Notes From Underground

Friday’s unemployment report was worse than expected and to make matters worse June’s tepid numbers were revised downward. Prior to the U.S. release, we got news that Canada had negative job growth but that is not a terrible thing as the three previous Canadian numbers were very robust. The question facing all economic policy makers is whether or not the global economy is indeed slowing or merely treading water at very tepid rates of growth? All the news reports from the U.S. during the weekend reflected concern that the U.S. recovery was grinding to a halt and the Obama administration was searching for a new policy mix to stimulate the moribund jobs market.

The political rhetoric was hinting that a more robust fiscal plan was needed, especially in regards to the terrible budgetary problems of the individual states. The unemployment report showed that 71,000 private sector jobs were created but that number is fragile as many states are moving quickly to reduce head counts. Also, in an effort to attract attention the first lay offs are heavily weighted on education. Will the dire straits of the STATES get the FED to be “brothers in arms” and get some type of new stimulus program underway?

Many analysts are predicting that the interest earned from the huge amount of MBSs on the FED balance sheet will be directed at buying new long-term debt. We don’t know the answer, nor do we offer any advice about the most effective action. However, we do know that Ben Bernanke is worried about the onset of deflation. The question is not if the FED does another QE but rather when? Will the FOMC wait for the August 17 meeting on Freddie and Fannie or will they move now? The political party in power would most assuredly desire an immediate FED action as the election season is about to commence in full force.

As an aside, we don’t concur with the noise makers concerned about the rise in WHEAT prices causing inflation. One-off commodity price rises do not cause inflation but that is not to say we are not concerned about the world food supply. We have written and discussed for years that the Bush/Obama ethanol program was fraught with danger for it screws with the food chain to produce energy. We have always believed that it would take a drought or other supply disruption to cause severe damage to the global food chain, which is why the U.S. persistence to use corn rather than importing sugar-based ethanol from Brazil was/is a mistake of potential cataclysmic proportions.

The drought in Russia is real and is affecting more than wheat. Barley prices have more than doubled in the last six weeks. We also want to inform our readers that Russia is the world’s largest producer of OATS so we will watch that thinly traded grain for further proof of stress in the global food chain. Another problem for OATS is that Canada, the second largest producer, cut back its crop earlier this year as torrential rains in spring kept the crop from being planted. We will watch to see if the stress to global food crop sends the world’s food prices higher.

Tags: Canada, Fed, FOMC, MBS, oats, Obama, QE, states, U.S., unemployment, wheat

This entry was posted on August 8, 2010 at 9:48 pm and is filed under Commodities. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.