Dealing with the argentine beef threat

Are Argentina's Cows Happy Eating Grain? - WSJ.com

BUENOS AIRES -- Argentina's fame as a home for happy cows wandering the lush pastures of the Pampas is being challenged as an increasing number of cattle are being crowded into feedlots for the last months of their lives before being served at the table.

While feedlots are common in the U.S., Canada and Europe, Argentina has built up a strong brand as the land of purely grass-fed steak, with flocks of tourists lauding the lean, flavorful steaks served up in Buenos Aires' ubiquitous steakhouses.

But the high price of croplands across the Pampas, higher relative profits for growing grains and government subsidies on feed designed to stimulate production is leading to a surge in the use of feedlots.

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Deflation Japanese style

FT Alphaville » Blog Archive » 8 Japanese deflation lessons…

8 Japanese deflation lessons…

Deflation is coming. Be prepared.

From Merrill Lynch today (emphasis ours) a very useful quick look at the new economic order - lessons from Japan:

1. Bonds are the ultimate inflation/deflation barometer; equities go up and (much more often) go down with bond yields in a period of deflation.

… bond yields and equities become positively correlated, watch the 10yr US Treasury.

2. Yen strengthened in the initial stages of Japan’s deflation (as is the US$ today, a -ve for EM); but in an extended period of deflation the currency becomes correlated and ultimately declines with financial sector stocks.

The Yen (read dollar) was a very strong currency during the first half of the crisis but then weakened in line with deflationary expectations and the BoJ’s ever more strident bailout actions (USD in this phase already?)
3. The equity market trading pattern after an inflationary boom and deflationary bust is emphatically sideways, a big, fat trading range.

See also “The Mega Bear Quartet” from Doug Short.

4. Deflation did not prevent +20% equity rallies every year in Japan; and every other year there were rallies in excess of 33%

5. The business cycle does not die and the inventory cycle in particular drives equity market inflection points within the big, fat trading range

topix v inventory - graphic by Merrill Lynch

6. “Best of Breed” stocks massively outperform a deflationary trading range (and once volatility subsides should do again in Asia & EM next year)

7. Small cap never comes back because small cap is a “price-taker” not a “pricemaker”; monopolistic companies with pricing power outperform, e.g. utilities

8. Deflation makes interest rate sensitive stocks such as banks become interest rate insensitive; sectors reliant on bank capital (e.g. construction in Japan) massively underperform; and the deflationary price action never dies until real estate prices and bank lending recover.

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Deflation vs High Inflation, the new debate

It seems that the only silver bullet left to fight deflation will be high inflation. It looks as it is going to be a very very difficult pill to swallow.





Printing presses work overtime to save economy - Times Online

An increasing number of economists are concerned that keeping the printing presses on overtime might trigger the sort of double-digit inflation and 20% interest rates that Jimmy Carter willed to Ronald Reagan. Paul Volcker, chairman of the Federal Reserve Board at that time, and now the head of Obama’s new Economic Recovery Advisory Board, undoubtedly remembers the pain inflicted by the inflation he had to wring out of the economy in the 1980s.

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Hard Facts about recoupling

Manufacturing Slows in China - WSJ.com

BEIJING -- Two key gauges of manufacturing in China fell to record lows in November, signaling the country's economic growth will likely slow further in coming months before getting a boost from the government's pro-growth policies.

The China Federation of Logistics and Purchasing said Monday its Purchasing Managers Index for China fell to the lowest level since the index started in 2005. The November PMI was 38.8, down from 44.6 in October.

CLSA Asia-Pacific Markets said its PMI plunged to the lowest level since the index started in 2004, registering 40.9 in November compared with 45.2 in October.

A PMI reading above 50.0 indicates the manufacturing economy is expanding. A reading below 50 indicates contraction.

The global slowdown, as well as the slump in the local property market, is hurting China's economy.

The export-order component of both PMIs plunged in November from October, falling 12.4 percentage points to 29.0 in the CFLP survey, and 16.1 percentage points to 28.2 in the CLSA survey.

"Export orders will weaken further and we expect further cuts in production and employment," said Eric Fishwick, head of economic research at CLSA.

Citing the global downturn, the slowdown in Chinese manufacturing and weakening domestic demand, J.P. Morgan economists Monday cut their forecasts for China's economic growth to 7.7% in the fourth quarter from 8.2%, and to 9.2% for all of 2008 from 9.4%. They predict growth will rebound in the second half next year because of policy measures, bringing 2009 growth to 8.0%, just off their previous forecast of 8.1%.

Reflecting Beijing's shift in focus to growth and away from inflation, the country's economic planning agency said Monday it has removed price controls on certain foods, such as processed grain products, edible vegetable oil and meat.

In January, when inflationary pressures were on the rise, the government required large producers of such foodstuffs to seek government approval before raising prices.

The PMI for Hong Kong, released Monday by NTC Economics Ltd., fell for a fifth consecutive month to 38.8 in November from 43.1 in October, partly because new orders from China fell at the steepest rate since 1998.
—Jackie Cheung in Hong Kong contributed to this article.

Write to Terence Poon at terence.poon@dowjones.com

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Mankiw on Keynes

Economic View - What Would Keynes Have Done? - NYTimes.com

According to Keynes, the root cause of economic downturns is insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.

The situation reverses, Keynesian theory says, only when some event or policy increases aggregate demand. The problem right now is that it is hard to see where that demand might come from.

The economy’s output of goods and services is traditionally divided into four components: consumption, investment, net exports and government purchases. Any expansion in demand has to come from one of these four. But in each case, strong forces are working to keep spending down.

In normal times, the Fed can bolster aggregate demand by reducing
interest rates. Lower interest rates encourage households and companies
to borrow and spend. They also bolster equity values and, by
encouraging international capital to look elsewhere, reduce the value
of the dollar in foreign-exchange markets. Spending on consumption,
investment and net exports all increase.

But these are not normal
times. The Fed has already cut the federal funds rate to 1 percent,
close to its lower bound of zero. Some fear that our central bank is
almost out of ammunition.

Fortunately, the Fed has a few secret
weapons. It can set a target for longer-term interest rates. It can
commit itself to keeping interest rates low for a sustained period.
Most important, it can try to manage expectations and assure markets
that it will do whatever it takes to avoid prolonged deflation. The Fed’s decision last week to start buying mortgage debt shows its willingness to act creatively.

It
is hard to say how successful monetary and fiscal policy will be in
avoiding a deep downturn. But as events unfold, you can be sure that
policymakers in the Fed and Treasury will be looking at them through a
Keynesian lens.

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Acceptance

Chinese President Cites Threat of Global Slowdown - NYTimes.com

SHANGHAI — President Hu Jintao of China warned at a government meeting over the weekend that the global financial crisis was threatening to undermine the country’s booming economy and that China could lose its competitive edge as trade growth slows.

The comments, which were published in the Communist Party’s newspaper, People’s Daily, offered few details but were the latest indication that Beijing was growing increasingly concerned about a sharp slowdown in the country’s growth.

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Squeeeeeeeeeeeeeeezzzze

Credit card industry may cut $2 trillion of lines: analyst | Reuters

(Reuters) - The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent."

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