In all aspects of economic activity money is the final measurement of economic activity. When the money is broken, and governments intervene at every turn, moral hazard corrupts RISK/REWARD relationships and we are now reaping what we have sewn for the past 50 years.
1.)Canadian Seaway Strike/UAW Strike
The St. Lawrence Seaway has shut down as workers walked off the job Sunday.
UAW workers have been on strike at various locations across the country.
We are going to see negotiations for wages across the country heat up. Whether it is the SEAWAY strike or the UAW strike, there will be issues that will cause shortages …count on it. Items in inventory are valuable if you need them when you need them. A bird in the hand is worth two in the bush!
The UAW and the Seaway Strike is not about a raise in REAL wages it is about not taking a pay cut. It appears that Ford has agreed to some pay increases that will have implication across the industry and will move wages across all industries.
In 2008 the average tenured union auto worker was making $28/hour. If you just use the CPI adjustment that equates to a $41/hour today. The last three years REAL wages have dropped nearly 5% on average. If your pay has not been adjusted then you have taken a 15% pay cut. Fairly clear to me why they are striking.
Sound Money Take:
Let the wage market sort out the cost of labor vs the supply. If GM pays to much they go bankrupt. But remember if the UAW asks for too much they ultimately lose their jobs when bankruptcy hits. See how actions have consequences when the government stays out of it.
Broken Money take:
I think the UAW realizes that the government is going to bail out their industry if these higher wages cause hardship for the auto industry. They are not going to make the same concessions they made in 2008.
Conclusion:
The moral hazard of bailing out bad behavior in 2008 is going to cost the corporations in 2023. In turn, that will cause more money to be injected into industry through subsidies and tariff protection…..who pays? We all do…….privatize profits and socialize loss.
Which brings me to Argentina….
2.) Argentinian Election Results
There are two certainties in Argentine politics. One is that polls cannot be trusted. The other is that predictions of the demise of Peronism, the populist movement that has dominated politics for seven decades, always prove premature. In the first round of Argentina’s presidential election on October 22nd, both truths were borne out.-The Economist
What is “Peronism”? I had not heard of the term myself until studying the Argentina monetary system. Peronism is often described as a "third way" ideology, standing apart from traditional left-wing and right-wing ideologies. It incorporates elements of both socialism and nationalism, making it a unique and distinctive political movement. In the USA it would be union of AOC and Donald Trump running things.
WHO CARES?
I believe we are going to continue to see higher than normal inflation for the coming decade. It would be good to learn from farmers who have experience with extreme inflation.
Argentina is known for their “money printer go brrrr”….they have had 4 defaults (read bankruptcy) since 1982 that were usually accompanied with high (hyper)inflation. Currently they are experiencing over 100% annualized inflation rates. Imagine losing 10% of your money monthly!!
My guess is you will get CREATIVE!!
What are the main strategies farmers in Argentina do to hedge against hyper-inflation/currency debasement?
1.) Hold grain in storage to protect the purchasing power of their wealth until the following years crop inputs are ready for purchase.
2.) Convert inflationary currency to stable currency via mobile banking apps (read crypto currency, euro dollar, or USD market).
3.) Hold gold/silver/land/art/inventory inputs.
4.) Indexing contracts(think inflation adjusted forward contracts)
3.) UKRAINE WAR/ ISRAEL WAR
The market seems to shrug off any new news out of Ukraine and now Israel/Palestine. I think the market has become NUMB to the constant drone and missile strikes.
The market is focused on supply and without a major shock to supply price of ag commodities continue to drift lower.
I did come across an interesting note on exports out of Ukraine. The market has developed nontraditional routes to get grain out……The Danube River runs from western Ukraine through Romania, Serbia, Hungary, Slovakia, Austria, and Germany. The name of the river changes along the way and so to must the flow?? The Danube is connected and navigable to The Main River via the Ludwigskanal and then The Rhine River before it empties into the North Sea via The Waal River.
This is a long journey of 1500 miles as the crow flies, for comparison, the Mississippi river is 1300 miles as the crow flies from Louisiana to northern Minnesota(google earth is amazing).
I am guessing that every country will take its pound of flesh(tax) along the way. But, if it is the only route that you are not facing drone and missile strikes…..it may be worth it?
I do not think the majority or any of the grain will even make it all the way, but the point here is the market will find a way.
Where is the FREE MARKET?
I asked a question in the last update if there is a truly “free market” left in the world?……I did not get any good responses. So that begs the question: Is the truest form of capitalism in decline?
Carl Marx had a saying that “capitalism is socialism a few steps back”!
Time will tell….but if we continue to bailout every blip in the financial system and protect every industry that writes a political donation check, then the answers to both questions above are clear.
Creative destruction is the act of allowing markets to clear without outside interference. It can be painful, but it is productive in that un-economical decisions cause monetary pain and therefore changes behavior to productive endeavors.
WE HAVE TWO PATHS
1.) Take our medicine….
Or
2.) Bail everyone out and kick the can down the road……
A while back I wrote about how high inflation and a low interest rate was the plan for the Federal Reserve Bank (FED). This allows prices to rise and the GDP to grow vs the DEBT. The plan was to inflate the debt away….or in layman’s terms…Just print it!
Do this trick for a decade and presto!.....you reduce your DEBT/GDP ratio back to manageable levels. Bondholders and Cash holders take the loss and life marches on.
The problem with that plan was that as inflation was sensed by the population (they complained…the nerve of some people!) so the politicians got involved and all but ordered the FED to raise rates to fight inflation…all the FED had to do was stay out of it…let inflation run a bit. Pain…yes, there was going to be alot of it!! As rates were raised rates the value of bonds held by the banks went down and created BIG loses(we can’t have that!!). All the FED had to do was stay out of it…let some banks fail. As rates on the 10 year shot thru 7 or 8 percent all the FED had to do was stay out of it and let bond holders take the loss.
As oil prices go thru $150/barrel all the FED would have to do is, stay out of it, and not let the politicians release the SPR. This would have allowed a “free market signal” to invest in oil production….but instead the market got a false signal of abundant supply from the SPR(some now calling it the Strategic Political Reserve 😊) We have still not felt the consequences of that move….talk to me when oil hits $200/barrel to determine if this was a good move.
We just cannot help ourselves from fixing things…..the problem is we can only see to the next election.
Side note on the Bond market…….US Treasuries are bonds. They are supposedly the deepest and most liquid asset class in the world and are also considered by most to be the safest investment. What we are currently witnessing in the bond market is historic.
The index that tracks long term bonds(the safe ones) is down more than BITCOIN from the highs!! The volatility in US Bonds is near an all-time high. And recently, even more erratic than gold(see chart below).
WHY?
Refer to what farmers in Argentina hold when going thru high inflation.(hint: it’s not government bonds!). So as the USA prints its way to prosperity, the world loses confidence in the value of the dollar and chooses to hold “hard assets” that are sensitive to inflation. In the simplest terms: SELL BONDS…BUY GOLD/SILVER/LAND…ETC(or pick your commodity). As I have stated before the natural course of a farmers business mostly protects him/her from inflation.
It is political suicide to actually fix the problem(cut spending or increase taxes). It is impossible for politicians not to protect their donors of today and therefore sell the future generations down the river.
We are already seeing this play out.
BANK RUN, OIL RUN, INTEREST RUN, EVERYTHING RUN!
As soon as the FED raised interest rates to around 4% we had a bank run(they called it a “liquidity event”😊). In March of 2023 Silicon Valley Bank, First Republic Bank, and Signature Bank all had massive outflows and could not pay depositors. The treasury(think FDIC no limit) stepped in to guarantee ALL depositors regardless of balance and allowed all banks that were sitting on losses in their bond portfolio to pledge those bonds with the FED as collateral for a loan at 100% value(see BTFP or Bank Term Funding Program also known as QE infinity). We just can’t keep our fingers out of it!!
Just tell me where to sign up for private profits and public loss’ and I will go 100X leverage and close my eyes! Hello Moral Hazard my old Friend!
As inflation perked up we saw oil prices climbing and we all know you can’t have that going into the midterms!! So let the SPR flow!
As interest rates moved up the stock market started roll over…..so what do we do……IRONICALLY….increase spending on with the Inflation Reduction Act!
You just cant make this stuff up!!
We can’t keep our hands out of it and let the free market clear the bad decisions of investors/donors/ or anyone really.
Everyone does NOT get a trophy in the end!!
The government has moved from being a parasite on private business to being a predator of private business.
Eventually someone must take a loss.
The government spends 2 trillion a year more that it takes in!
….…its truly insane.
Best Regards,
John