Wednesday, May 17, 2006

Alan’s Bathtub Reading

I think I know what Alan Greenspan is contemplating right now in his bathtub.

(Don’t get the wrong idea: Greenspan is famous for spending mornings reading all manner of economic reports while soaking in his tub. Just listen to Don Imus, the no-longer funny ex-shock-jock who likes to ask Andrea Mitchell—a talking head who happens to be Greenspan’s wife—what “Crazy Al” is up to in the bathroom.)

If I’m right, Greenspan is contemplating the fact that U.S. industrial capacity utilization hit 81.9% last month, its highest level since July of 2000.

Why do I think I know that? Well, I happen to know capacity utilization is the sage Mr. Greenspan’s single favorite statistic of all the thousands churned out by government statisticians. It is, in his view, the least volatile and therefore most accurate barometer of economic health, encompassing as it does employment, capital spending and inflation all at once.

I know this because I read it somewhere, probably in a New Yorker profile—one of those endless, detailed pieces that cover everything from what kind of cereal the subject likes to how he or she takes coffee. And the fact the Greenspan relied on one statistic more than all the others was a lot more interesting to me than how he takes his coffee.

But you don’t need a government statistician to tell you that industrial capacity utilization is at the highest level in five years. All you have to do is listen to the earnings calls of companies ranging from teen retailers to coal miners, and you know there isn’t much slack in the system.

Just last night, on Cramerica TV, the CEO of engineering giant Foster Wheeler told a rapt, cheering student audience that business conditions for his company were the best in the entire history of the company. (For the record, that means back to 1884.) The audience of Cramer-mad budding stock jockeys couldn’t have been happier to hear it than if Derek Jeter had appeared on the stage to promise another championship this fall.

Furthermore, the Foster Wheeler CEO also made it clear that his company intends to spend whatever it takes keep up with those all-time-high orders from customers drilling wells in Saudi Arabia and building LNG plants in Asia, and everything in-between.

Which is why, in my opinion, the producer price index might have been ten basis points less than expected yesterday, and the housing market from Boston to Sacramento may be rolling over, and the bond market may find comfort in weaker revenues than expected at Home Depot…but Alan Greenspan’s favorite all-time index is heading up, not down.

The water in that tub is still rising.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

5 comments: said...

For the first time since I discovered your blog, which I love reading, I'm not sure I get your point. Maybe you're the only blogger who uses even more sarcasm than I do, and that confuses me. Maybe smarter readers can help with their comments.

Anonymous said...

Hey Jeff, I agree with you about inflation risks, but Greenspan isn't Fed head anymore, and while Bernanke has so far seemed like a chip off the old block, two of his noteworthy academic studies were about dealing with the aftermath of bubbles, both the Great Depression and the Japanese experience post 1990. Maybe you're saying the markets will force the Fed's hand, but I think besides what's happening in capacity utilization and the commodity pits, what's happening to stocks might make Ben a little more dovish. And maybe he was seeing ahead better than the rest of us, and that's why he said the Fed might pause even if the risks for inflation were still unbalanced.

Nate Mink said...

When looking at CapU versus the 91day tbill yield, it seems that CapU leads the yield by 9months. Taking this lead into consideration, when the CapU rate is betwixt 81 and 83%, the median tbill yield has been 5.02% with an average of 5.43%.

Stepping up to the range of 83 to 85%, the median tbill yield has been 5.16% with an average of 5.57%.

Even assuming that there is still upside to the CapU rate, there is not (much) more upside to the short rate.

Uncle Bigs said...

Modern day capacity utilization is useless. Does anyone really measure the number of daily lattes that can be made at Starbucks or the number of toes that can be painted at the local salon?

Corporate America is busy adding capacity to meet a false prosperity based on a debt induced orgy.

This added capacity will come on stream just as the consumer blows up because he can't borrow more on his house for the seventh time in the last 4 years.

Aaron Koral said...

Jeff - don't you think Mr. Greenspan's got better things to read in his bathtub like Ayn Rand's "The Fountainhead" than the latest cap utilization figures (just kidding, of course)?