| The Daily Reckoning Presents | |||
| The Milkman Indicator | |||
He comes every Friday and drops off a crate full of cold bottles of milk, along with tubs of yogurt and butter, cheeses and sometimes meats. You place your orders online, and the milkman brings it your doorstep, fresh from a local family-owned farm not far from where I live. I mention this because I got an interesting e-mail from the farm over the weekend, which I think sums up what we face in today's economy. The problem we face is particularly insidious because lots of people don't really understand what causes it, which allows it go on. But before getting to abstractions, let's look at the e-mail I got from my milkman. "We would like to take the time to tell you," it begins, "that due to some large price increases we are facing on materials we use to bottle milk...we must raise the price of our glass bottled products." The e-mail then goes on to show, in some detail, exactly what price increases the farm sees. The milkman is a model of good disclosure and transparency. Many of our banks and corporations should use this e-mail as a model for communicating with the public. The sources of the pain include a 4% increase in the cost of glass bottles and a 6% increase in the cost of plastic caps. The farm has also seen a 14% increase in shipping costs in just the last six months due to the rising price of fuel. There is more: a 2% increase in materials such as latex gloves and hairnets, a 5% increase in lab supplies for milk testing and an 8% increase in the chemicals used to clean the plant and equipment. "I hope that you can all see that we have seen a huge increase in total," The e-mail continues. "This is why at this point it has become a must to increase the price of our bottled products 7%. This is always an agonizing decision for us, but sometimes can't be avoided." We might call this the Milkman Indicator. I can tell you that this is happening across the economy right now. I follow a lot of companies, and rising raw material costs are at the top of the list of concerns facing anybody who makes anything. Naturally, as investors, the idea would be to play those who benefit from such rising raw material costs and fade those who cannot pass on these costs to their customers. So for example, the rising cost of glass bottles makes me think of Owen-Illinois. This is the world's largest glass container company. I recommended it in my investment letter, Capital & Crisisin December. Part of the thesis there is that price increases in 2011 would help raise margins and profits. So far, the stock hasn't gained much ground, but the core idea behind owning it is still very much in play. This has actually been something of a mini-theme in Capital & Crisis, where I have recommended several specialty producers of materials that are rising in price. Another idea is to own the producers of the commodities rising in price, like many of the energy and mining stocks I have recommended. This phenomenon of rising raw material costs brings us around to causes. Why is this happening? The short answer is that our Federal Reserve is printing a lot of money. It's funny how I can explain this to my 12-year-old using monopoly money - and he gets it - yet it seems economists with Ph.D.s and fancy titles in think tanks and government agencies don't get it all. When you create a lot of money, that money loses some value. It buys less than it did before. That's what we're seeing, in essence. The main barometer for monetary creation is the Fed's balance sheet. When it expands, so too does the amount of money sloshing around. All that money sloshing around has to go somewhere. People buy stocks, commodities and gold. There are many, many ways to show this, and I've seen many different kinds of charts that all show the same thing. But I grabbed the one below from today's Wall Street Journal to show you:
So "QE2" is the fancy name given to a very base and simple act: money printing. And you can see that as the Fed's balance sheet has swelled, so too have stocks and gold surfed the wave of cash. The dollar has also weakened (buying less), and rates on mortgages have gone up. This is just the beginning. We know how past bouts of money printing ended. Badly. [If you want to read up on the hazards, no book details it better than Adam Fergusson'sWhen Money Dies. Take 20% off when you buy a copy from Laissez Faire Books right here.] Look again at that table above that shows mortgage rates. Those rates are in the 4-5% range. In the 1980s, it was rare to see new home mortgage rates below 10%. In 1982, the average interest rate on a new home mortgage was 15.12%. These cycles often take a generation to play out from peak to trough and to peak again. Mortgage rates of 10% didn't just happen in one year. It was a slow buildup over a good two decades. The average mortgage rate in the 1970s was 8.8%, compared to 11.79% in the 1980s. In the 1960s, mortgage rates were in the 5%s. Look at gold. It didn't jump to $1,500 in a year. It's been in a 10- year bull market. So to wrap up here, I think we're looking at a long period when prices rise and the cost of money rises. I doubt the Fed's resolve to take back the cash it put in, until it gets really bad. Then another Paul Volcker will arrive on the scene to break the inflation and a deep recession will ensue, like a nasty hangover. Until then, I think the Fed will keep the bar open and let the good times roll. This means gold up, dollar down, interest rates up and commodities up. And the prices the milkman charges will go up as well. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: As Chris mentions above, it doesn't take a Ph.D. to understand that more money chasing the same or fewer things means higher prices. An intelligent 12-year old can grasp that...even if the concept remains beyond the nation's leading economists and central bankers. Take a look around your grocery store...the gas pump...the metals indexes. You already know what's going on. You see it every day. |
At times it really is breathtaking how corrupted the U.S. government has become. Government corruption has become so endemic in our society that most people have just kind of accepted it as "normal". But shouldn't we all get hopping mad when we learn that the Federal Reserve sent billions of dollars in bailout money to addresses in the Cayman Islands? Shouldn't we all be furious when one of the leading candidates for the 2012 Republican presidential nomination, Mitt Romney, declares that he is "not going to spend my time focusing on the Federal Reserve"? Shouldn't we all be alarmed when Nancy Pelosi gives a speech in which she says that "elections shouldn't matter"? Shouldn't we all demand that someone be held accountable when we find out that a CBO analysis shows that the "$38.5 billion" in spending cuts will only reduce the budget deficit for this year by $352 million dollars? On top of everything else, shouldn't we all be absolutely horrified when the TSA gropes little 6 year old girls and virtually none of our politicians demand change?$38.5 Billion In Budget Cuts Is Really Just $352 Million In Deficit Reduction?
Yesterday I wrote about how a close examination of the "budget cut deal" reveals that the 38.5 billion dollars in budget cuts are largely illusory.
However, even I was not ready for what the Congressional Budget Office had to say about this deal. What I read in the Washington Post today absolutely floored me. According to the Washington Post, the Congressional Budget Office is saying that the budget deal will only cut the budget deficit for this year by less than one percent of what was being claimed by Republican and Democrat leaders....
The Congressional Budget Office estimate shows that compared with current spending rates the spending bill due for a House vote Thursday would pare just $352 million from the deficit through Sept. 30. About $8 billion in cuts to domestic programs and foreign aid are offset by nearly equal increases in defense spending.
What a joke.
The reality is that U.S. government is increasing by over 2 million dollars every single minute. So the entire "savings" from this "budget deal" will account for approximately 3 hours of government spending.
Look, the U.S. government ran a budget deficit of $188 billion dollars for the month of March alone. We are in debt up to our eyeballs and it is getting worse at a mind blowing pace.
When are people going to wake up and realize that neither political party is the least bit serious about dealing with our debt problem any time soon?
The Federal Reserve Sent Billions In Bailout Aid To Millionaires and Billionaires In The Cayman Islands
Most Americans don't even understand what the Federal Reserve is, and yet they get to throw trillions of dollars around while being more or less completely unaccountable the entire time.
In a new article for Rolling Stone (which is a must read), Matt Taibbi exposes some of the folks that the Federal Reserve has been sending money to....
The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans eachto Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."
How in the world does it benefit the American people to send billions of dollars to some ultra-wealthy people down in the Cayman Islands?
In light of what we have already found out, it is absolutely amazing that Congress is still refusing to authorize a complete audit of the Federal Reserve.
The corruption of the Fed is crying out to be investigated.
Unfortunately, many of our top politicians are openly declaring that they have no intention of going after the Federal Reserve.
Mitt Romney Declares That He Will Not Be Going After Ben Bernanke Or The Federal Reserve
In case anyone needs one more sign that Mitt Romney is just another shill for the establishment, just check out the two statements by Romney below.
According to Politico, Romney recently told CNBC's Larry Kudlow that he is not concerned about the Federal Reserve at all....
"I think Ben Bernanke is a student of monetary policy; he's doing as good a job as he thinks he can do," Romney said when Kudlow asked what kind of job Bernanke is doing. "I'm not going to spend my time going after Ben Bernanke. I'm not going to spend my time focusing on the Federal Reserve."
That's just great. The Republican candidate with perhaps the greatest amount of "establishment support" says that he thinks that Bernanke is doing a good job and he does not plan to spend any time focusing on the Federal Reserve.
So if Romney gets in the Federal Reserve will continue to be able to dish out trillions to their friends without any interference.
Nancy Pelosi Declares That "Elections Shouldn't Matter"
How are we supposed to respond when the top Democrat in the House of Representatives declares that "elections shouldn't matter as much as they do"?
During a recent speech, Pelosi implored establishment Republicans to "take back your party" so that elections won't "matter" as much....
To my Republican friends: take back your party. So that it doesn’t matter so much who wins the election, because we have shared values about the education of our children, the growth of our economy, how we defend our country, our security and civil liberties, how we respect our seniors. Because there are so many things at risk right now — perhaps in another question I’ll go into them, if you want. But the fact is that elections shouldn’t matter as much as they do… But when it comes to a place where there doesn’t seem to be shared values then that can be problematic for the country, as I think you can see right now.
Apparently what Pelosi wants is for America to go back to a time when all of us just went along with the false left/right paradigm and when we were all content to sleep while the establishment agenda rolled right along.
Well guess what Nancy? Some of us are starting to wake up.
6 Year Old Girl Molested By The TSA
How far have we fallen as a nation when a 6 year old girl has to have her private areas touched in public by the TSA before she is allowed to get on an airplane?
America is becoming a very strange place.
The following is video that was posted on YouTube of the recent incident involving a 6 year old girl....
So is this what we have become as a nation?
Will we subject ourselves to anything as long as the authorities insist that it will keep us a little bit safer?
Pretty soon America is going to be unrecognizable.
I have previously written about how in one town in Missouri, girls scouts have actually been banned from selling girl scout cookies in their own front yards.
How crazy is that?
In Cleveland, authorities haves announced plans to have "trash supervisors" go snooping through trash cans to ensure that people are actually recycling according to city guidelines.
The control freaks we keep voting into office seem to have an obsession with running ever detail of our lives.
In many areas of the nation we aren't even allowed to do acts of kindness anymore.
For example, in Houston, Texas a couple named Bobby and Amanda Herring that had been feeding homeless people for over a year has been banned by the city from doing so.
So what is next?
Are they going to ban kids from taking lunches to school?
It is already happening....
At one public school in the Chicago area, children have been banned from bringing their lunches from home. Instead, it is mandatory that they eat the food that the cafeteria serves.
Meanwhile, the Federal Reserve gets to create trillions of dollars out of thin air and they get to send it to whoever they want.
What a country we have, eh?
Our system has become corrupted beyond all recognition. Government corruption is out of control and it is getting worse with each passing day.
So when are the American people going to get sick of all this nonsense?
When are....
Wait.
American Idol is on tonight.
Perhaps all of this can just wait for another time.
After all, who wants to miss what J-Lo and Steven Tyler are going to say tonight?
Those two are really a couple of characters!
Our leaders know what they are doing, right?
We can trust our politicians to act in our best interest, right?
So instead of writing about all of this "doom and gloom", perhaps I should just lighten up and focus on fun things like American Idol a little bit more.
What do all of you think
Posts
