TRANSITORY INFLATION REVISITED (FOOD)

THE FED'S WAY OF THINKING
I find myself reflecting back on the old days of my early career in Finance when Alan Greenspan shared wisdom and knowledge in a manner that left all of us wondering, "What the heck does that mean?".  Greenspan's watch over the US economy earned him the nickname The Maestro since he was able to save us from the financial cataclysm of the 2000 (remember when the world would end because the year changed from 1999 to 2000?).  Greenspan guided us through recession and even gave us a wonderful housing bubble to comfort us after the tech collapse.

Greenspan's cryptic and smooth delivery left a high bar for all following Federal Reserve Chairmen to follow and it is obvious that Ben Bernanke is not quite as eloquent as his predecessor.  As we reflect back, we now know that Greenspan is actually not The Maestro, but probably should be called The Destroyer as his policies clearly contributed to the real estate collapse of 2006 to 2008.  On his watch he avoided oversight and management of banks and lending institutions that pursued profit without concern for solvency.

THE SAVIOR
Bernanke has done a remarkable job "saving" the existing system by performing heroic measures that are by anyone's assessment, simply extreme.  The new Fed Chairman has done the impossible and so he is credited by many as the savior of the financial world.  This blog has often declared that the extraordinary steps taken by Chairman Bernanke really are going to be the undoing of the world financial system as the actions really have only delayed the inevitable and probably made the collapse even more dramatic and far reaching.

THIS TOO SHALL PASS
I wanted to remind readers of the famous discussion Bernanke had where he defended his policies and stated that if there was actually an inflation in terms of food or gasoline, the impact was "Transitory".  In addition, Bernanke stated confidently that if there was discernible inflation in the system, the Fed would aggressively intervene and address the situation.  

(please see the Bloomberg story from April 2011) -

In an effort to check in on how Mr. Bernanke keeps his promises, lets examine an interesting graph I put together using data from the UN Food and Agriculture Organization.  The arm of the UN tracks world food prices so that we may look and see if in fact prices are going up or down over time.

FOOD FIGHTS
As you can see clearly, in April of 2011, food prices were rocketing much higher and this has to be one of the most significant reasons for the "Arab Spring" last year.  Starving people don't tolerate bad leadership for long, and these food prices caused them to take action.  Bernanke was able to step off the gas and we notice that astonishingly Bernanke was correct, prices moderated almost at the same time he gave his speech.  2012 has been a year of decline of food prices, but since September of 2012 and the announcement of QE 3, we have seen the UN Food Price Index reverse and begin to move higher.

Since I don't want to present data that tells an incomplete story, I've also posted a chart below that gives us a view of the nominal prices of the food index (as shown above), but also presents the inflation adjusted values.  The adjusted values still highlight that the food index is close to 30% higher than 2009 levels.  Let me say that again, food costs are close to 30% more than  3 years ago.

Nominal vs Real

The FAO data also has a breakout of the component commodity food prices and I have posted them here too.

Sugar continues its fall, but meat, dairy, and cereals all have move higher since their lows in January.

TWO CHOICES - BEN PICKS INFLATION!
As I wrap this up, the point I am trying to make is that Bernanke told us that inflation was moderating and seemed "transitory".  Almost in tandem with his statements, inflation worldwide reversed course and prices came off significantly.  In 2012, we have seen a reversal to this trend and we now see that food inflation is now heading higher.  It will be interesting to see additional data for October as it will include more of the results of the QE 3 announcement.

At this point the consumer worldwide is paying more for food and we all need to question Bernanke as to how long "transitory" really means and how he plans to aggressively intervene to stop inflation while he is aggressively holding rates at ZIRP through mid 2015.  My guess is that he will gladly let inflation stay awhile longer (forever) rather than stop his zero interest rate policy.  Our government and the Federal Reserve would gladly export food inflation and instability throughout the world to keep the financial system alive for a little while longer.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

LET'S EAT - FOOD COMMODITY UPDATE

Photo by - Alan Turkus

As August ends and markets hold their collective breath about what decisions will be made at Jackson Hole, I wanted to see if I could debunk the commonly held notion that we'd be in for more QE3 later this Friday.

LOTS OF TALK
I have noted in several posts that I think Bernanke will announce that interest rates will continue to remain low through 2015 and not just 2014 as he previously disclosed.  The hope is that another year of low interest rates will continue to underpin the housing market's "recovery" and of course ZIRP will force Mom and Pop and Grandma and Gramps out of their savings accounts into riskier assets.

Unfortunately, I think the market is really looking for more out of the great academic than just constant rate twisting and therefore we may actually see the markets correct a bit here as banks and traders need another boost from the central bank to push the indices higher.  There is only one problem with the conventional notion that we'll get more of the stimulus that we need, it is simply that real food and gas prices have been increasing significantly even though the Fed's own inflation measures remain in check.

HOT CAKES?
What types things are going higher in price?  We need to look no further than food commodities to see some dramatic prices increases.  July 2012 was frankly the hottest July on record in the USA.  In addition to the heat, the midwest also suffered a severe drought that has really destroyed corn and soybean crops.  As a result of impaired crop growth, prices for have farm products have increased.  Soybeans and Corn have not only moved higher, they have exploded to near record highs.  Rice is one of the lone exceptions to have not vaulted into record territory.

SOYBEANS

CORN

RICE

WHEAT

The point in putting these charts of the "softs" is that Bernanke may just have put himself in a box with the help of these weather conditions.  If he were to implement a fresh round of QE3, 4, 5, or something here, we can be sure to see these food inputs go even further above their ranges and records and also we'd see gasoline blow sky-high.  I noted earlier this summer that gasoline has actually done a Crazy-Ivan and actually gone up in July which is HIGHLY unusual.  Bernanke can't push gas prices and food input prices much higher without really slamming on the brakes of our economic recovery.  UGA has broken out and now could be headed to test its 2008 high near $67 (currently at $58.50). (Not charted here).

GASOLINE

TRADING UPDATE
I have been watching agriculture related commodities since last year and in the new year wrap-up and outlook I mentioned that "AG STUFF" would be a place take advantage of our central bank's foolishness.  I've copied a selection from that post here;
TAKEN FROM CONFIDENCE LOST - 13 FOR 2012 - PREDICTIONS

"6)  AG STUFF -Yes, I said it again, corn, wheat, soybeans, sugar and anything that can be consumed will move much higher.  A safe play is to time the exit in May as well, but I think that agricultural commodities will be the one uncorrelated asset this year that just kills it.  The more intervention we see domestically by Uncle Ben and his round table of doves we will see more food disruption in the form of out of control prices fed into the system.  Tunisia, Egypt, Libya, and Syria will all just be the tip of the iceberg as world citizens rise up to confront their leadership's ability to control prices of food as a result of the never-ending liquidity spigot originating in the USA.  Names to watch here are CORN, JJG, SGG."

One I do own now and have had since earlier this year, but didn't mention in the piece is DBA, the Powershares Ag Commodity Trust.  I've had a decent 8% gain since obtaining it, but I feel that there is going to be more in this trade coming from macro-factors.

DBA

While I own DBA, I'm not loving where it is sitting now unless Bernanke does go ahead and announce something this week.  Clearly, DBA is in between these two trend lines and without new news we'll see it bounce between $32 and $28.00.  Overall, I think I am ok with a solid $28 floor here, so I am still waiting on this position.  A move through $32 could set up a much larger move to $36.00

WHAT COULD TEMPER THE BULLISHNESS?
While US farmers and agribusiness producers are having a terrible time this summer, Brazil has jumped into a significant leadership roll.  Brazil is now the world's largest soybean producer and also had their best corn crop ever.  Brazil's role in global food production and exportation has never been so large and important.  All the bullishness for agribusiness commodities could dampen if Brazil posts larger than expected production or if the US farmers could actually save some of their crops.

Ultimately, if Bernanke doesn't move to fire up some form of QE as a result of fear of overheating commodity prices or concerns about retaining fire-power as the Euro situation continues to deteriorate, these commodities like corn, wheat, or soybeans could shock the markets and fall significantly.

BIG WEEK = BIG FLOP?

I want to drop a quick note here.  This is a really, really, really big week. 

ELECTIONS
We have elections in the US for mid term positions where it is widely anticipated that voters will reject the unfettered spending of the current administration, Congress, and Senate.  (Don't forget Bush was also a complete idiot when it came to fiscal controls too and should be held responsible for his completely insane implementation of Medicare Part D which is the worst and costliest entitlement program ever!)

FOMC
Probably more important from a market and economic standpoint we also have a Federal Reserve FOMC meeting on Wednesday.  This is the meeting where Ben Bernanke has purposely timed the unveiling of their plans for additional stimulus spending which has been named "QE2" for Quantitative Easing 2.  The purpose of this program is to continue to spew liquidity in the form of electronic dollars all over the global economy to ensure that asset prices will rise.   As Alan Greenspan has stated, "nothing will help cure the economic conditions as much as a rising stock market!"  The real impact of all of this money sloshing around though is that the value of the dollar drops with each keystroke on the economic printing press.  QE2 is synonymous with dollar debasement.

DOLLAR DOWN MAKES GROCERIES RISE
Is it a wonder why you are going to see grocery costs rise?  Sugar, wheat, corn, rice, and coffee are rocketing higher.  Clothes prices are going to rip higher as cotton is at an all time high.  Oil and gas are vaulting upwards and it is suddenly possible to see my $100 oil price target prediction actually be met this year.  We are seeing all of these hard goods increase in cost, yet personal incomes are dropping.  If you hadn't realized it yet, it is almost like this is a war on the poor as these are the ones that will get squeezed the most in this environment.  Thank you Federal Reserve, US Treasury, and President Obama.  It is odd that the President sits idly by as the Fed rips up and destroys the purchasing power of the poor and the middle class.  I guess this achieves his goals though as more and more marginally middle class will slip into poverty and he can be their benevolent care-taker.  He can continue to promise to take from the wealthy and give the poor their fair share of hope.  The President should be slamming Bernanke and Geithner now and demanding that they quit destroying the value of the dollar.  Instead, he tells us that he inherited this mess and that fixes take time.  Very directly Mr. President, it takes no time to make a phone call and demand that Bernanke quit this now! 

TRADING UPDATE -
Ok, so what do I expect?  I expect that the elections will be exactly what has been predicted.  Congress will go to the Republicans and the Senate will remain in the hands of the Democrats.  The Fed will announce that they will do another $500 Billion of QE 2 and they are going to add more when and as needed with no cap.  This announcement will be less than the markets expect, but the added sentence that they will do more when needed will be somewhat of a life preserver.  The market should sell off some 3% to 5% (individual stocks could go down 10% or more).  At that point, that will be the signal to buy.  The Fed is essentially the market's put (floor) and therefore they will step in and buy and float this thing no matter what.  In a 1930's analog, this is about the time when the market dropped another 30% to 40% because the FED did not provide stimulus and Congress became budget hawkish and tried to reign in spending.  Bernanke will not make this mistake and in fact will go overboard attempting to overwhelm the stagnant real economy.  This annoucement is half the real deal and half a promise that there is no end to the intent to provide as much massive stimulus as needed.  He will signal with overwhelming confidence that there is no lack of desire or willingness to blow as much money as need to reflate the US stock market.

After the temporary drop in the market due to a smaller than expected stated amount, we will be buying anticipating a huge stimulus inflow courtesy of the Fed.  Of course our old favorites will be the targets with a couple of additions.  I still like emerging markets, but I will add SLV and DBA.  I am more positive on silver than gold right now and I like the agriculture commodities.  In addition, although the fertilizer names have run it is possible to see an even bigger move there.

Be careful ------ AND WAIT FOR THE PULLBACK!

GOATMUG