Redstate

I'd been wondering what the heck you guys were really up to, out there in Chicago, Minneapolis and Kansas City.

What's the weather telling you? And what about the stories we're hearing about farmers planting beans instead of corn this spring?

Oh, and just to clarify: a lot of the alpha males on Wall St. these days are (in a biological sense) women. They're just as predatory and rapacious as the guys are. ;-)

I concur with the revision to my "alpha-male" statement. Many of the most steely-balled (can I say that...?) businesspeople I've ever encountered are women (see Pat Woertz of ADM, or Carly Fiorina at her best for HP). In a sense, they frighten me more than men, because if my marriage and childhood are any indication, most women are smarter than me.

As to your questions regarding '08 planting intentions, the anecdotal evidence filtering in suggests 90 million (down 3 mil from '07) planted to corn, 70 million to beans (up 7 mil) and wheat collectively going anywhere from 48-55 mil acres, with range being wholly dependent on the depth of the tumble in wheat prices of late (still, $9 wheat looks nice, especially with soybean rust a major concern this year, and wheat rust a distant concern at the moment).

Weather is an issue, as many guys will be getting to fields a week later than normal in a lot of the Midwest. Even in the South, where planting should have begun by now, some guys have not even applied their spring nitrogen, indicating another week or two before planting commences there. Strange times, what with global warming supposedly going to allow producers to start planting in January...guess we'll have to move the goalposts again.

I think some of it is fertilizer costs. We aren't dirt farmers, but fertilizer this year is costing us $538.50/ton. That's about triple what it used to be, as it has been driven up enormously by energy costs.

Corn is an extremely heavy feeder, beans - not so much.

I meant what I said and I said what I meant. An elephant's faithful 100 percent.

They've been forced to start buying up palm oil from Indonesia to deal with the shortage (and higher prices) of soy oil.

I agree with that assessment. Fertilizer costs are horrendous right now, and the scuttlebutt is that this is at least a 3-5 year trend, driven significantly by increased crop production in Asia, and a lack of real infrastructure investment throughout the world. Supply shortfalls are becoming rampant, and the only producers I'm aware of that are having no issues with their NPK this spring are pre-payers from last summer. I'm hearing of regional spot shortages in urea and anhydrous, and prices are up 30% in urea, 150% for potash and over 200% for DAP since January 2007. That's brutal. There's a real danger of these higher commodity prices accelerating industry consolidation and farm abandonment, rather than delaying it, like I had initially thought.

Itrytobenice, what are the application rates p/acre in your area for corn, on what soil types? That is, if you don't mind my asking...

moved a few dollars because someone released a report that predicted some weather events a few months into the future- hurricanes, I think. This wasn't actual weather, mind you, but a take on future weather.

I wonder if a market could be established for climate futures?

Oh, wait, Al Gore cornered that one. Never mind.

Ive read that buying oil doesnt require the same ammount down as buying stocks.

I hope these people continue to lose their shorts.

One thing is for certain, though, the oil market is not responding very well to fundamentals. Instead, its mostly based on speculators. You could call it the socialization of risk.

In any case, what these people have done - ruining people's lives by pushing oil based solely on a guess and nothing to do with supply and demand - is reprehensible. I would hope that Congress might do something like increase the ammount down to "invest" in such a commodity because of the economic impact.

there'd be a failure in the home loan market? We've been through it all before, though on a geographically limited scale. During the late-seventies, early eighties, the housing market in all the oil patch states was easily as crazy as what we were seeing in the most superheated markets over the last few years. When the price of oil crashed, so did those economies, starting with houses. By '86 - '87, people were just driving by the bank and throwing the house keys at it. The joke was, "What's the difference between a condo and gonnorea? You can get rid of gonnorea." That bust took one Helluva lot of banks with it. Here in Alaska, only the two old-time, and very conservative, banks survived relatively unscathed. (1st National of Anchorage was/is the archtype of the bank that won't loan you money unless you can demonstrate you don't need it.) Several which came here or were founded on the boom folded completely. The bust in the Oil Patch was a major piece of the S&L bust. How could people forget that? Or do things only happen if they happen in NYC?

In Vino Veritas

There are a couple of can't-miss leading indicators for the collapse of the real estate market.

The easiest one is found by merely noticing the increase in the number of books produced and seminars conducted on how to make a fortune in real estate. When you cannot pick up a publication without seeing full page ads for these kinds of things, you know that the crash is coming. In the '70s and '80s it was about a two year lead. It's shorter nowadays. About 20 months ago I heard some radio commercials for a seminar conducted by Donald Trump on real estate investing. I figured that if even The Donald is out hawking these things, collapse must be imminent.

Another one is just simply doing a price trend. When the units are doubling, or even tripling in price, in a couple of years, it does not take a professional to suspect that this is not sustainable, and that it is probably not a good time to get into the market despite the hype (see above).

I am not particularly sympathetic to real estate investors who got caught with their pants down. This goes for homeowners who consciously bought above their capabilities, gambling that the market would play along. Among the fundamental laws of survival is that you do not befoul your own nest.

...underperform your peers than it is to lose money.

I think there is huge moral hazard built into the compensation structure of financial institutions.

Without disclosing my sources, I have some good information that the Wall Street houses did just fine and dandy last year, while their shareholders took it on the chin. (Disclaimer: I either am or have been one of those shareholders during the past year.)

I'd really like to see what would happen if the i-banking business went back to private partnerships. (Unfortunately that might not be possible without reinstating the Glass-Steagall Act.)

And I would be in favor of eliminating the "two-and-twenty" compensation structure for hedge funds, private equity and venture capital.

But wait, blackhedd! Isn't that anti-private enterprise and anti-free markets?

Yes, certainly. But here's the other side of the coin: Maybe half of Wall Street's earnings come from proprietary trading rather than underwriting risk. All of that trading acts like a tax on the broader economy, and we might do well to eliminate it.

Oh boy, am I gonna catch h*ll from my mother for saying that. Not to mention all the rest of you.

Don't worry, Blackie - you won't catch any heck from me on this one! :-)

I don't know what mechanisms we can use, but I'm more than a little sick of the finance world being so detached from reality and basically being a game of just playing against each other - rather than building real value.

Anything that can get us to where we should be will be helpful. By "where we should be," I mean the use of finance to enable new ideas, new technologies, new growth, and so forth - things that really matter to the greater-sized world - and to do so in a way that is fully open (to participants) and honest.

A good start would be to see the finance world (on both coasts) putting it's serial scr*w-ups out to pasture. I'm sick of running into the same people who make one mess after another but always seem to get another turn.

I'll stop there for now.

Oh, BTW, did you get my note a couple days ago about Ukraine?

Markets, being human institutions, are imperfect. And some are more imperfect than others.

There are certain free market ideologues who do not understand this. It's like saying St Francis of Assisi and the Borgia popes are both holy because they took religious vows.

One market that seems relatively free is the lettuce market! Lots of buyers and sellers, good information availability and freedom of action. (No one has to buy or sell lettuce.)

On the other end of the scale is the oil market. Prices are set by a cartel and then amplified through titanic speculation in the commodities markets, which dictate prices to buyers who have to buy. Unlike the lettuce market, the oil market is ripe for manipulation.

Food for thought!

Your posts have been well-written and insightful, and the comments that follow are nearly always educational. These have become must-reads for me.

I will just get out of the way now and let more informed people converse.

I'm interpreting the break in commodities as the unwinding of a trade that's been on for a few weeks now, rather than the start of a new trend. In other words, there's an expectation that rate cuts have either stopped or slowed.

I haven't talked to anyone that's expecting a deflation. The high TED spread (interesting you bring that one up- Krugman has been howling about it for days) is really a sign that the credit crunch isn't unfreezing. (As I've said, that's really bad.)

[For other readers: the "TED spread" (Trasury-Eurodollar) is the difference between three-month dollar-LIBOR and the three-month US Treasury bill rate. Normally a few basis points, it's now well over 100.]

I was actually thinking about deflation this morning. I'm not an economist so I'm at a disadvantage here, but I was trying to decide if a drastic fall in asset values (home prices) has the same effect on the economy as monetary deflation. Your thoughts?

I read somewhere this morning that Ben Bernanke is of the belief that the financial crisis will end when the housing market stabilizes. I'm not sure of that, because I think the housing collapse exposed a deep flaw in global credit markets that has nothing directly to do with housing: the hunger for high risk-adjusted yields ("alpha") together with some innovative financial engineering caused a lot of markets to get overliquified. Too much money chasing too few good investments. That applies systemically. And the collapse will leave a mark. We've already swung way too far in the other direction, and that may continue for a very long time.

That's what I mean when I use the deliberately provocative phrase "Great Depression II."

for a while now over on his blog. The fear is that the unwinding of leverage coupled with a falling housing market and consumer tightening will effectively lead to deflation in the relative near term. It all has to do with belief in the Kontradeiff(sp?) cycle.

Or is it just a correction of the previous speculative inflation?

I wonder what a good benchmark year might be - 2004? If prices go below that benchmark, then maybe some true deflation is in play?

On the financial engineering front, I have some printing samples which include a Greenpoint Mortgage Funding Trust official statement. It has fourteen tranches- with various levels of credit ratings, collateral protection and subordination. Being my skeptical self, I have reservations about whether traders and hedge funds really read the documents (this o/s is over 200 pages) to understand what they're holding.

I've spent a lot of time with economists, but I'm not myself properly trained, so consider me more of poser or enthusiast.

I think this crisis is bringing to wide attention - not exposing for the first time, because people have been talking about it for years - aspects of the new securitized financial world that previously hadn't been given proper thought. This particular crisis may resolve when housing gets to its bottom, but we will then just proceed to the next one unless we consider how to regulate and function in a securitized world.

The Fed and the SEC and the other regulatory agencies were all designed for a different world - one where banks held the loans they made, where the securities markets consisted of plain vanilla stocks and bonds, where futures and options trading was limited to ag commodities and raw materials. That's not our world. We have a vast derivative superstructure erected over the "real" assets, and this superstructure is remarkably hidden from regulation or meaningful disclosure by its nature. This time, the crisis started with mortgages; next time, it could be something totally different; but it will keep happening until we figure out a way for regulators to figure out what role they play in this new world besides preventing failure of those too big or too entangled to be allowed to fail.

As for the impact of a fall in asset values - that's beyond me. It's clearly different from monetary deflation, but should affect both monetary deflation and the real economy. People who see their asset values tumble are more likely, I think, to hold on to the liquid assets they have (I know I am) and not loan them out or otherwise circulate them in a way that expands money supply. They are also less likely to buy stuff, thereby affecting the real economy.

As for rate cuts stopping, you want to stop them before you get to the point, like the Japanese did, where they have no ability to stimulate production. Some think we are about there. The rate cuts we had already hammered the dollar, which causes problems of its own, so you don't want to cut rates any more unless you get a real benefit.

...pointing out that Japan has an essentially dysfunctional banking system. Failure is culturally prohibited in Japan (if acknowledged, it creates an expectation that you'll commit seppuku), and this applies to banks too. Since they couldn't charge off all the toxic waste that got created when their real-estate bubbled popped, there was nothing to get their economy going again. Fifteen years later, it still hasn't.

Except for exports to China and North America. Which is why they're scared to death of the higher yen.

I don't disagree with your other points.

but the separate point remains that once they got to zero percent rates they had no bullets left to fire. We want to avoid getting to that boundary. Bernanke is well aware of that, and also has spent a lot of time thinking about what the fed can do when it can't cut rates - some of which it has already done in this crisis.

n/t

On Sunday, the Fed dropped the "discount rate" by 25 basis points (one-quarter of a percentage point), and on Tuesday they dropped the Fed funds rate by 75 points.

The discount rate is the rate at which the Fed lends money directly to financial institutions. The Fed funds rate, which is far more important, is the rate at which banks lend their reserves to each other on an overnight basis.

The Fed controls the discount rate directly. The Fed funds rate is controlled by the market, but the Fed intervenes in the market to push the rate close to its target.

You are the ultimate "black helicopter" cynic. You're not interested in helping Starbucks, you're not interested in helping GM, you're not interested in helping your local pizzeria. You're interested in how panicked the rest of the dumb bunnies will be.

My advice is to leave gold to the dumb bunnies and the Mr. Ts of the world.

Sorry, The A-Team Flashback rose unbidden from the murky depths of subconscious memory.

"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.

Leave the Gold to your necklaces and use your money to invest in actual businesses staffed and run by actual people. Putting your money into fixed assets like gold and other precious commodoties helps only the worst individuals in this world.

He's been highlighting every increase in Gold as though it actually meant something. Mostly because Matt Drudge is profiting from it. My advice is to let the man eat his gold.

Dropped about $100 in three days. Interesting stuff.

The opium stored in the National Repository at Fort Knox, KY has a higher street value than the Gold by a wide margin.

"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.

I've heard legends that they still have a couple hundred million ounces of gold left over from the early Seventies, lying around someplace. But no one knows for sure since it hasn't been seen (much less audited) since then.

Supposedly there's quite a stash of it in Europe as well. Bring a little bit of it to market, and gold wouldn't stay at $920 for long.

Too bad the stuff isn't useful as money.

of Afghan Heroin. I could be their SECTRES. I just need those keys to Ft. Knox.

"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.

back in the hyperinflation days in the '70s when the goldbug/black helicopter types decided it would be a really great thing to put all sorts of State pension and other investment money in gold. Lost our a** on the gold compounded by the fact that gold and oil went down preciptitously at the same time - and for the same reasons.

I still don't get investing in it and a lot of other assests whose increases aren't really an increase in actual value but in the value of the asset vs. the value of the dollar. I take to heart the lesson that the first thing Gen. Lee looked at whenever he got a US or British newspaper was the value of the US greenback, the paper money with which the US financed The War, vs. gold and the pound sterling and he did everything he could to "influence" that value. But then, I'm a Southern dirt-farming peasant at heart and really have no use for high-finance and grew up believing that "speculator" was a particularly dirty word.

In Vino Veritas

...explain to people what money really is.

The value of the dollar is ultimately based on US Treasury securities. The "monetary base" of the US totals about $800 billion, give or take, and that's about the size of the Federal Reserve's inventory of US Treasury debt.

So, ultimately, when you make an investment in any kind of an asset other than real property, what you're buying is someone else's promise to pay you back.

When the Fed wants to create money, all it takes is a few clicks on a (well-guarded) keyboard in the bowels of the New York Fed Bank building in lower Manhattan.

Need more people with an appreciation for earth.

back in the hyperinflation days in the '70s when the goldbug/black helicopter types decided it would be a really great thing to put all sorts of State pension and other investment money in gold. Lost our a** on the gold compounded by the fact that gold and oil went down preciptitously at the same time - and for the same reasons.

I still don't get investing in it and a lot of other assests whose increases aren't really an increase in actual value but in the value of the asset vs. the value of the dollar. I take to heart the lesson that the first thing Gen. Lee looked at whenever he got a US or British newspaper was the value of the US greenback, the paper money with which the US financed The War, vs. gold and the pound sterling and he did everything he could to "influence" that value. But then, I'm a Southern dirt-farming peasant at heart and really have no use for high-finance and grew up believing that "speculator" was a particularly dirty word.

In Vino Veritas