Question of the Week

The value of all assets will begin to decline due to lower demand, lower risk-taking, and less confidence. At some point, it could create a gravitational force that would be hard to reverse. Do you believe America would be able to survive?

Yes
No

Friday was the most impressive session of the week:

• Stocks rallied into a summer weekend
• Apple was down and reversed intraday
• Quietly, Euro-zone kicked Greece’s can down the road with an 86 billion Euro deal
• Oil prices may have hit a bottom
• China may not be done devaluing its currency

There are a lot of amazing stocks out there still seeking a spark, but poised to rebound if or when the perception is that the coast is clear. In our August newsletter, I point out that this ‘disappointing’ earnings season has been anything but disappointing once we strip out energy results.  (Click here to download a free copy of our letter, or ask your rep.)

Second Quarter Earnings Season	Consensus	Actual
Consumer Discretionary	7.9%	12.0
Consumer Staples	-2.9	0.2
Financials	14.8	20.7
Healthcare	4.1	11.5
Industrials	-1.1	-1.3
Information Technology	-2.1	5.5
Materials	4.9	18.0
Telecom	5.5	9.3
Utilities	0.5	4.5
Energy	-62.8	-56.2

That said, the reaction, even to clear earnings beats and solid guidance, was near hysterical. It was completely overdone, although considering the backdrop of increased fear, this was perhaps expected.  People are waiting for the market to crash, or at the very least, correct. Thus far, we have focused on some of the more egregious examples of overreactions on the Swing service because it is about trades; soon we will apply them to some buy-and-hold ideas and to some open positions as well.

Global Food Plunge

Much has been made of the plunge in commodities. Prices around the world are led by the freefall in crude oil. While there are obviously pluses to these kinds of moves in the building blocks of economies, there’s a point when these declines represent anything but opportunity.

These times, they represent lower demand, lower risk-taking, and less confidence.

Under those economic conditions (otherwise known as deflation), the value of all assets begin to decline. The domino effect can be harsh and swift; at some point, it can create the kind of gravitational force that’s hard to reverse.

This is also known as a ‘deflationary death spiral.” Many see this as the biggest issue for the global economy. Is America immune?

 

Individual Food Commodity Prices

The Food and Agricultural Organization of the United Nations (FAO) monitors global food prices and its index is currently near a six-year low. Drivers of food prices are like any other commodity or product, beginning with supply and demand.

Supply is driven from input cost, labor, and energy.

In addition, the supply of agricultural products are affected by severe weather changes. The six-year plunge would counter the notion that severe weather has changed dramatically in recent years. I suspect that it’s the proliferation of media outlets and political agenda that’s really spreading. Be that as it may, save for an African drought that sent cereal prices higher this year, weather has not been an issue.

The demand may be waning from the global economic slowdown.

It would seem obvious that cheap food could be the key to the prosperity of the planet, but when it is cheap because of the slowing demand, it is symptomatic of an economy that needs a booster shot. The irony is the world’s arid land shrinks each day as the population increases. There was a time when top scientists saw this combination as a death knell for the world and used it to promote population control.

No one believes that these days as technology has made farming more effective.

Still, the foundation of growing food is seeds, soil and nutrients, which means that potash and phosphates are critical. Only rich nations who have taken food for granted could see an organic food movement take flight since it makes it easier for the spread of disease; thus, sending the prices higher.  (It’s very dangerous when these rich nations try to force poor nations to act the same. The genetically modified food (anti-GMO) movement, if truly successful, could potentially lead to starvation, and it would certainly increase the reliance on foreign generosity rather than domestic developments within poor nations.)

There has to be a happy place where demand can put a slight uptick into commodities from crude oil to food prices. It might sound counterintuitive, but the fact of the matter is that when food prices and crude oil get to downside levels, it is symptomatic of major problems, not solutions.

The Global Economy

For all the outrage at China’s currency devaluation last week, it’s a game that most of the world has been playing for some time. However, the Yuan is still the second strongest currency in the world. The bigger problem is that the race to the currency bottom appears to be the main technique for boosting economics. This week, I will be watching very closely for a bounce in crude oil, back toward $45 and the U.S. dollar pulling back from seven-year highs.

 

Today’s Session

The major equity indices retreated into the downside following the release of the New York Fed District’s Empire State Manufacturing report. The Empire State Manufacturing report serves as an indicator for the broader nation’s manufacturing behavior. For the month of August, the New York Fed District’s general business conditions index plummeted to a reading of minus 14.92 from a positive 3.86 in the prior month. Weakness was seen among the new orders, backlog, and shipments components.

Comments

Put simply, there will be pain and loss of asset value. However, the US economy is one of the most diverse and the continued decrease in asset values will create wealth opportunities for those that hold cash. Finally, contrary to john Kerry's statement that the U.S. May lose its reserve currency status is pure baloney. Brent C on 8/17/2015 10:15:45 AM

I lived through the German inflation, it destroyed everything. A American Flier type cart, filled with marks, thousands of them,for one loaf of bread. We have no idea of what we are in for when the US stops buying it's own debt.... tom wayne on 8/17/2015 10:23:46 AM

No --as in no more free stuff. Yes---as in yes the ideals of Capitalism and the good it provides. john cowger on 8/17/2015 11:25:21 AM

Wasn't the excuse for all the Keynsianisms of the last 10 years to avoid the deflationary death spiral? Now what will the luminaries supporting this bankrupt idea turn to now? No .... wait for it.......MORE DEFICIT SPENDING!!!!! Scott Manhart on 8/17/2015 12:07:00 PM

Regarding the question of the week. Excluding government debt which it seems could easily become impossible to repay after significant deflation (heck it may well be very hard to repay without deflation), I believe that America would be able to survive some deflation and there must be a bottom to the spiral. It must be necessary for countries to survive deflation or the world is going to be in a world of hurt in the not too distant future. Currently there are a number of developed countries with a birth rate that is below the rate needed to maintain the population and as more and more countries join this group and have a birth rate that at best sustains the population, the growth of economies will no longer be driven by a growth in population. It seems to me that this could easily lead to a deflationary spiral world wide. If there is no way to survive deflation the change in world wide population from growth to contraction could become catastrophic. Charlie on 8/17/2015 12:39:29 PM

It took you a lot longer than should be accepted by investors Charles. I'm talking Deflation....global deflation...what's this about technology fixing food harvests and GMO movements causing food shortages? Maybe that'll take you 10 or 20 years to reverse your need for Dow Chemical or Monsanto! Ralph Meeker on 8/17/2015 12:47:18 PM

If the demand for goods is what raises or maintains pricing then the US could be in trouble. The Baby boomers already have their STUFF and have very limited need to buy more. In fact, we have too much because we are dealing with aging parents that have passed away and their STUFF too. The only market segment that may do well is public storage companies. Remember my "Spending retreat" comment a few weeks back? Steve W on 8/17/2015 2:23:38 PM

I concur with Charlie. The crisis is ultimately demographic. European countries have been below population replacement level for 20 years, and we're hitting the top of the curve, too. To date, we've had 58.5 million abortions, and we're already into the "echo effect" of that phenom because that 58.5 million are no longer around to have kids for this new generation. That adds up to a huge drop in demand. Both births and abortions are in decline because there are fewer women around to have either. Meanwhile, China has had their 1-child policy since 1978. Meanwhile, the Muslim world has roughly 5-times the rate of natural increase as countries in the West. In time, they'll be able to walk all over Europe without firing a shot. However, reversing this is nearly impossible. Just try getting all those young Italian guys to move out of Momma's kitchen and start eating their girlfriend's cooking. I'm delivering a paper on this at the Bringing America Back to Life Conference in Nashua, NH on Sept 19th, followed by a Meet & Greet with the presidential candidates. Hopefully, this issue is ready for the national attention it deserves. Dennis Howard on 8/17/2015 2:59:35 PM

No doubt, we're at a tipping point on the downhill side . . . unless we change. Economies still equal people x (money+ resources+innovation). Clearly, we're not running out of either resources or innovation. What's killing is the belief that we can still have growth without moderate population growth, which was long argued by the late Julian Simon. Meanwhile, the Negative Population Growth ideologues are intent on reducing the U.S. population to 150 million by the end of this century, using every scare tactic available to convince people that babies are our real enemies. In fact, they are the only way to guarantee our own future. If all you leave behind is money, the government will be happy to spend it for you. Dennis Howard on 8/17/2015 3:10:34 PM

I am shifting out of investments with risk as a 69 year old woman....I have my nest egg from sold realestate and will use bank products that are easier to get to....Risk makes me nervous....This bear market is troubling so I am focusing on cash.... Lacy on 8/17/2015 3:12:23 PM

At some point, reality will intersect virtual, and we will be glad for an excuse to wrap up mourning at this economic wake and move forward. We might not even care if prosperity takes on a diminished definition - a piece of small is better than no share of more. Patricia Flynn on 8/17/2015 3:21:54 PM

Charles, I believe you need to research the GMO issue some more. The anti-GMO movement is well established and fully successful in a large portion of the world. Europe and Asia refuse to allow that product in. This is reminiscent of thalidmide, only the positions are reversed. With thalidimide, the FDA waited for full testing and avoided a horrible situation suffered by the rest of the world. With GMO, Monsanto has spent $B to corrupt the system to allow a dangerous product into the US market. It is not the modified genes tfat are the problem. The problem is why the genes were modified. Monsanto wants to sell a very dangerous systemic poison called Roundup to farmers to control weeds. The seeds are genetically modified so the crop will survive dorect application of Roundup, which kills all the other vegetation. The problem is that it also kills helpful microbes in the soil. With those gone, a weaker microbe flourishes. That weaker microbe gets into the plants and contaminates the grain. If the grain is them used on breeder lots for cattle and hogs, it will result in huge increases in infertility and spontaneous abortions. More than 50% losses occur. This link has been properly proven. What has not been proven is whether the bloom of bad soil microbes in our food has contibuted to human infertility. The only real benefit from Monsanto GMO product is Monsanto profit from selling more roundup. Other methods produce as much or more food without introduci Bob G on 8/18/2015 1:49:14 AM

Tweet

 

Home | Products & Services | Education | In The Media | Help | About Us | Disclaimer | Privacy Policy | Terms of Use | All Rights Reserved.