A Golden Inflation Conundrum
Posted: April 17, 2023 Filed under: commodities, CPI, gold, Monetary Policy, PPI | Tags: abandoned baby top, Christopher J. Waller, Consumer Price Index, CPI, Federal Reserve, gld, inflation expectations, Monetary Policy, PPI, Producer Price Index, SPDR Gold Shares, technical analysis, University of Michigan surveys of consumers Leave a commentLast week, SPDR Gold Shares (GLD) rallied on weak inflation news and pulled back on strong inflation news. The gap up in GLD followed by a gap down created the dreaded “abandoned baby top.” This technical pattern typically signals the end of a rally. What gives with this golden inflation conundrum?
SPDR Gold Shares (GLD) printed a technical topping pattern amid mixed inflation news, but it is trying to hold uptrending support at the 20-day moving average (DMA)
The Conundrum
The current inflationary cycle could be ending, at least in North America. For example, the Bank of Canada (BoC) showed inflation data with a steeply descending trend ending with a near perfect landing at the Bank’s 2% target in late 2024.
Here in the U.S. plenty of pundits have declared inflation a non-threat ever since the Federal Reserve finally got serious about it. Cathie Wood has been one popular critic of the Fed’s inflation concerns. The disbelievers received more confirming evidence when the latest producer price index told a disinflationary story. A slightly weaker than expected inflation reading from the March Producer Price Index (PPI) generated cheer in stocks given the implication for looser monetary policy. Since producer prices sit upstream from final goods prices, PPI can be a leading indicator of future prices.
Gold also celebrated the soft inflation numbers; GLD gained 1.4%. This reaction represents the upside of the golden inflation conundrum. Gold bugs suspect that the seeds of inflationary pressures remain well-grounded in the economy. I agree with them. A relaxed Fed is a potential catalyst for rewatering the garden of growing prices, especially if labor markets remain tight. Thus, the prospect of a relaxed Fed supports higher gold prices.
The downside of the golden inflation conundrum can come on stronger inflation signals because they support an aggressive, inflation-fighting Fed. GLD went into retreat in the wake of a surprising surge in consumer expectations for inflation next year from 3.6% in March to 4.6% in April. This reading from the University of Michigan’s surveys of consumers was last this high in November, 2022. Even if this move coincided with the jump in gas prices, surges in inflation expectations are sure to encourage the Fed to stay on message. As it happened, the market got a timely dose of messaging from Governor Christopher J. Waller the same day.
The Fed Stays On Message
In the wake of the economic data, Governor Christopher J. Waller spoke at the Graybar National Training Conference in San Antonio, Texas. Waller reiterated the all too familiar refrain “inflation remains much too high.” He provided the following cautionary assessment of inflation (emphasis mine):
“Inflation moderated in the second half of 2022, but that progress more or less stalled toward the end of the year…On April 12, we got consumer price index (CPI) inflation data for March, and it was another month of mixed news…Core inflation, which strips out food and energy prices, is a good guide to future inflation, and that measure came in at around 0.4 percent in March, which translates to an annual rate of 4.6 percent if it were to persist. It was the fourth month in a row with core inflation at 0.4 percent or higher. Since December of 2021, core inflation has basically moved sideways with no apparent downward movement. So, despite some encouraging news on a slowing in housing costs, core inflation does not show much improvement and remains far above our 2 percent inflation target.
Whether you measure inflation using the CPI or the Fed’s preferred measure of personal consumption expenditures, it is still much too high and so my job is not done. I interpret these data as indicating that we haven’t made much progress on our inflation goal, which leaves me at about the same place on the economic outlook that I was at the last FOMC meeting, and on the same path for monetary policy. Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”
With the Fed’s next decision on monetary policy just two weeks away, Waller’s words suggest that the Fed could raise rates yet again. The odds are low of getting a disinflationary signal strong enough to counter Waller’s observations. Thus, I think GLD will struggle to invalidate the technical topping pattern for the time-being.
The Trade
The golden inflation conundrum leaves GLD in a contrary place. In the short-term, GLD’s best chances lie with soft inflation numbers. Indeed, GLD bottomed shortly after the market bottomed in October when market participants concluded that inflation had finally peaked. Inflation’s peak does not equal the Fed’s inflation target; the Fed has gone to great lengths to issue these reminders. Yet, beyond day-to-day volatility, the market has overall chosen to fight the Fed’s hawkishness ever since October. Volatility is even back to levels last seen at the start of trading in 2022 despite the linger crisis in regional banking.
Where volatility is poorly positioned, GLD is well-positioned. From the looming battle over the U.S. debt ceiling to the prospect of the Fed standing down later this year to geo-political risks, there are enough reasons to stay bullish on GLD. I am back to trading around my core position. I took profits on half my call spreads last week. My remaining half is set to expire in September. I want plenty of runway for the gold-positive catalysts to work their way through the golden inflation conundrum.
Be careful out there!
Full disclosure: long GLD shares and call spread
Don’t Blame the Fed: The Fed Gives Us What We Want
Posted: March 21, 2023 Filed under: commodities, Economy, gold | Tags: CME FedWatch Tool, Fed balance sheet, Fed Fund Futures, Federal Reserve, gold, Jim Chanos, Monetary Policy, National Financial Conditions Index, NFCI, Panic of 2023, PHYS, SBNY, Signature Bank, Silicon Valley Bank, Sprott Physical Gold Trust ETV, SVB, SVB Financial Group 2 CommentsThe Fed’s risk management strategy was ostensibly designed to keep pushing rates higher until the Fed slayed the inflation dragon or something in the economy forced it to stand down, whichever came first. Unfortunately for the Fed, the dice rolled in favor of the latter. Instead of a soft landing or even a mild recession, bank failures landed on the Fed’s collective lap in the form of SVB Financial Group (SVB), the parent company of Silicon Valley Bank, and Signature Bank (SBNY). It is very easy to blame the Fed for this mess (today’s chorus is pretty emphatic on this point). However, the problems in Silicon Valley Bank (SVB), which was the strongest catalyst for the Panic of 2023, started well before the Fed belatedly decided to start tightening monetary policy. ABC News confirmed reports from the New York Times and the Wall Street Journal on the following timeline:
- Starting in 2019: The Federal Reserve warned Silicon Valley Bank about risks in the bank.
- 2021: “The Fed identified significant vulnerabilities in the bank’s containment of risk, but the bank did not rectify the weaknesses.” Ironically enough, one of the six fines issued to SVB included “a note on the bank’s failure to retain enough accessible cash for a potential downturn.”
- July, 2022: a full supervisory review revealed the bank as “deficient for governance and controls.”
- Fall 2022: the Federal Reserve of San Francisco met with “top officials at the bank to address the lack of accessible cash and the potential risks posed by rising interest rates.”
In other words, tight monetary policy was not the root problem of the bank’s problems. Tighter monetary conditions finally forced the issue of disciplining the bank. Tighter monetary policy is supposed to mop up excesses in the economy, and Silicon Valley Bank is starting to look like yet one more egregious example of the excess enabled by the prior era of easy money. It will be interesting to see whether the Fed’s review of its regulatory supervision includes claims that it lacked the authority to force SVB to change its ways.
The Fed Gives Us What We Want
Regardless, as I continue to see blame heaped on the Fed for this latest episode of financial instability, I have surprisingly adopted a more sympathetic view of the Fed’s work. The Federal Reserve has a near impossible job. It seems every major change in monetary policy sets the seeds for the next financial drama. Every financial drama raises the Fed’s prominence yet higher as a centralized economic planner, never able to return to the background of a free market. The Fed now must constantly tinker with interest rates with no clear terminal point. In particular, the economy has set up the Fed to bias towards keeping monetary policy as accommodative as possible for as long as possible. The Fed gives us what we want: policy that supports higher asset prices from stocks to real estate.
The index of financial conditions, as measured by the National Financial Conditions Index (NFCI), since the Great Financial Crisis (GFC) shows extended periods of very easy financial conditions. It is remarkable how little time the economy has been stuck with a positive index, or even a component on the positive side of danger…even in the aftermath of the economic shutdowns from the pandemic.
The Fed’s balance sheet is an even better example of how the Fed gives us what we want in the form of accommodative monetary policy. The Fed was never able to reduce its balance sheet after the GFC. The current tightening cycle barely put a dent in the Fed’s balance sheet. I have a sneaking suspicion that the Fed will never get its balance sheet back to pre-pandemic levels either. Note how the balance sheet ticked up as of last Wednesday in the wake of the rescue programs rolled out to backstop failing banks.
![Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets: Wednesday Level [RESPPANWW], retrieved from FRED, Federal Reserve Bank of St. Louis, March 21, 2023.](https://inflationwatch.files.wordpress.com/2023/03/fed-balance-sheet.png)
Board of Governors of the Federal Reserve System (US), Assets: Total Assets: Total Assets: Wednesday Level [RESPPANWW], retrieved from FRED, Federal Reserve Bank of St. Louis, March 21, 2023.
Before the GFC, this kind of balance sheet expansion was considered unthinkable. Surely, such a growth in the balance sheet would cause dangerous inflation levels. Given the on-going duration and size of this expansion, I am guessing economic theories will slowly but surely normalize the existence of this balance sheet. Yet, the longer this largesse continues, the more the economy will depend on sustaining these high levels. Thus, the economy will remain vulnerable to instability whenever economic conditions force the Fed into tightening policy. (Recall how the previous tightening cycle moved at a snail’s pace but still eventually forced the entry of a “Plunge Protection Team” to put a floor under the stock market).
What We Want Is Not Free
In a July, 2022 interview on Bloomberg’s Odd Lots (starting at the 14:35 point), famous short-seller Jim Chanos presciently claimed (emphasis mine):
“The one thing people are not prepared for is interest rates resetting meaningfully higher…It just hasn’t happened in most investors’ lifetimes…the idea that actually interest rates are not going to be 2 or 3% for the foreseeable future is going to be hard for a lot of investors to deal with. If we go back to what I would think are more reasonable rates based on what we’re seeing in the economy…this market will not be able to handle 5 or 6% 10-year. It just won’t. So many business models that we look at are extremely low return on invested capital because capital has been so plentiful for the past 12 years.”
The subtext here is that the Fed’s bias has been to leave monetary policy as accommodative as possible for as long as possible. Deflation was the great imperative chasing the Fed into monetary corners. The response to the pandemic was the logical conclusion of this policy as the Fed decided it had the luxury to keep driving unemployment ever lower by holding rates lower for longer. The economy appeared to be in another era where liquidity and massive stimulus could be conjured up for free. The pandemic’s inflationary pulse eventually turned the tables. What we want can actually be quite costly.
Thus, the Fed finds itself in a new trap. I feel for the Fed, but I don’t blame them…we prefer easy money…and many eagerly await the Fed getting disciplined back into cooperation by the Panic of 2023. The Fed Fund futures suddenly expect a long string of rate cuts to follow peak rates in May. I sure hope inflation cooperates as well!
Source: CME FedWatch Tool as of March 21, 2023
A Golden Epilogue
Gold received a new burst of life thanks to the Panic of 2023. As soon as the Fed blinks, I expect gold to rally further. I am keeping the buy button close as we go into the next several decisions on monetary policy starting with March’s. The Sprott Physical Gold Trust ETV (PHYS) broke out to an 11-month high. Today’s 2.0% pullback from over-extended price action looks like it is setting up the next buying opportunity.
Source: TradingView.com
Be careful out there!
Full disclosure: long GLD
Fed’s Daly: The Market Is Wrong About A Hump in 2023 Fed Rates
Posted: October 6, 2022 Filed under: commodities, Economy, iron ore, Monetary Policy, oil, Salaries | Tags: BHP, BHP Group, Fed Fund Futures, Federal Reserve, Mary Daly, Monetary Policy, real wages, UGA, United States Gasoline Fund 4 CommentsThe Federal Reserve board governors continue to stay on message, reminding the market over and over about its serious intention to fight inflation. San Francisco President Mary Daly has been particularly articulate on the Fed’s plan and what likely lies ahead. In an interview with Bloomberg Finance today, Daly informed financial markets that they are “wrong” to project what the interviewr called a “hump” in rate expectations. This hump is a peak sometime in 2023 with rate cuts to follow soon after. The current view from CME FedWatch has rates peaking from the February through June, 2023 meetings with a rate cut in July.
Daly’s steadfast perspective is important to remember every time the stock market rallies in anticipation of peak inflation and/or a “Fed pivot.” Indeed, Daly warned that the Fed needs to be prepared for inflation to be more persistent than expected. For context, Daly was one who was unwilling to predict peak inflation ahead of what turned out to be the “CPI shocker” that delivered a surprise of higher core inflation. Part of Daly’s persistence comes from what she and the Fed see as inflation’s greater potential for economic harm than the short-term consequences of normalizing monetary policy. Daly noted that over two years real wages have fallen 9%. She even shared an anecdote of a worker who told her about how he “loses” money when he goes to buy something with his earnings (an anecdote that speaks to nominal wages failing to keep up with nominal increases in prices).
Other interesting nuggets from the interview:
- Rates are probably now around the neutral rate, and the Fed needs to get slightly restrictive.
- The length of time rates stay neutral (or slightly restrictive) is more important than the specific level.
- 50% of today’s inflation is driven by demand (thus justifying the Fed’s desire to get slightly above neutral), 50% from supply.
- Daly refused to take the bait on the question of whether the Fed was purposely trying to induce a recession, trying to force losses on the stock market, or intent on hiking rates until something breaks.
- Daly insisted the Fed is forward-looking and recognizes lagging indicators of inflation.
- Daly pushed back on the notion the Fed needs to coordinate with global central banks. She insisted that the Fed must stick to its domestic dual mandate.
While the signs a few months ago were clear from commodity prices that the Fed’s actions were impacting inflation, the recent strength in oil threatens to rekindle inflation fears from the average person. For example, gas prices look like they are already done declining. The United States Gasoline Fund, LP (UGA) broke out today. UGA looks like it double-bottomed in September.
The recent downtrend in United States Gasoline Fund, LP (UGA) came to an end this week with a powerful breakout above 50 and 200DMA resistance.
Similarly, diversified commodities producer BHP Group (BHP) looks like it is holding a bottom in place since late last year.
BHP Group (BHP) has so far held its lows from a year ago. While upside may be limited, BHP also looks like it is done going down for now.
If these bottoms are indicative of what is ahead, then any soft readings in the near-term inflation numbers could be, well, transitory… (tongue-in-cheek intended!)
Be careful out there!
Full disclosure: long BHP
The Fed’s Hawkish Pressure Is Working Against Inflation
Posted: July 3, 2022 Filed under: Agriculture, Bond market, commodities, iron ore, Materials, Monetary Policy, Steel | Tags: 30-year fixed rate mortgage, BHP, BHP Group Limited, corn, FCX, Federal Reserve, Freeport McMoRan, lumber, RIO, Rio Tinto, TIPS, Treasury Inflation-Protected Securities, XME 5 CommentsThe Federal Reserve has stuck by its aggressively hawkish stance despite massive pains suffered in financial markets and growing risks of a recession. Markets are so convinced by and so scared of the Fed that they have raced far ahead of current policy to anticipate a lot of price hikes ahead. Soaring mortgage rates are one example of the Fed’s sharp impact. The 30-year fixed rate mortgage was last this high during the recession of the Great Financial Crisis (GFC).
![Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; June 28, 2022.](https://fred.stlouisfed.org/graph/fredgraph.png?g=RiKx)
These suffocating mortgage rates are an important sign of victory for a Fed whose primary inflation concerns come from housing.
An even clearer sign of victory comes from the bond market, specifically the breakeven rates on five- and 10-year Treasury Inflation-Protected Securities (TIPS). Reuters reported that these TIPS “slid to 2.636% and 2.362%, respectively, a level last seen in September 2021.” Nancy Davis, managing partner and chief investment officer at Quadratic Capital Management LLC, accordingly observed that “the breakeven market, the difference between TIPS versus regular Treasuries, is dramatically downward sloping. It’s barely above the Fed’s long-term average (inflation) target of 2%.” In other words, the bond market is already anticipating that the Fed’s aggressive push to normalize monetary policy and fight inflation will work.
A broad swath of commodities and commodity-related stocks are suffering under the weight of the Fed’s success. The charts below are just a sample: diversified commodities producer BHP Group Limited (BHP), iron ore producer Rio Tinto (RIO), copper producer Freeport McMoRan (FCX), and the metals and mining ETF (XME) (charts from TradingView.com). Even agricultural commodities like corn and lumber look like they have topped. Perhaps these declines represent the early signals of a recession. If so, those concerns may wait for a post-inflationary day.
BHP printed a double-top in 2022 BELOW the 2021 highs.
RIO topped out in 2022 well below 2021’s highs. It now trades at the November, 2021 low and is at risk of challenging the November, 2020 low.
FCX is close to erasing ALL its 2021 gains.
The SPDR S&P Metals & Mining ETF (XME) quickly reversed its entire 2022 breakout.
Spot corn prices closed below the uptrending 200-day moving average for the first time since January. The topping formation for 2022 looks like the dreaded head and shoulders top (shoulders in March and June, the head in April).
Lumber prices topped out in 2022 well below the 2021 highs.
Be careful out there!
Full disclosure: no positions
Inflation May Be Dead, But Inflation Watch Is Not
Posted: June 15, 2013 Filed under: Australia, commodities, Monetary Policy | Tags: Federal Reserve, inflation rate, Reserve Bank of Australia 2 CommentsThings have been pretty quiet around here. Every now and then I see a story about rising prices somewhere in the world and think the story would make a great quick post for Inflation Watch. However, I usually do not feel the same sense of urgency I had from 2008 through about 2011 when I felt that rapid inflation was the imminent result of extremely accomodative monetary policy. Everywhere I look, commodities continue to decline in price. Most commodities reached a peak in 2011 and that peak of course had me convinced more than ever that inflation was soon to be a big problem.
Now, thanks to a friend, I am ever closer to accepting that inflation may not be a problem for an even longer time than I expected. He sent me a link to an article called “The Fed won’t taper as long as inflation is low” (by Rex Nutting at MarketWatch) that makes the convincing case that not only is inflation low, but the Federal Reserve has so far seemed powerless to generate the inflation it wants. (I recognize the limitations of government data on inflation, but I do not subscribe to theories that they are concocted specifically to hide true inflation). Incredibly, core inflation is apparently at its lowest point since 1959 (the core PCE price index):
Rex Nutting uses this graph to make the point that all the Fed’s QE have failed to go reflate according to the Fed’s goals
Nutting also links to a paper from the Federal Reserve Bank of New York called “Drilling Down into Core Inflation: Goods versus Services.” In this paper, authors M. Henry Linder, Richard Peach, and Robert Rich demonstrate that more accurate inflation forecasts come from breaking out CPI into a services and a goods component. Nutting uses this as reference for the claim that the Fed is failing because of global disinflation. This global disinflation is responsible for a decline in the prices of the goods component. Services inflation is much more sensitive to domestic forces (we all know about skyrocketing healthcare and education costs). However, I am not sure where housing sits on this spectrum. It seems to provide a crossroad of forces given housing is not tradeable but foreigners are certainly free to overwhelm a housing market with cash. Foreign demand is reportedly helping to drive up housing prices in some of America’s hottest housing markets like in California and some parts of Florida.
All this to say that, for the moment, inflation is all but dead. But “Inflation Watch”, this blog, is NOT dead. I remain vigilant because I believe that when inflation DOES come, the Federal Reserve will either be ill-equipped to handle it and/or unwilling to snip it early for fear of causing a severe economic calamity. I am a gold investor, and I am eager for another chance to invest in the midst of a commodity crash (I am LONG overdue for an update to my framework for investing in commodity crashes/sell-offs).
The chart below from the Reserve Bank of Australia (RBA) shows that commodity prices remain at historically high levels, mostly thanks to rapacious demand from China. The current relative decline is what is helping to drive goods inflation down. The 2011 peak was well above the pre-crisis peak where prices have fallen now. Also note that prices are much more volatile. I suggest that this chart should remind us that commodity prices are a tinder box that can flare up at anytime. Aggressive rate-cutting by the RBA should also help keep prices aloft.
From the Australian perspective, commodity prices remain historically high although they have returned to their pre-crisis peak.
So stay tuned. Just when everyone finally concludes that the world has reached a golden age of disinflation where surpluses abound across the planet…that could be the exact moment the tide turns.
Be careful out there!
Full disclosure: long GLD
Relative, not absolute, oil prices impact the economy
Posted: March 7, 2012 Filed under: Automobiles, Economy, oil, Retail | Tags: consumer spending, oil Leave a commentJames Hamilton posted a quick study of the impact of oil prices on car sales in “Oil prices and the U.S. economy” in EconBrowser. Hamilton demonstrates from recent history that once the economy has made an adjustment to high oil prices, a subsequent price run will not impact the economy until it reaches new highs. In other words, oil prices must force the economy (consumers and businesses) to make new adjustments before a significantly negative impact occurs. Auto sales already greatly favor more fuel efficient vehicles, thus blunting the traditional drag on the auto sector as consumers shun bigger, gas guzzlers.
Oil’s relative share of consumer expenditures is another factor to consider. Amazingly, energy’s overall share of consumption has declined as gas prices have soared in recent months.
For more detail and data see “Oil prices and the U.S. economy“
General Mills fighting food inflation with innovation
Posted: February 21, 2012 Filed under: food | Tags: General Mills, GS Leave a commentTom Hudson from the Nightly Business Report just tweeted the following: “how @generalmills is fighting food inflation with innovation on @bizrpt exclusive CEO interview.”
Sounds interesting! I will try go post a summary of the interview and/or point to the transcripts and video.
Prices going up yet again at the company lunch counter
Posted: February 7, 2012 Filed under: commodities | Tags: food Leave a commentLast year, my company raised prices 4-5% on food in its cafeterias. With the ink on those price hikes only 10 months old, my fellow employees and I are getting hit with another substantial price hike. The planned 4% hike is once again well ahead of the general (reported) rate of inflation.
To add insult to injury, the cafeteria will now be charging by the ounce for frozen yogurt. I am sure this is a “Dr. Duru” policy given I am guilty as charged for piling on the chocolate good stuff as high as I can.
The inflation accountants may be relieved to know that we have also received expanded meal service in recent months. Perhaps a hedonic adjustment evens everything right out…
Despite declining coffee prices, Starbucks ($SBUX) hiking some prices by 1%
Posted: January 4, 2012 Filed under: Agriculture, food | Tags: coffee, iPath Dow Jones - UBS Cotton Total Return Sub-Index ETN, JO, SBUX, Starbucks Leave a commentAlthough agricultural prices have generally decreaed for several months, coffee included, Starbucks (SBUX) announced today that it will hike the prices of some beverages by about 1% in the Northeast and the Sunbelt regions of the U.S. SBUX cites “the prices reflect competition in certain markets and higher costs for coffee, fuel and other commodities.”
Note that Starbucks stock was actually down today while the major indices experienced strong rallies.
For more detail see “Starbucks to raise prices in certain regions”
Starbucks had a great 2011. Did today's news end the coffee run for now?
Source: FreeStockCharts.com
Coffee prices have been sliding for months and ended 2011 down from 2010
Agflation finally slowing down
Posted: December 13, 2011 Filed under: Agriculture, food | Tags: DBA, food, PowerShares DB Agriculturae Fund ETF 1 CommentGlobal supplies of agricultural products are expanding, perhaps in response to past shortages. These forces are driving down prices and discouraging hedge funds from making bullish bets in agricultural commodities. According to Bloomberg in “Funds Reduce Bets on Rising Food Costs to Lowest in 27 Months: Commodities“, the bullishness of hedge funds has reached lows not seen in over two years.
Here is a key quote that describes the situation:
“World food prices tracked by the United Nations retreated for a fifth consecutive month in November, the longest decline in more than two years. The U.S. government said Dec. 9 that combined global inventories of corn, soybeans and wheat will be 3.2 percent larger than anticipated a month earlier. Cocoa capped its longest slump in 50 years last week on increasing supplies from Ivory Coast, the world’s biggest producer.”
DBA, the PowerShares DB Agriculturae Fund ETF, tells the story. the ETF has now sunk to 14-month lows. Today’s price marks the previous post-recovery high in 2009.
After going straight up for nine months starting in 2010, DBA has now gone nearly straight down since its April highs
When is it really cheaper to make your food at home?
Posted: November 26, 2011 Filed under: Agriculture, food | Tags: book_recommendation, cooking, food Leave a commentOn Thanksgiving Day, NPR’s Marketplace included a follow-up segment to a story from 2009 on Jennifer Reese, a San Francisco woman who set out to determine when it is really cheaper to make things at home versus buying in the store. She has now published a book about her experience called Make the Bread, Buy the Butter: What You Should and Shouldn’t Cook from Scratch — Over 120 Recipes for the Best Homemade Foods
Her general conclusion is that it is cheaper to do the “non-glamorous” things at home, but glamorous activities like raising chickens, goats, and turkeys cost too much in infrastructure to make it worthwhile. It is definitely cheaper to make your own bread and muffins but more expensive to make candied ginger. It is cheaper to buy lemonade than make it – not to mention all the effort it takes to squeeze the lemons. Reese also addresses convenience, food quality, and moral choices.
The book looks like a worthwhile read for those considering to beat higher food costs with homegrown and homespun creations.
Anticipating higher diamond prices
Posted: September 24, 2011 Filed under: commodities | Tags: diamond Leave a commentInvestment funds are preparing to help investors chase higher diamond prices. Demand from India, China, and investors looking for trsuted hedges against the U.S. dollar are expected to keep driving diamond prices upward. For more see: “New Funds Target Expected Rise in Diamond Prices.”
High rare earth prices impact more and more products
Posted: September 18, 2011 Filed under: China, commodities | Tags: rare earth Leave a commentIn “China Consolidates Control of Rare Earth Industry“, the NY Times builds from a General Electric FAQ on rare earths (covered here) to describe the spreading impact of high rare earth prices. In addition to compact fluorescent bulbs, these prices are driving up the costs of giant wind turbines and hybrid gasoline-electric cars. Even Walmart has been forced to increase the price of the compact fluorescent bulbs it sells.
China’s efforts to consolidate its rare earths industry and to move it more effectively under the government’s watchful eyes promise to increase international pressures for manufacturers to relocate to China to get cheaper prices.
See the article reference above for more details.
Australian mining companies struggle with higher labor costs
Posted: August 22, 2011 Filed under: Australia, commodities, iron ore | Tags: BHP, BHP Billiton Limited, coal, mining, RIO, Rio Tinto 2 CommentsAustralia’s mining sector has done extremely well, largely from exports to a rapidly growing China, especially for commodities like iron ore and coal. This rising wealth helped Australia emerge from recession earlier than most other developed economies and prodded the Reserve Bank of Australia to hike interest rates multiple times.
This amazing growth has come with costs, primarily in the form of higher labor costs. In “Lovesick Miners Raise Costs for Rio, BHP,” Bloomberg describes how the isolation of work in the remote mining areas makes these jobs very unattractive. Mining companies like BHP Biliton (BHP) and Rio Tinto (RIO) not only have to pay extremely high wages as compensation, but they also must include other perks to help miners deal with the isolation. For example, work schedules for miners can include extended trips to major cities in between extended shifts. Still, major shortages of labor exist in many skills. Australia will likely need to rely more and more on foreign workers to do these jobs – the isolation THOSE workers will feel will likely be many times what Australian miners feel. So, this dynamic will be important to watch.
Overall, this article is a fascinating look into the lives of Australian miners and how their work impacts their ability to gain and maintain relationships.
Grocery prices falling in Switzerland
Posted: August 22, 2011 Filed under: Currencies, food, Switzerland | Tags: deflation, grocery store, supermarket, Swiss franc Leave a commentThe Swiss franc has had an incredible run over the past two years that has accelerated in 2011 as many traders and investors have sought “safety” from the European sovereign debt crisis. The Swiss National Bank has utterly failed in its varied attempts to fight currency appreciation over this time. (See “No Currency Peg Yet for the Swiss Franc As SNB Escalates” for the latest in this drama).
At one point this year, the franc had gained over 30% on the euro in the span of a few months!
Source: dailyfx.com charts
A story out of Marketwatch provides a fascinating example of the impact of a much stronger currency: price deflation. In “Swiss supermarkets cut prices, cite franc strength” we discover Swiss shoppers are crossing the border to take advantage of their stronger currency to buy cheap goods in places like Germany and France. To win back the business, Swiss supermarkets are cutting prices and pressuring suppliers to lower their prices as well. Stories like these are important to watch as competitive devaluations continue to unfold across major currency countries.
Author disclosure: long USD/CHF
Gold prices squeeze margins at Marvell Technology
Posted: August 19, 2011 Filed under: commodities, gold, High Tech | Tags: copper, gold, Marvell Technology, MRVL Leave a commentGold has soared over the last six weeks. I never thought about its impact on manufacturing because I have believed gold is a very minor component of any production process. However, over at Marvell Technology (MRVL), high gold prices are squeezing margins enough to make the company plan switching to copper. From Seeking Alpha transcripts of MRVL’s earnings call on August 18:
“The price of gold has increased from about $1,200 per ounce a year ago, to over $1,700 today. This has eroded our gross margin by about 1.5% in that period. We are transitioning to copper, but this will take some time.”
MRVL also noted that foundry prices have fallen more slowly than expected, and the company is looking for new fabs with better pricing.
Author disclosure: long GLD and GG
Imperial Sugar squeezed by poor demand and high sugar prices
Posted: August 15, 2011 Filed under: earnings reports, food | Tags: Imperial Sugar Company, International Sugar Organization, IPSU, ISO, sugar Leave a commentLast week, Imperial Sugar (IPSU) lost 59% of its value in one day after reporting extremely poor earnings. The stock has continued to sell-off over a week later losing an additional 20%. The reason? IPSU is experiencing the worst of all operating squeezes: higher input costs (sugar) and the inability to raise prices to accommodate those costs. In this case, competitive pressures are to blame.
From the earnings report:
“Our inability to increase prices in the face of higher raw sugar costs because of competitive pressures from domestic and Mexican sources was the principal driver of the quarter’s disappointing results,” commented John Sheptor, president and CEO of Imperial Sugar. “Raw sugar purchased during the quarter was priced largely against the March and May futures contracts, which peaked near $40 per hundredweight prior to the USDA import quota announcement in early April. The subsequent decline in the raw sugar futures market which occurred after the quota announcement was only temporary and the raw market has rallied back to near the same level. Our raw sugar costs in the fourth fiscal quarter should see little relief, while sales prices thus far in the fourth quarter have only improved modestly.”
Higher manufacturing costs also hurt operating results in the previous quarter.
Note that last week, the International Sugar Organization (ISO) confirmed that no relief is in sight from higher sugar prices.
IPSU crashes after reporting very disappointing earnings
Source: Stockcharts.com
No relief coming from high sugar prices
Posted: August 14, 2011 Filed under: Agriculture, food | Tags: sugar Leave a commentBloomberg reports that sugar prices are not coming down anytime soon. The International Sugar Organization says that current surpluses are not high enough to satisfy demands of importers for stockpiling. Production costs have also risen. See “Sugar to Stay High as Surplus Not Enough to Replenish Stockpiles, ISO Says.”
GE warns higher rare earth prices may impact pricing for lighting products
Posted: July 27, 2011 Filed under: commodities | Tags: GE, General Electric, lighting, rare earth 2 CommentsFirst Seagate warned that higher rare earth prices are squeezing margins on hard disks. Now, General Electric (GE) has added its own warnings about the soaring prices of rare earth elements (REEs).
In a briefing paper written to explain the situation, GE warns:
“We will do our best to manage these costs where we can, but rises on a similar scale to those seen in recent months will mean further significant price adjustments may be unavoidable.”
The brief paper provides a very general summary of the current rare earth market and describes GE’s current attempts to reduce the impact of high rare earth prices. I now strongly suspect that more and more industrial companies and manufacturers will flag rare earth prices as a potential and/or growing issue. Moreover, these warnings will keep rare earth prices in the foreground of the market’s “thinking” and potentially keep pushing rare earth stocks higher.
Disclosure: author is long several rare earth stocks, including MCP. Also long GE
Inflation Watch 