Food Prices Through the Roof; But Government Says No Inflation

Food in the U.S. economy is now more expensive than ever before and the U.S. dollar can be blamed for it. The greenback has been declining in value against other world currencies (except the euro) for four years now, making prices of commodities more expensive.

In 2011, consumer spending (as a percentage of income) on food increased 5.4% from 2010. (Source: Bureau of Labor Statistics, September 25, 2012.) An even bigger portion of consumer income will go toward consumer spending on food this year as food prices continue to increase significantly.

Rising food prices have been blamed on the drought in the U.S. Midwest and a dry summer in Russia, the Ukraine, and Kazakhstan. (Source: The World Bank, August 30, 2012). In the second quarter of this fiscal year, corn production declined by $12.0 billion in the U.S. economy and farm inventories fell significantly. (Source: The Washington Post, September 27, 2012.)

From my point of view, the U.S. dollar is the culprit of higher food prices and a retrenchment of consumer spending on other goods.

The prices of commodities like corn and wheat in U.S. dollars have increased 18.5% and 39.5%, respectively, since the beginning of 2012. However, when measured in gold bullion, corn prices only rose 7.3% so far this year, and wheat prices have increased by 24.3%.

Both of these commodities, corn and wheat, have certainly seen more price appreciation than gold bullion itself, but the price increases are less, when measured in gold bullion as opposed to U.S. dollars.

The following charts show the prices of these two commodities in gold bullion since the beginning of this year.

corn spot price gold spot price chart

Chart courtesy of www.StockCharts.com

wheat spot price gold spot price chart

Chart courtesy of www.StockCharts.com

How does this all relate to consumer spending in the U.S. economy? As I have been harping on about in these pages, as food prices increase, consumer spending declines; consumers will have to spend more on food, shifting their spending over from other goods to food.

My point: rising food prices are going to take a toll on consumer spending. The falling U.S. dollar just makes it an even bigger issue. The Federal Reserve’s quantitative easing may have protected banks, but it may actually be killing consumer spending by devaluing the U.S. dollar as inflation is created.

Consumer spending, which accounts for 70.0% of the U.S. gross domestic product (GDP), has always been the heart and soul of the U.S. economy. Now consumer spending is stuck and may actually contract again. I really wonder how many people, aside from my readers, are prepared for an unexpected recession in 2013.

Michael’s Personal Notes:

It wasn’t too long ago when the Dow Theory flashed a sell signal.

To reiterate, the Dow Theory simply states that in an uptrend, or downtrend, two popular stock indices must follow each other. For example, if the Dow Jones Transportation Index moves downward, the Dow Jones Industrial Average must follow in a similar direction for the overall trend to be considered down.

In these pages, on September 26, 2012, I wrote that the Dow Theory turned bearish (see “Dow Theory Flashes Sell Signal”).

This earnings season, we have witnessed disappointing earnings from large multinational companies.

To add to the misery, other Dow Jones Industrial Average companies, such as Caterpillar Inc. (NYSE/CAT), General Electric Company (NYSE/GE), McDonalds Corporation (NYSE/MCD), and International Business Machines Corporation (NYSE/IBM), are raising questions about future expectation.

International Business Machines (IBM) saw its revenue decreased in the third quarter, saying the government and businesses are very carefully watching their spending. (Source: The Wall Street Journal, October 29, 2012.) Caterpillar and General Electric (GE) are also warning of softening demand for their products.

But before the Dow Jones Industrial Average companies started warning about earnings, the Dow Jones Transportation Index had already tanked.

Below is the chart of the Dow Jones Transportation Index. The index hasn’t achieved a lot in 2012.

dow jones transportation average stock chart

Chart courtesy of www.StockCharts.com

On the other hand, the Dow Jones Industrial Average has had a banner year, until recently.

dow jones industrial average stock chart

Chart courtesy of www.StockCharts.com

What does this all mean? Are the trends changing and are the markets reversing? Yes, I believe this is exactly what is happening. We are seeing a huge reversal in the direction of the Dow Jones Industrial Average; a “reversion to the mean” as they say.

If you follow the Dow Theory, the recent weakness in the Dow Jones Industrial Average, with the Dow Jones Transportation Index having deteriorated for months, shows a turning point in the markets.

I have been warning for weeks that the third-quarter earnings season would disappoint. Poor corporate earnings have been the catalyst for the weak performance of the Dow Jones Industrial Average. The right shoulder of a large head-and-shoulders pattern for the Dow Jones Industrial Average—very bearish for stocks—may now be complete.

Where the Market Stands; Where It’s Headed:

This week’s rut for the stock market has caused major technical damage for stocks. The bear market in stocks that started in March of 2009 may be just about over. I can just hear the cries for a fourth round of quantitative easing (QE4) starting.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in Profit Confidential, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.