Sunday, November 18, 2007

'The Undertaker' and His Economic Doobie Brothers

Greenspan Says Dollar's Decline Has No `Real' Impact

—Bloomberg, November 18, 2007

Anybody else out there think the original title of Alan Greenspan’s recent memoir of his time as Federal Reserve Chairman (“The Age of Turbulence”) must have been something closer to “Purple Haze, All in My Brain, Rainy Days You Don’t Seem The Same, One Pill Makes You Larger and One Pill Makes You Small, but I Get High With a Little Help From My Friends so Why Does it Feel Like They’re All Staring At Me???”?

I mean, how else to explain the following statement by the man Ayn Rand used to call “The Undertaker” ostensibly because of the dark suits and sober demeanor he wore during their smoke-filled late-night debates, although I am coming to believe both his demeanor and the smoke actually owed more to some lethal Maui Wowie he must have kept stashed in the lining of his Brooks Brothers’ vest pockets, if you get my drift:

Nov. 18 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline hasn't affected the global economy and is a ``market phenomenon.''

``So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it's a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences,'' he said today.


Did he really say a falling Dollar has no real fundamental economic consequences?

What’s with Fed Chairmen these days?

First Greenspan’s successor flatly denies the deflationary impact of the Chinese labor arbitrage (see “Fed Big Flunks Eco 101” from March 7, 2007) of the last decade, and now Greenspan himself claims to see no link between the falling value of the U.S. Dollar and inflation in the United States.

Regarding the former issue, readers may recall that I offered to put Mr. Bernanke in touch with an American businessman who experienced first-hand the massive and deflationary impact of China’s manufacturing policy throughout the last decade.

I now offer to put Mr. Greenspan in touch with an American businessman who is currently experiencing first-hand the massive and inflationary impact of the recent collapse in the U.S. Dollar.

His name is Ron Moquist, and he is the CEO of Raven Industries Incorporated.

Now, Mr. Moquist wouldn’t know me from Alan Greenspan, but I do listen to enough conference calls during the week to stay current on companies such as his.

And his company’s recent earnings call provided just the sort of real-world insight into the real-time economic impact of the weak Dollar that Mr. Greenspan seems unable to see—perhaps owing to the lingering after-effects of all those days “discussing economic policy” with Ayn Rand and the rest of the Economic Doobie Brothers in those smoke-filled rooms:

You would think that with weak U.S. demand for plastic resin, prices would be -- resin prices would be soft, but with the cheap U.S. dollar, a lot of the product is being shipped to foreign markets, which keeps the demand high, and with those higher material costs we haven't been able to pass along all those increases, just because of the competitive pressures.

And that pressure is being driven by the dramatic drop in construction activity, not just residential construction but commercial and manufactured housing as well. These various construction markets currently add up to almost 40% of our total sales volume in Film, so it is a big factor.

—Ron Moquist, Raven Industries November 15, 2007

Maybe, technically, those Doller-related cost increases aren't getting into the Fed's computation of the Producer Price Index, adjusted as it is to exclude everything people actually use; but the impact on businesses such as Raven Industries is as real as the 4.9% price increase UPS just announced for next year.

Ironically, Greenspan made his Dollar comments at the “Learning Annex Wealth Expo” in New York City. No doubt The Donald was also there, and possibly Tony Robbins, giving their sure-fire get-rich-quick methodologies.

I wonder if David Crosby and Keith Richards were also in the wings, anxiously waiting to score some, er, Bolivian Marching Powder, if you get my drift, from the man they call “The Undertaker”...

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

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. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.


Mia said...


I live in Sioux Falls, where Raven headquarters are located, and all things considered they have experienced one helluva boom period the last 8 years. Nonetheless, I never thought I would get as much enjoyment reading anything related to Raven.

The Undertaker is just another inconsistent Randroid.

Unknown said...

These are the rules. Central bankers shall never admit to deflating the currency publicly. Central bankers shall never admit to exporting inflation to countries with pegged currencies. Central bankers are a bank cartel step to stop bank runs and fund the state. Those are the rules.

Unknown said...

I think you are right. The fed should not use the cpi to look at inflation, they should use plastic resin, which is something each and every one of us use.

Liz said...

I remember Jim Grant used to do his own CPI of stuff he actually bought and used on an annual basis, I think it's time for the Fed to revisit the real world, where property taxes go up 30% every 3 years as well as insurance and gasoline!

Unknown said...

It's Maui Wowie...I was there and believe it was!

whydibuy said...

A couple thoughts here. First, Mr. Moquist's comments are interesting to me in that, between the lines, he is saying that the U.S. is no longer the dominating force in world economics. We can see weak demand here but foreign demand continues to push prices up. The U.S. will now be dictated to by world forces, not the U.S. dictating to the world anymore. As for Greenspan, these latest ramblings are just more in a long line of assinine statements by a guy who's been given alot of credit by wall street mistakenly confusing good luck for brilliance. I'll reiterate my previous comment that Greenspan was tremendously lucky during his tenure. Low and stabile energy prices, declining long term rates, low inflation thanks to the dramatic industrialization of china and its strongly deflationary export policy and a tech revolution that powered the economy. My grandmother could have looked just as brilliant running the fed under those conditions. Ben B. I fear will not be so lucky. As for his brilliant insights, he also was the guy who in '04 1) talked up the newfangled mortgage financings ( yes, the ones that are now blowing up month by month ) as a positive development allowing greater home ownership by more folks. And 2) recommended that people get adjustable rate mortgages right at the bottom of his rate cutting orgy. Sheeple that listened to him are now seeing multiple point jumps in those adjustable mortgages and are defaulting. So follow Greenspan at your own risk.

A said...

whydibuy said it.
Small Investor Chronicles™

Oliver Townshend said...

The Australian Currency fell in the 90s from 80c to 50c. No inflationery outbreak. It's now risen to 80c and inflation is rising. The Argentinian currency was held high in the 90s and the economy collapsed and inflation went through the roof.

Greenspan wasn't making it up.

BlackLab said...

Your post makes me wonder if Greenspan does his own grocery shopping.

I’m old enough to remember when Bryers sold ice cream in a square box with a piece of peel-away cellophane on top. That was a true half-gallon, which most people know is 2 quarts. Some years ago, Bryers moved to an oblong container that was narrower than the box, but taller and with slightly rounded corners. At 1.75 quarts, it was smaller than the container that preceded it. Of course, the price stayed the same.

This practice of keeping the price the same but giving you less product, effectively raising the price per ounce, has a name.

It’s called inflation.

Where I live, we have a brand of ice cream named “Turkey Hill”. It is marketed by the privately held company of the same name. While in the grocery store this weekend, I noticed that Turkey Hill was on sale, buy one, get one. The price of a container was $6.29, 8.6% higher than it was this time last year. When I took my usual choice of All Natural Coffee out of the case, something seemed off. The container felt smaller and lighter than usual.

There was a reason for that. Turkey Hill has moved to a 1.5 quart container. Of course, the price is the same as they previously charged for 1.75 quarts.

So I contacted them to ask why, even though I already knew the answer. Here is their response:

“Thank you for contacting Turkey Hill Dairy. We appreciate your comments regarding our new 48 & 56 oz frozen dessert containers. The concept of smaller sizes for ice cream products is not new to consumers. In fact, a great number of ice cream products are now offered in less than 48 oz size containers.

We had originally changed our Philadelphia Style Ice Cream to 56 oz during June 2003. This was due to increasing ingredient prices. At that time, we had no intentions of changing any other line. However, in our industry, as in many others, manufacturing costs continue to climb. Increasing costs of raw materials (ingredients such as milk, cream, cocoa, and vanilla), packaging, distribution, and labor have forced many ice cream companies to take action in order to bring selling prices more in line with costs of goods. It's an industry wide dilemma, not unique to Turkey Hill or even to the dairy business.

We have conducted various surveys and focus groups from random consumers in our market area. We were faced with a few options: keep the same sized containers and increase the selling price, decrease the package size and keep our high-quality products the same, or switch to lower-quality ingredients. This would ultimately sacrifice our high-quality products. Turkey Hill's frozen desserts are still made with the same premium ingredients. Reducing quality by using cheaper ingredients has never been an option for Turkey Hill, so it was necessary to adjust the size of the container to maintain acceptable retail prices relative to production costs.”

Yes, ice cream is sold in container sizes less than 48 oz. They’re called quarts and pints, and they are marketed as such.

I’m not calling Turkey Hill disingenuous. But I am suggesting they’re betting some people won’t notice the price increase, which amounts to 16.7% per ounce compared to last month, and 26.7% per oz. compared to last year (there are 128 oz in a gallon, for those wishing to do the math themselves).

The guy standing next to me at the freezer certainly didn’t, until I pointed it out to him.

The cost of dairy products has risen substantially this year. Domino’s said as much on its conference call when discussing the price of cheese. Herhsey has been hit by higher dairy costs, and Dean Foods has felt no small amount of pain.

What applies to Raven Industries also applies to Turkey Hill, save for the inability to pass along price increases, which I just ate. For now.

Harleydog said...


As usual priceless commentary. Much appreciated.


Anonymous said...

Jeff: I wonder whether Bernanke and his merry band of Fed governors will start talking up the dollar by takin' it to the streets.

Mia said...

Nice summation of the domestic cost-push inflation scenario blacklab. Now watch, the next ploy by Greenspan and HeliBen will be to focus on super-core inflation; everything except energy, food, and import price increases. Super-core metrics will further dampen the cost-push inflation being experienced. This will do little to help Turkey Hill and Raven purchasing their product ingredients domestically, but it will keep the focus off their plights.

smith said...

...and with those higher material costs we haven't been able to pass along all those increases, just because of the competitive pressures...

Maybe, technically, those Dollar-related cost increases aren't getting into the Fed's computation

"Technically"? Either they are or they aren't. The fact is that Raven (and the vast majority of other manufacturers) have been unable to pass along cost increases, and we therefore have low inflation. End of story.

S Benard said...

Another important idea that doesn't escape everyday Americans, but seems to blow past the brains of the Feds and CNBC pundits: focusing only on core inflation, by its very nature, artificially suppresses the headline inflation. The more people must pay for food and fuel (which, per the Fed, they don't count), the less they have left for discretionary items, which are all the other things that the Fed DOES count. Thus, higher fuel/food costs tend to depress the prices of the other items. How ironic that food and fuel (headline inflation) are necessities, but discretionary items (core inflation) are largely optional (hence, discretionary). With higher fuel and food prices, people have less left for the other stuff, so demand falls and prices are suppressed.
Last month (Oct) headline retail sales were UP by a healthy amount, but what the government DIDN'T say was that the only retail establishments that had sales INCREASES were gas stations and grocery stores (yes, fuel and food). So while the Fed doesn't consider food and fuel in their inflation calculations, they DO report them when trying to convince the people that retail sales -- and therefore the health of the economy -- are good.
They can't have it both ways, but they sure try, don't they?