Are crop investors learning from the wrong crisis?

by Mike Verdin

Are investors drawing lessons from the wrong crisis?

They have taken a heavy toll on agricultural commodities since mid-February, when the start of Libya's turmoil crystallised concerns that the region's unrest could put global economic recovery on the skids, before Japan's earthquake compounded concerns.

Sugar and wheat have fallen some 20%, reaching the level which many analysts use for a sell-off to qualify as a correction. Rubber is down by more than 25%. The falls are reminiscent of the sell-off after the 2007-08 rally.

It is certainly rational to think that consumption will take a hit as higher oil prices bite. But there are good reasons to think a rerun of 2008, when prices of main grains halved in less than six months, is not on the cards.

Spring not sprung 

One reason is in the timing. When investors ran scared from crop futures three years for fear of lower demand, northern hemisphere farmers had already got bumper harvests in the barn, and southern hemisphere producers got many of theirs' in the ground.

World wheat production jumped 12% in 2008-09, far faster than consumption, leading to a jump in stocks of more than one-third – and the depressant effect of ample supplies on prices.

This sell-off has happened before spring crops are sown in the likes of the US, Europe and Canada, or winter grains in Australia, giving farmers the option of pruning planting programmes plans rather than bringing less fertile or conservation land back into production.

Sure, the picture for sowing incentives in the US is clouded by insurance programmes.

But the message elsewhere is that with stocks of, especially, corn, soybeans and cotton at historically thin levels, markets need to persuade the farmer to get seeding big time - which they wouldn't by pricing in a 50% discount.

Inflation vs deflation

The second is the nature of the central shock which has got investors in such a stew.

An economic slowdown caused by higher oil prices would present the world with a different set of problems to those it faced in 2008, when a credit drought sent the globe into recession.

Inflation is one, as higher energy prices feed through the pricing chain, unlike the deflation threat posed by tight money which got central bankers worked up until lately.

The oil-induced inflation scenario, while hardly comforting, may not be such a setback to farm commodities as some other assets.

Shock resistance

Take the most famous hit by oil to the world economy, in 1973.

Chicago corn prices rose 73% that year, and a further 27% in 1974, while wheat prices more than doubled.

OK, failed Russian crops had a big impact that time, as they have in 2010-11 too. But in many other years when oil prices have spiked, such as 1979, 1991 and of course in 2007-08, crop prices have improved as well.

And correlations between grains and crude will only have been enhanced by greater use in making biofuels.

China factor

That's not to say investors can ignore Middle East instability.

For one thing, it would hit hard in China, such a huge importer of raw materials including cotton, rubber and soybeans. The country wasn't such an issue during previous oil shocks, before it became such an important global economic player.

But to think that we are about to witness 2008 again looks misguided too.

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The Probability of More Quantitative Easing

By: Richard_Daughty

It would be an understatement to say that I was flabbergasted to see that the monetary base jumped $130 billion dollars in two weeks!

Well, using an exclamation point as punctuation seems to confirm my suspicions that I was, indeed, flabbergasted, as the term seems, somehow, appropriate since I felt something more than the usual crushing pains in my chest, numbness running down my left arm, my guts heaving and sphincters tightening kind of reaction I get when I see horrifying, huge increases in money and credit created by the damnable Federal Reserve.

Perhaps it is customary for those who are "flabbergasted" but I am a screaming crybaby about the horror of the terrible inflations in consumer prices that all this excess money creates, how it is going to destroy the country by destroying the purchasing power of the dollar, and take down the rest of the world with it.

And, I shudder to say it, the Fed is still at it! Last week - in One Freaking Week (OFW)! - the Fed waved its little magic wand and pressed the magic button to increase Total Credit by a huge $13.3 billion, which turned into money when the Fed ran all of this new credit through the banks, which multiplied it by whatever bizarre fractional-reserve multiplier that the banks want to use, and then turned it into boatloads of new money when borrowed by financial-services middlemen so that the Fed could buy $14.7 billion of government and agency debt, plus a smattering of anything the Fed wants to buy, no matter what the cost, to bail out any of their slimy friends, for any reason that they can think of, whimsical or not, in case all those commissions and fees are not enough.

At this point, the probabilities are very good that I am going to go into a Screaming Mogambo Tirade Of Outrage (SMTOO) about all of this monetary insanity, particularly to fund all the fiscal insanity of the federal government.

And speaking of probabilities, I will probably end up telling you what an idiot you are for not buying gold, silver and oil Right Freaking Now (RFN), which, if you are, then you're not, but if you are not, then you are, if you know what I mean.

But probabilities or not, I will try not to "lose control" and end up screaming and crying and making death threats until my throat is sore and my head hurts and my stomach hurts and everyone is laughing at me, which is good, as I see that other pundits are already discussing other probabilities, namely the possibilities and probabilities of something more horrifying: More monetizing government debt by the Federal Reserve, already referred to as Quantitative Easing 3.

If you have any worries about this, let me put your mind at rest. Yes, the Federal Reserve will continue to monetize government debt, regardless of the staggering, unbelievable amounts of money it takes, for as long as they want, whether the dollar has any value or not, which it won't have ere long at this rate.

To be fair, the Federal Reserve has to do this horrible thing because the time when it could stop creating excess money without collapsing the economy was decades and decades ago. Now nothing can be done, and it is "damned if you do and damned if you don't," so, they figure, "Why not?"

The problem is inflation in food and energy prices, primarily caused by all of this new money increasingly created by the evil Federal Reserve since the '80s makes people grumpy when they can't afford food.

And with incomes virtually stagnant in nominal terms, and falling rapidly in real (inflation-adjusted) terms, raging price increases will cause massive suffering as real, inflation-adjusted incomes go down faster and faster.

And to show you how this works in real life, let us tune into Chris Martenson of ChrisMartenson.com interviewing John Williams of ShadowStats.com, who says, "If you look at the government's latest statistics - the poverty survey of 2009, which is the most recent release, with average and median household income adjusted for inflation, it shows that not only has household income been falling the last year or two, but it's below its near-term peak before the 2001 recession."

Real incomes are lower than they were 10 years ago, thanks to the inflation caused by the foul Federal Reserve constantly creating more and more money? Yikes! Monetary policy is not working too well, is it?ù

Well, hold onto your hats, as it gets worse, and using the CPI-U sub-index of the Consumer Price Index as a proxy of inflation, "household income today is below where it was in 1973."

And with silver costing a couple of bucks in 1973 and gold at less than $70 an ounce, even an idiot like me can see that over the long term, "Whee! This investing stuff is easy!"

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The Commodity Price Rollercoaster and the CRB Golden Ratio Failure

By David Knox Barker

Commodity prices have been on a rollercoaster ride as central banks have pumped trillions in liquidity into the global system, trying to prevent a deflationary long wave debt collapse from delivering the economic coup de gras, and driving the global economy into a natural Kondratieff (aka Kondratiev) long wave winter season bottom. Commodities are the ingredients of global economic production; they go into almost everything you buy. Investors in commodities, stocks, bonds and gold should all take note of the most powerful resistance line the CRB Index has encountered since the 2009 bottom.

The 362.38 price target in the CRB is the golden ratio of the entire 2001-2008 commodity price edifice. It is extremely important that Mr. Market’s golden ratio just repelled the liquidity driven assault sponsored by the central banks of the developed world. Commodities ultimately have an impact all global markets, including equities and bonds, so they will have a major impact on the global economy, for better or worse.

 

The goal of the central banks is rather straightforward. They are trying to cajole the global economy and commodities away from the global debt driven deflationary abyss and into the arms of inflation. Their objective is to inflate away the value of the mountains of debt. Debt is an albatross hanging around the neck of the global economy. Excessive debt threatens the stability of national governments, states, municipalities, businesses and individuals that took on too much of it over the past few decades.

In recent months, it has appears as if the central bankers have succeeded with their inflationary objectives. Deflationists would be less than honest if they try to convince you that their deflationary convictions have not wavered a bit. The inflationary arguments are very convincing and the markets have been agreeing with higher prices. Commodity prices have surged, driving the cost of goods higher for producers and manufacturers world over.

However, after this weeks market action, the score is now the Fibonacci golden ratio 1, the central bankers zero. The commodity rally was turned back. Deflationists have been dining daily on humble pie as inflationists have taken the wheel of global markets, since the rally in commodities off the 2009 low at 200.16. From the 2001 intraday low at 181.83 to the 2008 intraday high at 473.97, global commodities have ridden wave after wave of central bank injected liquidity, but now the commodity rally suddenly looks fragile.

 

Unfortunately, in all the central banker’s calculations, they forgot about supply and demand and the fact that labor supplies are abundant, food not so much, so inflation flowed into the food prices of the emerging markets where it can be least afforded by workers. Inflation is threatening to flow down the entire global economic food chain, except for labor rates and housing prices, and spill into your gas tank, cereal bowl, and even pop out of your toaster. A mouse jumped out of our toaster the other morning, but that is another story that comes with the joys of a hundred plus year old farmhouse, and a fat cat that is a slacker. The moral here must be that when fat cats are slackers troubling things can happen.   

Where the economic food chain is short, such as in most emerging countries, commodity price increases flow rapidly through the real food chain and onto dinner tables. In developed economies food processing and labor costs mute the affect of the rise in commodity prices. The anger resulting from the central bank’s inflationary objectives has now spilled into the streets. The central bankers have set the political world on fire.

It is rather odd that while hundreds of billions are being pumped by the central banks, everyone seems to need more money, but from street vendors in Egypt to the commodity pits in Chicago this week, money is increasingly in short supply. Even with central bank liquidity supposedly pouring into markets, the actual amount of money available appears to be shrinking. Global debt is a great sponge, soaking up all the liquidity the centrals banks can pump and more.

The stresses produced by the great commodity price boom engineered by central banks, and laid on the backs of hard working bread winners world over, threatens the very foundations of civilization. Of course, theory only goes so far, price is where the rubber hits the road and all the theory puts up or shuts up with prices paid, and the CRB golden ratio just sent a massive heads-up signal as the inflation vs. deflation battle rages around the globe. The central banks may be able to pump trillions more and breach the golden ratio in their battle against forces of debt deflation. If they do, inflation is back in the driver’s seat. Observing the CRB, investors and traders in commodities have a front row seat in the fight of the century. Mr. Market, on the advice of his manager the Kondratieff long wave, just landed a hard right to the inflationary policies of Chairman Bernanke.   

The inflationist’s arguments are brilliant. Money supply, multiplier affects, electronic printing presses, the death of the dollar, they all make so much sense. What I can’t seem to figure out is how after all that pumping, all the trillions, why did the CRB just recoil from the golden ratio like it had touched the third rail of inflation theory. The 2008 high is still miles away.

Just remember that Mr. Market has the last word and he speaks in the language of markets called price. Right now, he is standing on the Fibonacci golden ratio in the CRB and telling the central banks and inflationists to go ahead and make his day. Inflation may yet take Mr. Market down and leave him bleeding in the back alley of some emerging market, where struggling entrepreneurs are just trying to earn enough profit to feed their families. They are fighting against the fat cat slackers that are trying to take the easy way out and slowly make all the debts go away, but they just keep getting bigger. Just watch price, especially in the CRB, this is where all the theories of inflation and deflation meet reality.

Speaking of price, if you are not observing the Fibonacci grids in the market in which you invest and trade, along with time and sentiment, you are investing and trading blindfolded. You create Level 1 grids by identifying the most important high and low in any market or security. Drilling into those grids to the next level between any two adjacent Fibonacci grid targets and on down, you can observe a detailed roadmap of intraday market action. A reader recently recognized the drill-down Fibonacci grids are “the holy trading grail” for day traders. Long-term investors are more interested in the Level 1 and Level 2 moves, like that failure that just occurred in the CRB at the golden ratio. The CRB tried to break into the Frenzy range but failed.

 

Until the central banks can reload their QE canons, which is now questionable due to the rising political opposition expected at this stage in the long wave winter season, the inflationist better have a Plan B. A commodity price crash is not out of the question, since the attempted breach of the golden ratio has failed. A retest of the floor of the Normal range at 293.41 is now in the cards.  

Political revolts have begun sweeping the globe, freedom and liberty from central planning is the cry, including freedom from the failing market manipulation efforts of the central banks. The age of human design is ending. Human action is stepping up to the challenge and filling the void, creating order out of the chaos created by human design.

It is only now coming into focus, but objective reason is winning the day. The Internet is triggering human action and spontaneous order is trumping the chaos of human design; you are observing the objectivation of the world unfold. The looters are on notice. Ayn Rand would recognize what is occurring, as the chaos in the cities is growing and darkness threatens. Unlike the novel Atlas Shrugged, the prime movers remain hard at work, they did not leave the scene of the looters crime and head for the mountains of Colorado. Atlas is refusing to shrug. He has dropped into the heart of the action and is fighting back.   

Listen to Mr. Market, who speaks the language of price, he can be manipulated, but he never lies. A modern day Jubilee has come to Wall Street. The unfolding global debt collapse will force the old order to pass away. The central banks want inflation, but their objective of global inflation has just failed a major test. A new economy will rise on the other side of the global debt disaster that looms.

Price convulsions indicate that major global change is in the wind. The central bankers are keeping their options open. They have stopped selling their gold. They are now gold buyers. Digital gold currency (DGC) is in its infancy and ascendency. The global economy is convulsing into something new. The Great Republic is dawning. All the world is the stage, enjoy the drama, and have a great weekend!

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Has The Tsunami In Japan Destroyed The Japanese Economy?

by The Economic Collapse

The entire world is in a state of mourning today as details regarding the horrific damage caused by the massive tsunami in Japan continue to trickle in.  The magnitude 8.9 earthquake that caused the tsunami was the largest earthquake that Japan has ever experienced in modern times.  Waves as high as 30 feet swept over northern Japan.  The tsunami waters reached as far as 6 miles inland, and authorities have already recovered hundreds of dead bodies.  Those of us that have seen footage of this disaster on television will never forget it.  But this nightmare is not over yet.  There have been dozens of aftershocks, and many of them have been quite large. 

In fact, there have been 19 earthquakes of at least magnitude 6.0 in the area over the last 24 hours.  So what is this disaster going to do to the 3rd largest economy in the world?  Japan already had a national debt that was well over 200 percent of GDP.  Could this be the "tipping point" that pushes the Japanese economy over the edge and into oblivion?

It is hard to assess the full scope of the damage to Japan at this point, but virtually everyone agrees that much of northern Japan is a complete and total disaster area at this point.  Many towns have essentially been destroyed.  Some are estimating that the economic damage from this disaster will be in the hundreds of billions of dollars.  Others believe that the final total will be in the trillions of dollars.

Fortunately, major cities such as Tokyo came through this event relatively unscathed and most of the major manufacturing facilities are not in the areas that were most directly affected by the earthquake and the tsunami.

But let there be no doubt, this was a nation-changing event.  Japan will never quite be the same again.

Also, it isn't just Japan that will be affected by this.  The truth is that economic ripples from this event will be felt all over the world.

An economist from High Frequency Economics, Carl Weinberg, told AFP the following about the economic consequences of this disaster....

"There is no way to assess even the direct damage to Japan's economy or to the global economy. This is a sad day for Japan, and economic aftershocks could affect the whole world's economy."

It is literally going to take months to figure out exactly how much damage has been done.  Let us just hope that we don't see any more major earthquakes in the area.

The Japanese are a very resilient people and the Bank of Japan is already vowing that it will be doing whatever is necessary to ensure the stability of the financial markets.  The Bank of Japan has announced that it is going to provide as much liquidity as necessary to keep the Japanese economy functioning normally.

But the truth is that the Bank of Japan has already been printing money like crazy....

Is a tsunami of new yen really going to solve the economic damage that has been done by the earthquake and the tsunami?

Of course not.

The truth is that the economy of Japan was already deeply struggling before this disaster.

The national debt of Japan is now well over 200% of GDP and there seems to be no doubt that they will need to borrow massive amounts of money to deal with the aftermath of this crisis.

Up until now the Japanese government has been able to borrow money at ultra-low interest rates of around 1.30 percent for 10-year bonds, drawing on a huge pool of savings from its own citizens.

But in light of what has just happened, will the citizens of Japan still have enough resources to continue to fund the rampant spending of the Japanese government?

At this point, it is estimated that this gigantic mountain of debt breaks down to 7.5 million yen for every single citizen of Japan.

Politicians in Japan have been pledging for years to do something about all of this debt, but nobody has been able to make much progress.

Even before this disaster, the major credit rating agencies were warning that they may have to downgrade Japanese government debt.  The earthquake and the tsunami are certainly not going to make the Japanese even more credit-worthy.

Hideo Kumano, the chief economist at Dai-ichi Life Research Institute, has said that a "tipping point" will come when world financial markets finally recognize that the government of Japan simply cannot afford to service its debt any longer....

"It's hard to predict when the bond market might collapse, but it would happen when the market judges that Japan's ability to finance its debt is not sustainable anymore."

Is the massive tsunami that just hit Japan such a tipping point?

Other countries such as Greece and Ireland would have already collapsed if it had not been for the massive international bailouts that they received.

So who is going to bail Japan out?

This could potentially be one of the greatest economic disasters that the world has seen since World War 2.

With the world already on the verge of a major financial collapse, this is the last thing that world financial markets needed.

In fact, much of the rest of the world had been hoping that an influx of capital from Japan would help to stabilize things.

For example, Japanese insurance companies had recently announced that they were planning on buying up lots of European sovereign debt, but now obviously those plans are on hold.  As a result of this disaster, Japanese insurance companies will be forced to sell off assets like crazy in order to pay settlements.  But as Zero Hedge is correctly pointing out, without Japanese financial institutions stepping in to soak up Eurozone bonds this is going to make the European sovereign debt crisis even worse.

But right now the focus in on the devastation in Japan.  At the moment it is unclear how much of the economic infrastructure of Japan has survived.

For example, as USA Today is reporting, some factories cannot even be reached by phone at this point....

Toyota's phone calls to its plants in affected areas were not being answered, said Shiori Hashimoto, a spokeswoman in Tokyo. The Toyota City-based carmaker began production at a new plant in Miyagi this year that makes Yaris compact cars and has capacity to make 120,000 vehicles a year.

What is clear is that the cost of recovering and rebuilding after this disaster is going to put extraordinary financial stress on the Japanese government.

Julian Jessop of Capital Economics certainly does not sound optimistic about what this is going to mean for the Japanese economy....

"Japan's economic recovery has lost momentum and a large part of the reconstruction costs will add to the government's significant debt burden."

Hopefully the full extent of the damage is not as bad as many are now fearing.

But the truth is that this is a huge, huge event for a world economy that was already on the verge of collapse.

May our thoughts and our prayers be with the Japanese people at this time.

This is truly one of the biggest disasters that any of us have ever seen, and Japan will never be the same again.

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Japanese Tsunami: Donate to Red Cross

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If you would like to help out those suffering from the effects of the Earthquake/Tsunami, feel free to donate to the Red Cross.

TWO YEARS INTO BULL, PORTFOLIO LESSONS STILL APPLY

by Charles Rotblut

 

The second anniversary of the bull market is a good time for investors to review.

Investors who maintained their allocations to stocks in the face of the financial abyss have mostly benefited from the rebound. Those who sold too late into the bear market and then waited for clear signs that a rebound was underway have likely trailed the performance of the large-cap index.

In hindsight, the ideal strategy would have been to sell stocks in the first half of 2007 and bought stocks early in 2009. To do so, however, would have required making two correct market calls–a task that would have been extremely difficult. Repeating this feat in the future is practically impossible.

The only alternative for investors was, and continues to be, diversification and rebalancing. Since no one can predict what the best-performing asset class will be in the future, diversification increases the odds of being in the right asset class at the right time. Rebalancing forces you to buy low and sell high–you take profits from the best-performing asset class and seek bargains in the worst-performing asset class.

It’s not a perfect strategy. Rebalancing and diversification would have only cushioned the blow of the last bear market, not prevented your portfolio from losing money. It also would have lowered your participation in the second year of the current stock rally.

Yet consider your alternatives. Correctly timing the market on a consistent basis is impossible. If you are too late with your buy and sell decisions, you could end up locking in big losses and missing out on big rebounds. 

Conversely, if you choose to do nothing, you toss your portfolio to the whims of the market. This actually causes you to experience more volatility and worse performance than if you simply rebalanced once a year. Options can provide a hedge, but they also hurt returns due to commissions and the probability that they will expire worthless.

Plus, exercising a put option (a contract to sell a security at a set price within a given time period) subjects you to the risks of market timing.

Investing is messy and the future is always uncertain. The best you can do is to proactively manage your portfolio. In other words, control what you can control, and try not to worry too much about the rest.

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