying about with these "commodity speculators" anyway.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Gasoline is still cheap in the U.S., relatively speaking

You don't really appreciate just how cheap gasoline still is in the U.S. until you travel abroad. On our last trip to Europe in 2005, we filled up the ten-gallon tank on our rental car at a cost of about $80 - that seemed like lot back then and still does today.

Well, actually, the part about $8 a gallon still seems like a lot.

But, $80 a tank? That doesn't sound like such an outrageous amount anymore.

Of course, those visiting the U.S. today from Venezuela, Saudi Arabia, and elsewhere probably say the same thing about fuel prices in the U.S., so, it's all relative.

This report in today's Wall Street Journal has a nice summary of fuel prices in the U.S. and in Europe. For some reason, the graphic you see below appears only in the print edition.
With a little video clip about angry truck drivers in the U.K. (where the news always sounds a bit different when delivered with a British accent) the report explains:

With gasoline costing upward of $9 a gallon in parts of Europe, protests are putting governments under pressure to cut the taxes that make up much of the price of fuel.

Hundreds of truck drivers converged on London Tuesday, jamming a major road and forcing police to divert motorists. In France, fishermen continued to block ports and oil depots, while their counterparts in Spain and Italy signaled they would join the protest. French President Nicolas Sarkozy responded by calling for a Europe-wide cap on fuel sales tax.

So far, however, the real puzzle is that the soaring fuel costs -- which make U.S. pump prices look cheap by comparison -- haven't caught fire as a major political issue in Europe. The reasons for that, analysts say, range from simple fatalism to a growing green consciousness that makes some Europeans feel they should be cutting back on car travel anyhow.

In much of Europe, taxes account for more than half of the retail price of gasoline and diesel, hence the modest increases in price as shown above which would be even less in local currency terms. That probably helps to explain why it's not as big an issue as in the U.S.

This is one case where high taxes have caused businesses and consumers to change their behavior for the better (unless of course you believe that the current recent era of cheap energy will last forever).

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We've sure had a lot of bubbles in the last 37 years

Dr. Ben Steil's idea that a "fiat currency bubble" may be much more important (and more dangerous) than any asset bubble makes more sense with each passing day.

Recall that Dr. Steil's views were mentioned here last week.

While poking around at Wikipedia in an attempt to answer the question of whether the typical definition of a "financial bubble" requires there to be broad participation by the public, this summary of bubbles throughout history was stumbled upon.

We've sure had a lot of bubbles since the U.S. severed the last link to gold back in 1971!
Yes, they have a lot of individual housing bubbles that could be grouped together but the post-1971 bubbles would still outnumber the pre-1971 bubbles above.

The Poseiden bubble???

Note that the answer to the question asked above regarding public participation is a tentative 'yes'. This casts even more doubt on the "bubble" label being properly applied to such things as oil and gold, unless, that is, you have a lot of friends that own oil futures and gold coins because I certainly don't (well, actually, lots of 'internet' friends probably own oil and gold but my 'in person' friends and relatives still think I'm a little crazy).

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