Tuesday, November 30, 2021

ICYMI: General Mills Says to Expect Higher Prices (up 20% on some items) + the St. Louis Fed on the Best Predictor of Inflation

General Mills is a major ($18 billion revenue, next report due this week or next) consumer packaged food producer.

From Food Processing, November 23:

General Mills plans to raise prices for hundreds of items as much as 20% in mid-January, according to a letter to trade customers obtained by CNN.

The letter, which an employee of a grocery wholesaler shared with CNN, warns General Mills’ trade customers that price increases are coming on hundreds of SKUs across dozens of brands, including Cheerios, Pillsbury products, Yoplait yogurt and more.

"The current operating environment is as dynamic as we've experienced in at least a decade, resulting in significant input cost inflation, labor shortages, and challenges servicing the business," General Mills said in the letter. It estimates that its own input costs will rise 7% to 8%....


We first posted this research in December 2020 after the UN's FAO Food Price Index had printed higher for six consecutive months. The correlation with coming CPI prices apparently held.

We reposted in September 2021.

Reminder: "St. Louis Fed: Food Prices As An Indicator Of Future Inflation"

A repost from December 29, 2020:
St. Louis Fed: Food Prices As An Indicator Of Future Inflation

An interesting commentary, especially in light of the generations of Econ profs admonishing against putting much weight on headline inflation, as food and energy prices are volatile and should be stripped out to reveal core CPI and PPI trends.

From the Federal Reserve Bank of St. Louis, January 1, 2002:

Predicting Inflation: Food For Thought

"When I was your age, I walked 20 miles uphill in the snow to get to school and a gallon of milk only cost a nickel."Who doesn't remember grandparents and relatives sharing similar stories with us at family get-togethers? Today, a gallon of milk at the grocery store will cost more than a nickel, as will other goods that our grandparents paid considerably less for in their day. The overall rise in prices is known to economists as inflation.

Over the long run, inflation is caused by too much growth in the money supply. Monetary inflation is bad because it obscures the price signals that make our market system work efficiently. The job of monetary policy is to supply just the right amount of money so that the average price level remains stable.

Over short periods, however, inflation can be influenced by large changes in the market for particular goods and services. Because these bouts of inflation tend to be short-lived and self-correcting, the proper monetary policy response is to ignore them. The problem for the Federal Reserve is to know when inflation is due to excessive monetary growth (requiring a policy response) and when it is due to transitory market fluctuations. To sort out the short-run real effects caused by disruptions to particular markets from the long-run monetary effects caused by Federal Reserve policy, economists have developed techniques to filter the inflation news. Traditionally, economists have excluded food and energy prices in their filtering process, but we find that by filtering out food prices, we might be losing valuable information about inflation.

What's in the Basket?

Economists looking at inflation generally track a price index, which is the average price of a consistent "basket" of consumer goods. The two major price indexes are the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCEPI).

The CPI, reported by the Bureau of Labor Statistics, was created for the specific purpose of adjusting veterans' pension benefits for inflation following WWI, while the PCEPI, reported by the Bureau of Economic Analysis, is used to compute the nation's Gross Domestic Product. Both indexes measure the rate of inflation faced by consumers, but the PCEPI is more comprehensive.

Approximately 25 percent of the items in the PCEPI basket are excluded from the CPI basket. A guiding principle for deciding whether an item belongs in the CPI basket is whether it is paid for "out of pocket." The main items in the PCEPI that are not included in the CPI are things that consumers get but don't pay for out of pocket, such as free checking, employer-funded medical care and medical services paid through Medicare and Medicaid. Also, the CPI is an index of inflation for urban dwellers; so, it excludes spending by rural households.

The PCEPI, then, is a larger and broader index that includes a more varied bundle of goods than the CPI does. Although both are valid for gauging inflation, in 2000 the Federal Reserve began reporting its inflation forecasts in terms of the PCEPI instead of the CPI. Because of the PCEPI's wider basket of goods and the Fed's focus on it, we'll look only at the PCEPI, although our conclusions also apply to the CPI.1

When tracking inflation, people monitor data releases to predict the underlying inflation trend, which is driven solely by monetary policy. However, information about the inflation trend has been compared to a radio signal that is obscured by static. Just as noise filters are used to remove the static in radio signals, economists filter inflation data to remove the static caused by supply and demand changes. One way to filter the inflation news is to measure the change in prices over a long period, such as a year, to eliminate the short-run fluctuations. But then, the useful information is delayed for a year.

Another way that economists filter out the static is to delete the items in the price index that are sensitive to large, frequent disturbances to supply and demand and, therefore, have highly volatile prices. After deleting these items, what is left is core inflation, that is, inflation in the basket of goods excluding the more volatile components. Since the 1970s, core inflation has typically been measured by excluding food and energy from the basket of goods. This is because the early 1970s saw highly volatile food prices and, soon afterward, a rapid rise in the prices of gas, oil and other energy products.

The core measure of inflation, the PCEPI excluding food and energy, has been less sensitive to temporary shocks to the economy and has seemed to have been a better barometer of the underlying trend in inflation than the all-item PCEPI. Looking at Figure 1, we see that the rate of inflation measured by the PCEPI excluding food and energy has been less volatile than with the all-item index. During times of high inflation, such as the mid-1970s and early 1980s, the PCEPI excluding food and energy did not increase nearly as much as the all-item PCEPI.When inflation dropped considerably in the middle of 1986, the index excluding food and energy did not show the same massive drop.

Let's take a closer look at the changes in the prices of components excluded from the core: food and energy. From Figure 2, we see that inflation in energy prices indeed has been very volatile, increasing and decreasing much more than the food component or the all-item PCEPI. We also see that food prices have become increasingly stable recently, while energy prices continue to fluctuate significantly.

What has caused the recent increase in the stability of food prices? Improvements in technology and a change in consumer eating habits have both contributed.2 Major advancements in the food distribution system have led to shorter lag times between picking produce at the farm and getting it into the hands of urban consumers. It is not unusual, as it once was, for a shopper in a supermarket in Chicago to be buying fresh produce grown in South America. As technological advances have reduced the cost of air freight and refrigeration, their use has become widespread and commonplace in the food industry, increasing the geographic size of the market for food and reducing the volatility of food prices.

Another change in the food distribution system is that many more people now buy their food from large grocery store chains. These large chains have an advantage over smaller specialty retailers in that they have the ability to stock larger quantities of many more different types of items. Large supermarkets purchase food directly from the producers in huge quantities, cutting the cost to themselves and their consumers.

Eating habits of the American consumer also have changed. With the hectic schedule many Americans have, people are less inclined to buy fresh fruit, vegetables, meat and poultry that may go bad in their refrigerators or require time and energy to prepare. People are much more likely to buy prepared meals at the grocery store or to eat at restaurants. The prices that consumers pay for these meals are largely expenditures on the labor used to prepare and serve the food. The price of these labor services is less volatile than is the price of the raw food products.

Should We Put Food Back into the "Core" Basket?

Because volatility in food prices has dropped in recent years, does it still make sense to exclude food from our measure of core inflation? Are we losing information about the underlying trend in inflation by removing such a stable component from the core? Indeed, by excluding food prices in our traditional analysis of core inflation, we lose more knowledge about the trend in inflation than we gain....


Inflation: The Differences Between The PCE Index and The Consumer Price Index

Convexity Maven: “Unbalanced Leverage or Options for Civilians"

Our boilerplate introduction to Mr. Bassman:

...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change).

Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
"Pish. Posh." is a technical term only used by market professionals for those situations where one has decided to go full Alinsky rule #5*

From Harley Bassman, The Convexity Maven, at Simplify Asset Management, November 30:

Earlier this month, my eldest daughter (finally) married her college sweetheart in a beach ceremony near my home in Laguna Beach. (Yes, it’s a struggle.) Late in the evening, after a few too many Tiki Punch craft cocktails, one of the guests boldly asked me the source of my good fortune.

I eventually distracted him by a pithy paraphrase of Thomas Edison: “Success is missed by most people because it comes dressed in overalls and looks like work.”

But upon a bit more introspection the next day, I came to recognize that the real answer was always placing myself mid-stream in a river of positive Convexity; or in layman’s terms, situations where I could win much more than I could lose.

Math geeks will banter about Convexity as the second derivative, a Physicist will measure it as acceleration, while an Economist will calculate the change in the cost to produce an additional item.

Civilians will not be bothered with such hifalutin equations, rather their contact with Convexity occurs via options, both financial and otherwise.

One does not need a Robinhood account to appreciate options. When you make a reservation at a sumptuous restaurant that you can cancel at any time, you own an option to decide later if you care to dine there. If you buy a refundable airline ticket, you own the option to fly to a fancy resort. This is good for you, but not so much for the restaurant or airline as they may not be able to resell the service if you rescind at the last minute.

This is why service providers often charge a cancellation fee, which is essentially is the price of the option. These sorts of options are common in our daily lives, but they are neither transparent nor fungible, which is why an airline can ask for a $150 change fee on my $39 ticket from LAX to Las Vegas.

So, let’s consider the incredibly liquid and visible market for options on stocks, which has exploded since the start of COVID. Trading of -gaeta line- call options and -picotee line- put options have both jumped over 40% since early 2020....

....MUCH MORE (10 page PDF)
#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...

The Convexity Maven is nothing if not a professional. Here is part of his mini-bio at MacroVoices:

Harley S. Bassman
Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six-year career at Merrill Lynch.  In 1985 he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions.  In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities.  Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS - Beneficial Interests in GNMA Servicing.  Later, he started a GNMA servicing conduit becoming one of the Top 20 originators in 1992.  As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader in this product category writing protection that covered the risk on tens of billions of notional mortgage servicing rights.  Later, Mr. Bassman managed Merrill's initial venture into off-balance sheet mortgage trading.
In 1994, Mr. Bassman assumed responsibility for OTC bond options.

Within a year, Merrill was the leader in this product sector.  A wide variety of products were offered including vanilla and complex options on MBS spreads and the Treasury yield curve.
To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index.  Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.

From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.

Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001.  During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit.  He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform....
And so much more, all those cutesy Merrill acronyms can be blamed on him and his team.

Chinese Developing Facial Scanning To "Detect Journalists and Other ‘People of Concern’.”

 From the BBC:

China surveillance of journalists to use 'traffic-light' system
The Chinese province of Henan is building a surveillance system with face-scanning technology that can detect journalists and other "people of concern".

Documents seen by BBC News describe a system that classifies journalists into a "traffic-light" system - green, amber and red.

Journalists in the "red" category would be "dealt with accordingly", they say.

The Henan Public Security Bureau has not responded to a request for comment.

The documents, discovered by the surveillance analyst firm IPVM, also outline plans to surveil other "people of concern", including foreign students and migrant women.

Human Rights Watch said: "This is not a government that needs more power to track more people... especially those who might be trying to peacefully hold it accountable."

'Thematic libraries'

The documents, published on 29 July, are part of a tendering process, encouraging Chinese companies to bid for a contract to build the new system, won, on 17 September, by NeuSoft.

NeuSoft has not responded to BBC News request for comment.

The system includes facial-recognition technology linked to thousands of cameras in Henan, to alert authorities when a "person of concern" is located....


I was under the impression the Chinese could already do this. From December 2017:

BBC Journalist Attempts To Evade Chinese Surveillance: It Took 7 Minutes For CCTV To Locate Him
In a city (Guiyang) of 3.5 million....

Capital Markets: "Pessimistic Omicron Assessment Squashes Risk Appetites"

 From Marc Chandler at Bannockburn Global Forex:

Overview: A pessimistic assessment offered by the CEO of Moderna shattered the fragile calm seen yesterday after the pre-weekend turmoil. Risk appetites shriveled, sending equity markets lower and the bond markets higher. Funding currencies rallied, with the euro and yen moving above last week's highs. The uncertainty weighs on sentiment and makes investors question what they previously were certain of.

The MSCI Asia Pacific Index fell over 1% before the weekend and again yesterday. Today, South Korea's 2% slide led the regional decline that saw Japan and Hong Kong fall more than 1%. Australia, Taiwan, and India managed to post minor gains. Europe's Stoxx 600 is off over 1.5%, giving back all of yesterday's gain (~0.7%) after the pre-weekend 3.6% drop. US futures are sharply lower. Bond yields are tumbling, led by an 8 bp decline in the US 10-year yield, bringing it to around 1.42%. European benchmark yields are 3-5 bp lower. In the foreign exchange market, the dollar-bloc currencies and Norwegian krone are under pressure, while the funding currencies--euro, yen, and Swiss franc--have risen through last week's highs. Emerging market currencies are mixed, though several central European currencies appear to be pulled higher by the euro. Gold is firm but below $1800. Recall the high from the end of last week was near $1815.50. Oil prices are sliding. January WTI fell through last week's low and took out the 200-day moving average (~$67.45). While US natural gas prices fell and are near two-week lows, European (Dutch) gas prices are up more than 4% on top of yesterday's 7.5% rally. Iron ore prices are paring yesterday's 6.8% rise, while copper is off around 0.5% after recovering 1.25% yesterday.

Asia Pacific
The Moderna CEO warned that the vaccines will likely prove less effective against the Omicron variant, and it will take months to create a vaccine specific to this mutation.
This unhinged the markets again. The news overshadowed favorable economic news. China's November PMI was stronger than expected, and Japan reported the first increase in industrial output in four months. China's manufacturing PMI rose above the 50 boom/bust level for the first time since August, albeit barely (50.1), and the non-manufacturing PMI slipped less than expected (52.3 vs. 52.4 in October, while the median Bloomberg forecast) was for 52.3). The composite rose to 52.2 from 50.8, its best reading since July. Japan's industrial output rose 1.1%, which was less than expected, but still the first gain since June. The unemployment rate unexpectedly fell to 2.7% from 2.8%, even though the job-to-applicant ratio slipped to 1.15 from 1.16. October housing starts jumped 10.4%, nearly twice the pace expected.

Still, not all the economic data from the region was upbeat. Building approvals in Australia slumped 12.9% in October. The median forecast (Bloomberg) was for a 1.5% decline. October industrial output in South Korea fell 3%, while the market looked for a 0.1% decline. The September series was revised to -1.1% from -0.8%. South Korea's industrial production has not risen since July....


Monday, November 29, 2021

Covid-19: The U.S. Centers For Disease Control Is Now Just Messing With People's Minds

From the CDC, November 29:

Source: CDC county-level Covid tracker.

Current 7-days is Mon Nov 22 2021 - Sun Nov 28 2021 for case rate and Sat Nov 20 2021 - Fri Nov 26 2021 for percent positivity. The percent change in counties at each level of transmission is the absolute change compared to the previous 7-day period.