Another Bad Day for Equities

Six consecutive weeks of stocks closing lower.

Dow Drops Nearly 1000 Points Since May 1st

Dow Plunges 155 Points

Highest Price for Corn in Three Years

Not since the commodity bubble of 2008 has corn cost this much, and not in 15 years have supplies been this tight. Meanwhile, China is increasing its purchases of corn. And lest we forget, the EPA mandated a 50% increase in ethanol use just a few months ago. Higher prices, coming soon to an America near you!

Bad News for Anyone Who Eats

from Zero Hedge regarding this morning's USDA update:

So much for transitory inflation as corn prices are again pennies of a fresh all time high. Earlier today an update by the USDA showed that corn stocks will come in much lower than expected at the end of the 2011/12 marketing year at just 695 million bushels: this is far lower than the analysts consensus of 771 million bushels. The spring weather was blamed for the drop: "cold, rainy spring and flooding cut U.S. corn plantings by 1.6 percent, will reduce the harvest by 2 percent and will keep U.S. corn supplies at their tightest level in 15 years through the fall of 2012, the government said on Thursday." Another factor for the record price: surging China demand: "USDA also forecast a hefty increase in corn use by China -- up 8 million tonnes, or 5 percent, this year and up 13 million tonnes, or 8 percent, in 2011/12. China will draw down its stocks rather than import corn, USDA said." Just like in China where record droughts have been replaced with deadly floods, the weather continues to be unusually volatile, not just in the US: "Besides plaguing the eastern Corn Belt, rains and floods have slashed the rice crop by 5.5 percent since May, USDA said. Drought in the Southwest would reduce the cotton crop by 1 million bales, or nearly 6 percent, to 17 million bales, and the rice crop, at 199.5 million hundredweight, would be the smallest in four years." This is probably the latest data the market needed to completely ignore today's worse than expected initial claims data, and go into full "Inflation: ON" mode. In other news, expect Obama to announce the launch of an Adverse Weather Task Force investigating speculative movements in air masses momentarily.

Jim Rogers: Worse Crisis Coming Because of Debt

Legendary investor Jim Rogers, CEO of Rogers Holdings, offered a very glum outlook on the U.S. economy yesterday. According to him, we’re headed for a crisis worse than 2008, the Chinese Yuan will soon be safer than the dollar, and Fed Chairman Ben Bernanke will probably institute another round of money-printing, or QE3.
“The debts that are in this country are skyrocketing,” he told CNBC. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.
“When the problems arise  next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around.”
He later added, “The U.S. is the largest debtor nation in the history of the world. The debts are going through the roof. Would you keep lending money to somebody who’s spending money and not doing anything about it? No you wouldn’t.”
Because of that, he said the Chinese Yuan will be a safer currency bet than the dollar. And what may even better is gold and silver: he’s hoping the price goes down on both so he can “pick up the phone and buy more.”
He’s also convinced Ben Bernanke, who he calls a “disaster,” will institute another round of quantitative easing, essentially printing money, later this year.
“They’re gonna bring it back because [Bernanke will] be terrified and Washington will be terrified,” he said. “There’s an election coming in November 2012. Washington’s gonna print more money.”
According to him “draconian” cuts will be needed to control U.S. debt:

Rogers comments come as a new poll reveals nearly half of Americans expect another Great Depression in the next 12 months.

Stocks Go Negative In Closing Minutes of Session

Bernanke's speech failed to reassure markets, and stocks went negative in the final moments. Amazing volte-face, after being higher throughout the entire day. Absolutely stunning reversal!

from WSJ:
NEW YORK—A gloomy economic assessment from Federal Reserve Chairman Ben Bernanke erased an earlier stock rally, sending major indexes in the final minutes of Tuesday's session to their fifth consecutive drop...
The sharp reversal came after Bernanke offered downbeat comments on the U.S. economy. He said economic growth has been "somewhat slower" than expected, although he added that the recovery should pick back up in the second half of 2011 despite recent signs of weakness.
Mr. Bernanke also said the recovery two years after the end of the recession remains "uneven" and that conditions—particularly in the labor market—remain troubled.
"The market is not buying what Bernanke is selling," said Keith Bliss, senior vice president at Cuttone & Co., a brokerage on the New York Stock Exchange floor. "He's not wowing the crowd."
Mr. Bernanke's comments follow a drumbeat of weak economic data and worries that the recovery is running out of steam. The government's disappointing jobs report last week came on the heels of several weak regional manufacturing reports and consumer-confidence data that have fueled anxiety on Wall Street.
"[Bernanke] certainly seemed to be a little more dour on the economy," said Jay Suskind, senior vice president at Duncan-Williams. "If you had to classify it, it's more glass half empty than glass half full."
The disappointing data, combined with the looming end of the Fed's bond-buying program, or "quantitative easing," has weighed on investor sentiment. Chatter on a third round of quantitative easing, or "QE3," has intensified in recent weeks as more investors are discussing whether the Fed may have to enact some new form of monetary support.

Stocks Lose All Gains

I haven't yet heard about Bernanke's speech this afternoon, but it appears that it has sent stocks tumbling. After being up 60-70 points the entire day, stocks have lost all gains and are back to flat for the day.

Chronic Unemployment Now Worse Than Great Depression

(CBS News)  There is an unfortunate adage for the unemployed: The longer folks are out of a job, the longer it takes them to find a new one.
CBS News correspondent Ben Tracy reports that the chronically unemployed face the hardest road back to recovery, and that while the jobs picture may be improving statistically on a national level, it is not for them...
About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months - a higher percentage than during the Great Depression.

Hussman: Deterioration of Economic Fundamentals

In recent weeks, and particularly in last week's ISM, employment claims and unemployment reports, we've observed a substantial weakening in measures of economic growth. At present, the evidence of economic deterioration is not severe - as I noted in 2000, 2007 and last summer, recession evidence is best obtained from a syndrome of conditions, including the behavior of the yield curve, credit spreads, stock prices, production, and employment growth. While all of these components have weakened, they have not deteriorated to the extent that has (always) accompanied the onset of recessions.

To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we're coming up on the can that the Fed kicked down the road when it initiated QE2. While the Fed was successful in releasing a modest amount of pent-up demand, and was certainly successful in provoking speculative activity, there was never a realistic prospect of creating a beneficial "wealth effect" for the economy as a whole. The historical evidence is emphatic that people consume off of perceived "permanent income" - not off of volatile dollars. Wealth is driven by the creation of long-term cash flows through productive investment, not by boosting the valuation of existing cash flows by encouraging speculation. There was no reason for people to take much of a permanent signal from fluctuations in a stock market that has lost more than half of its value twice in a decade (and is likely to lose a good chunk of its value again if history is of any indication).

So while the Fed has been successful in fostering speculation, further impoverishing the world's poor through commodity price increases, and subsidizing banks by driving funding costs to zero (at the expense of the risk averse and the elderly), QE2 has clearly failed from an economic standpoint. This failure is not because we haven't given it enough time, or because monetary policy works with a lag. Rather, the policy has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren't binding in the first place. Very simply, neither the Fed's policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households. 

How much scope for intervention does the Fed have left? As of June 1, according to the Fed's consolidated balance sheet, the Fed is now leveraged 53-to-1 ($2.79 trillion in assets / $52.6 billion in total capital). This is more extended than Bear Stearns and Lehman were just prior to their failure. The principal difference being that the U.S. Treasury, and by extension, the U.S. public, is on the hook for any losses incurred by the Fed.