Are prices headed down until another QE?

May 6, 2011

Baltimore, Maryland

We're finally getting some action on Wall Street! The Dow has lost more than 200 points in the last two days. Gold is down more than $50. And oil closed below $100 yesterday. ----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

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Could this be the sell-off we've been waiting for? Maybe.

Why do we expect a sell-off? Because we're still in a Great Correction. And in a correction, prices tend to go down. Deflation is the underlying trend...not inflation. Debt gets marked down...defaulted on...and written off.

By our reckoning, the beginning of the correction actually began more than 10 years ago when the Nasdaq cracked wide open in January 2000. Since then, the US economy and stock markets have gone nowhere, in real terms.

Who noticed? The feds poured on so much liquidity - beginning in '02...with a huge flood in '08-'09 - everything was swamped. Trash floated.

But households drowned...they were shackled to sinking incomes, while the cost of living rose with the tide.

And their costs are still rising. On the radio last night we heard about how hard $4 gasoline has hit America's lower and middle classes. These people live on tight budgets. If their fuel costs go up $20 a week...they feel it.

The Wall Street Journal:

LONDON-Consumer prices in developed economies rose in March at the fastest pace since October 2008, driven by energy and food inflation.
A couple of reports in the Financial Times have focused on how they cope. One tells us that they aren't driving to malls the way they used to.

"Online shopping jumps in US as cost of fuel curbs trips to malls," says the headline.

No report from the malls yet...but online sales are said to rising at a 7% rate.

Meanwhile, "Americans ditch TV is move to save money," says another headline.

"Lower and middle classes are giving up their televisions and unplugging their landline telephones..." it begins.

Hey, there's some good news. The TV has probably done far more damage than drugs and alcohol. And certainly a lot more damage than terrorism. Yet, the feds spent $2 trillion fighting terrorism (according to another FT report). How much did they spend fighting TV?

But let's think more about what happens to investors.

If we're in a Great Correction...

...and if liquidity from the feds is the only thing that keeps the correction from dragging prices down...

...then, you'd expect prices to go down whenever the feds ease up, right?

Well, get ready. When the feds stop pouring on liquidity, the correction reasserts itself. That's what happened last summer. QE 1 ran dry. Stocks fell throughout the summer...leading Ben Bernanke to announce QE 2 in August.

What's happening now? Is the market anticipating another QE end? Are prices headed down until another QE is announced?

We'll find out...

*** The US grew and prospered in an era of cheap energy, cheap land, cheap wood, cheap everything.

What if everything isn't so cheap in the future? What if the cheap oil has been pumped? What if the cheap land has been plowed and irrigated with cheap water? What if steel, copper, zinc...not to mention cotton and cattle...are in a major upswing? What if Jim Rogers is right?

Here's our old friend on CNBC yesterday:
"Where is the oil? I still want to know where is the oil? You know why the price of oil is going up? Because there is no oil," he said.

But if the price is going too high, the race to find the last drops of crude will accentuate, before the search for alternative energy resources yields results, according to Rogers.

"At $300 a barrel they would be drilling for oil under Buckingham palace," he said.

The International Energy Agency "has come to the conclusion that the world's oil reserves decline by six percent a year," and that is an argument for the rising price of crude, Rogers said.

"Say they don't decline by six percent, say they decline by four percent. That means in 25 years there's no oil at any price," he said, adding that rising oil prices will "hurt some people very badly" and some companies will go out of business.

"We will certainly have dips (in oil prices), we will certainly have consolidation, I hope we do. If oil goes into a spike, if it goes parabolic, you have to sell it," Rogers said.

The world uses 86 million barrels of oil every day, he pointed out, adding: "we found some big oil fields in Brazil and let's say the bull estimates there are correct, that's still only two years worth."
Bloomberg is in the case too:
(Bloomberg) Across the road from Zhao Yuanyi's wheat field in China's Shandong province, Beijing-based Chonche Group is expanding a rail car factory on what used to be 227 hectares of farmland. Nearby, Geely Automobile Holdings makes sedans on an 87-hectare (215-acre) site that four years ago was covered by crops. A five-minute drive away, farmland cedes to dozens of gray-tiled villas for wealthy residents of the city of Jinan, 220 miles south of Beijing. "This year, maybe next, they'll develop my field," the 63-year-old Zhao says, gazing at the land he has tended all his life. If that happens, Zhao would receive modest compensation. Without the farm, he says, "I don't know what I'll do."

The factories sprawling from Jinan, 15 miles to the west, put Zhao on the front line of a clash between a policy of food self-sufficiency and the industrial growth that has made China the world's No. 2 economy. Grain production is "on a shaky base," says Qian Keming, head of the Agriculture Ministry's market and economic information division. "With rising living standards and more consumption of meat, eggs, and dairy, grain consumption is inevitably on the rise."

Growing cities, expanding deserts from years of overgrazing, and a reforestation effort have helped shrink China's farmland by 8.3 million hectares in the past 12 years, the government says. With most factories rising in temperate, grain-growing coastal regions, the drier north must take up the slack. "Food production is increasingly focused in northern areas that have water shortages," Chen Xiwen, top agricultural adviser to Premier Wen Jiabao, wrote in Caijing magazine in December. That's "very worrying for food security."

With less land under cultivation, Chinese farmers are unable to boost production of corn and wheat fast enough to cool surging domestic prices, so the country is importing more. "China's increased demand for agricultural commodities will mean an increase in prices for the entire world," says David Stroud, chief executive officer of New York hedge fund TS Capital Partners.

China, the world's biggest grain producer, was a net exporter of soybeans until 1995. This year it's forecast to import 57 million tons, or almost 60 percent of global trade in the oilseed used in animal feed and tofu, according to data from the U.S. Agriculture Dept. China's food imports as a percentage of domestic consumption is "tiny"-about 3 percent, says Frederic Neumann, a Hong Kong-based economist for HSBC Holdings (HBC). "If you doubled that to 6 percent, that implies enormous purchases on the world market," he says. "The guy with the most financial firepower is going to drive up the price."

Making up for a 5 percent shortfall in China's grain harvest could consume 20 percent of current global grain exports, says Abah Ofon, a Singapore-based commodities analyst at Standard Chartered Bank. In February wheat on the Chicago Commodities Exchange reached its highest level since 2008 as traders fretted that drought was damaging China's crop, raising the risk the country would drain the world market. "As China continues to grow, demand and supply will struggle to keep up," Ofon says. "For China, the world's biggest consumer and producer, a small deficit can result in huge demand for imports."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Are prices headed down until another QE?"


May 6, 2011

Its stagflation!
Have you seen the World Population Graph? check out on google ---looks like a BUBBLE?? HAHAHAHA A BUBBLE IN POPULATION !!! tHE BUBBLE HAS TO CORRECT /BURST!

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