2010 Food Crisis for Dummies

2010 Food Crisis for Dummies: The world is blissful unaware that the greatest economic/financial/political crisis ever seen is a few months away. While it is understandable that general public has no knowledge of what is headed their way, that same ignorance on the part of professional analysts, economists, and other highly paid financial "experts” is mind boggling, as it takes only the tiniest bit of research to realize something is going critically wrong in agricultural market.

Wisconsin Farm Bureau: It is so unusual for corn harvest to stretch into December that USDA had no year ago or five-year average harvest progress comparisons. Wet weather has plagued harvest in parts of the Midwest and Great Plains. North Dakota corn harvest stood at just 60 percent, while South Dakota stood at 82 percent and Wisconsin at 85 percent.

Computer Modeling - FAIL

Another example of trying to define computer modeling as science with disastrous results.

http://ti.org/antiplanner/?p=2299

No economist influenced the economics profession in the second half of the twentieth century as much as Paul Samuelson, who died Sunday at the age of 94. As the New York Times noted, “Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.”

Unfortunately, Samuelson’s influence was not as positive as the Times would have it. Samuelson turned economics from a social science that tried to figure out how the world worked into an pseudo-science that tried to turn the world into a mathematical model — a model that failed to account for the realities of individual human desires, incentives, and diversity. As a result, by 1960, economists, politicians, and would-be central planners were misled into viewing the economy as a machine that could be controlled by pulling levers, i.e, passing laws, issuing regulations, and setting tax and discount rates.

The economy is not a machine.

Computing is an epic technological advancement. Too many people, however, believe programming always generates correct answers. Reference: http://xkcd.com/676/

Leading Indicator Action

Zero Hedge says: California lost more than Michael Jackson on Thursday. They also lost their credit rating as Fitch dropped them to A-minus and even that rating was immediately placed on negative credit watch. California faces a $24 billion-plus budget deficit for the fiscal year that begins Wednesday, rapidly declining sales tax revenues and an impotent legislature that can’t agree on solutions. Faced with the prospect of running out of cash, State Controller John Chiang said Wednesday the state will begin to issue IOUs for all general fund payments other than those categories protected by the state constitution, federal law and court decisions.

Waxman-Markey Government Control Act of 2009

Mama says: I don't think the average person realizes that much of our current power plant dates from decades ago, that nuclear plants are going to going off line in about a decade due to age, and that we are apparently signing on to something that will raise the basic cost of living in a very substantial way, without actually having any alternatives.

Okay, so in pursuit of a goal that's nonsensical, for a problem that is international and that will not be addressed internationally (India and China, for example, are refusing to starve their people to death), we adopt legislation that either sets up an iron wall of tariffs or drives half the nation into poverty in about 15 years. This is the most bizarre thing I have ever seen in my lifetime. Let's hope it can be stopped in the Senate.

The $134.5 Billion Mystery Chap 2

Karl Denninger says: This is stuff out of a Tom Clancy novel, and the longer it goes on and the more twisted the "explanations", the less sense it makes. I find it incomprehensible that the Italian government released these two if they were actually caught in a massive counterfeiting operation with $134 billion in fake US Securities.

I find it equally incomprehensible that there was not an immediate indictment out of a US Prosecutor coming from such an event and a demand for extradition back to the United States. And further, I find it equally incomprehensible that if the securities are in fact real, and Treasury is lying, that Italy would not impose the fine.

Only the latter scenario, however, covers what apparently has happened - the two "couriers", whoever they are, have been released and, according to some accounts, they took the allegedly "fake" instruments with them, and there has been no US indictment issued for counterfeiting the instruments. Uh, can we have some truth here folks, because none of what is being reported adds up and my BS detector is ringing off the hook.

The $134.5 Billion Mystery

Contrarian Profits says: For those of you who don’t know, a report surfaced on Monday, June 8, on an obscure Vatican-sponsored news website, AsiaNews.it, that Italy’s financial police (Guardia Italiana di Finanza) had “seized US bonds worth US 134.5 billion from two Japanese nationals at Chiasso (40 km from Milan) on the border between Italy and Switzerland.”

The story has received a lot of coverage in Europe and Asia. But US media outlets have ignored it, despite the fact that it concerns either the biggest ever counterfeiting or the biggest ever smuggling of US bonds. (A third possibility is that the story itself is a fake. Even so, this would merit serious attention as it implies that someone or some state or state agency is interested in destabilizing the value of US debt at a time when it’s most sensitive to destabilization, i.e., when America is issuing most of it.)

The Vallejo Precedent

In the discussion of the bankruptcy of Vallejo, CA comes this Factoid of the Day:

Consider this staggering comparison: State and local public employees comprise approximately 12 percent of the U.S. workforce and have an estimated $800 billion or more of unfunded pension liabilities (not counting other post-employment benefits). By comparison, employees in the private or corporate sector make up about 78 percent of the U.S. workforce with an estimated $450 billion of unfunded liabilities.

I foresee a steaming pile on a beeline towards our primary air circulation driver.

Our Consumer Economy

A picture is worth a thousand words.

Red Alert: Gold Backwardation!!!

I always view gold bugs with a healthy degree of skepticism but Antal E. Fekete lays out a soundly reasoned warning that the global financial system is going to lock up. Soon.

Red Alert: Gold Backwardation!!! In the commodity futures markets the terminus technicus for a positive basis is contango; that for a negative one, backwardation. Contango implies the existence of a healthy supply of the commodity in the warehouses available for immediate delivery, while backwardation implies shortages and conjures up the scraping of the bottom of the barrel.

Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold.

Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold.

They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why? Well, they don't believe that the physical gold will be there and available for delivery in 30 days' time. They don't want to be stuck with paper gold, which is useless for their purposes of capital preservation.

The full faith and trust in the US government to pay its promises is in question. I have read a challenge to the definition of spot price used in the article but overall it makes a good case that this is an indicator worth watching. If the commodities markets begin saying that gold can not be purchased with US dollars, no matter how many of those dollars are offered, it means a complete breakdown in the trust between nations. Scary stuff. The wave of time is towering over the mountains we know.

Building for the Future

I have been watching a work crew start building a commercial building. My first thought is hoping they have their financing approved. Since approved financing is time limited, I suppose they needed to start the project before the approval expires lest they lose the claim on all those million of dollars. Planning for the future always contains the hope the future will mostly continue to resemble the present.

The gentleman operating the top of the line Volvo excavator is an artist. There is an old New Yorker cartoon with the punch line: Americans love to move dirt. So true. Trench, trench, backfill, infill, grade. The rebar and concrete guys are all supporting characters to the master excavator. With every three cubic yards of topsoil he transfers into the back of a truck or smoothes along the nascent foundation, I think these are the people that will get us through the coming economic disaster.

Paulson, Bernake, Cash n’ Carry, Thomas Donilon, Wendy Sherman, Franklin Raines, Jim Johnson, Tim Howard and all the rest of the best and brightest could all use some quality time on the labor farm. Chairman Mao inflicted a great deal of evil upon the life of this world but his insistence that intellectuals actually experience impoverished slave labor is one thought I know I should reject, but which still appeals to my sense of justice.

History Lesson

JC Penney: As Penney later said, “Give me a stock clerk with a goal and I’ll give you a man who will make history. Give me a man with no goals and I’ll give you a stock clerk.”

In 1959, Penney cast the sole dissenting vote when Penneys board of directors decided to offer credit cards to customers. Penney explained to his fellow board members that he understood the company had to keep up with its competitors, but he did not approve of policies that encouraged customers to go into debt.

Our Foundation of Promises

Denninger: If you think the stock market is bottoming then you must have some sort of belief that the credit markets are improving. I'm sure you can explain, then, why the IRX (13 week T-Bill) is yielding a whole 1/11th of a percent (annually!) … Barack Obama made the statement that "deficits are not important" on 60 Minutes Sunday.

He is going to get a rude surprise; the President of the United States is subservient to the bond market - specifically, he is subservient to the willingness of foreigners to finance our deficit spending. Embroiled in their own mess this capacity is quickly eroding, and over the last ten years our Treasury has put itself in the unenviable position of shortening the maturity of its outstanding debt (to get lower interest rates) which raises the potential of a rollover funding "emergency".

I have said it before and I'll say it again - President Obama is going to find himself on the wrong end of reality, and be forced into austerity measures that neither he or Americans are going to like one little bit. I wouldn't want his job when he is forced to go on Prime Time TV to tell America that we simply can't finance our profligate spending any more and that serious, real, across-the-board cuts are going to have to be made to our federal budget, entitlements and "promises" - that we simply cannot keep those promises.

History Lesson

Read This: You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made.

Economic Experimentation

I’ve observed that people will pick up a loose quarter while leaving twenty six pennies alone. Please feel free to replicate this experiment and formulate and defend your conclusions.

Elitist Entitlement Whining

As I’ve said before, money is putting three quarters and a nickel into a vending machine and getting back a pack of peanuts. Getting Goldman Sachs to lend you $600 million dollars to buy a company that “has never posted an annual profit and has lost a total of $194.6 million since it was founded” is finance.

Cash flow through the modern economy is a complex journey through the fusion of market exchange and non-market gifting. What concerns many of us is the size of the grant economy distributing our tax dollars around. Wisconsin is firmly committed to creating a biotechnology economy so it is worth noticing how entitlement mentality develops when government grants prime the pump.

California Scientists Sound Alarms: The California Healthcare Institute (CHI) and PricewaterhouseCoopers (PwC) today released a report, "The National Institutes of Health: Fueling Healthcare Innovation in California," urging legislators to support increased funding for the National Institutes of Health (NIH) — the backbone of the biomedical industry in California, which employs more than 267,000 people in high wage jobs. Without a sustained commitment of funding, scientists, academicians and leaders in the biomedical industry in California profiled in the report fear the biomedical ecosystem in California, made up of universities, research institutions and industry, will lose its capacity to produce the next generation of inventions to treat and cure disease.

However, as the federal deficit soars and legislators pare back discretionary spending, the NIH has come under intense pressure. In the first true budgeted reduction in NIH funding since 1970, the 2007 budget represented a 0.1 percent decrease from 2006

According to the … Supplement Survey, … the competition for peer-reviewed grants is rising and investigators must revise proposals several times in order to receive grants that are oftentimes lower in amount and shorter in duration than requested. Funding constraints prohibit faculty from maintaining sufficiently staffed labs and limit them from hiring qualified younger researchers.

I can imagine the indignant conversions as researchers sip on fine Merlot and sample award winning California cheese. It strikes me that the purpose of taxpayer financing is ultimately not to sustain 267,000 people in high wage jobs until some product emerges that can be sold to Wall Street. It’s also hard to work up tears just because finances get tight and you can’t have every toy you desire and all the minions you want. There are too many people struggling with unnecessarily expensive gasoline and punitive regulatory restrictions to empathize when academic lifestyles are asked to share the social pain.

An Annual Recap

I stopped trusting the “traditional” media a very long time ago. I think it followed my understanding that there is no objectivity in the perception of activity. As the calendar year winds down the annual ritual of reflection winds up. A list for thought from the Business & Media Institute: The Media’s Top 10 Economic Myths of 2007. It is possible to find gloom and doom if you seek it out. It is probable that biased perspectives produce biased reporting.

Hope Now – For Favorable Tax Treatment

Money is when you put a dollar into the vending machine and you get back two nickels, a dime and a bag of peanuts. Finance is when you package a large group of loan contracts and make the income stream tax free. The rich who want to exploit us and the rich who want to manage us are not concerned about money, but they are united in their desire to remain rich. Today our political leaders give us Hope Now --- it’s a website.

Atlanta Journal: Help with mortgages: The fine print. The plan announced Thursday by President Bush applies to subprime residential adjustable-rate mortgage loans that have an initial fixed-rate period of 36 months or less and that: were originated between Jan. 1, 2005 and July 31, 2007; are included in securitized pools of mortgages; and have an initial interest rate reset between Jan. 1, 2008 and July 31, 2010.

The government says they are willing to let specific things happen on some loans within a narrow window of time. What things? Well the government is willing to let the loans try not to default. You may think the government is concerned about the welfare of misguided borrowers in over their heads in debt. You would be wrong. These actions are all about tax law for beneficiaries of the mortgage payments.

Tanta: First, REMICs … One of the qualifying requirements of REMIC status is that the underlying pool of loans is “fixed.” … If at any time the trust starts taking actions that can be interpreted as “actively managing” the underlying pool, the REMIC status is in jeopardy.

The takeaway point: … whether securitizations “allow” modifications is based not on a question of what verbiage is or is not in the PSA, but rather on an interpretation of what is or is not required for REMIC tax treatment or off-balance sheet accounting.

Is it all kind of anemic after all the build-up? Yep. Does it mean contracts are now invalidated in the U.S.? Not as far as I can see; in fact, I'd say the contracts were the part of this that got the most thorough protection. In my reading of this, giving a deal to a borrower almost seems incidental.

The government actions are in essence a clarification that loan servicers can take advantage of the verbiage within mortgage contracts to “mitigate” the potential for default, without those actions being interpreted as management of the securitized loan pools - for tax purposes. Underneath the façade about saving the family home, this is really all about tax law. Warms the heart don’t it.

The Big Brother Time Out Plan

Hillary Clinton and George Bush agree on one point. Contract law can be scrapped if there is political gain to be gained by discarding the rule of law. On second thought, this is also the shared thinking on immigration law. Hillary Clinton and George Bush agree on two points. Michelle Malkin sums it up succinctly: “Behold the bipartisan politics of entitlement”.

Bloomberg: Federal regulators and U.S. lenders agreed to freeze interest rates on subprime mortgages for five years to stem rising foreclosures, said a person familiar with the measure.

The freeze may apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said a person familiar with the plan. Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was sold will be given priority. Those with scores above 660 will be more closely scrutinized to determine whether they are eligible or must continue making payments under existing terms, said the person.

The details are not fully released until tomorrow but any freeze is government interference into the mechanics of a freely entered contract. Any freeze applied selectively based on external eligibility factors is a bad precedent for the rule of law over private transactions. Bad Judgment Joe gets a big brother time out with real dollar savings, while Prudent Peter gets to move immediately onward to higher monthly payments.

Michelle Malkin: Instead of letting lenders and subprime mortgage-holders suffer the consequences of their actions, politicians and grievance-mongers are riding to the supposed rescue. In a supreme irony, the very same champions of the needy in the Democrat Party who complain constantly about the lack of “affordable housing” are now fighting tooth and nail to keep housing prices high…

… Let’s boil this down to fundamentals: Why should the rest of us have to shoulder the burden because some buyers made poor choices, overextended themselves and bought more house than they could afford? Why should other business owners bear the costs of lenders’ failed bets? And why are falling home prices such a catastrophe to be “fixed” in the first place?

The ultimate mortgage industry Ubernerd Tanta is still waiting to see the details but states: “So far, I'm prepared to believe assurances that this will not involve taxpayer subsidies”. I am less willing to extend the benefit of the doubt that tax money won’t come into play, but this is a secondary point. First and foremost, long term decisions depend on the law honoring the good faith in contract agreements. This willingness to tamper selectively in the name of the public good highlights the lack of faith our political class truly have in the ability of the marketplace to work out excess without assistance.

Riding an Oil Slick 362 Points Down

The seductive lure of a command economy is the illusion that something useful is accomplished by administrative tinkering with price. I’m sure the central government in China went to sleep tonight believing they successfully addressed a problem troubling the country.

China, Others in Asia Raise Gasoline Prices: China has increased gasoline and diesel prices for the first time in more than a year, as shortages disrupt transportation in the south of the country. … In southern China, long lines have formed at gas stations because of gasoline and diesel shortages. Some stations have had to shut down after certain oil refiners suspended operations due to rising crude oil costs.

The reality is that supply and demand establishes actual prices and government interference only distorts the market in occasionally unbeneficial ways. This is not so say that everything is that everything is warm and snugly with the energy economy. Exxon Mobil helps trigger a massive sell off in the stock market with a profit miss.

Exxon Mobil's quarterly net falls 10%: Exxon Mobil Corp.'s third-quarter profit fell 10%, its biggest year-over-year decline in three years, as the rising cost of crude-oil needed to supply its vast refining business outpaced the price the petroleum giant could fetch for its finished products.

The socialists in the Democratic Party can believe “Big Oil” makes profit on demand but it ain’t true. There is a big difference between accumulating money via free exchange transactions and raising money by legal demand. The decision to move American toward either a healthier trade economy or an increasingly take and distribute economy is at the heart of all the politics this coming year. The Republicans at Red State are advocating a platform of positions they hope will capture the majority of voters in the elections a year from now. The energy “plank”, however, is simply retarded.

Reagan 21: Be a Part of It: Energy: America must become Energy Independent to secure our nation and our economic future. Our policy initiatives include tax incentives for conservation and innovation in alternative fuel technology, environmentally responsible increase in domestic oil production, reducing cumbersome regulations, eliminating boutique fuels and building more refineries.

What bloody rot. “Energy Independence” is the Democratic goal. They want this precisely because it insures a perpetual shortage which they can exploit for increasing government control over society. They want America in a position where a summer drought creates biofuel shortages so they can step in and save the day by setting price by fiat. What America needs is an energy policy that declares all the resources of the planet should be available for those willing to purchase them. The idea that America needs to be independent of the big bad scary world just strikes me as absurd.

See A Penny Pick It Up

Unable to impose financial discipline on themselves, the government of Wisconsin decides to increase spending both tax dollars and borrowed money in hopes this unprecedented run of prosperity continues. When the rich people start to worry, however, the rest of us may want to take notice. From a pdf courtesy of the International Monetary Fund, the storm clouds on the horizon may be closer than they appear.

Assessing Risk to Global Financial Stability: Financial risks have increased and underlying conditions have worsened since the April 2007 Global Financial Stability Report (GFSR). The period ahead may be difficult, as bouts of turbulence are likely to recur and the adjustment process will take some time. Uncertainty about the final size of losses, and when and where they will be revealed, will likely continue to keep market sentiment and conditions unsettled in the near term.

The global financial markets are completely fused. This means financial shocks that originate anywhere in the world reverberate almost everywhere in the world. Local economies structured to live within their means will survive difficult times better than those winging it on blind faith the future will somehow pay the bills. After all, you never know where trouble is going to come from.

Is Russia's Economy Collapsing? : Dictator Vladimir Putin announced a wave of Soviet-style price fixing. It's been announced that Russia is facing double-digit consumer price inflation for 2007, and prices may be rising at double that rate on the small basket of foodstuffs and other items that are readily affordable to the mass population, which works for an average wage of less than $4 per hour. It's quite shocking to think that G-8 member Russia needs to resort to the tactics of Zimbabwe strongman Robert Mugabe in order to stave off short-term panic, simply making price rises illegal -- as if that was a way to solve inflation that the other G-8 members never thought of.

Oh well, life goes on and tomorrow is another day. The sun will come out tomorrow. See a penny, pick it up … yadda, yadda, yadda.