Thursday, February 17, 2011

Why Rise Up Now?

The Turmoil Continues

By Joel Bowman
Reporting from Buenos Aires, Argentina

Bernanke Distances Himself from Rising Food Prices

Is the world finally cracking up? It certainly seems least in that fiery patch of land claimed by the world's three major monotheistic religions. This is serious stuff. Are you paying attention, Fellow Reckoner? Are you looking at the situation closely? In any case, here's a freebie:

"Warning: Riots may be closer than they appear."

Every day we sit down at the computer to read stories of chaos, government overthrow and "anarchy" (as incorrectly defined by the news media) breaking out across the Middle East and North Africa (MENA) region. Here are a few headlines the Associated Press led with this morning:

"Egypt: Death toll put at 365 as strikes continue..."

"Anti-government protests spread to Libya..."

"Thousands of police confront protesters in Yemen..."

"Bahrain protesters urge more pressure..."

What are these people so angry about? So they're oppressed, under the thumb of the state and barely able to earn enough to feed themselves. But so what? Tunisia's ousted thug, Ben Ali, held sway over his countrymen for some twenty-three years before finally being given the proverbial boot. In Egypt, the poor, unwashed masses endured three decades of Hosni Mubarak's disastrous policies. In fact - and perhaps not coincidentally - Egypt was the birthplace of the state. A dubious accolade, indeed. For 6,000 years they've suffered the experiment of state-sponsored aggression. So why rise up now? What makes 2011 so special?

Well, for one thing, it's getting more and more expensive to live from hand to mouth, as the overwhelming majorities in these countries do. More than 40% of the Egyptian people live on $2 per day or less. A whopping 70% rely on food subsidies and handouts. A few percent increase in the price of milk and honey may not break the bank for the average American or European (at least, not yet)...but for those living in Egypt and her surrounding states, it's the difference between eating and going hungry. These people, it may fairly be said, are quite literally starving for change.

"Global food prices are rising to dangerous levels and threaten tens of millions of poor people," World Bank chief Robert Zoellick announced yesterday. "It's poor people who are now facing incredible pressure to feed themselves and their families."

Chimes Addison in today's edition of The 5-Minute Forecast, "The World Bank's latest data on food prices reveals an overall 15% increase from October through January. Its index now sits just 3% below the 2008 record, although a separate index maintained by the UN's Food and Agriculture Organization has already surpassed 2008 levels."

According to the World Bank's own data, global wheat prices have doubled between June and January. The price of corn - which is used to feed the cattle, hogs and chickens that populate the meat shelves at your local grocery store - has surged 73% in the same period. Prices for sugar and edible oils have also risen "sharply," the bank said.

"Zoellick acknowledges rising food prices were 'an aggravating factor' behind the downfall of dictators in Egypt and Tunisia," writes Addison.

But the story doesn't stop there. Not even close. And here comes our second free tip of the day:

"Warning: Inflation may be closer than it appears."

In fact, according to some measures, it may be so close it's already here.

Back in the good ol' US of A, continues Addison, "Wholesale prices jumped 0.8% in January, according to the Bureau of Labor Statistics. The producer price index has now jumped 3% over the last four months. And no, that's not an annualized figure.

"Note that the PPI headline number is for 'finished goods' - stuff that's ready to be sold direct to consumers. In the category of 'crude goods,' the figures are far worse - up 3.3% in January, and up a staggering 15.8% over the last four months."

For his part, the man printing all the money chasing these commodities, Fed Chairman Ben Bernanke, flatly denies any wrongdoing. The trillions of dollars he has injected into the world's economy have nothing to do with the escalating price of commodities, he contends; commodities coincidentally priced in those very same dollars. Instead, Bernanke blames the "two-speed recovery" - where emerging markets are, shall we say, "out-recovering" developed economies - and a failure of these emerging markets to tackle their own inflation.

To blame the increase in dollar supply for the soaring prices of items measured in dollars is "entirely unfair," complained Bernanke. Again, are you listening to all this, Fellow Reckoner? Are you paying attention?

We wonder how long it will be before we wake to read news of uprisings and riots at the source of the world's central fiat currency supply. Can't be long now...

In today's essay, guest columnist and eloquent critic of the Federal Reserve, Fred Sheehan, lends us his thoughts on the real price we pay for our central banks. Please enjoy...

The Daily Reckoning Presents

"We do not now have a problem.... Inflation made here in the US is very, very low"
- Federal Reserve Chairman Ben S. Bernanke, February 10, 2011

When inflation is rising, it is necessary to take matters into ones' own hands, or, get crushed. Those who remain whole during inflationary periods act early.

What follows are summaries of recent quarterly earnings reports. Most of these companies have headquarters in the United States, although they buy and sell worldwide. The key take-away is that inflation is a major burden.

As such, the key question investors must ask themselves is, "How imminent and pervasive is the threat of resurgent inflation." Bernanke says inflation is "very, very low." Corporate America begs to differ.

Numerous quarterly reports from large multi-national companies indicate very clearly that inflationary pressures are building. Here's a representative sample:

DuPont & Co. - Fourth quarter sales rose 15%; net profits fell 15%. "DuPont forecast raw-material and freight costs to be some 4% to 5% higher this year than last, moderating from the 6% rise seen in 2010. [Executives] were confident they would be able to pass these on to end users. Ethane, chlorine, solvents, and pigments were seen as the key areas of cost pressure."

Procter & Gamble - Sales rose 2%; net profits fell 25.5%. "P&G, which sells everything from Tide detergent to Olay skin-care products, said its commodities bill will cost $1 billion for the fiscal year that ends in June, more than double what it had expected."

Colgate-Palmolive - "Colgate's profit fell [in the fourth quarter] 1%...squeezed by higher commodity costs and money paid to promote its products."

3M Company - Fourth quarter sales rose 10%; net profit fell 0.7%. "Margins declined under rising material costs and weakening sales in the company's health care and graphics businesses... 3M said it intends to recover higher material expenses through price increases, which include Scotch tape, Post-It notes, furnace filters, sand paper, automotive components, and thousands of other household and industrial items."

Pepsico - [Pepsi-Cola, Frito-Lay, Quaker, Tropicana, Gatorade] - Full- year reported earnings per share increased 4%; fourth quarter earnings per share declined 6%. CEO Nooyi was pleased with the results, but acknowledged she is "mindful of three realities: (1) A weak consumer landscape given the poor macroeconomic picture, especially the high level of unemployment in key developed markets; (2) High levels of cost inflation for the coming year, driven by broad and pronounced commodity inflation; and, (3) A potentially difficult competitive pricing environment, particularly in beverages." Hugh Johnson, Pepsi's CFO, talked about cost inflation of 8% to 9.5%: "That type of inflation has a pretty strong impact."

Goodyear - [tires, blimps] Net fourth quarter sales rose 14%; with a $177 million fourth quarter loss. "Raw material prices costs are likely to rise 25% to 30% in the first quarter of 2011 and rubber prices have risen 40% since October [2010]."

Whirlpool - [Maytag, Kitchen Aid] Fourth quarter sales fell 1%; profits fell 61%. It is "seeking to offset cost increases for such items as steel, copper and plastics..."

Electrolux - [refrigerators, washers] "Operating income in North America and Europe declined as the company was hit by higher costs for raw materials and lower sales prices." "The costs for our most important raw materials continue to increase," Electrolux CEO Mr. McLoughlin, said in a statement. "In addition to increased costs for steel, we also see considerable increases in resins (used in plastics) and base metals."

In light of these firsthand accounts from the business world, Bernanke's QE2 campaign is succeeding all too well. Inflation is on the upswing, just as he planned. But once this genie emerges from the bottle, there's no telling what will happen next. Before long, the genie makes the rules; not the Federal Reserve Chairman. And often, the rules the genie makes are ones that punish the prudent and reward the reckless.

"Inflation is a means by which the strong can more effectively exploit the weak," Federal Reserve Governor Henry C. Wallich, declared in a 1978 commencement address at Fordham University. "[Inflation] introduces an element of deceit into our economic dealings... [T]he increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government."

Wallich went on to tell the Fordham graduating class of 1978 that, during inflationary periods, contracts are no longer made to "be kept in terms of constant values." By definition, one party to the contract understands this reality better than the other. The one who understands that tomorrow's values will be much lower than today's values is the one who benefits.

In other words, as inflationary pressures build, the forward-looking individual will want to prepare in advance. But that means the forward- looking individual will also want to ignore all the assurances from Washington and Wall Street that "everything is under control." The latest testimony from the titans of global commerce demonstrates very clearly that Bernanke's "very, very low" inflation has already become uncomfortably high.

Prepare accordingly...or you might get crushed.


Frederick J. Sheehan,
for The Daily Reckoning

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