The Food Crisis Is A Dollar Crisis

The Daily Reckoning ^ | 2-18-2011 | Dan Amoss

[blam]

The Food Crisis Is A Dollar Crisis

By Dan Amoss

02/18/11 Jacobus, Pennsylvania – At this week’s hearing on Capitol Hill, Fed Chairman Ben Bernanke demonstrated a lack of understanding about what causes inflation. His comments reflected a belief that GDP growth causes inflation.

But true economic growth is production-driven, and adds to the supply of goods and services in the economy. True economic growth is not inflationary. Rather, inflation is driven by runaway government deficits and bloated central bank balance sheets. And right now, we have plenty of both. So we have every reason to expect the CPI, even with all of its window-dressing shenanigans, to soar past 2% in short order.

I’m surprised at how complacent the stock market remains in the face of obvious pressure building on the CPI. If the Fed doesn’t react to a rising CPI by tightening policy, Treasury yields will keep soaring, and inflationary psychology will take root among most producers. If the Fed does react by ending Quantitative Easing and raising short-term rates, it doesn’t require much imagination to guess what would happen to a stock market that’s running entirely on fuel from the Fed. Either of these potential scenarios is bad for stocks. The only scenario that argues for further rallies in stocks is if – miraculously – even with unprecedented money printing and deficits worldwide, the CPI doesn’t continue rising.

A rising CPI will give more ammunition to the growing chorus of Fed critics in Congress. At this week’s hearing, when questioned about the building pressure on consumer prices, Bernanke answered that it would be easy to stop this trend by reversing his policies. But you know he’s terrified at the prospect of tightening. He’s an academic with his head in the sand.

When asked about the impact of QE2 on global food prices, Bernanke responded that the destabilizing spikes are due to weather and rapid growth in demand for grains in emerging markets. What a lame excuse! As an admirer of Milton Friedman, he must know that “inflation is always and everywhere a monetary phenomenon.” Inflation isn’t a “weather phenomenon.”

Without forever-growing money supplies, price spikes in one set of goods, like food, would be offset by price declines in more discretionary goods. But in today’s world, demand isn’t limited to what one can produce and save; it’s boosted further by what one can get from government handouts and what one can borrow at the Fed window at 0%.

Yet after all the experiences of recent years (including the early 2008 experience in oil and grains), Bernanke is still oblivious to the consequences of debasing the world’s reserve currency. In his view, if the world doesn’t conform to his personal Phillips Curve and output gap models, there must be something wrong with the world, not his models.

Bernanke has the intellect to understand the negative consequences of the Fed’s radical policies, but he simply chooses to ignore them or rationalize them away. By pushing on the monetary accelerator last fall (rather than wait for another “deflation scare”), Bernanke is going to undermine public support for the Fed. As a result, Bernanke gambled that he could spark a stock market rally. He indeed sparked a rally, starting last August – one that looks very long in the tooth.

But the fact remains that there is no direct “transmission mechanism” from the Fed’s balance sheet to the stock market. Speculators have to have a very specific, benign perspective on Fed policy in order for Fed policy to impact stocks. Today’s misplaced faith in the omniscience of the Fed will soon fade, and when it does, the market will return to intrinsic value very rapidly. The day trading robots and speculators counting on a “Bernanke put” will all look to sell at the same time, and patient investors won’t look to buy until prices fall much closer to intrinsic value. Using the most robust, back-tested historical valuation models, the best estimates of fair value for the S&P 500 that I’ve seen is somewhere in the range of 800-1,000 – 25% to 40% below current levels.

At times like these, it is often constructive to contemplate probable outcomes – to thoughtfully consider the likely winners and losers that soaring food prices will create. The shares of Ag equipment guys and fertilizer companies have been soaring. For example, the shares of Deere and Caterpillar have both more than tripled since Chairmen Ben announced his very first QE program on March 18, 2009. Fertilizer company stocks like Potash and Mosaic have also been on a tear. All these companies are on the receiving side of rising food prices – more or less.

But what about those companies who are on the paying side? Food producers and processors of all types are struggling to accommodate soaring food costs into their business models…and their share prices are showing the strain. Pilgrim’s Pride, Tyson Foods, Sanderson Farms, Kellogg, General Mills and Safeway have all turned in conspicuously poor stock market performances during the last several months.

I recently issued a bearish call on another likely victim of rising food prices. This company is subject to many of the same food price stresses that have been buffeting the companies cited above. Yet, for reasons that are not completely intuitive, the shares of this particular company continue to trend higher. Nevertheless, I suspect rising food costs will put the breaks on this uptrend and cause the stock to reverse course.

This company is facing serious fundamental stresses that will cause similar problems for individuals as well. Inflation is here, folks…whether we like it or not. No use in complaining. Better to prepare.

[phockthis]

Well, it’s offical...

He IS dumber than dirt...

[ClearCase_guy]

I find it very disturbing that the two big economic "truths" today are:

1) Unemployment is going down.
2) There is no inflation.

Who believes that?

[blam]

Rising Food Prices Through the Scope of Quantitative Easing

By Eric Fry

02/18/11 Laguna Beach, California – If only the world’s poor, starving masses understood the benefits of Quantitative Easing, they probably would not be rioting in the streets over rising food prices. We simply need to educate these people. Sure, the prices of wheat and corn are soaring, but so are the profits at Goldman Sachs.

These poor people just need to understand that debasing the world’s reserve currency serves a greater good. It’s not just about whether they can eat; it’s also about whether we Americans can weasel out of our massive debts.

The momentary food problems of the poor people over there –wherever they are – are a small price to pay for our resurgent economic activity over here. And remember, if we don’t make lots of money over here, we can’t send any handouts over there.

Such is the logic that seems to inspire Chairman Bernanke’s QE campaigns.

During this week’s Congressional hearings, the Chairman abided no connection whatsoever between Quantitative Easing and soaring food prices. Blame the weather, Bernanke suggested, or credit the economic recovery…or both.

Bernanke’s remarks before Congress echoed his defense of QE2 two weeks ago at the National Press Club in Washington. “Clearly what’s happening [to food prices] is not a dollar effect, it’s a growth effect,” Mr. Bernanke explained.

During that high-profile Q&A session, Bernanke completely rejected any connection between his dollar-debasing policies and the subsequent “re-pricing” of foodstuffs and other commodities. “It is entirely unfair to attribute excess demand pressures [in the emerging markets] to US monetary policy,” he insisted.
“In some cases, some of the emerging markets are facing inflationary pressure because their own economies are growing faster than their own capacity.” Furthermore, the Chairman pointed out, “As people’s diets become more sophisticated, their demand for food and energy grows.”

Translation: It’s their problem; don’t blame me.

To be fair, Bernanke is at least half right; it is their problem…and it is a serious one. As to where the blame should fall, that’s open to dispute. Bernanke has already presented his defense, pro se, before the court of public opinion. On the other hand, the nifty little chart below testifies persuasively for the prosecution.

Agricultural commodity prices, as represented by the Rogers Agricultural Commodity ETF, seem to catch a stronger tailwind with each successive “QE” announcement.

Bernanke initially entered the bond-market-manipulation business back in March of 2009. The stock market was on its back, economic conditions were deflationary and fear was palpable. He announced that the Fed would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities.

A handful of academics and a few fringy financial writers criticized this Zimbabwe-esque rescue effort. But most folks were happy to know that the Chairman was “doing something.” At the time, the something that he was doing seemed to most folks to be a necessary one-off. So they did not trouble themselves with the potential inflationary implications of this rescue effort.

Since Bernanke’s initial QE campaign seemed to go off without a hitch, he decided that more must be better. Thus, the initial QE campaign begat QE-lite in August of last year, which then begat QE2 in November.

With every step down this slippery slope toward dollar debasement, the commodity markets reacted ever more violently.

[sickoflibs]

The Peter Schiff/Austrian Economics ping. (Washington Bankrupting our Nation by Spending your past, present and future money!)

[sickoflibs]

The Peter Schiff/Austrian Economics ping. (Washington Bankrupting our Nation by Spending your past, present and future money!)

If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.

If you think there is a Santa Claus who is going to get elected in Washington and cut your taxes, spend a few trillion and that will jump-start the economy, this list is not for you.

You can read past posts by clicking on : schifflist , I try to tag all relevant threads with the keyword : schifflist.

Ping list pinged by sickoflibs.

To join the ping list: FReepmail sickoflibs with the subject line add Schifflist.

(Stop getting pings by sending the subject line drop Schifflist.)

The Austrian School’s Commandments plus :From : link

1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: “First, do no harm!”
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is God’s money.

Add mine:

1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .

[sickoflibs]

Nice post.

I been joking that Obama set off a revolution in the middle East by starving them with high food prices. I told that to a Obama lover today. He tried to claim that Obama doesn't set monetary policy so it's not his fault, but at the same time he says all the economic problems 2008 to today were ALL Bush's fault (Greenspan had nothing to do with it.)

There are Koolaid drinkers in both parties.

[Gilbo_3]

wait til yer ‘friend’ has beans or ramen noodles to choose from...

[Cacique]

Btt

[investigateworld]

Anyone recall last January when Cankles had all the US ambassadors return to Washington for 'consultations'?

And no public announcements?

And no body is curious?

Hmmmmmm

So far I've learned old Cankles told the attendees that if they don't support the US dollar; then no admittance to the ark (at Denver Airport)

So don't sell the buck too soon.

[BfloGuy]

Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.

It's extremely frustrating, isn't it, to think that our supposedly-brightest economic minds really don't understand economics. And that, every year, thousands more little skulls-full-of-economic-mush are let loose with newly-printed degrees that aren't worth the paper they're printed on.

These are trying times.

[RipSawyer]

“I find it very disturbing that the two big economic “truths” today are:

1) Unemployment is going down.
2) There is no inflation.

Who believes that?”
/////////////////////////////////////////////////////////////
Those who don’t work and don’t pay for anything and have a room temp IQ believe that.

[FromLori]

How Inflation Could Be 66% Higher Than the Fed Reports

[MichaelCorleone]

-—I recently issued a bearish call on another likely victim of rising food prices....-—

Does this stock have a name?

[FromLori]

A Tipping Point Is Nearing

[FromLori]

“-—I recently issued a bearish call on another likely victim of rising food prices....-—

Does this stock have a name?”

It should be called Bennocide :)

[FromLori]

Inflation Liftoff

[FromLori]

Inflation Building, Fed Should Back Off: LaVorgna

[FromLori]

Bennocide has no intentions to stop printing so prepare accordingly Fed won’t fall on its sword, Bernanke says

[FromLori]

State of Denial