Thoughts on Global Weather, Food Supplies and Inflation
A brief note: There is really nothing further to add from prior updates of the S&P, HUI, XOI, USD or TNX as the patterns appear to be playing out as forecast (the HUI is taking slightly longer and may be putting in a slightly different count). Is there such thing as having an impartial Elliott Wave count...everyone has a bias in some form or another. The way someone perceives market action to follow (inflation or deflation) will affect their logical processes for how labeling schemes "should" appear. This thought would be equivalent to a downhill skier at the bottom of a hill expecting to magically ski to the top...right idea but wrong location (the skier at the top recognized the landscape correctly and got it right). For this reason, it is extremely important to marry fundamental analysis in some degree to technical analysis in order to ensure interpretation of the trend under study is correct. There are many individuals out there who are fantastic Elliotticians, Neowavers, wavers etc. that all may have different counts. If at the end of the day the same conclusions are drawn, there is no bias except in the proposed labeling scheme of the individuals collectively. I wrote a piece for our site some time ago titled "Signal to Noise Ratio"...during periods of high background noise, attempts to label accurate wave patterns within the congestion at 1-2 Degrees lower may be compromised. Focus more on the larger scale pattern and how surrounding wave structures "piece together" (frameshift analysis) rather than extremely short-term (1 minute data) patterns.
I have had several different requests the past few week or so to comment on technical analysis of food etc. so a few comments about this. The important things to understand when it comes to analyzing the grains, food etc. are available supply, inventory levels, longer-term supply trends, and most importantly the weather. Some of my reading the past week found one article that suggested Earth was on the cusp of another ice age. I did some further digging into this article and found a site that forecasts space weather. A lack of sunspots for the sun's 11-year cycle generally results in very cold weather i.e. reduced crop output. The link shows that one sunspot is developing at present, but a global decline by 0.7oC last year had something to do with a lack of sunspots, in the midst of the CO2 craze here on good old planet Earth. Update: the sunspots appear to be coming back on line now.
The sun is by far the rate-limiting step for temperature on Earth, since it is our lifeline...literally. Without the sun, there would suddenly be 6.3 billion people in suspended animation much like the Mammoths and other creatures that experienced a flash frozen experience some 10,000-12,000 years ago. These sort of climatic events happen quickly, which is 15-20 years, not one millennium as some would like to suggest. Chances of an ice age occurring in the next 200 years or so is not likely...there are far more important things to worry about the demise of North America, Europe and Northern Asia (due to 1.5 km high glaciers) such as food and water supplies and of course, Peak Oil.
I think it was last week when I stated at some point Canada might be forced to ban grain exports in the not too distant future (10-15 years) in order to feed those within its own borders first. This drew some noted criticism and perhaps I should have provided some data to support my hypothesis for this future event. I live in Manitoba, as many of you are aware, so I pay attention to the local weather. Winnipeg receives its water supply via an aqueduct from Shoal Lake, which happens to be approximately 100 miles to the East within the Ontario border (this part used to belong to Manitoba until 1881, actually, the Manitoba/ Ontario border until 1881 was right down Main Street in Kenora Ontario, but I will not get into this). There is no industry in this area (forestry is non-existent except for the locals harvesting wood to stay warm) and northwestern Ontario has a lot of water...so Winnipeg is fine. However, what generally falls on the field is all the farmer can count on for growing crops, unless it is a cash crop like potatoes, watermelon etc. that require constant irrigation. Runoff this year was minimal and episodes of high water levels accompanying ice jams were non-existent on many river systems.
Overall, percent moisture conditions for the topsoil in southern Manitoba at present are low enough to cause crop failure in certain areas. Click on "soil conditions" and go to the very bottom portion of the web page under "Attachments". Granted, the data is six months old, but rain has not been a regular thing the past six weeks. If the dry weather persists, crop output could be severely affected. There have been some really dry years in Manitoba that resulted in crop failures, so the present situation is not an unusual occurrence. Surprisingly, northern Manitoba at present is busting at the seams with water, which creates a dilemma for generation of hydro electricity in 1-2 years from now when the water from the south heads north to meet the ocean. I can not remember the percent moisture required in topsoil for seed germination, but 25-30% comes to mind. Chances are this year will see enough grain produced to export across the border, but for those who were unaware, the US required importing grain 2-3 years ago for internal demand (and the US is one of the bread basket countries of the world). Everyone in today's society forgets how high crop yields are due to implementing fertilizer, genetically modified grains resistant to pests, pesticides, herbicides, harvesting efficiencies, storage, transportation etc. All of the above is incredibly energy intensive and at present, every calorie present in food at the table requires 10 calories of energy input.
In the good old days, with Agrarian lifestyles, 20-30% of the crop went to feed farm animals helping to work the land, etc. while another 30% of the land lie in fallow. At any given time, 50% of farmland was essentially off limits for open markets. Of the 50% land remaining, consider the farmer requires to save 10-15% of the harvest for future crops. So, the energy input to bring 1 calorie to the table lied somewhere between 0.5-0.6 calories, along with much sweat and toiled labour (compare this to the 20 fold increase for bringing food to the table today). Without oil, crop output with 2% of the population producing food (this number was around 70% at the turn of the century) would decline by 90%. Reduce 6 billion people by 90% and there are 600 million people. Population curves that top out the way humankind presently is can see reductions swing beyond this, often to 95%. So, when there is talk of Peak Oil, cooler weather or warmer weather (cooler weather is actually worse because the growing seasons are reduced), take into consideration that food shortages "will", not "if" become an issue in the coming 2-5 years, if not sooner.
As an aside, I have been cruising our local SuperStore awaiting to purchase more Basmati rice...the shelves as of 9:30PM last night were absolutely cleaned out of rice, even the cheaper Rooster Brand white rice. Everyone I know is now aware of rice shortages and are starting to stock up. Supposedly, a shipment is due overnight, so I am off to pick up some this afternoon. Generic 20 pound bags of flour are now $11.48 each, up from $10.48 last week. The only items that have not really moved in price are white and brown sugar and suprisingly, oats. The old thing of switching to something else when the other becomes too expensive is going to apply to food, so watch for the price of oats and sugar to soar. Sugar is around $10 per 20 pound bag at present, but I expect the price to rise much higher, likely $40-50/bag within 5 years or less. Don't believe me, go look at a chart of sugar over the past 20 years and see where the price is relative to the 1980 peak...it is going to be going much higher, so stock up on it now before it rises to levels that discretionary spending. Sugar was a luxury in the 1800's and if history is any guide, chances are it will be again in the not too distant future. As an aside, avoid purchasing shares in any food producer company, such as Nestle, Kelloggs etc. Food prices are going to cause a shift to people eating home made granola, oatmeal, oatmeal with apples, oatmeal with cranberries, oatmeal with tapioca etc.
Some may wonder why I am focusing so much on food lately. By making the purchases up front now, it could literally result in saving thousands of dollars and the mental stability of knowing that there will be food on the table tomorrow rather than having to run to the store and potentially fight someone over a bag of rice...yes there have been some deaths around the globe due to food shortages as people literally fight for the last remaining bag.
Applying this thought to gold and silver bullion, there is an extreme shortage of silver, similar to rice, maybe worse, yet the price remains relatively untouched the past 6 months. I am not sure if anyone can remember seeing food shortages, panic setting in for those with little money hoping to be able to feed their children etc...I am not from that generation, but I do a lot of driving around our city to do visual surveys of what people are doing and I am starting to see this, particularly in the poorer neighbourhoods. Soup kitchens are having more and more people show up, food banks...it would appear they were held up in broad daylight because the vault is nearly empty. This sort of "fight or flight" mentality occurs during inflationary cycles because of the concept of reduced purchasing power per unit time. Some people on the Internet suggest that the psychology of the market is presently wrapped up in deflation...I suggest reading this book. The book is rather dry, but draws many parallels to the US at present. Whether we will have full-blown hyperinflation or simply inflationary purgatory is up for debate, but M3+Credit of the global money supply suggests global inflation...any other interpretation is simply flawed and ill conceived (I have written extensively about this over the past 3 years and have nothing new to add...simply click on the Archive section of this web site for prior reference based upon title). Instinct brings out the "Inner squirrel" in everyone and hoarding becomes an important survival instinct. This will apply to gold and silver as people want to park their money into something tangible...not because of greed but because of fear. Fear is by far the most dangerous emotion to base any decision around, since the outcome will likely be illogical.
Do not be a part of the crowd standing in line trying to buy gold and silver bullion at prices 2-3 times above current levels, or staring at a computer screen wondering if a stock at $25/share should be purchased, when it could have been obtained 1-2 years previously at $3-5/share. The instinct to click the "buy" button will be overpowering for most and this behaviour will literally feed and drive the price of gold, silver and their related stocks much much higher. By facing the future uncertainty now, logical financial decisions can be made, rather than illogical financial decisions in a state of chaos later on.
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For further viewing of prior work, simply click on the Archive section of this site. I update the AMEX Gold BUGS Index, AMEX Oil Index, US Dollar Index, 10-Year US Treasury Index, S&P 500 Index as well as commentary on market-related issues and new technical analysis findings. Recently, the TNX had positive reversal that failed and has had a significant decline since then. The S&P also had a positive reversal with a measured move to 1612 fail and it was hypothesized the downside move should equal the upside potential, which lies just above 1200 (this is the minimum downside target). A future article will be written about this idea along with 2-3 different editorials, so there will be no updates for the HUI for some time. We follow some 60 stocks, with a focus on core positions and stocks that actually make up our personal portfolio. As well, the keeper of the site, Captain Hook writes 3-4 articles per week discussing macro issues, ratio analysis of various markets and an in-depth study of put/call ratios and shorting candidates.
May 5, 2008