Let Them Eat Quantitative Easing

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Grain prices soared on the Chicago futures exchanges on Friday. A report from the USDA stating that there would be lower inventories was cited as the cause. Quantitative easing from the Fed was behind the extent of the move however. Commodities are priced in dollars and with more of them floating around; any piece of negative news can cause food prices to go through the roof.

Food prices were already rising during the summer because Russia had halted wheat exports due to a severe drought. On Friday, the USDA (United States Department of Agriculture) cuts its crop estimates for the U.S. for second month in a row. The corn crop is now expected to be 3.4% lower than last year. The soybean crop is still expected to be good, but will come in 2.2% less than last month's prediction. The USDA now says global wheat inventories will be 1.8% lower than they thought in September.

While these changes seem minor, as would be expected in a market with too much money floating around because of the Fed, the impact on prices was explosive. December corn futures rose 8.5%. Soybeans were up 3.9% on the day. Both are used as animal feeds and this raises prices for producers. Shares of some of the big meat companies fell sharply in response. Consumers should expect higher prices at the store.

Analysts are now concerned about another food crisis, like the one in 2007 and 2008. Food prices got out of control back then and a number of countries stopped grain exports to insure adequate supplies for their domestic markets. This is only one of the many potential downside risks of Ben Bernanke's new quantitative easing program. Bernanke continually insists there is no inflation however, just as he continually insisted that subprime loans wouldn't cause any problem with the economy. Like a modern day Marie Antoinette, if bread prices become too high he is likely to suggest the peasants eat cake. They are already eating his quantitative easing, whether they know it or not.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

U.S. Dollar Down, Everything Else Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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The trade-weighted dollar hit a new yearly low overnight falling to 75.10 at one point. It only decisively broke important support at 76.00 six trading days ago (there were short breaks before that signaling what was coming). While there is minor support at 74.00, this is not likely to hold very long. A test of the all time low of 71.50 is almost inevitable at this point. It may take a couple of months before this happens. Expect a bounce when it does. How long the U.S. dollar will be able to hold at that level remains to be seen. Eventually, new all time lows will be reached.

The decline in the dollar is causing almost everything else to rise. This includes gold, silver, the stock market, food commodities and now oil. All of these price movements can be traced to the huge money printing operations of the U.S. central bank. Markets move first, then consumer prices second. Expect noticeably rising CPI starting with the report for December. The current rise in oil, which hit $80.05 a barrel for light sweet crude early this morning, has insured the inflation numbers are going to start perking up soon. The rally in grains currently taking place is also going to start impacting food prices sometime next year.

Oil's performance is impressive considering it is taking place against seasonal headwinds and the interference with energy trading that the CFTC conducted this summer. While the CFTC drove 200% long oil ETF DXO out of business, it left the 200% short oil ETF DTO alone. It seems that only leveraged long positions cause excess volatility in energy trading, but leveraged short positions don't. U.S. investors are left with non-leveraged ETFs such as OIL and USO as their only means to invest in oil at the moment. How long the oil rally lasts is still an open question. Higher priced oil definitely upsets the authorities and now that their summer attempt at price controls has failed, you should assume that plan B will appear at some point in the future. Also watch natural gas prices, just as silver usually moves after gold, natural gas can follow oil. Their price ratios are still incredibly out of whack (in theory oil should be 6 times the price of natural gas, it was priced well over 20 times during the summer).

Oil is still far away from its all time high of $147 a barrel (although it will be getting back to that level), while gold keeps hitting new highs. The close of spot gold at the end of the afternoon session of Globex yesterday was $1064.50. To hit another all time high, $1070.40 has to be taken out. Spot silver closed at $17.86 yesterday and needs to break and close above important resistance at 18.00. It has been above $18.00 briefly twice so far (the inverse pattern of the U.S. dollar breaking 76 twice briefly before a major break took place). Once it breaks this level, silver will test its 2008 high around $21. It is only a matter of time.

NEXT: What Earnings Are Telling Us

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.