The Real Crash is dead ahead as 2008 is forgotten

Commentary: Ironically, you’ll win by buying banks now
By Paul B. Farrell, MarketWatch

July 31, 2012, 12:04 a.m. EDT

Think history folks: Remember 2000-2002? The economy suffered a 30-month recession and a brutal bear market. The Dow Jones Industrial Average peaked at 11,722, then crashed, losing over 4,000 points dropping below 7,500, down more than 43%, with massive losses of more than $8 trillion in market cap.


But it gets worse: Shilling’s bluntly warning: “If we aren’t already in a recession, we’re getting very close.” Yes, he’s more reserved than Nobel economist Paul Krugman, whose latest book goes beyond hinting that the America economy is repeating the 2000-2002 recession, His title says it all: “End This Depression Now!


But the scariest fact is that America’s warring politicians, CEOs and Super Rich can’t even see the obvious link between the 2012 social-media bubble and the 2008 Wall Street credit bubble that nearly bankrupt our monetary system and forced Congress and the Fed into bailing out our too-big-to-manage banks to an estimated $29.7 trillion in cash, credits, cheap money loans and debt relief. But, unfortunately, the banks still haven’t learned the lessons of history. Instead, they dug in their heels, spending hundreds of million on lobbyists, fighting all reform efforts, went back to business-as-usual, sabotaging America and ultimately themselves.


Déjà vu: here we are four years later. Again mired in another presidential election, right back where we were in the summer of 2008. In denial, trapped in lies and mean-spirited theatrics, ignoring warnings, blinded, obsessed about the smell of election victories no matter the cost, even if it triggers a recession.


Yes, déjà vu all over again. Four short years. We forget. We’re back repeating the same buildup scenario to another meltdown.

.Worse, bankers, politicians and billionaires just don’t seem to care. And you get the foreboding feeling that it really doesn’t matter who wins the election. This war will go on till 2016: For one party and their billionaire super PACs will do anything to hold on to the presidency, and the other, backed by their billionaire super PACs, will do anything to regain it.


Politics is now a deadly blood sport that reminds us of the “Hunger Games.”

As if 2008 never happened, creating the granddaddy of all bubbles

Yes, another crash is coming soon because we’re back playing the same speculative games as we did for years prior to the 2008 crash. Nothing’s changed. And when we collapse, it will be because America’s leaders never do learn the lessons of history. And never will, if you get the meaning of economists Carmen Reinhart and Kenneth Rogoff who surveyed 800 Years of Financial Folly” and saw nothing but repetitive cycles.


In a BusinessWeek editorial, Peter Coy and Rouben Farzad described the latest cycle in this eternal drama of the bubbles:


“It’s as if 2008 never happened. Once again the worlds investors are pumping up bubbles that will probably explode in their faces. After the popping of a real estate bubble led to the first global recession since the 1930s, world markets are frothing like shaken Champagne. Pundits claim to have spotted price increases that are unsupported by economic fundamentals in assets ranging from U.S. farmland to Israeli biotech to Australian housing to Chinese cemetery sites. Commodities have soared. Global junk-bond issuance hit a record... this is the granddaddy of them all, an almost-encompassing bubble right at the heart of monetary systems.”

Yes, for the past four years our great free-market system has been blowing many new bubbles, like the Facebook bubble that we saw coming months ago. It will soon halt Chairman Bernanke’s nonstop printing press. This bubble will sink like a mafia stiletto deep into the “heart of the monetary systems worldwide, proving something Nassim Taleb said about Bernanke when Obama reappointed him in 2009: “He doesn’t even know he doesn’t understand how things work,” that his methods makehomeopath and alternative healers look empirical and scientific.”

Warning, the Real Crash is dead ahead, will bankrupt America


That’s also what economist Peter Schiff, CEO of Euro Pacific Capital, predicted recently when interviewed on Fox Business about his new book, “The Real Crash: America’s Coming Bankruptcy.”

“We’ve got a much bigger collapse coming, and not just of the markets, but of the economylike what you’re seeing in Europe right now, only worse … when we hit our real fiscal cliff” and a meltdown more severe than the Crash and Great Recession of 2007-2010.

Schiff was one-upped during the same NewsmaxWorld report by Robert Wiedemer, author of the 2006 America’s Bubble Economy” and recent “Aftershockbook about the “Next Global Financial Meltdown.” He warns that “the data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation,” starting this year.

Yes, it sounds like overkill to drive home the message, but maybe not. Maybe this is déjà vu 1929. Maybe the Real Crash is dead ahead. And maybe nobody wants to see it, like 2008.

Big secret, buy banks? Yes, if Wall Street doubles down, splits up

That signal comes from no less than former Citigroup president Sandy Weill. Imagine, the man responsible for building the first too-big-to-manage mega-bank, and killing the 60-year-old Glass-Steagall separating commercial and investment banking back in 1999, now saying:

“I think what we should probably do is go and split up investment banking from banking. Have banks be deposit takers, make commercial loans and real estate loans. And have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.” What a game-changer.


Huffington Post columnist Mark Gongloff notes that Weill is “not doing it out of the goodness of his heart.” But the truth is banks haven’t been doing well since 2008, in spite of controlling politicians and regulators: “The banks themselves, including the abomination he created, Citigroup, would be worth a lot more if they were broken into smaller pieces.”

Since 2008 “the market has turned against the big banks,” investors have beendoing the government’s dirty work for it.”

De facto Glass-Steagall? Yes, split and get richer on two bank stocks

Weill must also sense that with all the relentless political fears about the government’s out-of-control debt, plus the real possibility that the American economy could in fact go over a Fiscal Cliff in 2013 and into a long recession, or even a depression, the appetite for another taxpayer bailout will be zero, forcing a bank breakup anyway.

So Weill’s brainstorm makes a helluva lot of sense: Take command. Get ahead of the coming slowdown. Shilling warns the social-media bubble will keep deflating.

Forget them, seize this opportunity. Refocus on new bank stocks. Besides, if insiders control a split-up into a commercial bank and an investment bank, it’d be on terms more favorable to bank insiders, executives and shareholders than if Washington did it.

And you can bet the smart money’s on Weill’s strategy. For example, The Wall Street Journal quotes Phillip Purcell, former CEO of Morgan Stanley: “From a shareholder point of view, it’s crystal clear these enterprises are worth more broken up than together.”

Yes, deniers are claiming it’ll never happen, especially Jamie Dimon, who publicly doubled down on loving his too-big-to-manage $2.3 trillion bank. But Gongloff and the Journal note that Dimon’s reshuffled organizational chart suggests otherwise.

Moreover, you know bank CEOs like Lloyd Blankfein are motivated more by their own personal wealth than by firm assets under management. Ultimately, if they can make more money and get more control of their destiny by owning two bank stocks, you can bet they’ll plan a de facto Glass-Steagall revival in a New York minute. They can make more … and so can America’s 95 million Main Street investors like you.

Bottom line: if you are a risk-taker, maybe you can beat the market to the punch, before The Real Crash overwhelms Wall Street, like it did in 1929 and in 2000 and in 2008. Because next time, even though our too-big-to-manage banks expect they’ll get bailed out, the reality is that they’ll go begging for bail-out billions and Congress won’t do it again, without forcing a newer, tougher Glass-Steagall law on the banks.


July 30, 2012 7:28 pm
US drought: Stuck on dry land

A tractor and a chopping machine circle a corn field, pulverising the ruined stalks and spitting them into a grain wagon. By day’s end only a 10-foot wide strip will be saved for the insurance adjuster.

This land, in Farmington, Missouri, normally yields 130 bushels an acre when harvested in the autumn. Not this year, when the dried out crop is fit only for being turned into silage.

“The handful of ears that are out there don’t have grain on them,” says Richard Detring, a farmer, before returning to his grim work inside the air-conditioned tractor. A thermometer reads 106F (41C).

Disappointments such as Mr Detring’s are taking place around the US corn belt as crops have been weakened by relentless heat and the worst drought in half a century. Analysts have torn up predictions of a record US harvest. Now they are focusing on which consumers, from pig farmers to ethanol refiners, will capitulate first and use less grain. Futures markets have concentrated consumers’ minds: prices for corn, soyabeans, soyameal and rapeseed have exploded to record highs.
Click to enlarge

The third food commodities price spike in five years highlights how problems in one corner of the world quickly become a global concern. The US leads the world in agricultural commodity exports; countries and regions as diverse as China, Europe, Egypt and Mexico depend on imports of grain from the boundless fields of states such as Iowa, Illinois, Indiana, Ohio and Missouri. Government officials fret that a further surge could induce panic buying by importers or export restrictions in the world’s breadbaskets, turning an episode of high prices into a crisis. While restrictions are unlikely in the USRussia’s export ban on cereals in 2010, when it halted cereals shipments amid its worst drought in a century, still haunts commodity markets.

The impact of a looming crop shortfall in the US, the country with the best seed technology, first-class export infrastructure, the deepest commodity futures markets and plenty of capital available to farmers, also raises unsettling questions about how food supplies will keep pace with a growing population and a warming climate.

“When something happens in the US like what is happening today, it has a huge impact on world prices,” says Maximo Torero of the International Food Policy Research Institute in Washington.

US farmers last year grew 35 per cent of the world’s corn and soyabean crop, and exported 40 per cent of these staples traded on the world market. The most productive farms are in the Midwest. Or they normally are.

The US categorises almost half of its corn crop as poor or very poor, the worst rating at this point in the season since a severe drought in 1988. More than a third of the soyabean crop had the same rating. Nine in 10 acres of corn and soyabean crops are on land suffering drought, the US Department of Agriculture says.


As recently as mid-June, USDA forecasters estimated farmers who had rushed to sow corn during an extremely warm spring would average 166 bushels on each acre, lifting total US production to a record 14.8bn bushels. In Chicago’s futures market, corn was trading at an 18 month low below $6 a bushel.

Most of the corn belt two months ago was fine,” says Brian Fuchs, climatologist at the National Drought Mitigation Center in Nebraska state.

Then, seemingly out of nowhere, prolonged blasts of heat hit emerging stalks and plants. Corn has surged 41 per cent since mid-June to a record above $8 a bushel; soyabeans have soared 25 per cent in the same period to almost $18.

US corn and soyabeans are mainly consumed by livestock, and the processed foods and biofuels industries. Their journey to a dinner plate is usually through a factory or the digestive system of a cow, pig or chicken. As any farmer can explain, people do not eat hard cobs of yellowfield corn”.

Rice and wheat, which are boiled or baked directly into staple foods, do not share the same dire supply situation. But economists say the devastation in US corn and soyabean crops will nonetheless affect these markets.

There are several reasons for this, says Abdolreza Abbassian, senior economist at the UN Food and Agriculture Organisation in Rome. First, he says, as US corn prices surge, chicken and pig farmers in Asia may feed animals more wheat instead. This increases demand.

The next effect takes hold more slowly but takes longer to reverse. As corn and soyabean prices rise, farmers plant more acreage with these crops the following season. This past spring, US farmers gave more land to corn and soyabeans but took it away from wheat. “You intensify competition for crops,” says Mr Abbassian.

Bunge, a top global agricultural trading house, expects “massive planting” of corn and soyabeans in South America later this year.

Wheat prices have also risen 50 per cent since mid-June. Traders and officials are especially nervous that domestic food inflation could pressure governments in grain surplus countries to limit exports. The Russian export ban caused the greatest shock two years ago sending wheat prices soaring.

Moscow has said there are no grounds for limiting exports but traders are beginning to speculate about export taxes or even another ban.

Alberto Weisser, chief executive of Bunge, which has port facilities on the Black Sea, says: “The Russian government heard the last time around how negative that measure was ... They are going to be much more careful.”

. . .

High prices hit grain importers especially hard. As the Arab uprisings began to spread last year, countries from Algeria to Saudi Arabia stepped up wheat purchases. As of now at least, Mr Weisser says: “We don’t hear of any panic buying.”

After declining in the past three months, the FAO Food Price Index will probably jump when it is updated next week. Food inflation fears are building in emerging markets.

Inside the US, retail food prices do not rise at the same pace as commodity prices. Food manufacturers generally choose to sacrifice profit margins or swap cheap ingredients for more expensive ones when their commodity costs jump. The USDA forecasts US consumer food price inflation will accelerate to 3-4 per cent next year. Still, it kept its 2012 outlook stable as it will take months for the drought to take its toll at the supermarket.

More immediate shocks from the drought are already being felt in the US livestock business – the source of the 44bn pounds of red meat Americans will eat this year and the 8bn pounds they will sell abroad.

In Missouri, which boasts 57 cattle per square mile, the drought has ruined the grass that calves traditionally graze before they are sold for fattening on feedlots. Farmers are feeding winter hay stockpiles in summertime to keep animals alive, in some cases paying more to transport a bale than what it is worth.

Cattlemen out of hay are increasingly turning up in sales barns such as the Farmington Livestock Market – an amphitheatre-shaped room with torn seats and cigarette smoke – where cows, bulls, goats and even a pair of llamas were prodded and paraded across a sawdust floor to be auctioned last week.

Ben Davis of FCS Financial, a Missouri lender, says cattlemen are accepting $900 for cows that would have cost $1,500 a few months ago.

“They got no grass. They got no hay. They got no water,” says Lloyd King, a cattle transporter.

Mr Detring sells his silage to Joe Crawford, a cattleman with pastures across a dry creek bed from his field. Mr Crawford says his land normally grows 600 round hay bales; this year it was 300. Even with the silage he still does not know how he will feed his 100-strong herd.

“The sales barns are full,” he says. “They don’t have a choice.”

A similarly subdued mood enveloped last week’s annual Illinois meeting of pig farmers under contract to the Maschhoffs, a family-owned company that sells 4m pigs a year to slaughterhouse operators such as Cargill and JBS Swift.

When you’ve got a cost structure that is built around $5 corn and it goes to $8, there’s only one way to deal with that. It’s reduce supply and raise the price of hogs,” says Jason Logsdon, Maschhoff chief executive.

The cull is boosting supplies to slaughterhouses, pressuring prices in the short term.

. . .

Unlike grains, in which farmers can adjust to market signals every year, it can take cattle farmers years to rebuild herds after they have sold off breeding cows normally owned for a decade or more. Spared animals are having difficulty reproducing. “Bulls don’t breed in 105-degree weather,” says Matt Hardecke, who raises cattle in Steelville, Missouri.

The US, dominant in grain exports, has a smaller share of the international market for meats and in fact imports almost as much beef as it exports. Emerging market consumers with rising incomes are eating more animal protein fed domestically with US grain and soyabeans, propping up demand for crops from the corn belt.

Another key consumer of corn once seen as voracious – the US ethanol industry – has begun to retreat. Production fell to the lowest level since late 2009 despite a government mandate requiring 13bn gallons to be blended with motor fuel.

The animal feed industry is nonetheless pressuring Washington to declare an emergency suspension. “We’re not anti-ethanol. We’re pro-ethanol. But let the market dictate usage of ethanol. There is no mandate that any retailer sellXpounds of pork,” says Mr Logsdon.

Ethanol policy is one of several sensitive political dimensions to the drought in an election year. The Obama administration has declared 1,200 counties drought disaster areas, making farmers eligible for low-interest loans. The administration has allowed farmers to mow hay or graze cattle on some pastures that were set aside for conservation.

The drought has also struck in the middle of debates on the US Farm Bill, legislation that sets out farm policies and subsidies. The Senate had eliminated a $5bn annual subsidy, which is awarded to farmers regardless of whether they planted a crop, but the House has proposed a one-year extension.

Corn and soyabean prices hovered at record levels this week as rains sprinkled parts of the Midwest. Precipitation may be a blessing for soyabeans but for many corn fields rain will be worthless. The extreme heat made it nearly impossible for blowing pollen to fill ears.

“It didn’t stand a chance,” Mr Detring says.

Falling yields and the climate change question

On the Interstate 55 highway, south of Cape Girardeau, Missouri, a billboard towers above the speeding traffic. 300 bushel corn?” it asks.

The advertisement entices farmers with the prospect of producing 300 bushels per acre. This would be an exceptionally bountiful harvest in most of the country, even with perfect weather. With this year’s drought, it seems like a cruel joke.

Rising yields have played a critical part in America’s agricultural success storyproof, it would seem, of the benefits of using fertiliser, expensive machinery and new seed varieties. But recent weather patterns have brought unexpected plot twists.

Since 1970, average US corn yields have doubled, enabling the country to feed a growing world population with a mounting hunger for meat as well as its own burgeoning ethanol industry.

But yields peaked at 164.7 bushels an acre in 2009. This year, some analysts are eyeing a 122 bushel harvest, a level last reported in the 1990s. Lower yields in the US have raised prices and led to aggressive planting by rivals in countries such as Brazil and Ukraine.

Seedmakers and many analysts say that, despite the annual volatility, the upward trend in yields will continue. US-based Monsanto, one of the world’s biggest seedmakers, aims to double yields from year 2000 levels by 2030. “This would get us to the 200s, even 300, for corn in the US. We’re still committed to that goal,” says Monsanto’s David Fischhoff.

After an unusually warm and dry spring, US farmers this year planted earlier than usual in many places. They hoped this would enable stalks to survive the sensitive pollination phase before the worst of the summer heat. But the heat also came early and proved so intense that many plants did not even form kernels.

It might yet be too early to link the drought to the longer-term warming trend in the world’s climate. In much of the corn belt, spring and early summer precipitation has increased in recent decades. “Drought is a natural phenomenon,” says Brian Fuchs of the National Drought Mitigation Center.

Still, in a paper published this month, US Department of Agriculture economists write: “Agricultural production has always been affected by variability in weather and US farmers have adopted production practices and strategies appropriate to their local climate. The weather that shapes the structure of US agricultural production, however, is changing along with world climatic conditions.”

Copyright The Financial Times Limited 2012.