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Sunday, March 20, 2011

Bye Bye Affordable American Pie.

Oil prices lead to higher prices in food, and high food prices lead to Consumer Spending Halts. 
You can avoid driving your Escalade, but you cannot stop eating.

Why does anyone listen to the Fed Chair, Ben Bernanke on anything?  His track record is terrible.  Bernanke does not own a Delorian with a Flux Capacitor, and therefore cannot go into the future to tell us what the future looks like.  He is at best a contrarain indicator.  I have stated in previous posts that I believe Ben Bernanke sees himself as a Master Wizard that believes in magic, and that he has the magical magician power to control financial markets with his words... and the use of quantitative easing. 

I personally do not believe in wizards.    
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong fundamentals.
A young Ben Wizzie in 2005
Housing prices crashed the year following this statement.
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so .
Not yet a Master Wizard, Ben's call at the end of June 2008.

Our Fed Chair was just a little behind the 8-ball on this shot call as well.  On December 1, 2008 the National Bureau of Economic research came out and said the US entered recession in Dec 2007.  In Ben's defense, wizards cannot 'see the future' per se, they can only manipulate the outcome with QE and Fed speak.  At this point in his wizard training there had been no manipulations by the Feds. 
Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States
A True Master Wizard, Ben Wizzie stokes the fire in Nov 2010

Ben's wizard speak has helped the market shoot higher since QEII MUCH.  He is proud of being the Fed Chair that controls the S&P.  While Main Steet struggles with the afterbirth of the recession, the good times keep rolling in Wall Street.  

Let's not forget an old adage in investing that all of us need to remember:  It is not different this time...  This goes for uncontrollable inflation crippling consumer spending AND Bernanke being 100% off the mark. 

Bernanke's QEII is about to turn full circle and will soon become a self-fulfilling prophecy.  QEII was put in place to increase inflation just enough to increase economic growth and jump start the velocity of money.  In reality, QEII is has become an uncontrollable 2-headed monster that is quickly leading us back into recession.

The 2-Headed Monster:  Food inflation and No wage Growth

Food is the 2011 story to follow-- follow crude and rap with your buddies about gas prices, but if you really want to watch the consumer fall to pieces, follow food.  

Food prices are at mania levels today.  You cannot hide behind these stats.  While families can choose to not drive, they cannot choose to not eat.  Humans are not autotrophic, meaning that we can not produce our own food source.  If a Master Wizard was able to, through monetary stimulus, he would turn all Americans autotrophic to avoid food increases.  That is just silly, but what is more silly is believing that food increases will not affect the consumer's purchasing power in 2011.  

The big problem for 2011 is that there is no more money.... literally.  The Avg wage has been dropping since 2007 and is expected to fall again this year.  As prices rose in the 1980's, wages followed and so did rates of return on fixed investments and CDs.  Today you would be lucky to find a CD that yields anything substantial, and slack in the job market is holding back wage growth.  As stated in a previous post, the participation rate in the job market has dropped from 65.5% in 2008 to 64.2% today while the number of working age Americans has increased.  If you look at the big picture, there is more slack in the economy than meets the eye.  What happens when the participation rate increases and these over 3 million 'recovery believers' re-enter the job market but there are no jobs?  Wages can not rise to cope with rising prices until unemployment is contained. 

Inflation is becoming a big problem, but if a Master Wizard sees no inflation, inflation is not real.  The CPI measurement system is a complete hoax and needs to be abolished. 

Costs are rising rapidly but the question is:  Who takes it in the shorts?  Consumers or companies. 

Consumers take it in the tank:  Gas rose another $0.7 in the last week to over $3.57 a gallon-- The highest price ever recorded for this time of year.

Consumers will most likely take it at the grocery store as well-- Food prices rise at the fastest rate since 1974.
The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.
Ben Bernanke 2002

So, here we are, at the crossroads of another recession brought on by a consumer slowdown or a true turning point in the recovery.  I have a hard time seeing a true recovery, but I cannot say I see stocks collapsing anytime soon either.  If the adage of don't fight the FED holds true, the bull may stampede on.  Then again, the market is looking shaky today and the consumer is being pinched. June is a long way away, but I would guess that come June QEIII will be a sure thing... We just don't know what it will be called yet or where the but-zillions will be poured into.

Food Stamps for all?  Gas subsidies?  Research to make autotrophic humans?

That is for the wizards to determine.   



  1. "The big problem for 2011 is that there is no more money.... literally."

    If this is the case, who is paying all these high prices for the food? Who is paying $4/gas? And who is buying record numbers of iPads?

    If the consumer is really strapped (and he may indeed be), it's not showing up in what he is buying. And it can't be blamed on HELOCs anymore.

    I would say the data is simple incorrect somewhere..and the likely spot would be on the imcome side.

  2. How many iPad 2's were sold in the first week? That money is coming from somewhere. People are eating ANd theyre buying iPads for $600.

  3. My guess is that they stop eating- that ipad 2 is awesome and worth the starvation.

    Food and gas increases will take a bit of time to trickle into the economy. Consumer confidence is showing cracks already and spending habits will change, as they always do-- like I mentioned: It is NOT different this time.


  4. Almost comical isn't it?
    Free markets have an incredible way of re-balancing inefficiencies and inequities. However, this argument is contingent on the validity of the premise that we enjoy the liberties of free markets.
    But free markets eventually overcome all obstacles--even oligarchies !!!!! Free markets adhere to the tenets of natural law and represents the ultimate balance--although dynamic in nature--of economic forces.
    The problem lies not only in the absurd machinations of the Fed and its Wall Street minions but is rooted much deeper. The engine of our consumer based capitalist paradigm is like an old oak tree--rotting from the inner core. When the wealth of the middle class is being bifurcated--albiet disproportionately--between have and have not, the foundations of our culture begin to deteriorate. The hideous polarization of wealth in America will be its undoing--the status quo will collapse and the process of regeneration will begin to address the structural imbalances.
    When the misery endured by, what was once the middle class, hits a critical mass unconventional changes (Uranus enters Aries) will shake society and the redistribution of wealth will commence.
    We are rapidly approaching an epoch that will dramatically alter Western society.