Monday, August 08, 2005

Report from the Midwest

Even here, in the cool, quiet dawn of the northernmost point of Michigan’s Lower Peninsula, major worldwide economic trends make themselves known.

For starters, the daily parade of iron ore ships that first appear on the western horizon heading towards us under the five-mile Mackinac Bridge and then plow inexorably through the narrow channel between Bois Blanc Island and Mackinac Island, are greater in number than I have seen in a decade—and they are always startlingly huge beasts.

Those ships are taking iron ore from mines in Minnesota to steel plants in Hamilton Ontario and the Detroit area—which are having the best years of their lives thanks to booming consumption in China and India.

For another, the woman at the front desk of the hotel—this is a 118 year old hotel in the heart of the Midwest—is from Bulgaria. So is the kid in the coffee shop, and so is the girl who serves coffee at breakfast.

Before they arrived this year, the only seasonal staff was the local kids from the area and the Jamaican men and women who have been handling the dining room for years. Turns out, the Bulgarians responded to a jobs fair and came over here to work.

That’s globalization.

One more economic trend: inflation, or at least whatever it is you call price increases which the bond bulls wants to pretend don’t exist.

The ferry to the island—diesel fuel costs, you know; the hotel itself—being fully occupied and consuming millions of BTUs of electricity for running the building and gas for cooking the food; and even the local fudge-makers who churn out cubic yards of the thick, fattening stuff—which requires that pesky, ever-present and highly costly thing that the government and the bond buyers deduct from the various inflation indicators as if it doesn't matter...also known as “energy.”

They’ve all raised prices.

Let the bond market beware.

Jeff Matthews
I Am Not Making This Up


Bamass said...

Not to nitpick, but how is it that Lake Michigan and the Straits of Mackinac are part of the route for iron ore ships routed from Minnesota to Detroit or Hamilton?

DaleW said...

The legend lives on from the Chippewa on down of the big lake they call Gichegoome.

Check out the map:

Here's the Wikipedia on it:

Sorry, I'm a Buffalo guy, this is a favorite subject of mine.

investor_advocate said...

Bulgarians in MI? Try Czecks and Brazilians in coastal Alabama... and that's with the woefully underemployed citizens of the Black Belt (named for the quality of the soil) less than three hours away.

whydibuy said...

Ah, but look at the bright side of inflation. FNM reported the ave house increased 16% in the second qtr y.o.y. WE'RE ALL GETTING RICH!!!!!!

Its_strange said...

Are housing prices part of the gov inflation data ?

Its_strange said...

I'm in the nursery business ( Trees , flowers, etc. ) Not only are we charged a fuel sur-charge on the stuff we ship in from the west coast the growers are trying to lock in prices for the plastic tray and pots they will need for next year and the vendors will not agree .......So while we have zero inflation the growers are fighting over the price of plastic trays and pots ...pots the public will throw in a dump

Chris Fischer said...

Its strange-

The answer is "Sort of". There are a couple things going on here. The CPI uses rental rates, not home sale prices, in the calculation - and housing is something like 23% of the CPI. Since renters are a small percentage of the population, they try to use something called an imputed rent, in which a homeowner basically has to guess what it would cost to rent the house he owns.

Further, in RE booms like this, house prices and rental rates can actually move in opposite directions, which further depresses the CPI. (But when you consider all the government obligations, like COLA's and veterans benefits tied to the CPI, this shouldn't be a surprise)

Check out the graph in the following article.

Ritholtz said...

The government has a vested interest in inflation appearing to be low -- or at least lower thanit actually is -- Social security COLA increases are based on CPI data.

While they shouldn't fudge the data, at least we know their bias and motivations.

What the hell the bond market is thinking is anyone's guess. (Mine's economic weakness in the next 18 months -- hence, low rates)

bubbles said...

I grew up on Lake Michigan and still spend a couple of weeks there in the summer. If the ships are carrying iron ore they would be entering Lake Michigan to go to Gary, IN. If the ships are leaving Lake Michigan and entering Lake Huron they would not be carrying iron ore.

Its_strange said...

Thanks for the help but i gotta tell ya this "imputed" rent stuff just gives the Wallstreet smoothies cover. I mean its as strange as half the stuff Patrick comes up with or maybe Bob O'Brien .

bubbles said...

I made a mistake about iron ore not being shipped from Lake Michigan into Lake Huron. Actually from Jan 15 to March 25 the locks at Sault St. Marie, MI are closed so depending on demand, iron ore can be shipped out of Escanaba, MI and could very well end up in Detroit or Hamilton, Ontario. And considering how strong demand is its entirely possible that even though the Soo Locks are currently open, the six iron ore docks on Lake Superior could be at capacity, so they hauling iron ore by rail to Escanaba to ship it out to meet demand.

Jeff Matthews said...

I thank "bubbles" for his informed insights on Great Lakes shipping, and "bamass" for flagging a mistake: the ore ships we see coming from Lake Michigan through the Mackinac Straights are from Michigan's Upper Peninsula, not Minnesota.

Jim said...

I see trains of grain, sulphur and potash heading west in Calgary. Did anyone look at 3 year charts of RIO and CLF?