With today’s release of the Producer Price Index the ratio of Crude Goods For Processing relative to Finished Goods is at a level that the index has only been at 4 times in history (data back to 1947). The last time we were at this level was in 2007 when we were warning about an economic recession while the rest of the media was talking about a “soft patch” and a “Goldilocks economy”. We warned our readers in March of 2008 that it would be the worst recession since the depression in the 30’s and most likely the stream of economic weakness that is rearing its head in the latest numbers are warning us that a recession, not withstanding another round of monetary stimulus in some form which could postpone a recessionary pull once again as it did last year, is in the offing sooner rather than later.
We will update our composite PPI/CPI index later this week which should confirm weakness in both the producer as well as the consumer side. With the consumer in a balance sheet recession it is highly unlikely that any real recovery can be made on the consumption side of the equation. Therefore, it will be very hard for business to pass through higher costs to the consumers as any negligible impact there will result in further weakness in end demand. This in turn impacts the profit margins of businesses.
Any shock to the economy is going to exacerbate the relative weakness that is already showing up in the system which in turn will lead to more problems for producers from the consumption side. All of these indicators are tracing out a bigger picture of economic weakness and I see no value, as an investor, to continue to try and put a positive spin on issues that have a likelihood of negatively impacting your investments in the coming months. Promoting an optimistic spin to a statistical recovery is fine if you are running for office – telling it to investors with short time horizons to retirement is just dangerous.