The Road Ahead for Markets

by Michael Seek Fox Group at the Board of Trade

The monthly inflation data for this last month was released and both Core Inflation and Inflation Year over Year came in higher than expected. The markets did not react as violently as many veterans on Wall Street would have expected. However, if you look closely at the charts up above you can see that trouble looms on the horizon. The inflation rate of 6.4% was more than THREE TIMES the 2% Federal Reserve inflation mandate. Take the 6.4% inflation rate off the current mortgage rates of 6.67% and you end up with a near zero ‘real rate’. Real rates this low are not likely to achieve the Fed’s mandate of 2%. The world has become so accustomed to near zero rates that the Five Year Treasury Yieldd displayed in the charts above looks laughable. It is not.

As interest rates normalize over the next 2 years while the Federal Reserve unwinds the balance sheet of the Mortgage Backed Securities and Treasuries the US Dollar should have some powerful rallies. Think of the US Dollar as 2-ply tissue. The US is awash in debt with over 30 Trillion Dollars of national debt. However, the other industrialized countries have similar or worse debt issues and thus you could consider the other currencies of the world as 1-ply tissue.

Regardless of whether the interest rate normalization helps facilitate a recession or instead reduces exports of United States grain and beef and energy the end result is a lose-lose. Add into this equation the escalating tensions between China and the United States and you have China buying less and less from us and more from whoever will capitulate to the whims of the Chinese leadership.

Major banks have already given forward guidance that forecasts recession and difficult days for the banking industry. Amazon and Google stocks broke sharply the last several weeks and Home Depot stock has broken sharply off 6 month highs. The combination of the foregoing implies that hedging asset classes from Grain to Cattle production.

The stock market via the SP500 Dow Jones Industrial Averages may survived the inflation data on the 14th, however, the market is not likely to survive very long at such lofty levels when the biggest investor in the world—the Federal Reserve—is unwinding its balance sheet for the first time in 14 years. The Piper has to be paid and always will have to be paid.

Cattle prices have been a blessing to most producers since Thanksgiving and the high price for cash Fats sure came in handy. However, the old adage ‘if everyone is long then is left to buy’….comes to mind. June Fat Cattle finishes’ have not been friendly to cattle producers for many years and there is no reason to not trust the multi-dollar discount on June Fat Cattle to April Fat Cattle and get May and June and July finished Fat Cattles hedged. Ditto on Corn prices for producers of the yellow kernel. December new crop Corn has been at a massive discount to old crop March Corn for over 2 months now and this too should be trusted and the new crop Corn sold ‘hedged’ by producers of the yellow kernel. December Corn says the guys who make Orville Redenbacher popcorn will not be squeezed on the price nor the supply thereof.

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