Tuesday, October 14, 2014

We are coming in for a hard landing.

1. The Saudi's are in a stealth trade war with us. Oil is collapsing and no one is blinking yet. When oil goes down more than 20% in four months - that is a huge deal. Markets can not adjust that quickly. Some people think they are in a trade war with Russia. Maybe they are. But the only change in this equation is that we are producing more. But really - it doesn't matter who the trade war is with - the end game is the same. Price deflation rippling through the economy.

2. Food inflation is almost over. Excluding animals. It takes a few years to rebuild a herd. But farmers in other parts of the country had good enough weather to produce bumper crops of wheat corn, and soybeans.

"Rising production and large stocks have sent prices of corn, soybeans and wheat down by more than 40 percent from their 2014 highs, according to Hamish Smith, a commodities economist at Capital Economics. " Here.

The drop in prices is significant enough that Monsanto had to issue a profit warning.

"Prices for commodities such as corn and soybeans have plummeted to their lowest levels in four years as bumper crops have flooded the market with billions of bushels of the widely used commodities. Many farmers, accustomed in recent years to robust prices, have struggled to cover operating costs. Farm equipment and seed companies also have been heavily impacted, with some cutting jobs and temporarily shuttering facilities." Here.

I honestly think this is why everyone in the market is peeing themselves a little. Food inflation has been masking downward pressure for months. They could convince themselves that growth was right around the corner because "how can you not see inflation! - have you seen how much milk costs lately"? Never mind that money printing had nothing to do with food inflation.

I am deeply loath to agree with anything Janet Yellen says, but she was right about "transitory" inflation. Now we get to see what the real economy looks without everyone screaming about how expensive their limes had gotten. Also.... see item number 1. When something goes down 40% in six months (in this case wheat) - you should really start paying attention. Food inflation is the easiest and quickest to fix. This also points to deflation.

3. Mortgage rates.

This morning when I checked, rates had pretty solidly fallen below 4%.  This is not an inflationary environment.

I haven't checked today, but as of yesterday the price reduced homes from last month had not cleared in my city. This is notable because this is the first month they haven't cleared before the next month starts. And... it is a little concerning that it's almost the 15th of the month and they still haven't all cleared yet.

I am not sure how this is going to turn out at this point. I think there is a troubling scenario shaping up. Some bond investors thought we were going to be in serious inflation by now. We aren't, and I bet they are getting tired of holding dead money. And if the economy starts to look shittier, that is going to make them all the more nervous. They might panic sell.

But - there might not be anyone on the other side to buy. Right now I am super fearful of liquidity drying up.

If the market goes - which I think it will - things are going to get very bad very quickly. Wall street can not "necessarily" count on momma Fed to to come in and save the day. They have been trying to tell us that everything is fine. Just fine. And with interest rates at 0, there is no place for the Fed to stimulate.

This isn't even accounting for markets that are not markets anymore. Africa had actually been doing pretty well before the outbreak. Now it is quite possible several nations could collapse. When productive parts of the population start dying (like farmers) and doctors, That only leaves the non-productive segment.

May parts of the Middle East were markets. Now they are hell bent on rejecting modernism.  To put it really kindly.

And then there is Europe.

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