Trichet, “Shocks” not over

For those who do not know, Jean-Claude Trichet is the European Union’s version of Ben Bernanke. Further, unlike the United States Federal Reserve who is supposed to be balancing 2 missions – growth AND fighting off inflation (although they’ve totally forgotten about the latter in their desperation to stimulate growth – at any cost), the European Union’s bank has 1 mission – fight inflation. That is why when CNBC says every 3 weeks "the EU will be cutting any minute now, just you wait" and hence "the dollar should rally", it is really hard to take them seriously. But they’ve been repeating it now for about 3/4 of a year – they don’t understand the psychology over there – unlike the US, people actually have a memory over there – and the hyperinflation era of Weimer Republic hangs over their head every moment.

At the end of World War I, Germany was crushed, Britain and France emerged exhausted winners, and there were a lot of big questions at the time, such as, would revolution in Russia spread to the rest of Europe?

Enter the Treaty of Versailles, June 1919, which placed responsibility for the war on Germany, while France demanded that Germany pay in more ways than one. The German military was to be reduced to a shell of 100,000 volunteers and about 6 cruisers, plus the government was to pay reparations of some 132 billion marks (about $35 billion, depending on how you value the currency at this time), along with other payments such as of all extracted coal. French Prime Minister Clemenceau said, "We will squeeze the German lemon ’til the pip squeaks.’" 

Germany was reduced to economic chaos after the armistice. In 1920, prices plummeted around the world in a great deflation. This price and wage deflation was reinforced by the economic policies of conservative governments. Germany’s new Weimar Republic inherited the vast burden of debt and the crushing weight of reparations. Add in the fact that tax revenues were low due to the weak economy, while the outflow of payments in gold-fueled inflation.

It also quickly became apparent that Germany would be unable to meet its reparation obligations. In July 1920 the German mark plunged dramatically as the Weimar government informed the Allies it could not meet the schedule of payments, but that it would continue disbursements of coal and other natural resources. With the U.S. pressuring Britain and France to repay their own war debts, the Allies grew all the more determined that Germany pay up.

On January 11, 1923, French and Belgian troops (against the advice of the British) occupied the Ruhr, a region which furnished 4/5’s of Germany’s coal and steel production. The miners refused to work for the enemy and the Germans simply printed more money with which to pay them not to, allowing inflation to spiral completely out of control. The economy was strangled and the free fall in the mark was incredible.

By late 1923, the German government required 1,783 printing presses, running around the clock, to print money. Germans wheeled shopping carts filled with literally trillions of marks to pay for a single loaf of bread. Employees asked to be paid their wages each morning so that they could shop at noon before merchants posted the afternoon price rises.

Actually some of those words sound eerily reminiscent of a certain 1st world country in this era – printing presses working 24/7 to combat deflation in certain assets (home/stocks). Hmmm…

With that said as commodities move ever upward, we continue to hurtle towards a global recession in 2009. Keep repeating – inflation is a tax on all things and all entities – producers and consumers. Right Kimberly Clark? (last I checked KMB does not sell food or gas – but somehow these price increases will NOT show in government reports – because you will substitute – i.e. oak tree leaves to wipe your behind instead of toilet paper, or instead maple leaves patched together instead of diapers… that’s government "substitution" effect and how we can make inflation disappear) We pointed out this "real inflation" in consumer goods produced by the Procter & Gambles and Kimberly Clarks of the world back in April [Apr 10: Inflation Spans the Globe] Only in the hallowed halls of government does this disconnect continue – after all they cannot afford to pay seniors on fixed income the trust cost of living adjustment so 2.7% inflation it is! And will be. But more good news in the "real world" announced Friday – this will be the story of earnings reports in the next few quarters – company after company telling how their earnings are being pressured by input costs… all the while Consumer Price Index (CPI) – the government’s report on consumer inflation will sing along at a leisurely 2.4-3.4% – lalalala – everything is beautiful in CPI land.

• Adding to the sticker shock faced by many U.S. consumers, Kimberly-Clark Corp. announced plans Friday to hike prices on tissues, toilet paper, diapers and paper towels — again.
• Kimberly-Clark, like other consumer-goods makers and food companies, is being squeezed on the commodity front as crude oil surges to new highs and raw-material costs escalate. This is forcing companies to protect profit margins through price increases, sales of lower-margin businesses, factory closings and job cuts. (thankfully, it is "all priced in")
• The Dallas-based consumer goods giant said its latest round of price increases will become effective between July 20 and Aug. 31. It said boosting prices is "necessary to offset significant inflationary pressure from higher raw material and energy costs."
• Kimberly Clark said prices will be 6% to 8% higher on Kleenex facial tissue, Cottonelle and Scott bathroom tissue, Viva paper towels, Huggies diapers and Pull-Ups training pants. (not so fast Kimberly Clark! Consumers will be switching to tree leaves! Boo Yah! No inflation – substitution effect wins again)
• These products accounted for U.S. sales of about $4.5 billion in 2007. Back in February, Kimberly-Clark boosted prices on those same products by 4% to 7% (Folks, I’m not a math major but somehow 2 price increases of 4-7%, and 6-8% in the span of 4 MONTHS, somehow adds to more inflation than 2-3% per government reports. If any of you have a PhD in Mathematics could you please email me so that I can make sure my conclusions are correct. Or better yet can you please email the traders who live and die off government reports as gospel?)
• The company’s commodity bill is rising: For the quarter ended March 31, Kimberly-Clark paid $160 million more for raw materials, such as fiber, and fuel. And this slowed profit gains: Three of its four business units reported a lower operating profit. (wow imagine that, higher commodity costs hit the bottom line – not according to Wall Street where $120 oil is good, $130 oil is great, $140 oil is groovy, and $150 oil will be superlicious?)
• Larger rival Procter Gamble faces the same predicament. It too has been raising prices to withstand rising costs for energy and base materials.

When will Congress bring "greedy diaper makers" to the floor for a hearing about how they are milking the US consumer? I mean to be fair to big oil – they should start bringing all these companies raising prices. Instead of bringing Uncle Ben to Congress or looking in the mirror – more dog and pony shows I say! Now there is one bright spot folks – unlike the 70s or early 80s, there is 1 place where there is little to no inflation. Your wages. Labor has very little power in the new era of globalization (flat world, labor offshore can do your work for 70-80% off) so we have some GREAT news for corporate America – their workers cannot really go and ask them for higher wages – hence labor costs will stay firm. Awesome news. Well… for everyone except workers. (but who cares about them, they are not necessarily in the 2000s global stock market – more middle class Chinese is all that counts)

Anyhow back to Europe – the Wall Street Journal says Trichet, unlike the UK’s King or US’s Bernanke does not believe everything is honky dorey. (or will be "in 6 months") Considering Germany’s performance [May 21: Who is the World’s Largest Merchandise Exporter? Not China. Or the US] versus the UK/US and the fact Trichet refused to budge on constant calls (from American pundits) to cut rates to so he could help our banks from their self induced wounds- instead standing firm as he foresaw inflation risk, I think I’ll listen to his words with a bit more of a straight face than the circus conductors running the US.

• The president of the European Central Bank, Jean-Claude Trichet, said potential economic fallout from the turmoil in financial markets, coupled with pressures from rising food and commodity prices, add up to "an accumulation of shocks that is clearly not over."
• The currency he oversees, once the dream of a few pan-European idealists, is today shared by 15 countries, whose €8.9 trillion economy represents the world’s biggest market after the U.S.
• Mr. Trichet’s comments echo broader worries about a European economic slowdown as oil prices top $130 a barrel. The fallout affects the U.S. and Asia, because Europe is a key source of demand for the global economy as U.S. growth slumps. As European consumers buy less, demand for U.S. imports is slowing.
• The relentless surge in oil and food prices is dealing Europe’s economy a double blow — making it harder for the ECB and Bank of England to cut interest rates, and undermining consumer spending on other items.
• The ECB’s key rate has held steady at 4% since last June, and many economists believe the bank will stay put until at least the end of the year. "Had it not been for this oil-price spike, markets would be betting on ECB rate cuts in the coming months," says Jacques Cailloux, economist at the Royal Bank of Scotland in London.                 
  
• Many Europeans say the soaring prices of gasoline — and diesel fuel in particular — are crimping their lifestyles. Christian Dänzer, a health-center manager from Bavaria, says he’s using his car less now in his free time, but he can’t avoid driving for work. In Germany, diesel costs the equivalent of over $9 a gallon. That’s forcing Mr. Dänzer to cut back his spending on eating out, consumer electronics and clothes, he says. "Things I used to be able to afford, I can’t any more," he says. (this should sound familiar to anyone who does not work in federal government or the Federal Reserve – in their world, there is little US inflation – why all the fuss? It’s *only* food and gas after all. Ipods are cheap! Maybe when Apple comes out with the EDIBLE iPod then we can say food prices are going down as well)
• Trichet: At the moment, "we have a protracted period of high inflation rates. But we will preserve the delivery of price stability in the medium-term." (sorry to hear that, no inflation here in the States – consider moving; the Kool Aid is wonderful here.)