Fallout from QE - Rising Meat Prices

The talk today is of the subtle but significant shift in the FOMC in regards to another round of Quantitative Easing or QE. It appears the formerly hawkish dissenters from this madness have been brought in to heel with the Fed perhaps ramping up expecatations that they will act in some form as conditions worsen in Europe. 

Signals are still unclear and there is a lot of conflicting information swirling in the financial air which is leading to further instability and volatility in our financial markets.

I find it less than honest that those advocating another dose of financial morphine into the system are pointing to the lack of inflation as a signal that the Fed could engage in further money creation without unduly impacting prices in general. My response to this is "Bullsh_t".

Take a look at the following charts of the two basic meat sources, cattle and hogs. The first is of April 2012 cattle. Look at what has happened to the price of cattle. While this is obviously terrific news for cattle ranchers, it is a signficant foreteller of what is going to happen to the price of beef next year. As a matter of fact it has already happened with wholesale beef prices rising to very lofty levels.

The latter is of April 2012 Lean Hogs. That is a reflection of where pork prices are headed next year.

Can anyone with an unbiased mind look at either of these charts and tell me that the markets are not expecting meat prices to rise next year?

Some may suggest that consumers will not feel the impact because they could switch to chicken. A substitution is no doubt realistic but the problem is that the rising price of both beef and pork will lead to increasing demand for chicken which will pull it higher as well (and this does not take into account any fall off in broiler production due to the previous impact of rising feed prices).

Let me attempt to explain some of this and its connection to the Fed's QE. One of the major fallouts from this ill-conceived attempt at money creation was soaring food and energy prices. QE1 put a floor in the Corn market back in late 2008 taking it from near $3.00/bushel to $4.50 before it established a price range. Later in 2010, as talk surfaced in September about the Jackson Hole Summit that another round of QE was coming, corn prices began moving higher alongside the entirety of the commodity complex. When the actual implementation of the program began, corn shot up to $8.00 bushel.

Another way of stating this is that the primary feed grain for both cattle and hogs experienced an increase of 167% in a two and one half year period. Now I will admit that the entire price rise was not directly due to both QE's as there were weather factors, etc., that came into play as well, but it is undeniable that easy money policies of the Fed were a major contributing factor to the overall price rise in the feed grains.

Why is this important? The answer is because hog and cattle producers have to make decisions whether or not to increase the size of their herds by breeding either their heifers or sows. When they sit down and put a pencil to it, they look at the cost of their feed and the expected selling cost of the animals they are going to raise which will be ready further down the road (it obviously takes time for gestation and growth to slaughter weights).

Many cattle and hog producers were initially experiencing substantial losses on each head of cattle or hog that they were raising and bringing to market because of the sharp rise in their costs so they did what a rational person could be expected to do under such circumstances - they cut back production. The result is that the overall supply of both cattle and hogs has now fallen to levels that are not keeping up with demand and that is causing prices to rise and rise rapidly. (a side note is the severe drought we had this year in the Plains which led to substantial cattle losses further crimping supply).

The other factor is that the QE programs effectively undercut the value of the US Dollar making the beef and pork produced here in the US very cheap on the world export markets when compared to competitor nations. That has sent foreign buyers to the US to source both beef and pork further exacerbating the supply/demand imbalance and pushing prices yet higher.

In summary - the Fed created QE1 and QE2 and in the process helped to shove feed prices higher. That sent the WRONG signal to cattle and hog producers who then cut back their herds or did not actively seek to increase their size. This occured at the same time that the US Dollar was falling and creating a type of fire sale on US produced beef and pork which led to a surge in export-related demand. The result - US consumers are the ones who will feel the impact of this in the form of higher protein prices in the upcoming year. While I am happy for my friends in the cattle and hog business who work long and hard hours, I am extremely displeased to sit here and watch my protein sources move inexorably higher realizing that some of these cost increases did not have to occur but were rather man-made.

And this my friend is how the Federal Reserve and its money creation programs impacts every segment of society even down to the most basic needs of food. Remember this when you hear more chatter about further QE coming. By the time they finish with us, a porkchop will be $9.99/pound. But what will that matter - the stock market will be moving higher so everyone will feel wealthy and will not mind paying up, will they?

Monthly Gold Charts - October 2011

I have to keep my comments brief today as it is time for Halloween!

Looks like precious metals owners got a back of tricks today instead of treats. The culprit was the intervention by the Japanese monetary authorities who hit the Yen with a barrage of selling and sent the markets into a tizzy. The subsequent rally in the US Dollar then had the mindless hedgies dumping everything they bought late last week as equities were trashed along with the commodity sector in general.

Copper and silver were both sold off and gold went along for the ride to the downside.

If some of you might have noticed the Treasury bond had a gargantuan 3 point rally after just suffering a three point sell off last Thursday. How's that for ridiculously insane price action. The entire business cycle, just completely changed over the course of the last 4 days. Tomorrow it could merely take 24 hours to re-reverse the business cycle again. This is what computerized trading algorithms have created. And to think this is somehow supposed to be the "smoothly functioning price discovery mechanism".

What happened in the Treasury markets is that the Japanese came into the Forex markets and bought a boatload and then some of US Dollars and had to do something with all those worthless slips of paper so they turned around and bought up the equivalent amount of intervention's worth of worthless Treasuries.

No doubt the officials at the Federal Reserve are glad to see the Japanese doing their Operation Twist for them but I suspect that they are not particularly happy about seeing the Dollar moving higher!

We'll see where the dips buyers surface once again, particularly as Asia moves further into its session.

Happy Halloween to all!

Bank of Japan Intervention in Yen is doomed to Fail

The Bank of Japan stepped into the Forex markets overnight in an attempt to punish the impertinent speculators who have dared to nullify their former intervention efforts undertaken back earlier this year when the nation suffered the onslaught of the earthquake/tsunami.

Note the previous intervention, which I might add was a VERY RARE example of COORDINATED CENTRAL BANK EFFORTS involving the BOJ, the ECB and the FED. If intervention is going to be effective, it will generally need to be coordinated, sustained and have an eventual fundamental backing. Without those factors, it always ends up being a gigantic waste of money.

Note that even this coordinated intervention failed to stem the advance of the Yen. Now are we to believe that the Lone Ranger effort by the Bank of Japan this time around is going to be successful? Hardly. They have bought a bit of time but all that will happen is that speculators will use the intervention to step in on the buy side of the Yen and get it at a lower level.

In the process of intervening however, the Bank of Japan is devaluing the Yen when measured against Gold. Gold still remains a store of value protecting those who own it against the depradations of their own monetary authorities.

Trader Dan on King World News Weekly Metals Wrap

Please click on the following link to listen to my regular weekly radio interview with Eric King on the King World News Weekly Metals Wrap.

http://tinyurl.com/3qzxc6u

Dollar Bulls are Trapped if the RISK TRADES continue

Take a look at the following Commitment of Traders chart detailing the huge number of speculators that are positioned on the Long side of the US Dollar. There was a large amount of talk about the Dollar embarking on a Bull market not all that long ago and that combined with the Flight out of the Euro sent huge numbers of these specs rushing into the Dollar.

When the Europeans rained on their parade this week, the bottom dropped out of the Greenback as there was no one on the other side of the market to buy the Dollar from these specs who were all frantically selling it at the same time.

If the risk trades continue, the Dollar is going to come under additional selling pressure which will likely drop it down into a major support zone on the chart. If that gives way, there exists an enormous amount of speculators who are going to get hurt very badly and will be selling frantically which just might be the firepower to crack this major support zone which has been holding for the last two years.

Weekly Silver Chart

Silver had a very impressive weekly performance gaining more than $4 for the week and managing to squeak out a close above the 50 week moving average.

You will note that it still remains below both the 10 week and the 20 week moving averages which continue heading lower so silver is not out of the woods just yet. One would ideally want to see the metal get above both of these moving averages and see the shorter term 10 week turn higher. That would give us a shift from bearish to bullish on the WEEKLY CHART.

Also, note that downsloping line drawn on the chart that comes in very close to the 10 week moving average. That reinforces this level as resistance that the bulls need to overcome.

The MACD has been a pretty good indicator at measuring the direction and "trendiness" of this market nad it has turned up from a deeply oversold zone. While still bearish it is moving in the right direction.

A push by silver past $37 that can hold that level will turn the tide firmly in favor of the bulls and target $40 for starters.

HUI technical chart

The HUI put on a spectacular showing this week gaining more than 65 points and taking out several overhead resistance levels on its price chart in the process. The catalyst seemed to be the positive response by the broader equity markets to news coming out of Europe regarding their bank recapitalization plan and their funding of the Stability Mechanism. While I am personally repulsed by such actions the facts are that the hedge fund community could not wait for the ink to dry on the press release before they began pouring money back into the Risk Trades.

The resultant rally in stocks fed into the gold mining shares with the HUI actually outperforming gold this week.

We will have to wait to see whether there is a continuance of these risk trades next week but from a technical perspective the strong price action bodes wells for additional gains early next week. That would put the index up against a strong overhead chart resistance level coming in near 595 and extending towards 600. The shares have been stymied near this level in the past so the bulls have a big test of resolve coming.

The push past the last Fibonacci Retracement level of note near 580 should allow the index to first test the level just a few point above today's high. Should the bulls take this out, then the run towards major resistance will commence.

If the index sets back, dip buyers should surface down near the 560 level and again near 545.

My thinking is if we are moving back towards a period when RISK TRADES are back in vogue, the HUI should continue to lead the metals and outperform gold in particular. Note on the chart it is close to decisively ending the downtrend against the gold price. If the shares are going to eventually take a leading role then the horizontal resistance level noted on this ratio chart will need to be bested.

As a side note, that we are seeing some companies in this sector raising their dividends is a good sign and indicates that their management feels that earnings are strong enough to do so and should remain so for the foreseeable future. In other words, they are optimistic on future price prospects for the metal. That is also a sign that we should expect to begin seeing or hearing about planned aquistions by some of the majors or even larger mid-tiers as they look to increase their reserves. That should support the juniors which are of high-quality. This might be occurring already based on the ratio of the GDX to the GDXJ (major to juniors).

Note that since May of this year the majors have been outperforming the juniors as a whole. Beginning late last month (September) that began to change. Apparently some are already sniffing this change and are thinking acquisitions based on the profitability of the larger miners in the sector.

Wall Street Journal Editorial Page Dissects the European Bailout Plan

I would like to recommend the commentary from the editors at the Wall Street Journal dealing with the proposal that came out of Europe yesterday; a proposal which launched a massive short covering squeeze in both the Euro and in the equity markets.

Their editors are much more eloquent than I am but the crux of their analysis is in complete agreement with my own  - all these leaders have done is to temporarily paper over a problem that will not go away until the root of this weed is pulled up and disposed of. That however requires unpleasant business that will no doubt engender a loss in popularity to whatever leaders brash enough to actually roll up their sleeves and get down to the dirty business of fixing the cause of this morass.

Simply put - those governments in fiscal trouble have spent too much for too long and can no longer afford to do so.

If that sounds familiar, it should - it is exactly the path the current administration is leading the US down.

Forestalling the day of reckoning might make political sense in the short term but in the long term it is the stuff that composes the ruin of nations.

Everyone Bails Out Everyone

European deal has something for everyone, except the real problem.

http://online.wsj.com/article/SB10001424052970203687504577001671498250002.html?mod=WSJ_Opinion_AboveLEFTTop