Main Street Media And The Fed

They Don't Understand Economics/Finance

When I traded the two products I traded were Eurodollars ($GE_F) and Lean Hogs ($HE_F). Trading Eurodollars gave me keen insight into interest rates and foreign exchange policy and actions. Trading Hogs gave me keen insight into the livestock business. Since I traded my own money, knowing the rudimentary parts of those businesses helped me make quick decisions on the floor.

You never want to be a schmuck because schmucks lose money.

Main Street Media is full of schmucks.

Main Street Media has been talking about “how the Federal Reserve” is fighting inflation by raising interest rates. The Fed has raised rates, and so have other responsible central banks around the world.

Rates were too low for too long and that caused asset classes to be mispriced as money chased higher yield by being invested into riskier asset classes.

But, inflation isn’t a function of where the Fed sets interest rates. It’s not like a puppet. You pull a string and it moves. You pull the puppet string and raise rates so miraculously, inflation goes away.

First, interest rates are just the “cost of money”. Higher rates mean higher costs so which makes money more valuable or increases its scarcity. Hence, higher rates will increase the value of the underlying currency that is pegged to the rate.

Second, inflation isn’t caused by low-interest rates.

Inflation is caused by a high rate of government spending.

Joe Biden and the Democrats have been spending money like it’s the end of the world. “You get a billion, you get a billion, you get a billion.”

All that spending forces the Fed to raise rates to create a positive economic incentive for them to come out of the economy and into fixed assets like bonds. It also increases demand for Fed open market actions like matched sales.

In a matched sale-purchase agreement (MSPA), the Federal Reserve sells government securities such as U.S. Treasury bonds to an institutional dealer or the central bank of another country with the contractual agreement to purchase the security back within a short period of time, usually less than two weeks. The security is bought back at the same price at which it was sold and decreases banking reserves during the term of the matched sale-purchase agreement.

Until the Federal government quits increasing its spending, we will have inflation. The interesting thing about interest rate hikes is it really doesn’t matter how high they go if the government continues to spend money at the rate it is spending.

The Main Stream Press took the wrong lessons from the debacle of the Carter Administration fixed by the Reagan Administration. It looked at Volcker’s interest rate hikes and saw it as a panacea. They didn’t want to give Reagan credit due to their hate of conservative Republicans.

If we look at the data, the inflationary spiral created by Jimmy Carter didn’t have it’s back broken by high-interest rates. Short-term rates were 20% in 1980. For context, after yesterday’s Fed action today it is 5.5%.

Nope, it was the tax cuts and cuts in government spending by Ronald Reagan that broke the back of inflation. When they cut not only personal and corporate taxes but also cut all taxes on investment and depreciation, inflation was tamed. The economy grew.

The Democrats and Joe Biden want to increase taxes on corporations, individuals, and on investments. That will slow the economy and stop inflation from being tamed.

That’s the point. The economy needs to grow at a percentage point or more over the inflation rate. Then people won’t worry. Right now, it’s way upside down. Inflation is increasing at double-digit percentages, and the economy is growing at far less than 1% if at all.

The incredibly named, “Inflation Reduction Act” won’t do anything to stop inflation and because it increases government spending and subsidies will increase inflationary pressure. Someone in the Biden Administration read Orwell’s “1984” or Ayn Rand’s “Atlas Shrugged” and saw the actions of the government in those books as a how-to manual.

Check out this chart published by the Wall Street Journal.

Grocery prices change from a year earlier

• Eggs 39.8%

• Butter 24.6

• Roasted coffee 18.7

• Milk 17.0

• Snacks 16.7

• Chicken 16.6

• Breakfast cereal 16.4

• Bread 16.2

• Rice, pasta, cornmeal 15.7

• Cookies 14.3

• Ice cream 14.0

• Beef and veal 2.5

• Fish and seafood 8.7

• All groceries 13.5

• All items 8.3

• Fresh fruits 8.3

• Pork 6.8

• Fresh vegetables 7.6

Note: As of August 2022.
Source: Labor Department
Jemal R. Brinson/THE WALL STREET JOURNAL

Right now, livestock farmers are culling their herds. We will see cheap beef prices in the short run, but by this time next year, they will skyrocket. Chicken farmers were culling their herds and demand for cheaper protein rose as inflation rose, hence the increase in the prices of eggs. Dairy farmers also had been culling herds, hence the increase in milk prices which will also find its way to butter and cheese.

Fertilizer costs are increasing rapidly due to both the war in Ukraine and Biden fossil fuel policies. Farmers are adjusting. They also had tough weather spring/summer this year so we will see lower crop yields. That will increase grain prices.

As an old hog trader, I used to keep track of slaughter numbers. Just so you know it takes:

• Chickens six to eight weeks to go from egg to market

• Hogs take six to six and a half months to go from piglet to market

• Cattle take thirty-two to forty-two months to go from calf to slaughter weight

The other unfortunate part of this whole equation is much of the farm economy and industry is centrally planned due to government agriculture policy and subsidies. Because of that, it is harder for the market to send price signals to producers and consumers. That will take it longer for things to work themselves out.

Best to cast a suspicious eye on the media and the Democrats.