The Producer
Price Index for April was released May 14, 2014. The one-month change was
+0.6%, after it rose 0.5% in March (revised to that figure in the April
report). Foods rose 2.7% (+1.1% in March). In "All the Junk Food You Love
is Pricier This Year," Max Nisen writes on Quartz: "Chipotle's
[Grill - CMG: NYSE] food prices were up 34.5% last quarter in total, with big
increases in [beef, cheese, avocado, and pork]." Chipotle's CFO John
Hurtung laments: "While we want to remain accessible to our customers,
we're at a point where we need to pass along these rapidly rising costs."
Chipotle's stock price was $505 at the close on May 14, 2014, up from $49 at
the great liftoff on March 9, 2009.
Nisen went on to report McDonald's "has already boosted prices. McDonald's
CFO Peter Bensen suspects: "[Y]ou do see franchisees generally around the
industry, not just McDonald's, anticipating some of these higher input costs."
Nisen went on to discuss higher prices at Taco Bell, Pizza Hut, KFC (Kentucky
Fried Chicken to those over 50: it was the Chipotle Grill or Facebook of the
Go-Go Years) and Pepsi. Pepsi CEO Indra Noori discussed the situation as
unintelligibly as possible: "The strength of our brands is clear in our
ability to achieve consistent net price realization." Whatever that means,
family incomes are falling (See "April
2014 -Castles in the Air" and "The
Bed-Pan Economy"). It seems doubtful Pepsi's stock price
will benefit, but analysts, accountants and public-relation experts are very
well paid.
At the same
time, U.S. Treasury yields are falling. From over 2.7% in late April, the
10-year Treasury closed at 2.53% on May 14, 2014. The Wall Street Journal
commenced its front page dissection on May 15, 2014: "Global bond rates
dropped to their lowest levels of the year Wednesday, as central bankers
signaled their determination to jolt the world's largest economies out of their
malaise. Investors piled into U.S., German, and British government bonds-used
to price everything from mortgages to car loans-driving down their yields. The
yield on the 10-year U.S. Treasury dropped to as low as 2.523%, its lowest
level in more than six months. In Germany, 10-year bund yields fell to their
lowest point in a year. The Journal's headline was "Nervous
Investors Pile Into Bonds."
Note the
"central bankers" comment. Only 9% of Americans knew who the Federal
Reserve chairman was in 1979. These temporary celebrities' [redundant - ed.]
determination for the masses to believe "inflation is too low" knows
no limits. They are determined to prevent "deflation." Whether they
believe that or not, all of the tendencies: among central bankers, the media,
and Wall Street, will foster this myth. Martin Wolf wrote another irresponsible
mandate in the Financial Times on May 14, 2014 with the headline:
"Time for Draghi to Open the Sluice." The top of the front page of
the same edition drew readers to the column: "Time for Draghi to Pull Out
Another Bazooka," Martin Wolf, page 9.
It is said,
and with truth, that "stocks always get it last." Meaning, watch the
bond markets for signs of change. That phrase circulated before bond markets
were policy tools of central planners. At least part of the reason - I think
most of the reason - the 10-year bond yield has fallen is due to short
covering. One of the most widespread tactics in recent months has been to hold
long positions in riskier bonds while adding protection by shorting Treasuries.
Treasuries
are hard to come by. The Federal Reserve's various QE (i.e. money printing: in
which the money is credited to banks in exchange for the banks' U.S. Treasury
and MBS holdings) programs have made certain maturities hard to come by. For
instance, in 2011, the Federal Reserve held 24% of the 10-30 year U.S.
Treasuries. On December 31, 2013 it held 46%.
A bond
manager who is watching and worried that other bond managers may cover their
short positions (they have to buy the Treasuries they had previously sold),
contributes to the downward momentum in yields by reducing exposure to a
Treasury rally (by buying). Falling yields signal the opposite change to the
actual and immediate problem of price inflation everywhere.
If the
downward momentum in short-covering really takes wind, the 10-year could fall
below 2.0%, for a long enough time to buy or refinance a mortgage before the
great inflation grows obvious.
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