Crying Over Costly Milk

This is the price of milk since early May. The drought is affecting the cost to feed dairy cattle as well.

Gold Breaks Out Higher

Crude Oil At Highest Price of Summer

Seasonally, crude oil typically goes down at this time of year as the summer driving season ends. Not this year!

Global Economy Sinking

Stocks Buoyed By Fed, Global Economy Worrisome

All headlines are from the WSJ:

Stocks, after being buoyed overnight by the Fed's meeting minutes yesterday, only fell into the red within the past few hours.

CBO Warns of Recession Next Year!

Warning! Warning! Recession, Will Robinson! 

WASHINGTON—The U.S. economy will slide into recession in 2013 if Congress fails to act to maintain current tax rates and avert deep cuts to federal spending, the Congressional Budget Office said Wednesday in likely the last nonpartisan economic forecast before the November elections.
In its twice annual budgetary outlook, the CBO said U.S. gross domestic product will decline by 0.5% in 2013, while the unemployment rate will hover around 9% next year. Under current law, the budget deficit would improve substantially next year as a result of the scheduled increase in tax rates and reductions in federal spending, shrinking to $641 billion, or 4% of gross domestic product.

Corn Soybeans Hit New Record Highs

 AFP - US corn and soybean prices closed at new record highs Tuesday as a new survey showed worse-than-expected crop damage from a brutal drought across the country's central breadbasket.
The price of corn jumped 1.7 percent to $8.3875 a bushel, while soybeans finished at $17.3025 a bushel, up 2.8 percent from Tuesday.
That left the corn price up 68 percent from June and soybeans 39 percent higher.
An all-time record hot July accompanied by nearly three months of extreme drought have baked the country's prime farmland in the midwestern and central states, where the world's largest corn and soybean crops are grown.
Prices jumped after reports from the annual Pro Farmer Midwest Tour gave analysts and traders more bad news on the state of the crops.
"Crops in western Ohio and eastern Indiana were far below the norm," said Pro Farmer analyst Brian Grete.
Yields in South Dakota meanwhile were called "stunningly low."
"The Pro Farmer tour sparked the rally" Tuesday, said Frank Cholly of RJO Futures.
"They have a pretty good peg at final yields," he said.
The Pro Farmer estimates were significantly lower than the US Department of Agriculture's sharply slashed forecasts from last week.
"We are getting less production from South America, so that forces buyers to go to the US," driving up prices, Cholly added.
On August 10, the USDA sharply reduced its production forecast for the globally crucial crops, saying output would likely be at the lowest level in six years.
Last week, they estimated that 50 percent of the corn crop was in poor or very poor condition, compared to 15 percent at the same time last year.
For soybeans, 39 percent of the crop was in poor condition or worse, compared to 13 percent a year ago.
The drought has also hit feeds for livestock like hay, forcing ranchers to trim their herds, which analysts expect could push up the price of meat in the coming year.

July Retail Sales Far Less Robust Than Market Recognizes

Superb analysis!

Submitted by Jeff Snider, CIO of Alhamba Investment Partners
A Final Word On Those "Robust" July Retail Sales
This current weak trend in a broad cross section of economic accounts and variables has been a big threat to the decouple/muddle through philosophy.  Retail sales figures have been sharply lower in the most recent months, pointing very ominously to the exhausted state of that vital US consumer.  So it was very heartening to the decouplers to see a nice, robust rebound in July that was almost totally unrelated to the renewed soaring cost of energy and food.  The broad increase in retail sales figures, despite trends seen elsewhere however, seemed to be a bit of an outlier.  ZeroHedge created a bit of controversy by noting more problems in seasonal adjustments (http://www.zerohedge.com/news/mystery-july-retail-sales-beat-solved-it-all-seasonal-adjustment), only to be countered shortly thereafter by Morgan Stanley (http://www.zerohedge.com/news/morgan-stanleys-defends-retail-sales-seasonal-adjustments-crazy-zero-hedge-analysis-bac-upgrade).  So were the July figures muddle-worthy or otherwise?
It makes some sense that the difference in the number of shopping weekends is cause for large seasonal tuning to render a full apples-to-apples comparison between months.  I am not so sure that a mid-week holiday would cause such a major need for imputations and extrapolations, but that is the nature of econometrics and the vain pursuit (and false comfort) of economic precision.  Whatever the rationale, ZeroHedge rightly pointed out the inconsistency of results:

While there may have only been 4 shopping weekends in July 2012 vs. July 2011, that extra weekend found its way up into June 2012.  Compared to June 2011, there was an extra weekend that did nothing to help the atrocious results (on a seasonally adjusted basis).  Perhaps if we put the two months together to account for this shiftiness in Gregorian calendaring we can step outside these seasonal manipulations altogether.  While the mainstream of economics pursues the false sense of precision that comes from these attempts, there is a much easier method of getting at what is far more important:  the trend.
Using year-over-year changes strips out all of these econometric interventions into the data.  Since these figures are raw, they are not adjusted for inflation either (meaning there is no argument over what properly constitutes “real” retail sales growth). 

The retail sales figures from that perspective show a couple of very clear points:  1. Last year's Christmas season was not only weak and disappointing, it may have marked the inflection point in consumer spending (at least as far as retail sales measure); 2. The July "improvement" is far less impressive.  June 2012 had an extra holiday shopping weekend, but registered only a 3.3% improvement over June 2011.  Without an extra holiday weekend, July 2012 saw almost identical year-over-year growth; 3.4%.  No matter what or how weekends were arranged within the calendar context, non-adjusted growth was not really all that inspiring in either month. 


What may be worse is that since March unadjusted retail sales have consistently been running below the moving average.  That demonstrates conclusively and unambiguously that momentum in the consumer segment is slowing.  Inflections in retail sales, as you would expect given an economic system dominated by consumption, are followed by recessions.  At this point in the “cycle” (such that there is a cycle outside of the mini-cycles created by central bank interventions) there is not much left to reverse the course.
As more and more Americans fall off the 99-week cliff into disability (best case) or the general abyss of the new structural joblessness, it is hard to see any monetary dosage or application that would be beneficial to the real economy.  When you step back and try to analyze why there was an inflection in mid-to-late 2011, the combined impacts of waning job growth and exhausted government transfers under the umbrella of monetary-driven commodity pressures make for not just a tough environment or a muddle, but the reversal of everything that would be considered necessary for widespread economic health in any meaningful sense (there might be more dollars circulating but that is not really the true measure of economic success). 
If this inflection in consumption is indeed valid, it makes sense that the early part of 2012 would then experience economic “volatility” – revenue pressures at firms cause them to cut back on capex or re-investment in real projects, including a decrease in the pace of hiring new workers.  Manufacturing falls off (seen in the ISM and regional Fed surveys) as reduced demand from businesses works its way back into this vicious cycle of employment malaise where job growth is consistently and vitally below population growth or labor force expansion.   As government transfers drop off, the segment of the economy under the gun of stagnation rises in proportion and the bifurcated economy becomes more so – except that as the troubled half grows it inevitably pulls down the half doing relatively well.  What looks like a muddle of weak growth is really the rot of monetary intrusions eating at what should be a free market-driven reset to the previous dislocation of failures from past monetary episodes.  And it is all in the name of some ephemeral “wealth”. 
Stock prices may be higher, but the “wealth effect” is dead without the ability to turn paper portfolio values or tangible real estate “wealth” into spending through credit.  It has always been about debt. 
What might retail sales growth have looked like in the middle of the last decade without the $4.5 trillion in new mortgage debt and $500 billion in new consumer debt (added between 2003 and 2007)?  As we are about to find out, the number of weekends and the placement of holidays would have been the least of the concerns. 

Drought Continues to Devastate Crops

This morning's chart is for soybeans. Up 37 cents just today!

Global Economy Collapsing, But Stocks Higher

I learned yesterday that the Fed has now initiated a new money-printing scheme to pump an additional $600 billion into the financial markets, especially stocks, via repurchase agreements and the too-big-to-fail banks. No wonder reality and news have parted company with stocks. News, data, and reality are irrelevant. We have printed prosperity now!

Rampage of the Irresponsible

No News Is (Apparently) Good News

This is a slow news week. It appears that since there is little news, most of which has been negative in recent months, the market will continue its melt-up. There is no acknowledgment of reality in these markets any more because central bankers have eliminated all perception of risk or reality. When that occurs, asset bubbles are a certainty. The Dow is up 75 so far today.

Corn Still Trends Higher

The Unintended Consequences of Too Much Debt

by Lacy Hunt:
In the early 1960s, when JFK was in the White House and William McChesney Martin was Fed chairman, Keynesian economics was in full bloom. One of its major tenets is the Phillips Curve, which posits a stable inverse relationship between the rate of inflation and the unemployment rate. Yale professor James Tobin and others argued that the social outcome could be improved by a more activist monetary and fiscal policy. Specifically, they contended that the unemployment rate could be lowered while only resulting in slightly higher inflation.
The argument posited the notion that economic policymakers had sufficient knowledge to intervene or fine-tune the economy with tools like those of a surgeon. Presidents Johnson, Nixon, and Carter (two Democrats and one Republican) followed this policy. At one point, President Nixon made the famous statement that "We are all Keynesians now." Moreover, as the White House led, the Fed chairmen of the era – Martin, Burns, and Miller – generally acquiesced.
To judge the effectiveness of this policy, an objective standard is needed. Arthur M. Okun, Yale colleague of Tobin, developed such a standard, which he called the Misery Index – the sum of the inflation and unemployment rates.
Under the activist, Phillips Curve-based policy, some reduction in unemployment was temporarily achieved. However, inflation accelerated much more than was anticipated, and the net result was higher unemployment and faster inflation, an outcome not at all contemplated by the Phillips Curve. The Misery Index surged from an average of 6.7% in the 1950s, to 7.3% in the 1960s, to 13.6% in the 1970s, with peak rates above 20% in the early 1980s.
Many US households suffered. Wages of lower-paying positions failed to keep up with inflation, and when higher unemployment resulted, many of those people lost their jobs. Those on the high end had far more resources that enabled them to protect their investments and earned income, so the income/wealth divide worsened. A half-century later, the United States has never regained the prosperity of the 1950s.
Working independently in the late 1960s, economists Milton Friedman and Edmund Phelps, who would both eventually be awarded the Nobel Prize in economics, had determined that while the Phillips Curve was observable over the short run, this was not the case over the long run. While the economics profession debated the Friedman/Phelps research, the US had to learn its findings the hard way.

Growing Evidence of the Long-term Depressants from Activist Policies

In addition to the compelling evidence that more active monetary and fiscal policy involvement did not produce beneficial results over the short run, three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental indebtedness diminish economic growth. In other words, deficit spending should not be called "stimulus" as is the overwhelming tendency by the media and many economic writers.
Whereas government spending may have been linked to the concept of economic stimulus in distant periods, these studies demonstrate that such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.
These three highly compelling studies are:

• Debt Overhangs: Past and Present, by Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff, National Bureau of Economic Research, Working Paper 18015, April 2012;

• Government Size and Growth: A Survey and Interpretation of the Evidence, by Andreas Bergh and Magnus Henrekson, IFN Working Paper No. 858, April 2011;

• The Impact of High and Growing Government Debt on Economic Growth – An Empirical Investigation for the Euro Area, by Cristina Checherita and Philipp Rother, European Central Bank, Working Paper Series 1237, August 2010.

These papers reflect serious research by world-class economists from the US, Europe, and Sweden – and they all confirm the detrimental consequences of extreme governmental indebtedness.

Misery on the Rise Again

In the past year, Okun's impartial arbiter averaged 10.5%, the highest on record for the third year of an officially recognized economic recovery and almost double the average of the 1950s. The latest readings have occurred despite US gross public debt in excess of 103% of GDP and with the Federal Reserve's unprecedentedly large balance sheet that approaches nearly $3 trillion.
Other measures of well-being confirm the Misery Index. The Poverty Index in 2011 appears to have reached 15.7%, the highest reading in five decades. Not surprisingly, two unenviable records have been set: 46 million, or 14.6% of the population, are now in the food stamp program, up from 7.9% in 1970 and a record-high 41% pay zero national income tax.
In the eleven quarters of this expansion, the growth of real per-capita GDP was the lowest for all of the comparable post-WWII business cycle expansions. Real per-capita disposable personal income has risen by a scant 0.1% annual rate, remarkably weak when compared with the 2.9% post-war average. It is often said that economic conditions would have been much worse if the government had not run massive budget deficits and the Fed had not implemented extraordinary policies. This whole premise is wrong.
In all likelihood the governmental measures made conditions worse, and the poor results reflect the counterproductive nature of fiscal and monetary policies. None of these numerous actions produced anything more than transitory improvement in economic conditions, followed by a quick retreat to a faltering pattern while leaving the economy saddled with even greater indebtedness. The diminutive gain in this expansion is clearly consistent with the view that government actions have hurt, rather than helped, economic performance. Sadly, many of those whom the government programs were supposedly designed to help the most have suffered the worst.

The Way Out

The original theoretical argument in favor of deficit spending originated in J.M. Keynes' The General Theory of Employment, Interest and Money. A search of Keynes' work reveals no recognition of the "bang point," or the condition where a government engages in deficit spending for such a prolonged period of time that a massive buildup of debt leads to denial of additional credit to the government because of fear that the existing debt will not be repaid. Nor did Keynes address the situation where a large number of countries are all simultaneously getting deeper and deeper in debt and there are gradations of debt among these countries – serious shortfalls in the basic Keynesian theory.
Keynes, as opposed to some of his interpreters and predecessors, may have implicitly recognized that a bang point could occur, because he did not recommend constant budget deficits. Instead, he advocated cyclical deficits, counterbalanced by cyclical budget surpluses. Under such a system, government debt in bad times would be retired in good times. However, Keynes' original proposition was bastardized in support of perpetual deficits, something Keynes himself never advocated.
Milton Friedman, whom many consider to have been the polar opposite of Keynes, also never addressed the concept of a bang point, but he may also have understood implicitly that such a situation could occur. The reason is that Friedman advocated balanced budgets, which if followed or required constitutionally as Friedman argued, would prevent a buildup of debt. This view was largely rejected as being inhumane since in a recession, government policy would not be responsive to unemployment and other miseries of such a condition. What should have been discussed is whether some short-term misery is a better option than putting the entire country and economic system in jeopardy, as numerous examples in Europe currently illustrate.
The most sensible recognition of budget policy came not from Keynes nor Friedman, but from David Hume, one of the greatest minds of mankind, whom Adam Smith called the greatest intellect that he ever met. In his 1752 paper Of Public Finance, Hume advocated running budget surpluses in good times so that they could be used in time of war or other emergencies. Such a recommendation would, of course, prevent policies that would send countries barreling toward the bang point. Countries would have to live inside their means most of the time, but in emergency situations would have the resources to respond.
In the context of today's world, this approach would be viewed as unacceptable because it would limit the ability of politicians to continue their excessive spending, thereby saddling future generations with obligations and promises that cannot be honored. But isn't Hume's recommendation exactly what we teach our children in preparing them to manage their own personal finances?

More Market Mismatch

Under the headline of Euro-Zone Business Activity Shinks, the WSJ:
Business activity in the euro zone continued to shrink in July and new orders plunged, suggesting the 17-nation economy is heading for recession and any recovery is a distant prospect.
German private-sector activity fell at its steepest rate in more than three years, a sign that Europe's debt crisis is taking its toll on the region's biggest economy and main source of financial support.
The final composite purchasing managers' index for the euro zone was 46.5 in July from 46.4 in June, Markit Economics said Friday. That means activity shrank markedly month-to-month, but at a slightly slower pace than the previous month. A reading below 50 indicates contraction.

But look at the chart during the European session:

 Stocks are rebounding after yesterday's losses. Meanwhile, Bill Gross of Pimco says that the "death" of stocks is "imminent". But Bernanke and Draghi have created such an air of no risk that they have constructed another bubble in equities. There is no longer any perception of risk any more. This is precisely the stuff that bubbles are made of. It is the very definition of a bubble! Central bankers seems to be good at only one thing -- building bubbles! And creating the resulting crises!

U.S. jobs report to be released in a few hours!

Drought Continues to Devastate Food Crops

Corn continues to hover near record of $8/bushel. 

ST. LOUIS (AP) — Nearly 220 counties in a dozen drought-stricken states were added Wednesday to the U.S. government's list of natural disaster areas as the nation's agriculture chief unveiled new help for frustrated, cash-strapped farmers and ranchers grappling with extreme dryness and heat.

The U.S. Department of Agriculture's addition of the 218 counties means that more than half of all U.S. counties — 1,584 in 32 states — have been designated primary disaster areas this growing season, the vast majority of them mired in a drought that's considered the worst in decades.

Draghi Disappoints, Stocks Plunge 170 Points

from Zero Hedge:
As he began to speak the EUR rallied, EGBs rallied and ES rallied - last minute hopiness wrung out of the system, but as soon as he explained that his plan to promise a plan which plans to promise a solution was nothing but another promise and not an actual plan, so everything reversed. 

 Wall St. has far too much faith in central bankers

Stocks, Reality Disconnect

What doesn't match in these headlines? Both were on the website of the WSJ on the same day. Something is truly broken when Wall St is so disconnected from reality that constant central bank interventions become a necessity, and they still don't bring prosperity!

Stocks Collapse As Economy Degrades

Dow was down as much as 200 points.

Richmond Fed Disappoints

ZH:
And another epic miss in the slow motion trainwreck that is the US plowhorse economy now to its neck in quicksand. The latest B-grade economic indicator: the Richmond Fed, which was expected to rise modestly from -3 to -1. Instead it faceplanted to -17, the biggest miss since August 2010 and the lowest print since Apirl 2009