Economists and the public always want a simple answer in their favour – which normally means ignoring the question and hiding more than is revealed.
The consumer price index is a nice accurate number which normally has highly qualified economists sweating profusely to provide the very best estimate as to how the consumer is faring in this world. “Normally” their endeavors meet with reasonable success through various corrections kept in highly complicated spreadsheets arriving at a result pretty much the same as last month – and year. Errors and exceptions stare you immediately in the face.
But these are not normal times! Let me give you three examples:
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
Speculation In Metals
If we take the metals in the same chemical group of copper, silver and gold they are under pretty much the same geological and chemical conditions and should be found in ore more or less in a constant proportion. The California gold-rush always invokes the picture of Carl Malden wet, dirty and heartbroken. But actually mining for one is pretty much mining for all three which is clever, as it means only removing a lot – and I mean a lot – of rubbish once. I could have included sulphur as well as the metals, as many ores are sulphides of copper.
Now having eliminated that variable, the first graph shows the price of the three metals converging to the same proportions they had in the reference period 1999-2003 on average. Between then and now they have been meandering in a very peculiar way, apparently getting right back to where they started. This sort of behavior should give rise to a suspicion that it might not be just supply and demand that sets the market price. It is emphatically not what economists can use sensibly in their calculations – and still have a reasonable expectation of arriving at a even a half-witted conclusion.
I have thrown zinc in as a reference simply because zinc is a very useful metal in so many alloys, but speculators have so little knowledge of what they are investing other people’s money in, that their notion of zinc is that it as boring as an old fashioned bucket. It comes close to the definition of insanity to speculate in zinc. Their very limited scope would hardly encompass speculation in zinc. We can thus probably discount about half the price development to date of the copper group of metals as being external to supply and demand.
This could in turn indicate that the copper group of metals is at present still about twice their “rational” price, so if ever the speculators and their banks get things worked out we should have a gold price of around 600 USD/troy oz.
What is even more disturbing is that the breakdown in 2008 was apparently predicted in 2006 by the most boring substance in the earth. At least the claim that “nobody” could know that things would go wrong is false – they would have known had they bothered about where to look.
Shifts in Demand Of Meat
Exhibit number two is the price of meat in plain USD/lb where my favorite proxy for consumer prices, chicken, is used as a reference – simply because if you eat meat at all you will eat chicken and it is a food that is substituted for if beef gets too dear and if your budget will allow you some sort of improved diet. Furthermore it is difficult to speculate in, as storage of large quantities of chicken is neither cheap nor possible in the long term.
The advantage of the graph is that there are pretty good explanations for divergence from the chicken price. Most spectacular is the halving of mutton (actually lamb, but I like the old English word better) price in 2012 due to the “Arabian Spring” and other disturbances among the non-pork eaters, where a definite change in consumer preference and economic ability works together to wreck havoc with any price index.
The jitteriness of pork is due to the “hog-cycle” where rising pork prices makes farmers produce a lot of piglets to cash in on a boom. The problem is that the feedback to production then results in an oversupply of pork that will have to be cleared by lowering the price. The growth period of the pig is unfortunately such that it gives a destructive feedback to the market, making a smooth production difficult and taking a rather long time before converging on a “sensible” market price. The latest figures do show a rapid rise in pork price presumably driven by consumers that will eat anything.
Beef is influenced both by a lot of free ranging cattle and perhaps more importantly the production of milk – making it silly to slaughter a cash-cow. Actually there is a true ethnic or genetic thing – as opposed to preference from religion and habit – in milk. The Caucasian is somewhat of an anomaly because they don’t typically develop lactose intolerance as an adult. That is why milk powder is supplied in famine relief food aid—because you are fairly certain it will be given to the children, that otherwise suffer the most. In Greenland people traditionally used whale lard in their coffee (and do they drink coffee on Greenland!!), because milk or cream isn’t really a grown-up food. You have even observed fructose intolerance on Greenland.
These shifts in demand will disturb the weights of a price index.
Shifts in Supply Of Grain
Grain prices are much more supply driven. Grains have more or less the same nutritional value – and I know about the deficiency in maize of certain amino acids – actually the most nutritious bread is the sourdough black/dark brown rye bread of f.i. Germany, so they should have about the same price; but they have not.
There are definitely some supply side imperfections. The alarming price rise in rice in 2008 does indicate where these “imperfections” are. No points for that one. At the same time American farmers were paid to make fuel-alcohol of their corn harvest.
There is little doubt that rice is being produced far too expensively in general. It will not be the first time the U.S. Midwest destroys an empire. The area also devastated Russian grain production in the late 18th century and out-competed the world’s other grain producers. The Haber process of fixing nitrogen just before WW1 didn’t help either.
Market access is clearly not the only imperfection, as we can see because soya beans converge on the price of rice – yes, I know it is a fodder for ruminants mainly, but they produce milk on that also – and a large part of the production of soya beans comes from Brazil, so there is a heavy indication of currency manipulation. China has kept its currency undervalued with respect to the USD which might be a smart thing to do, if you are exporting to the US; but when you have to import it is less than intelligent because you end up with underpaid exports and overpaid imports.
In so far as the price difference between wheat and rice is due to a flawed exchange rate the numbers suggest that the RMB should be doubled in relation to the USD – which would end any Chinese hope of ever exporting again.
I’m not against price indexes as such. Any pilot would hate being deprived of his window to get some idea of where he is flying. But at times visibility is so poor that you have to be on instruments. The most fundamental thing taught pilots is to trust their instruments and not the seat of their pants – as experience and feelings are just about the most dangerous and misleading source of information when you are flying blind. Furthermore you have to cross reference a number of instruments as any one of them could be wrong.
We are indeed flying blind as there are a lot of interests in portraying the realities as something they are not.
Metallic raw materials are going down to where the needles are getting there to indicate power is failing on all four engines. The nose is pointing up to more expensive food – and yet you are not gaining the altitude you should, as grain prices have not been raised. Truth is someone is going DOWN.