Inflationary Manifestations Hit the Farm Belt

By: Doug Noland | Fri, Dec 5, 2003
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Despite the withering dollar, the stock market held its own. For the week, the Dow added about 1% and the S&P500 gained marginally. The Transports were unchanged, as the Utilities added 1%. The Morgan Stanley Consumer and Morgan Stanley Cyclical indices mustered 1% gains. The strongest S&P groups were Oil and Gas Drilling, Aluminum, and Paper Products. The broader market was somewhat weaker, with the highflying small cap Russell 2000 and S&P400 Mid-cap indices dipping 1%. The tech sector was soft, with the NASDAQ100 declining 1% and the Morgan Stanley High Tech index losing 2%. The Semiconductor's 6% decline reduced 2003 gains to 72%. The Street.com Internet index dropped 1% (up 69% y-t-d), while the NASDAQ Telecom index was about unchanged (up 58% y-t-d). The Biotech's 2% advance increased 2003 gains to 39%. Financial stocks were volatile, with the Broker/Dealers declining 1% and the Banks about unchanged. With bullion up $8.20, the HUI gold index was up less than 2%.

Today's unimpressive non-farm payroll data incited a bout of virtual buyers' panic throughout the bond market. And it didn't hurt that the Washington Post's John Berry wrote this morning that the Fed was likely in no rush to abandon "considerable period." Two-year Treasuries enjoyed their strongest gain in 16 months, with yields sinking 17 basis points. Five-year yields sank 18 basis points today and 10-year yields 14 basis points. For the week, 2-year yields dropped 18 basis points to 1.86%, 5-year yields declined 16 basis points to 3.20%, and 10-year yields dropped 12 basis points to 4.22%. The long-bond saw its yield dip 8 basis points to 5.21%. Mortgage-backed yields remain volatile. For the week, benchmark Fannie Mae mortgage-backed yields sank 20 basis points. The spread on Fannie's 4 3/8 2013 note was unchanged at 37, and the spread on Freddie's 4 ½ 2013 note was unchanged at 36. The 10-year dollar swap spread declined 1 to 39.25. Corporate debt spread indexes generally moved to the lowest level since just before the Russian collapse in August 1998, although corporates lost some ground with today's Treasury melt-up. The implied yield on December 2004 Eurodollars sank 27.5 basis points today to 2.35%.

It was a huge week for debt issuance, with almost $20 billion sold. Investment grade issuers included Alcan $2.25 billion (up from $1.0 billion), US Bank $2.0 billion, Household International $1.5 billion (up from $1 billion), Nationwide Building $1.25 billion, Swedish Export Credit $1 billion, CIT Group $750 million, Toyota Motor Credit $750 million, RBS Capital Trust $650 million, JPMorganChase $500 million, Georgia Pacific $500 million, HBOS Treasury Services $500 million, ASIF Global Finance $500 million, Istar Financial $500 million, US Cellular $444 million, Virginia Electric & Power $430 million, GE Capital $400 million, Unionbank of California $400 million, Commerce Group $300 million, TXU Australia $300 million, Clear Channel $270 million, Hanover Compressor $262 million, Duke Energy $250 million, Plains All America Pipeline $250 million, Precision Castparts $200 million, Camden Property Trust $200 million, RPM International $200 million, Massmutual Global Funding $200 million, Northern Illinois Gas $150 million, Wisconsin Gas $125 million, Northern Trust $100 million, 21st Century Industries $100 million, and Niagara Mohawk Power $90 million.

At $324.7 million, junk bond enjoyed another week of modest inflows (from AMG). Junk Issuance: Petrobras International $750 million, Huntsman LLC $455 million, Continental Airlines $415 million, Six Flags $325 million, Crown Castle $300 million, Unibanco Cayman $200 million, Insight Capital $130 million, Sweetheart Cup $95 million, and Atrium $50 million.

Converts issued: Genzyme $600 million, Fairmont Hotels $270 million, Dominion Resources $200 million, Concord Communications $75 million, and Input/Output $50 million.

Dollar watch:

The dollar index declined better than 1% this week to the lowest level since January 1997. Dollar weakness was noticeably broad-based. The Euro rose to a new record. The Australian dollar rose above 73 to the U.S. dollar for the first time since October 1997, enjoying 14 straight weekly gains against the greenback. Today the dollar closed at the lowest level against the yen since November 2000. Chile's peso gained almost 3% this week to a 30-month high, with only a handful of global currencies losing value against our faltering currency this week.

Commodity Watch:

December 4 - Wall Street Journal: "The oil minister of Saudi Arabia suggested that OPEC will aim to keep oil prices high to compensate for a weak dollar, in a sign the cartel is considering ending its system of price targets that has helped maintain stability in world oil markets in recent years. Since 2000, the Organization of Petroleum Exporting Countries has pledged to vary its production levels to keep oil prices between $22 and $28 a barrel. Now OPEC officials, who are meeting here today, appear to have given up defending the upper end of the price caps to capitalize on a wave of strong demand in the U.S. and China.'We are not going to do something about high prices,' one senior OPEC official said."

As a store of value from the sinking dollar, Gold today reached its highest price since February 1996. Recent fears of escalating trade tensions have been allayed for now by the Administration's repeal of steel tariffs. The CRB index jumped 3% this week to the highest level since May 1996. Cold weather and inventory concerns were behind this week's almost 25% surge in spot natural gas prices. With energy prices rising, the Goldman Sachs Commodity index (GSCI) jumped almost 4% this week. Copper enjoyed its best weekly rise in two years, with prices up 6% to a new 6-year high (up 38% y-t-d).

December 5 - Bloomberg: "Gold may top $450 an ounce -- a level it hasn't reached since 1988 -- within a year as a falling U.S. dollar and concern about the U.S. budget and trade deficits boost the metal's attractiveness for investors seeking a haven, Goldman Sachs... said."

Global Reflation Watch:

The Bank of Japan increased foreign exchange reserves by another $18.3 billion during November to $623.8 billion. Year-to-date, foreign reserves are up $172.3 billion, or 42% annualized. Foreign reserves increased $63.7 billion during all of 2002. Taiwan's central bank foreign reserves increased $6.2 billion during November to $202.8 billion, with reserves expanding at a 28% rate through the first 11 months of 2003. South Korea increased its foreign reserve position by $6.0 billion during November to $150.3 billion, expanding reserves at a 26% growth rate so far this year.

December 5 - Bloomberg: "Japan's index of leading economic indicators was above 50 percent in October for the sixth month, signaling the world's second-biggest economy will extend its longest economic expansion since 1997. The index, which measures job offers, consumer confidence and other indicators of economic activity in three to six months, rose to 88.9 percent from 66.7 percent... A reading above 50 percent signals an economic expansion. Today's reading was the highest since February 2000..."

December 1 - Bloomberg: "Deputy Governor Toshiro Muto said the Bank of Japan may pump more cash into the economy to help it recover, Nihon Keizai Newspaper reported, citing Muto.'It won't be odd for the central bank to take a policy action' during a recovery, Muto, one of two deputy governors and a member of the policy board, said in an interview.'Even if the economy moves in a better direction than the board expects, it doesn't necessarily mean we don't have to do anything.'...In October, the board unexpectedly decided to pump extra cash into the economy on the same day that it raised its monthly evaluation of the economy. Muto said Japan's deflation is continuing and that he sees some'fragility' in the current economic recovery..."

December 4 - Bloomberg: "Japanese companies are optimistic about the world's second-largest economy for the first time in almost three years as rising overseas demand for their cars, computer chips and flat-panel screens swells profits. Business confidence rose to plus 5.6 points this quarter from minus 5.2 points in the third, a Ministry of Finance survey showed in Tokyo. A positive number means most companies with at least 1 billion yen ($9.2 million) of capital are optimistic. Companies forecast a higher reading for next quarter."

December 4 - Far Eastern Economic Review: "Although still intervening heavily in the foreign-exchange market, in the last few months China has radically scaled back its purchases of United States bonds. In September, Chinese institutions were actually net sellers of U.S. government and agency debt by $2.8 billion, even though foreign reserves rose by $19 billion. Now, economists and market strategists are beginning to wonder what Beijing is doing with all the dollars it is buying. Chinese state media provided a partial answer in early December, reporting that Beijing plans to build up a 90-day, 50-million-tonne strategic oil reserve. At current crude prices of around $30 a barrel, that will cost China $10 billion. Bankers and brokers in Hong Kong predict further large purchases of strategic materials, together with the possible acquisition of equity stakes in overseas suppliers over the coming year. If pursued, China's diversification away from U.S. government bonds will be bad news for Washington, which has relied heavily on China's debt purchases to fund its fiscal and current-account deficits. In Asia, some economists even say Washington had it coming, suggesting that the switch is subtle retaliation for current U.S. trade pressures on Beijing."

December 5 - Bloomberg: "JP Morgan Chase raised its growth forecast for the Indian economy to 8 percent in the year ending March 31 from 7 percent... JP Morgan Chase predicts the economy will grow at 6 percent in the year to March 2005."

December 5 - Bloomberg: "German industrial production rose 2.4 percent in October, almost twice as much as economists had forecast, the sixth report this week to suggest growth in Europe's biggest economy is picking up."

December 3 - Reserve Bank of New Zealand : "The Reserve Bank has decided to leave the Official Cash Rate unchanged at 5.0 percent. However, in saying that, small increases in the OCR may be required over the year ahead to ensure that inflation remains comfortably within the target range over the medium term. New Zealand's economy has continued to perform well in 2003, although growth has been seated in the domestic economy rather than the export sector, where earnings are under pressure from the rising NZ dollar. New Zealand's current account deficit is again building and some key asset prices appear to be moving beyond their sustainable level. The strong activity, especially in housing and construction, spurred by rapid population growth and high consumer confidence, has produced quite intense inflation pressures in parts of the domestic economy. Despite the domestic inflation pressures, CPI inflation has fallen over the past year largely due to falling import prices."

The astute Reserve Bank of New Zealand should be commended for incorporating the concept of "inflation pressures" as distinguished from and paramount to "CPI inflation." Consumer price inflation is but one of many inflationary manifestations, including rising asset prices, current account deficits, over/mal investment, over-consumption, myriad spending distortions and speculative excess. Moreover, and certainly the case today worldwide, consumer price inflation can be a relatively insignificant manifestation of contemporary Credit inflation.

December 1 - Bloomberg: "South Korean exports rose 23 percent in November, widening the trade surplus to the highest in almost five years, because of higher overseas demand for the nation's cars, semiconductors and other goods. Exports rose to $18.62 billion from a year earlier, and imports gained 13 percent to $15.76 billion. The trade surplus widened to $2.86 billion, the highest in 59 months... South Korea joins Asian economies from Japan to India that are benefiting from faster global growth."

December 1 - MarketNews: "The euro is strong by default, since'nobody wants to buy the dollar anymore and people tend to avoid it as a transaction currency,' said (Eisuke) Sakakibara, ("Mr. Yen") now professor at the Keio university in Tokyo.'Only the (central) Bank of China and the Bank of Japan are buying U.S. government bonds.' Despite the lagging recovery in the eurozone and the need for structural reforms, investors are buying the euro since there is no other option, he explained.'After the U.S. presidential election, nobody knows which way the American economy will go,' he said.'Thus we could have a euro at $1.20 for some time!'"

Domestic Credit Inflation Watch:

December 4 - Bloomberg: "Bush administration efforts to tighten controls on Fannie Mae and Freddie Mac won't impede the housing industry or the ability of the largest U.S. home mortgage financiers to provide funding for American home buyers, a housing official said.'We are not intending to change their role in the housing market and we are not intending by any stretch of the imagination to weaken the housing market,' said John Weicher, assistant secretary of the Housing and Urban Development Department.'No president running for reelection wants to weaken a significant part of the economy just in time for the election.'"

December 5 - Bloomberg: "Poor federal supervision of Fannie Mae and Freddie Mac, the two largest sources of U.S. mortgage financing, is'getting worse,' said Wayne Abernathy, assistant Treasury secretary for financial institutions... What will drive the solution is the fact that the problem isn't going away,' Abernathy said after a speech in Washington to the Consumer Federation of America.'This is an issue that is being driven by the problem, and the problem isn't getting any better -- if anything, it's getting worse."

December 2 - Bloomberg: "Sales of high yield, high risk debt have almost doubled to $112 billion this year from 2002, as low interest rates drive investors to seek out higher yields, Standard & Poor's said. Issuance may remain strong next year, according to the credit rating company... Yield spreads of the non-investment grade debt have fallen by 53 percent, to 477 basis points from a high of 1,011 basis points in October 2002."

December 2 - Bloomberg: "Tyson Foods Inc., the biggest U.S. beef processor, has raised prices on wholesale beef. Marriott International Inc. is boosting room rates. Honda Motor Co. is charging 9.5 percent more on its Acura TL luxury performance sedan than a year ago. The U.S. is moving'from reflation to inflation,' said David Malpass, chief global economist of Bear, Stearns & Co., who predicts the Federal Reserve will have to raise interest rates as early as March to prevent a surge in inflation beyond the consumer price index's 2 percent rise for the year ended in October."

December 2 - Bloomberg: "Wealthy Americans are putting more assets into hedge funds and real estate, and pulling their money from mutual funds, to get higher returns, a survey by Chicago-based consultant Spectrem Group found. American households with at least $5 million to invest now have 6 percent of their investments in mutual funds compared with 11 percent two years ago, the survey of 300 respondents found. Hedge funds are owned by 15 percent, up from 6 percent in 2001, while real estate is owned by 74 percent.'They're reacting to three years of a (declining) market,' Spectrem President George Walper said...'They're more sophisticated with regard to the hedge fund world and interest rates have been so low that they've been able to leverage their investments in real estate significantly.'"

December 1 - Dow Jones (Christine Richard): "Changes in global capital flows, rules-based investing and higher balance sheet leverage have increased the risk of investing in corporate bonds, but these risks are being vastly underestimated by investors, according to recent research published by PIMCO... Key among those risks is the $500 billion U.S. current account deficit which is being offset by foreign investors lending $2 billion a day to U.S. borrowers, PIMCO managing director Chris Dialynas wrote... The stakes are high not only for corporate bond investors as'lofty valuations leave little room for error' but for the financial system...' U.S. corporations dependent upon foreign investors have jeopardized the post-World War II U.S. financial system.' The report also said that the Federal Reserve bailed out the corporate bond market in October 2002.'Chairman [Alan] Greenspan had indicated that spreads were a policy variable and Governor [Ben] Bernanke opened the door to direct credit insurance from the Fed...''The bank's participation was outright and in structured form. Clearly, the Fed invoked a too big to fail doctrine toward the corporate bond market at large.' PIMCO also put the blame for the $3.5 trillion current account deficit at the feet of the Federal Reserve, calling it the result of'massive misallocation of global capital.' That misallocation resulted from Fed policy aimed at protecting the markets against the potential negative impact of such events as the 1987 stock market crash, the savings and loan crisis, the Asian crisis, the bailout of Long Term Capital Management, Y2K risks, the NASDAQ crash of 2000, the Sept. 11 terrorist attacks and last fall's deflation fears... He also called for'an immediate 30-40% decline in the U.S. dollar and/or tariffs and consumption taxes on foreign goods' to create a better balance in global trade." (Rather aggressive "treatment," I would think...)

Economy Watch:

November auto sales were a stronger-than-expected 16.8 units annualized, up from October's 15.6 million unit pace. Toyota enjoyed its best November ever, with sales up 12.8% y-o-y. Lexus sales were up 40% from November 2002. It was also a record November for BMW, as y-o-y sales increased 6.4%.

There were 24,721 bankruptcy filings during the holiday week, up slightly from the comparable week one year ago. Year-to-date filings are running up 6.0%. October Consumer Credit increased only $941 million, although September's big gain was revised almost $2 billion higher to $17.0 billion.

Freddie Mac posted 30-year fixed mortgage rates rose 13 basis points last week to 6.02%. Fifteen-year fixed rates increased 14 basis points to 5.36%. One-year adjustable-rate mortgages could be had at 3.77%, unchanged for the week.

The Mortgage Bankers Association Purchase application index dipped moderately but remains at a strong level. Purchase applications were up 15% from the year ago level, with dollar volume up 33.0%. The average Purchase mortgage was for $205,400, with the average adjustable-rate mortgage at $286,400.

October Construction Spending was up a better than expected 0.9% from September to a record $922 billion annualized. Year-over-year, Construction Spending was up 7.0% (strongest y-o-y gain since October 2000). Residential spending was up 12.5% from October 2000. With year-over-year gains of 28.9% in Healthcare and 14.5% in Education, Public sector Construction Spending was up 6.6% from October 2002.

The F.W. Dodge Construction Activity Index jumped 4 points to a record during October. Non-residential construction surged during the month, pushing the overall index to a level 10% above one year ago.

As was widely reported, the ISM Manufacturing Purchasing Management index jumped almost 6 points during November to 62.8. This was up 12.3 points from November 2002 to the highest reading since December 1983. Also the highest since December 1983, New Orders surged 9.4 points to 73.7. This was up 21.3 points from one year earlier. Production rose 5.7 points to 68.3, while Imports rose to a record 62.4. Declining slightly, Exports remained at a strong 57.9. Prices Paid jumped 5.5 points to 64. This compares to the year ago 55.7 and November 2001's 32.0.

Total Bank Assets increased $29.8 billion. Securities holdings declined $3.3 billion and Loans & Leases dipped $1.3 billion. Commercial & Industrial loans gained $5 billion, while Real Estate loans dipped $4.8 billion. Consumer loans declined $3.0 billion and Security loans dipped $2.7 billion. Elsewhere, Commercial Paper sank $19.2 billion last week to $1.298 Trillion. Non-financial CP declined $10.7 billion and Financial CP decreased $8.5 billion.

Broad money supply (M3) declined $19 billion for the week ended November 24. Demand and Checkable Deposits dipped $0.9 billion and Savings Deposits sunk $23.2 billion. Small Denominated Deposits dipped $1.4 billion. Retail Money Fund deposits declined $2.7 billion, while Institutional Money Fund deposits added $9.3 billion. Large Denominated Deposits declined $2.9 billion. Repurchase Agreements were about unchanged and Eurodollar deposits added $2.2 billion.

Confirming that the GSEs have geared up to hawk debt to the yield chasing public (with clear implications for the contracting money supply "debate"), comes an article yesterday from Dow Jones' ace journalist Christine Richard: "As fears of rising interest rates continue to mount, retail investors have been buying step-up bonds issued by government sponsored enterprises, such as Freddie Mac and Fannie Mae... (LaSalle Broker Dealer Services managing director) Kelly estimates Fannie Mae, Freddie Mae and the Federal Home Loan Banks have sold around $25 billion to $30 billion in retail debt this year and about 40% of that debt contains step-up provisions.'Demand has picked up recently for step-ups as the result of expectations in the market about the future path of rates' said Itai Benosh, director of debt product management at Freddie Mac."

Foreign (Custody) Holdings of U.S., Agency debt increased $8.4 billion. Custody holdings were up $35.0 billion over three weeks. For all of 2001, custody holdings increased about $40 billion.

Inflationary Manifestations and the Farm Sector:

U.S. Department of Agriculture: "The preliminary All Farm Products Index of Prices Received by Farmers in November is 117... 4 points (3.5 percent) above the October Index. Both the Livestock and Products Index and the All Crops Index were higher in November. Producers received higher commodity prices for cattle, corn, soybeans, and wheat. Lower prices were received for cotton, hogs, and milk. The seasonal change in the mix of commodities farmers sell, based on the past 3-year average, also affects the overall index. Increased average marketings of all milk, cotton, cattle, and cottonseed offset decreased marketings of peanuts, soybeans, sunflowers, and potatoes. This preliminary All Farm Products Index is up 20 points (20.6 percent) from November 2002. The Food Commodities Index increased 5 points (4.3 percent) above last month to 121, and is 25 points (26.0 percent) above November 2002. This index value is the highest since records began in 1975."

December 4 - Bloomberg: "U.S. farm income will reach a record $65 billion in 2003, a third higher than last year, driven by stronger export sales and almost $20 billion in government subsidies, U.S. Agriculture Secretary Ann Veneman said... Veneman's remarks came as a delegation of China's grain buyers is expected to visit Chicago later this month, raising expectations of more sales to the biggest buyer of U.S. soybeans. Soybean futures have surged 36 percent from a year ago partly on strong export sales, particularly to China. Orders for U.S. soybeans, corn, wheat and cotton from overseas buyers are all running well ahead of the pace of a year ago, the USDA said in a report earlier today. Orders for corn, the largest U.S. crop, are up 26 percent in the marketing year that began Sept. 1 while soybean orders are up 20 percent. Wheat orders in the marketing season that began June 1 are up 28 percent. Cotton orders in the season that started Aug. 1 are up 38 percent, the report showed." December 1 - Wall Street Journal (Scott Kilman and Daniel Machalaba): "In a harbinger of potential snags across the U.S. economy, a sudden boom in the farm sector has combined with shortages of railcars and crews to delay freight trains and lead to higher delivery costs for farmers across the country. The demand for grain-hauling equipment is hot because the Farm Belt is humming after five years of recession. Grain prices are profitable for farmers in large part because corn and wheat exports have soared 24% since Sept. 1, a reflection of poor harvests this year in Europe and elsewhere. But there is a catch: Failure to deliver their goods is cutting into the potential profits. That is because years of cost-cutting on both personnel and equipment have left railroads short-handed, forcing them to scramble to deal with the unexpected surge in both the agriculture sector and the economy in general... Even when the train shortage ends, some costs will remain higher. Burlington Northern plans to raise its basic rate for hauling corn from the Northern Plains to points in the Pacific Northwest by 8%... Canadian Pacific says it is raising its rate for similar service by 8% to 10%."

The Journal titled Kilman and Machalaba's excellent article "Railroad Logjams Threaten Boom in the Farm Belt." I would have argued (and lost) for the headline "Powerful Inflationary Manifestations Hit the Farm Belt." All the same, the article captured the essence of the new strains of unfolding inflationary pressures now taking hold. It also helps to explain the precipitous upturn in the manufacturing sector.

Importantly, the demise of King Dollar has set in motion a major devaluation of the world's reserve currency. Accordingly, things priced globally in dollars are experiencing a major inflationary revaluation. Crude oil, gold, platinum, copper, soybeans, and commodities generally have all experienced significant price inflation. Buyers and sellers of such assets are forced to make major adjustments. At the same time, runaway global dollar liquidity provides extraordinary purchasing power for buying (especially for China !), investing and speculating.

Domestically, an over-liquefied Credit system and under-priced finance provide incredibly attractive means to profit from the unfolding agriculture and commodities boom. This newfound inflationary bias is today inciting the type of response one would expect from an overheated system: the forces of borrowing, investing/spending, and speculating have been unleashed; boom and bust dynamics, once again, have been nurtured and set on their merry way. Exuberance throughout the financial sphere feeds on exuberance in the real economy and vice versa.

I especially appreciated Kilman and Machalaba's article, as it captured the dynamics of a sector of the economy that has been suddenly and radically transformed by evolving inflationary forces. After years of stagnation - with previous King Dollar inflation manifestations prominent in the equity market and financial assets generally, technology, telecom and housing, much to the expense of other sectors - the farm sector is abruptly engulfed by a virile boom. Having suffered for so long, the agriculture industry today struggles to cope with its newfound prosperity.

The booming Farm Belt is one more example of the acutely imbalanced "stop and go" U.S. economy, as well as providing unmistakable evidence of mounting systemic inflationary pressures. And while the consensus fixates on monthly CPI data to measure the inflationary impact of the weaker dollar, this misses the crucial point. The key analysis is that surging prices for many things - especially those in previously stagnant sectors - is now in the process of fueling a self-reinforcing borrowing and spending boom. Systemic Credit excess is sustained.

The bottom line is that for years our dysfunctional financial system has thrown endless finance at housing, new technologies and consumption, with meager investment in the farm and industrial sectors. Now even the laggards are on an inflationary adrenalin rush. While the WSJ article focused on the farm sector, it carried the warning, "The delays are sparking fears that bottlenecks might also arise in other sectors of the U.S. economy as they also get busier." As long as the Credit spigot runs wide open, you can count it.

From the article: "The condition of the nation's rail fleet has deteriorated in recent years, particularly so with grain-hauling equipment. According to Steve McClure, president of the rail-leasing unit of CIT Group, 68% of railroad-owned grain cars are more than 20 years old." A grain elevator general manager was quoted: "I've been in the grain business 25 years, and this is the worst delay I've ever seen." "...railroads are scrambling to hire more crews and secure more locomotives." CSX is experiencing its worst delays since 1999. " Burlington Northern...was caught off-guard by the record U.S. corn harvest and a bumper wheat crop. It had allowed its fleet of grain-hopper cars to shrink 24% over the past five years... Grain cars are now in such short supply that (the company) has temporarily stopped guaranteeing when it will deliver any more to customers." "In addition, the railroad industry is short of skilled workers."

"The farm sector's demand for trains this autumn is particularly strong, thanks in part to the need to move soybeans to ports for export to China , which is buying U.S. soybeans at a record pace for this time of year. The domestic appetite for grain is strong, too. A rebound in the consumer demand for beef is lifting cattle prices to record highs, spurring the feedlots that fatten them on grain to expand their operations. Much of the grain they use moves by rail.'It is increasing costs all across the system,' says Kimberly Vachal, a research fellow at the Upper Great Plains Transportation Institute... Grain industry officials say the logjams are the worst since 1997... Transportation is a big part of the cost of making food, so the train shortage will help keep upward pressure on food prices already being pushed higher by rising cattle and crop prices... For instance, the charge for leasing one grain-hopper car for one month has doubled over the past six months to about $300." And there are indications that ports throughout the country are struggling to keep up with traffic.

Well, at this point it is reasonable to posit that the agricultural sector has joined healthcare, education, energy, financial services, and housing as key sectors demonstrating strong inflationary biases. The transportation industry has been caught flatfooted by the inflationary surge, and we will have to wait to see if similar dynamics are at play more broadly throughout manufacturing. Especially considering the current ultra-easy Credit environment, we should expect a substantial borrowing and spending boom encompassing the "farm belt." Farm income is already surging, and I would expect one heck of a land boom. The rail, trucking and international shipping industries will scamper to attain finance and upgrade their systems.

The beleaguered manufacturing sector now appears well on its way toward getting fully revved up, joining the energy, housing and services sectors. It is difficult to envision how this inflationary boom can run smoothly for a sector so atrophied after years of neglect. But, then again, these are precisely inflation dynamics a work. There is much more involved than money supply. And, importantly, we will witness yet another example of how Credit inflation begets heightened Credit excess and only greater inflation. Who knows, this Post-King Dollar inflationary manifestation may even make its way to the Consumer Price Index. But that's actually beside the point. We definitely have a ringside seat at a tenacious and historic affliction of an out of control Credit system and boom and bust dynamics.

As such, today was another fascinating day in the markets. The Credit market again demonstrated its strong inflationary bias, basically relapsing into histrionic melt-up on the news of weaker-than-expected job growth. Things have regressed to the point of this having become one big bet on the Fed. Meanwhile, the speculative marketplace is understandably confident that our biased central bankers will be more than happy to use tepid job growth as an excuse for sustaining 1% short rates. Then there is the massive and destabilizing derivatives and hedging monster waiting to accentuate market moves either way. But with the GSEs and their liquidity operations there to insure that rates don't move too high, and leveraged speculators keen to play the spread game, the market bias remains for aggressive financial sector expansion, liquidity excess, and for artificially low rates.

And with foreign central banks unabashed buyers, a weaker dollar is ironically an additional factor fostering lower market yields. Yet - and as I have rambled on about repeatedly - the dollar is in desperate need of some serious liquidity and Credit restraint. It receives the exact opposite. And the longer the requisite moderation is postponed, the greater the number and degree of (self-reinforcing) inflationary manifestations that take hold, the greater the amount of dollar claims inflation, the greater the dollar liquidity available to seek non-dollar things, the greater dollar selling pressure, and the greater the out-performance of non-dollar asset classes. Today's unprecedented derivatives overhang and the truly massive global speculator community transform these risky dynamics into something incomprehensible but absolutely dangerous.

And I certainly saw nothing this week that would encourage me to back away from the view that a serious dollar "problem" has arrived and won't be leaving anytime soon. It is almost as if the light bulb has gone off; a scurry has commenced with the intention of protecting wealth against what is being increasingly recognized as a permanent and ongoing devaluation of dollar value.


 

Doug Noland

Author: Doug Noland

Doug Noland
The Credit Bubble Bulletin
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