Hi folks, in case we don't converse between now and Thursday, Happy Thanksgiving ! When you think about the original basis for the holiday, the settlers giving thanks to those people who taught them how to farm, you could say that Americans today should be just as thankful to all you farmers as the original settlers were grateful to the Native Americans. There would not be much to be thankful for without the farming community, and a grateful nation owes you a great debt on this day as well as throughout the year !
Not a whole lot has been happening in the corn market for the last week or so, which is why I have been missing in action. There seems to be a double top formation in the upper $3.70s, but without a break of the $3.60 neckline, there isn't much to talk about, If the neckline is violated (and that is not meant to be a lewd double entendre in any way), then the projection of the double top formation would be down in the $3.42 area, which hen is in striking distance of the double top formation in December Corn Futures, which remains at $3.29. But that all is dependent on the breakdown through $3.60, a move that the market does not seem in any rush to embrace.
All of this short-term price action fits well into the plan that I have been espousing for the last few months, namely that the $3.60 and then $3.54 levels are critical to the corn market. If they hold we still have a chance to see the $3.85 to $3.95 area and maybe slightly over $4. But if they fail to hold, its going to be a pretty nasty downhill run.
There's something else going on in commodity and financial markets that may very well have an impact on corn prices. The price of oil has just fallen by over $20 a barrel during the two months, its the biggest drop in such a short time period for quite some time, maybe ever. At the same time, long term interest rates have been slowly moving lower as the stock market has taken some shots to the chin. Jim Cramer from CNBC, a guy who I don't put a lot of credence in except that he has some very good business contacts, reported during the last week that CEOs he talks with have told him that their businesses have experienced a substantial =slowdown during the last quarter. On top of that, the housing market is in a recession, with both housing starts and building permits sloping downward at a significant rate as the year heads to a close.
Now those of you who have read some of my posts know that I was expecting a recession in the US and world economies during the next year or two. I had felt that the combination of higher oil prices, a Federal Reserve that was raising short term interest rates, and a rise in longer term borrowing costs, all would combine to create a pretty severe recession, especially since the economies of the world have gone a rather abnormally long period of recovery and growth.
From the signs I delineated above, that expected recession may be arriving earlier than I previously thought. The drop in oil prices is especially disconcerting, since there was little capacity to increase oil production around the world when this price decline began. That tells me that the drop in prices was the result of a drop in demand, which is what causes recessions to occur. And the culprit probably is China, as it seems that the tariff burden has created a sharp downturn in their export business, and as a result their consumption of oil for their factories and offices has experienced a sharp decline. Additionally, after ten years of economic growth, it could very well be that consumers around the world have bought enough of what they need for now, and they are curtailing any further increase in consumption because they basically have everything they need.
Now what does this have to do with corn prices ? Well, even though people still have to eat and thus buy agricultural products, history has told us that price levels for all goods and services tend to move with the general trend of the economy. In times of economic hardship, producers tend to lower their prices and cut their profit margins in order to ensure that they will remain in business when consumers become stingy with their money. This process is what causes deflation, defined as a lowering of price levels, or more exactly, a rise in the buying power of a unit of currency.
So the bottom line is that if a recession is underway in the US and the world, its not going to be good for agricultural prices. And considering that many of those crop prices already have been in bear markets for some time, a deflationary cycle caused by a severe recession could do some real harm to corn prices. On top of that, land prices tend to fall in recessions along with all other prices, and that makes borrowing more difficult to come by as the collateral that lenders ordinarily require to back those loans becomes worth less. So you could also wind up with what is known as a credit crunch, an unwillingness of lenders to lend as much as they previously lent because the value of the collateral that secured the prior loans has fallen. Lower collateral value means less money available to be lent.
I am not trying to be a prophet of doom with these warnings, but rather seeking to relate what has happened in the past. Because the four most dangerous words in investing are "This time its different". Its usually not different, the same signs that caused recessions and deflation in the past will continue to do so, and the same effects from recessions will continue to manifest themselves over and again with every turn of the business cycle.
The way government statistics work, economies often are already deeply into a recessionary cycle before the statistics start showing the downturn. And so in order to protect yourselves against the ill effects of a recession that already has started but not yet confirmed, you need to look and consider the forward looking signs that historically have done well in predicting the future. Agricultural prices tend to be the last commodities to reflect an economic downturn, so you have the benefit of time that is not so available in other markets like crude oil, which quickly show a decrease in economic activity.
I guess the message in a bottle now is be more cautious than you ordinarily are with respect to your marketing plans for present inventory and growing plans for next year. If the signs we are seeing now actually turn out to be omens of a coming recession, you probably will want to change your expectations for both plans. What we are seeing now in the markets I referred to above may be the result of a pause that refreshes in the US and world economy. In such case you have little to worry about. But if they are indicative of a major slowdown coming soon, then it would make a lot of sense to re-think those plans.
Notwithstanding the economics of the day, I hope that you all have a very nice holiday and that you will be together with your families and /or friends.
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I don't know from where your questions originated, I don't think that I made any of those claims, but if you would like I will give you my take on the issues you raise, having lived through them and traded through them.
The recession of 2008-2009 was caused mainly by financial institutions making foolish uses of their capital, levering it by excessive multiples to buy the portions of financially engineered deals of mortgages and mortgage backed securities that no one else would buy. This was done solely to collect large fees from these deals that provided enough short-term boosts to earnings that kept the share prices of these institutions high enough long enough for the stock options held by the C-level officers of those institutions to vest at very profitable prices, providing huge windfall bonuses to the executives that held them. When the underlying holdings of the mortgages that constituted the mortgage backed securities that were put into the deals started failing in 2006, the financial institutions were left with terrible assets that were designed to be the first to collapse when the mortgages defaulted.
However, Federal Reserve policy had a role in causing the defaults to occur, and then such policy made a bad situation worse by not acting quickly enough to correct the liquidity trap and credit crunch that followed. In June of 2004, the Fed embarked on a tightening policy that raised short-term interest rates 4% over the course of the next two years, from 1% to 5%. In so doing, they caused adjustable rate mortgages, which were made at extremely low interest rates due to the Fed keeping rates too low from 2002 to the middle of 2006, to become too expensive to pay as their adjusting rates rose as the Fed hiked rates. Those defaulted mortgages were the trip wire that caused the financial crisis which then caused the recession as financial institutions had to curtail the issuance of new credit as their capital invested in the financially engineered deals was destroyed.
The Fed then made matters worse in 2007 by waiting until September to respond to the credit crunch that was developing through that year due to the capital destruction that was occurring as mortgages defaulted. Once they started easing they moved aggressively, they just should have started easing sooner. But because the Fed is basically staffed with economists instead of investment managers, they were too late to see what financial markets had been saying for most of 2007. As such, too much damage already occurred by the time the Fed arrived to put out the fire.
So not only did interest rates play a huge role in causing the problems that caused the recession, but they also participated in an important way in making a bad situation worse.
Paul Volker was faced with a massive problem when he was appointed Chair of the Fed in 1979. The US devaluation of its currency to pay the debts of the Viet Nam war and the great society programs of Johnson, combined with the lifting of restrictions on governments printing money once the US left the gold standard in '72-'73, provided the economic and emotional reasons to cause inflation to rise dramatically through the 1970's. This increase in inflation caused interest rates to rise across the yield curve, in rates the Fed could control and in rates the Fed could not control. It caused major problems for savings banks who were losing deposits at a rapid pace because they were restricted by law from raising the interest they paid on savings accounts, as well as because of the emergence of money market funds that paid as much as three times the interest of a savings passbook account. Companies had to re-consider their capital allocations in a world where the buying power of their earnings was eroding by double digits, consumers were straining under the rising costs of mortgage interest payments as long term interest rates were moving to levels not seen in decades. The problem was caused by a failure of monetary policy, and so the Fed had to employ a monetary answer to stop the damage. Had the Fed not acted as aggressively as they did, inflation would have destroyed the US banking system. How were banks supposed to survive when they had to borrow funds at 15% to finance mortgages made 10 years earlier at 5% ? The US business economy also was set to collapse, as rising prices of inflation were making purchases far too expensive for consumers. whose wage increases were lagging the increase in prices.
So Volker and the Fed in creased interest rates to unprecedented levels in their 60+ year history, and it worked as inflation dropped fairly quickly and the banking system and the US economy started improving,. It was too late for many, as in the farm industry where the costs of credit and mortgage interest wiped out large numbers of farm businesses. But there was no alternative, as to allow inflation to fester at the rates it was growing would inevitably cause a huge economic depression. If Volker and the Fed can be faulted for anything, its that they kept rates too high for too long. Four South American countries threatened to default on their debts to major US banks in early 1982, which led President Reagan to personally lobby the Fed Chairman to ease off the brake. In August of 1982, the Fed started reducing short-term rates, and the stock market started a rally that during the next 35 years would take it from 850 on the Dow Jones Index up to the 26,000 that it hit this year.
Now the reduction in interest rates was not the only cause of the incredible run up in stock prices since the Fed took its foot off the brakes in 1982. Much of that increase was the result of the advent of the computer making businesses far more productive and efficient. Some was due to the replacement of American workers with cheap foreigners in factories domiciled overseas. And some of it was caused by new business strategies that realized that low tax rates generate more business activity which in turn generates higher tax revenues, along with the understanding that incentives for investors to put capital at risk was a major force in providing the lowest cost way for companies to expand their operations and employment. These two new strategies, the former instigated by something called the Laffer Curve, and the latter called supply side economics, formed the basis of a new economic model called Reaganomics that proved to be the dual-pillared foundation of how American business would grow to record levels of profitability and performance during the subsequent three and one half decades.
Anyone who thought that Reaganomics was the cure all for all of the economic problems that could occur in a vast and complex economy like the one in the US was either a poor economist or a good liar. Reaganomics could not prevent, nor was it intended to prevent, many of the pitfalls that arise in a capitalist economy. While it set the stage and provided the foundation for the greatest economic expansion the world has ever seen, it could not stop the leaders of governments regardless of ideology from seeking to bankrupt their national treasuries in the quest to either secure votes for re-election or to keep the masses calm enough to accept dictatorial regimes that squandered the profits of their national enterprises for their own gain. Reagonomics introduced the means by which economies could grow strongly without fostering the typical inflationary pressures that previously caused boom and bust economic cycles, but it could not prevent future generations of business leaders from incorporating the export of jobs to cheap labor countries as a corollary to the reduction of capital gains taxes to incentivize holders of capital to invest. Reaganomics could not bring better guidance from a Federal Reserve that to this day relies on backward looking policies to drive an economy forward.
Suffice it to say that billions of people around the world have benefited from the implementation of Reaganomics into businesses around the globe, raising the standards of living for these people higher than they ever would have experienced without the advent of these economic policies. But that does not mean that there were not other problems that would arise and have arisen that still can bring the world economy to its knees if not dealt with. And that is the biggest problem affecting the global economy today. National leaders and business leaders allowed the success of Reaganomics to mask the deleterious effects of pother policies that are proving to be lethal to the health of the global economy. The ignorance of those leaders to craft solutions to these problems, even if they were half as successful as Reaganomics, is the lynch-pin that now threatens to destroy the world economy and the standards of living of the people of the world. What is needed is a plan as bold and effective as Reaganomics that will deal with the cancers that now threaten economic prosperity. To my chagrin, I doubt if you will see such innovation until the next financial crisis, one which cannot be overcome with the provision of mountains of liquidity. At that point, the problems that Reaganomics cannot answer will have to be solved with a set of new policies that are specifically designed to cure those ailments.
Thanks for the update Ray. I agree with your call of a recession in the next year or two. I'm looking for a safe home for my money, got into some gold a few weeks back. Any thoughts from you on safe hedges for the next couple years?
Well first of all please don't take this as advice, because I am not licensed to give advice. So these some of the things I am doing to protect wealth in a recession.
First, if you have a fixed rate mortgage and you can switch to a one year adjustable, that would probably make a lot of sense because short term rates will come back down hard in a recession.
Secondly, long term bond yields should drop pretty hard from where they are now if a recession hits. So I would be a buyer of US 30 year bonds.An when bond yields drop[ over a two year period, you can get back into a fixed rate mortgage at perhaps a lower rate than you are paying now.
Third, there is an index traded on the NYSE or NASDAQ with the symbol HDGE. It goes up as the stock market goes down. Its trading in the $7 to $8 range now, it should get up to the mid teens if stocks head back down to the levels they were the day Trump was elected.
Fourth, I would be short corn, beans and wheat, because the bear market in each of those will continue. As you know, I think we are going to trade below $3 a bushel in corn, and I would expect moves of similar percentage to occur in the other two.
Fifth, sooner or later oil is going to bounce, maybe as high as $70 a barrel. Sell that bounce, because eventually crude will trade in the teens. I thought crude was going to go to the $90s and I wanted to sell the heck out of it there. I missed the top, but I will be ready for the bounce.
Sixth, I would love to sell the living crap out of Amazon because I think its way way way overvalued, and in a recession people will buy less. Its just a tough short to make since so many of the knuckleheads running funds love it so much. Same with Facebook and Tesla. In a recession people work more, so they have less time to hunt down old high school flames on F*ckbook. And paying $75,000 for a car during a recession is beyond a lot of peoples' budgets. Those are high risk plays for the reason I mentioned above, but from a value perspective those stocks need to be pounded. The same holds true for Alibaba, although its already taken a good sized beating as China's stock market has taken a deeper dive to date than the US.
Another riskier play is to buy into the Mortgage Real Estate Investment Trust securities traded on the NYSE and NASDAQ. They have tremendous cash flow, with dividends in the 10-15% range, because by law the MREITs must return 90% of their profits. Most of them are run quite well by professional traders, and there is little credit risk in most of them as they invest in the CMOs issued by Fannie and Freddie which are guaranteed by the US government. You have to do some research on each MREIT you consider buying, because the ones that have Commercial Mortgage Backed Securities in their portfolios as well as private label CMOs are subject to credit risk. Also when rates come down, mortgage prepayments increase, and that can have deleterious effects on the performance of the MREITs, But they held up very well in the financial crisis, and I would expect the same to occur in a consumer-led recession. And because the cash flow is so strong, its a good buffer against capital risk. Most of these MREITs only move 5-10 points per year, so entry point is probably more important than their performance.
I am not all so keen on being long gold. It should go higher base don world economic instability, but cryptocurrency now takes away some of gold's traditional buy when hell breaks loose buyers. Gold will do well if we see banks folding in the next recession. That very well could happen again as banks are very exposed to each other in trillions of dollars of derivatives trades. But I don't see the same exposure in banks to one sector as we saw in 2007 with the housing and mortgage fiasco. The coming recession will be more of a traditional one in which the consumer pulls in his or her horns. What will make it a deep recession is that it may be a while before anyone needs a new car or home, and since America's economy still is one powered by cars and houses, it could be a bit dark for a good while. Bujt probably not as bad for the banks. so to short banking stocks will be a winner, not just a big winner. And therefore the move in Gold will be limited.
Gold will have its day near the end of the next recession, when the total debt of the US is so high that they will need continual QE programs to fund their annual deficits., That's when you want to be long gold. Its not going to be a inflation or deflation trade, its going to be a credit collapse among the sovereign risk sector. That's when the world finally will force a proxy gold standard on nations, by putting up the price of gold and thus crushing the buying power of all currencies of profligate nations. Recessions cause budget deficits to rise, as governments make transfer payments to unemployed people as well as subsidies to business sectors who are getting hurt by the economic slowdown. As the US deficits rise in times of recessions, the ability of already indebted nations to borrow becomes weakened. That;'s when credit concerns take center stage and gold is the ultimate hedge against a credit collapse of governments.
So that's what I will be looking to do as the next recession unfolds, if it has not already started. I already have some of those measures in place, like my short position in corn and a long position in HDGE and US 30 year bonds which I bought into during the last few weeks when the market rose above 3.25% and the Commitment of Traders report for 30 year bond futures became the most bullish its been in a very long time. I don't have a mortgage, so I have nothing to re-finance, and as i said I missed the top in oil.
I hope some of those ideas percolate favorably with you, and they wind up being winners.
I got long oil last week when it dipped ridiculously low while natural gas did the opposite. So that idea definitely percolates with me, I didn't know about HDGE, but i've been looking for a short mechanism so I'll do some research and definitely check it out.
I agree the US economy runs on cars and homes, as these are the largest purchases most consumers ever make, and that with rising interest rates these industries will be slowing down and quick... if they haven't already.
Back to Agriculture, the scenario we are in pre-dates me but it looks very similar to the farm crisis of the 80s could be repeated... even if interest rates never get to those levels again.
Well if we get a recession-induced drop in crop prices, along with a credit crunch because farm land drops in value for loans, I think there would well be a real problem for a lot of the small farms. And that would cause a lot of consolidation, which might not be a bad thing for the industry. It reminds me of the credit union and small community bank industry before the crisis of 1989.
There were just too many small banks and credit unions in the country, all vying for the same type of business. Many of the managements of those institutions had failed to grow with the times, in several ways, They did not incorporate new technologies into their businesses, they did not engage the new financial engineering tools into their loan books that would have helped hedged them against adverse movements in interest rates. Sound familiar ?
So in the early '90s, there was a lot of consolidation that went on in the small financial institution industry, which was followed by a likewise consolidation in the big bank industry. And that served the entire banking industry well, even through the financial crisis. Most of America's banks and credit unions were unscathed by the problems that brought down the big banks, and they actually prospered because they were well-managed and had capital to lend when the big banks capsized.
Perhaps that is what is needed in the farming industry, and a recession with decade low crop prices would thin the herd and clear the forest. But for the farms that survive and especially for those that expand from the consolidation, the other side of the recession should be quite profitable for them.
Thanks for your insight Ray. I`ve been saying "this sucker`s goin` down" since Ravi Batra wrote his book, "The Great Depression of 1990"...it should`ve happened then and we`d be healed up by now. We`re supposed to have depressions every 60yrs to blow the carbon out and naturally take care of 'wealth inequality". But some kind of alchemy was practiced and the 1990 depression was postponed. It`ll come even if it`s 30yrs too late and show up more angry
This is why there`s a glut of billionaires these days and a whole lost generation, the millennials that didn`t have to can food and pay their dues.
But it`s like waiting for water to boil on the stove, it takes fiveever, but I`ve joined the stupid people too over the last 10yrs, so I don`t want the circus to end either, my dice are in the vice too.
Here`s something interesting from Bill Holter
Bill Holter joins me for an economic update, and despite some good news and sunny musings from our President, Holter says there is upheaval coming that is beyond imagination. Holter notes that the annual payments on the national debt have surpassed $500 Billion and will soon eclipse national defense spending. And with the Fed continuing to raise interest rates, President Trump is quite right when he says his biggest threat is the Federal Reserve.
Its a lose-lose situation when you are deeply in debt as a nation. Sure the Fed has its problems, they always stay at the party too long, but if they are not vigilant against inflation, the US will have an even bigger problem. Investors in bonds seek "real" returns, which is the yield of a security less the current annual rate of consumer inflation. Because the yield itself is rather meaningless if you don't know what the interest generated at that yield is able to buy. If inflation is rising then the interest you receive on a bond buys less than if inflation was falling.
So in the final analysis, the US has to offer real returns, yields higher than the rate of inflation or the expected rate of inflation during the life of the bond. The higher the rate of inflation goes, the higher the yields. So by controlling the rate of inflation, the Fed is doing the US a favor because without the Fed fighting inflation it would be a lot higher and so would the yields at which the government could borrow money. Higher yields on government debt means the outlay for interest goes even higher.
This is why when the Fed is tightening short term interest rates, long term rates tend to fall at the same time, because the Fed is working to ensure that inflation will not rise over time. The Fed, in essence, protects the buying power of the interest investors receive whenever the Fed tightens short term interest rates, thus saving the government a lot of money that would have been spent on interest payments had the Fed not moved to reduce inflation.
Inflation is the least painful "solution" to pay off existing debt with "cheaper dollars". As a farmer, I would welcome the return of the "mistake" of inflation, we haven`t tried it since the 1970`s and "curing it" bankrupted a lot of farms and businesses in the 1980`s.
Old people living off interest complained that they don`t get a return on their savings. However to raise interest rates will bankrupt businesses that actually pay the taxes. Not to mention the country, it sounds like we`re already spending $700 billion to service the debt that this administration inherited, the previous administration had the luxury of 0% rates...easy to walk on water when the cost of money is nothing.
This is why worlds will collide with each Fed 1/4% tick raise in rates. Farmers already below cost of production get a higher cost of borrowing and servicing existing debt on $12,000 land and $600,000 combines...ol Willie Nelson better get Neal Young and John Mellencamp to warm up back stage.
Don 't kid yourself, inflation is a cancer that sucks the lifeblood out of an economy. Look at the history of Argentina since the second world war if you want to see how inflation cripples a nation. Or Venezuela today. What killed the farmers in the early '80s were the ridiculously high interest rates that were applied to stop the double digit inflation of the late-70s. If the conditions were not set in the early to mid 70's that fostered the inflation a few years later, the super high interest rates would not have had to be applied.
Its very tempting for countries with large national debts to want to inflate their way out of it, paying off the debt, as you wrote, with cheaper dollars. But it doesn't work out that way, because in the process of inflating, investors demand progressively higher rates of interest for their capital, so what you save from the inflation on the payback of your debt you lose in higher interest fees paid on the remaining debt.,
In the meanwhile, consumption across the economy withers as inflation reduces the buying power of wage earners. Company profits fall so they cannot give wage earners raises to keep up with the rate of inflation, further reducing consumption. Unemployment rises, the nation needs to borrow even more money to help sustain the unemployed, tax revenues plummet.
Like I wrote, its a cancer that can quickly destroy a nation, Which is why the Federal Reserve usually errors on the side of caution against allowing inflationary forces to build. And thus why politicians should tread lightly when criticizing their central bank, because without a central bank controlling inflation, there are no other good substitutes that can work quickly enough to avoid the pains of boom and bust economies, which was the history of the US economy before the creation of a central bank in 1913.
Now that's not to say that central banks do a good job. Sometimes they do and many times they don't. They have a lot of trouble anticipating, and hence wind up reacting. Which makes them stay a course longer than they should. But in the absence of a better mechanism, they are all we have to stand in the way of calamity, so we accept them with their flaws. If the situation could be improved, it would require that Congress exercise a lot greater oversight in what the Fed does, and who is selected to serve on the Board of Governors that determines monetary policy. The Fed manipulates markets with taxpayer money, and they should be held to very stringent oversight in that work. Congress wants to stay at an arm's distance, because its a convenient scapegoat to have in their pocket when economic times turn bad. Just blame the Fed, and hopefully the constituents will believe it and not hold the politician liable on election day.
Ray, aren`t we past stage IV already and treatments at this point aren`t effective? might as well take pain pills/inflation and make peace with God. The only alternative I see is negotiating a "haircut" for our creditors, but that would entail stop living beyond our means like free healthcare, asylum for the world and all the goodies that require a "wall"...heck, if we were doing what we had to, we`d need a wall to keep people in
But, it`s like this country is living on a minimum wage and trying to make mortgage payments, car payments...so long a the Visa card isn`t rejected, it`s all good.