• Will the Fed blink?
• The wheat fields around Walgett
• Trump’s Oval Office showdown: just more showbiz

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By Selva Freigedo in Albert Park

The Fed is looking at one more rate hike this year and three in 2019…or so they said.

But investors aren’t buying it.

They don’t think the Fed will continue on their rate hike path.

This from CNBC:

‘The fear of the Fed is fading.

‘As the 10-week stock market correction deepened, fears of slowing growth escalated and expectations for Fed rate hikes have fallen. While stocks weakened, investors jumped into bonds, sending yields lower and igniting worries about a looming recession.

‘Odds are pretty low in the futures market that the Fed would raise interest rates more than one more time, though traders still expect the Fed to hike the fed funds rate by a quarter point next week.’

Investors think the Fed will be taking a break.

While employment is close to full, inflation — which would cause higher rates — isn’t picking up.

But most likely, the reason they don’t believe it is because of something US Federal Reserve Chair Jay Powell said.

Back in October, Powell said the Fed was a ‘long way’ from its neutral rate, which implied that more rate hikes were coming.

Then a couple weeks ago he said the rate was ‘just below’ its neutral rate. That is, he hinted that the Fed may not be raising rates as quickly as initially expected.

And, just a few days ago, there were reports that the Fed may take a ‘wait and see’ approach after their probable rate hike in December.

All these contradictory remarks could mean the Fed is starting to waiver.

The truth is that nobody really knows what will happen next, and the Fed is just making it up as they go.

The other big worry for the markets is the trade war. It looked like there was some progress in Argentina after both parties reached a truce during a dinner, but the rally didn’t last long.

The US believes that China has affected US manufacturing and is a threat to the United States. They don´t only see this as an economic issue, but as a national security issue.

That’s why we don’t think the conflict between China and the US is over by a long shot. We see it escalating, not deflating.

The Fed needs to increase rates for the next recession…but they could be running out of time.

Talks of a recession next year are increasing as global growth slows and the markets are hitting more turmoil. JP Morgan sees a 35% chance of an early recession next year, up from 16% in March.  According to a recent survey by Duke, almost half of the chief financial officers at companies expect a recession by the end of 2019.

The truth is that 2018 hasn’t panned out anything like 2017. Any small piece of news is spooking the markets.

This is quite a change from last year, when investors where fearless and cheered the market on any chance they got. There wasn’t much that shook the markets back then.

As you can see in the graph below, volatility remained quite low all through 2017. In fact, investors were even betting that volatility would remain low.

2018 has been a much different scenario.

This year, volatility has spiked with a higher average.

Asset classes haven’t performed as well either this year. 

Stocks… oil…even cryptos are all falling. 

According to Deutsche Bank, courtesy of The Wall Street Journal, 90% of the 70 classes they track are all in the negative for the year. As you can see below, the last year that came close to this was 1920, when 84% of the 37 asset classes tracked were negative.

Now noticed the figure from 2017…only 1% of assets finished the year in the negative.

The US Fed has been increasing rates while starting quantitative tightening (QT).

To stimulate the economy after the 2008 crisis, the fed lowered interest rates and purchases assets pumped US$3 trillion into the economy by increasing their balance sheet, something referred to as quantitative easing (QE).

This created an asset boom, like in stocks and property.

Now the Fed is reversing this.

They are increasing interest rates and reducing their balance sheet to prepare for the next recession.

If their stimulus made asset prices boom for years, what do you think will happen when they take that away? 

And, as you can see below, they have only just started decreasing their balance sheet. There is still a long way to go…

Investors are struggling to find places where to put their money…and fear is starting to creep in. That nudging feeling that things aren’t quite right is spreading.  

Fear of a trade war, fear that interest rates are increasing, fear of Brexit, French protests and fear of a repeat of 2008.

At the end of the day, the market is all about supply and demand.

And when people are scared, they stop buying.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next big crisis is at our door step and Australia could be facing an ‘economic winter’. If you want to learn more about Harry’s worrying forecasts, click here.

The Wheat Fields around Walgett
By Matt Hibbard in Melbourne, Australia

At this time of year, country towns are normally a hive of activity.

From central Queensland, down into northern NSW. Across the Murray River into Victoria, and over to SA. It’s the same on the west coast as well.

Cartage contractors shadowing massive harvesters, as they head onto their next job. Truck drivers in shorts and singlet, fueling up, and topping up, with cold drinks.

Kids riding their bikes to the local milk bar to get an ice cream. Then off to the local pool or river for a swim. The heat melts the road, permeating every building and structure.

Vultures fight over road kill baking in the sun. Brown snakes, as thick as your forearm, feast on rodents that overfed themselves on grain.

WA steps up to the plate

From September into the New Year, the winter harvest goes in. Wheat, barley and canola, in the main, plus some chickpeas as well.

Trucks line up three and four abreast at grain terminals waiting to unload. The queue sometimes so deep that they run out along on the road.

Some drivers snooze. Others just shoot the breeze. Waiting to have their cargo graded, before running over the weighbridge. Then tipping off at their designated silo, before heading back out again.

Each truck sent to the terminal in which the farmer will get the best price.

From Burren Junction, through Wee Waa and into Narrabri. Or back along Kamilaroi Highway, through Cryon and into Walgett. Even a couple of dollars per tonne makes a big difference.

The grain is either stored, or sent on its way. Trucked or trained into port, before heading overseas.

This year, though, not all that grain will make its way overseas. Nor used to fulfil local contracts.

The Department of Agriculture and Water Resources estimate this year’s crop will be 20% below the average for the last 20 years, and 23% lower than last year. All up, the Department forecast a total of 29.3 million tonnes.

With the drought savaging the east coast, WA will contribute 56% of the national grain production for 2018/19. That is well above its average of 36%.

That amount is barely half of that produced only a couple of years ago in 2016/17. Staggeringly, though, it is still 69% higher than the lowest recorded amount over the same two decades.

Not only will there be less grain than average, but a chunk of it will head from west to east.

As the ABC reported, Queensland received its first shipment of WA grain in August. 30,000 tonnes arrived in Brisbane by ship, destined for cattle farmers ravaged by drought.

As the report continued, that’s roughly the amount required to supply the feedlots in Southern Queensland for about one week.

Local silos are near empty, and the cost of hay and any grain remaining, has gone through the roof.

Meat prices to head skywards

Farmers now have the unenviable task of reducing their herd size, as they can no longer afford to feed all the stock that they have.

It’s not just red meat, but chicken and pork as well. Grains are the staple food in most feedlots.

And the famous ‘long paddock’ — the 70,000-odd kms of public roads where drovers can feed their herds on roadside grass — has also run out of feed in vast areas. Some councils have even closed the routes indefinitely.

It all means that for consumers, the cost of meat will inevitably rise as demand exceeds supply. It is just another thing that will erode the value of the weekly wage.

Of course, the story of drought in nothing new. It is something that Australia has, and always will have to, deal with.

But what often gets lost is the multiplier effect.

All those trucks and drivers not buying fuel and food. Less mechanics fixing breakdowns on the side of road. Less buying of parts and equipment — less spending in the economy — as everybody tightens their belt.

A drought affects every part of the economy — not just our farmers.

The indirect effect

When car manufacturing closed in Australia, it took with it not just the direct jobs, but all those periphery companies that relied on it as well.

Those that made seats and seatbelts, windscreens and dashboards — even the workforce required to make all those tyres. They all had to close shop, or drastically reduce their head count.

That is why governments subsidised the industry for so long — a long while after it was no longer economic. The real job loss was many times more than the headline number.

The difference with agriculture, though, is that unlike global car manufacturing, there is not excess supply. The world has too many car manufacturers, but not enough food supply.

The demand for food will only increase, along with the size of the global population.

Add in the demand for a better quality of life for the rising middle class (particularly in China), and the demand for food will ramp up even further.

There will always be parts where farming is not economic. On marginal land where good years will never make up for the bad. And sure enough, that still won’t stop some from having a go.

But surely agriculture, given its most basic but important task of all — feeding us — should hold a much bigger place in the minds of our governments. Much more so than the latest populist cause.

And given our proximity to Asia, if the government manages it properly, could create the next leg of our economic growth.

Matt Hibbard

Editor, Options Trader

Trump’s Oval Office Showdown: Just
More Showbiz
By Bill Bonner in Baltimore, Maryland

A fight with the Fed one week. A trade war with China the next.

And now, it’s a war with the Democrats.

Donald J Trump knows how to keep the cameras rolling.

From Bloomberg:

‘President Donald Trump staged a confrontation Tuesday with the two top congressional Democrats before television cameras in the Oval Office as the dispute over funding for his border wall turned publicly acrimonious.

‘The drama may raise the chances of a partial government shutdown when funding for some agencies runs out after Dec. 21. The televised back-and-forth between the leaders will likely figure prominently as politicians seek to assign blame for any disruptions that result.’

Just showbiz

The sturm and drang keeps the groundlings entertained. If you want to draw a crowd, pick a fight. The Donald picks fights and draws crowds. And he plays his role well. He is a ‘big man.’ Confident beyond reason. A winner. The cock of the walk.

But behind the scenes, the situation is more complicated.

Russian leader, Vladimir Putin had it figured out long ago. ‘It works like this,’ he told reporters (here, we paraphrase and elaborate). ‘A president comes into office. Some guys in suits come to visit. They tell him what he can and can’t do. No, he can’t cut military spending. No, he can’t cut entitlements. Yes, he must keep the debt bubble expanding.’

After that, it’s all showbiz. But what makes showbiz so interesting and entertaining? Doesn’t it tell us something about real life?

Big Daddy, the jealous husband, the power-mad dictator, the corrupt businessman, the scheming step-mother, the flirt, and the saint — all the stock characters have their real-life counterparts. You find them in bars and malls…in churches and in prisons.

But humans are never fully reliable. They often flub their lines and go off-script. Or they play their parts so faithfully, they bring about — in real time — the catastrophes that were only intended to be entertainment.

Like a peacock

Yesterday, we were wondering how it works. Specifically, we were thinking about sex. Not like a teenager sitting in a dark room with his computer screen, but like an adult, trying to dope out what makes men so foolish, vain, and murderous.

That is, we were trying to understand why people so easily resort to win-lose deals…and why staged spats in the White House still capture viewers’ attention — as if they were real!

Win-win deals don’t make the headlines. But in the Diary, we have shown why they are better for everyone. They are more efficient. They produce honest information about what people want and what they are willing to give up to get it. They increase wealth and limit claptrap.

People don’t always get what they want or what they expect, but at least they get what they deserve…which is about the best we can do in life.

The reason win-lose deals persist, we concluded yesterday, has to do with man’s lust for sex. After his survival was fairly assured — after he had learned to herd cattle and plant wheat — man turned his attentions to sex.

Then, much of what he did, even if he didn’t realize it, was done for one, single-minded purpose — to make himself more attractive to the opposite sex.

Like the peacock, he spread his colourful feathers to draw attention to himself. Like the antelope, he locked horns with other males to find out which was stronger and braver. And like a medieval scholar, he retreated to his workshop, trying to turn base metal into gold.

But there were two possible avenues of approach: Self-improvement…or destruction.

Either he made his rivals worse off — by stealing from them, deceiving them, or killing them, thus leaving himself in a superior position.

Or he made himself better — by smiling, lifting weights, dieting, studying ancient Greek, or winning a Nobel Prize in medicine.

Love thy neighbour

In the Old Testament, God favours the first approach. He tells his chosen people to go and kill their competitors, take their land, and burn their cities. ‘Don’t even leave their pets alive,’ He says to His people.

But in the New Testament, God shifts to the second approach. ‘It doesn’t matter who you are,’ He seemed to say. ‘You’ll get no special favours from me.’ Instead of killing, man had to ‘love his neighbour’ and be a better person.

Win-win deals — do unto others as you would have them do unto you — were a great success. They brought civilization, growth, and progress.

But win-lose deals are deeply rooted in the human dirt. Why? Sex.

We are bred to mate. But with whom?

Therein hang a million tales. Stories of treachery and violence. Fights for love and glory. Cases of do or die. Stories with happy endings. And stories of monumental success…or abject failure.

Genghis Khan, for example, is said to have had his female captives paraded before him. He selected a different one every night.

We can imagine that the young women recoiled at the thought of being used for the pleasure of the Mongol chief. But maybe not.

Females face a different biological calculation. They can only bear a few children. In theory, it pays for them to be choosy…and to be chosen. So they would want to be chosen by the Genghis of the day — the richest, most powerful, strongest male in the group.

How many of them lowered their eyes coquettishly as they passed the Great Khan? How many of them straightened their backs and swelled their chests?

Being selected helped guarantee that their children were winners, too — partly because they had a winner’s genes…and partly because their father might protect them as children and help them along in life later on.

And apparently, it worked in practice. Genghis sired so many children that one out of every eight males now living in the lands he conquered have him as an ancestor.

Genghis, wasn’t he one of the biggest win-losers of all time…and one of sex’s greatest winners?

Regards,

Bill Bonner

From the Archives...

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