All Kinds of Glass

Federal Milk

How Much Is This Recovery Going to Cost?

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It's crazy how many different things can be traded these days. There are futures contracts for just about everything, even the weather. In my days as a commodity broker, many moons ago, we even used to joke about putting on a tiger shrimp/powdered milk spread. (You could actually do this, were you so inclined. Or at least you could back then.)

But you know what would be really great to see? A futures contract that rises or falls with the reputation of central bankers.

Someone smart (like Robert Shiller) should create the "Federal Reserve Good Will Index," to measure popular sentiment toward the Chairman of the Fed. Then the Chicago Mercantile Exchange could set up a contract that traded off it.

I wish they had done this years ago. If they had, I would have shorted the daylights out of Alan Greenspan futures contracts, right about the time Vice Chairman Alan Blinder referred to him as "The greatest central banker who ever lived."

Talk about an unsustainable high! Since that day in 2005, Greenspan has gone from "Maestro" to "Master of Disaster" in the eyes of the world (for anyone keeping score that is).

And as for today, your editor would happily short the monetary witch doctor du jour, Federal Reserve Chairman Ben Bernanke, in large size too. What an excellent speculation that would be.

Bernanke 5,000

Like the Nasdaq of old in the days of the dot-com bubble, the Federal Reserve's reputation has soared high in recent months. As the global financial crisis fades from investor memory, belief has been widespread that Ben Bernanke saved the day… that both America and the world were saved from disaster by the Fed's decisive action and generous intervention.

Well. We'll see how kindly history treats that judgment.

Remember Nasdaq 5,000? That was the magic number (5,408.62 if you want to be precise). When the Naz kissed that magical 5K level in March of 2000, soaring ever higher on gossamer dot-com wings, it turned out to be the kiss of death. A brutal 75% decline followed.

Your editor predicts that, were the Fed Chairman's reputation linked to an index, we would soon be approaching "Bernanke 5,000," in keeping with the Nasdaq of old. And also in due time, we will see a similar bone-crushing decline.

Bernanke's reputation will take a brutal dive downward – and never fully recover – when it becomes clear, to even the most deaf, dumb and blind observer, that this recovery was purchased, via the Federal Reserve's funny money trillions, at far, far too high a cost.

Cost? What Cost?

Of course, right now we have a situation that could be considered amusing… or tragic… or both. Many market investors and commentators aren't even aware – so far – that this recovery even HAS a hidden cost.

All they see are the pretty economic data points creating an oh so pleasing medium uptrend. Rampant stimulus? Out-of-control fiat money creation? Pshaw. They think all this came about for free!

Take Maria "Money Honey" Bartiromo for example. Ms. Bartiromo has been a CNBC financial reporter since 1993. She has written books, hosted World Economic Forums, reported "live on the scene" in countless exchange floor experiences, and ridden in private jets with the Wall Street glitterati.

And yet, for all that, she seems absolutely clueless as to what is actually happening.

Sound too harsh? The evidence is caught on videotape. In a Yahoo Tech Ticker interview, which you can watch here, Bartiromo said the following:

"There's nothing wrong with a boom bust economy. What's wrong with a boom bust economy? Things are booming and then you get a bust and that opens the door for wealth creation."

Nothing wrong with a… the mind boggles. Nothing wrong with trillions of dollars in wealth and savings, vaporized overnight by a bunch of greedy banksters? Nothing wrong with America in financial turmoil? Nothing wrong with 20% unemployment and underemployment? Nothing wrong with American small business – the backbone of the country – gasping for air like caught fish flopping around in the bottom of the boat, while the main perpetrators of the crisis are rewarded with risk-free billions in new profits? Nothing wrong with trashing the rule of law and descending into financial oligarchy?

Pardon my French, but Ms. Bartiromo has no idea – none – what the hell is actually going on. As Bill Bonner once quipped in Financial Reckoning Day, she is like a squirrel watching a bank robbery. She and legions like her – who represent the financial establishment! – have zero grasp of Austrian economics, which warns very plainly that these "harmless" booms and busts, brought on by government massaging of the credit cycle, lead to outright fiscal disaster. Wealth creation? Try wealth DESTRUCTION, on a vast and epic scale.

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The CAT Example

The problem with the financial establishment – and it is only one of many – is a sort of willful myopia. These people put on their blinders and green eye shades and fixate with intensity on earnings and indicators and managed data points… all the things that they want to see. Anything that they don't want to see or hear, they ignore. "A man hears what he wants to hear and disregards the rest," as Simon & Garfunkel once sang.

Take the recent earnings report from Caterpillar (CAT:NYSE), a well-known maker of earth-moving equipment and other machinery. CAT reported an "improved outlook," to much praise and good cheer from investors – along with a sharp price gap higher – even as its revenue declined 11% year on year.

(And somehow an 11% top-line decline, off the miserable crisis conditions of Q1 09 no less, counts as improved? Hmm.) Worse still:

• CAT's machinery sales were down 1%

• North American machinery sales were down 15%

• Dealer inventories were half the previous year's levels

• Engine sales were down 28%

Gee, that all sounds terrible. So why were investors cheering – and buying? Because Asia profits were up 40%, leading to a modest profit where last year saw a loss. That happy circumstance drove everything. The bad news on overall revenue decline… machinery and engine sales decline… utter North American malaise… all ignored.

It gets even more amusing. Those save-the-day profits CAT picked up in Asia? For a company that sells earth-moving equipment, how much of that strength might be linked to the fact that China is in the midst of a white-hot real estate and construction bubble? (Hmm, you think?)

Not only did CAT look awful everywhere except in Asia – where China has been bankrolling nutty construction projects like mad – the company actually conditioned its positive outlook on the presence of continued stimulus!

As the WSJ reported, "[CAT] raised it[s] outlook for 2010, though revenue declined on continued weakness in developed economies, especially the U.S. and Europe. It cited concerns about central banks withdrawing stimulus too soon."

A Cost We Cannot Bear

So there you have it. Caterpillar, one of the world's premier industrial companies, shoots the moon on positive investor sentiment even as its business model clearly hinges on the kindness of central bankers.

"Please Mr. Bernanke, don't stop the flood of free money – it's all that's keeping our USA lines from collapsing. Please Beijing, don't stop building deserted shopping malls and empty skyscrapers and highways that no one will drive on. It's the only thing making us look good. Yet our outlook has "improved"… as long as you keep it coming."

The thing is, the torrential gusher of free money that has so buoyed us isn't actually "free," any more than the low-cost funds once happily borrowed by Greece were free.

The unprecedented stimulus – a "great macro liquidity experiment" the likes of which the world has never seen – comes with a horrible embedded cost… a potential price so high that the crisis "cure" could ultimately prove far worse than the disease.

The true cost may only be known, in fact, once the Federal Reserve has managed to inflate yet another money and credit bubble (to compliment the decade's previous two). And once this third bubble pops, we could be left with an even bigger financial crisis to clean up… and no room on the balance sheet to spare.

A country without reasonable means of paying off its debts is only as solvent as the market judges it to be. At some point in future, thanks to the Greece precedent, the market may judge the USA technically insolvent – i.e. unable to pay its debts except by way of printing press, which is a form of default in disguise.

That is the frightening reality that the Maria Bartiromos of the world miss, even as the overlooked danger signs mount.

For all that we have sacrificed, there will not be nearly enough "bang for our buck" in the end, when expensively purchased recovery on the whole runs headlong into the brick wall of sovereign debt crisis. The looming costs of the stimulative printing press "solution" could prove too much for the West to bear.

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About the Author

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle's Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice Litle uses his 15 years of experience in the stock market to make fast-paced options trading recommendations and give hands-on guidance to the readers of Macro Trader. He covers all markets, from bonds and stocks to commodities, currencies and options in an effort to find investors the best investment opportunities regardless of the current global market conditions. In Taipan Daily, he contributes articles filled with investment analysis and insights regarding the safest investment opportunities on the market. His unique background has served him well in the markets and allowed him to adapt to its changes, and share his experience and knowledge with his readers.

If You Think 'Organic' Food is 'Organic', Think Again

The last decade has witnessed an increased interest in things "organic" as more and more consumers seek out products that are healthy, ethical, and environmentally friendly. Nowhere is this more evident that in the food industry.

In fact, the organic food industry has gone from a cottage industry start up to a multi-billion dollar business in less than a decade. Global sales of organic food were estimated to be $40 billion in 2006 with the world organic market growing rapidly by about 20% annually. In the US, organic food products are the fastest growing sector of the food marketplace.

Because of the rapid growth of the organic food industry, it is no surprise that big food companies and retailers have joined the act. Because of these alliances, unlikely organic products are sprouting up everywhere including organic cheetos and organic McDonalds coffee. The new movie FOOD INC eloquently speaks to this issue. Hershey Foods owns Dagoba, Kraft owns Boca Foods and Back to Nature, and Heinz is a big investor in Hain Celestial which is connected to many small organic companies including Earth's Best, Spectrum Organics, and Frutti di Bosco.

So who standarizes and regulates this burgeoning worldwide industry? Every country has its own regulations in labeling organic products.

In the USA, the Organic Food Production Act was passed in 1990 giving mandate to the US Department of Agriculture (USDA) to set national standards and in 2002, the USDA set up the National Organic Program (NOP) to regulate organic food products. The USDA regulations cover issues such as genetic modification, radiation, bioengineering, pesticides, fertilizers, hormones, antibiotics, and other man-made chemicals but they do not cover some environmental as well as ethical and social issues.

Certification covers all processes involved from production to processing, packaging and transport. The products that fall under NOP jurisdiction are fresh and processed agricultural food products, including dairy products, meat and livestock and food crops. It covers food products only and does not include non-food organic crops such as cotton and plants for cosmetics and personal care products.

Because the NOP is a very small understaffed subagency it cannot undertake inspection of food producers to verify organic claims and thus is dependant on no less than 54 accredited agencies within the US in addition to 44 accredited foreign agencies for products produced outside the US.

In the US, the following terminology is allowed on organic food products.

"100% organic" - single ingredient such as a fruit, vegetable, meat, milk and cheese (excludes water and salt).

"Organic" - multiple ingredient foods which are 95 to 100% organic.

"Made with organic ingredients" - 70% of the ingredients are organic. Can appear on the front of package, naming the specific ingredients.

"Contains organic ingredients" - contains less than 70% organic ingredients.

To say the least, organic labeling is both complicated and confusing. However, only those products that meet the '100% organic' and 'organic' criteria are allowed to carry the USDA Organic seal and the USDA emphasizes that the term 'organic' is not synonymous to 'natural' or 'all-natural'.

In addition to the labeling conundrum and the dependancy of the NOP on other entities for certification, all is not well in the organic realm. Several well-publicized events point to the fact that current regulation by the NOP may not be effective.

(1) In 2005 The Cornucopia Institute filed a complaint against Aurora Organic Dairy for multiple violations of federal organic regulations. Aurora is the supplier to big supermarket chains like Safeway, Wal-Mart, and Costco.

(2) In January 2007 The Cornucopia Institute reported that the retailer giant Wal-Mart was mislabeling certain products organic. The product packaging says "all natural" but Wal-Mart added the word organic to its price labels.

(3) August 2008. The USDA announced that 15 of its accredited certifying agencies had been placed on probation due to various violations of the NOP organic standards, according to AlterNet. The violations included several certifying agencies from outside the US and included agencies in China, a country which has recently been implicated in toxic contaminations, including lead to melamine. One product concerned an organically certified ginger which contained a non-allowable pesticide called aldicarb. The ginger, sold under the 365 label at Whole Foods Market, contained a level of aldicarb not even permissible for conventional ginger, let alone organics. Aldicard causes nausea, headaches and blurred vision even at low concentrations.

(4) April 2009: The Cornucopia Institute urged organic food consumers to petition to the NOSB for the removal of non-organic soy lecithin from the National List. The Institute claims organic lecithin is now commercially available.

(5) June 2009: A federal judge in St. Louis dismissed class action suits filed by consumers against Aurora Dairy for organic milk fraud.

Additionally the National List of Allowed and Prohibited Substances has become a minefield!

To be certified "organic", a product must contain 95% organic ingredients or materials during its production. The other 5% should be on the list of allowable synthetic substances. A National List of Allowed and Prohibited Substances was prepared in 2002 but has since been amended because food producers can file a petition to include substances that are not on the original list but which they think are essential in their production. In June 2007, a final amended National List was issued with the number of allowable substances increasing from 77 to 245, according to the LA Times. Subsequently, the advocacy group Organic Consumers Association expressed objections to the inclusion of some of the new products allowed, especially the food colorings.

And even organic labeling, itself, has recently come underfire due to the abovementioned scandals and controversies involving the NOP. Advocacy groups have put forward the following objections.

(1) Lax national standards. This has created a certification procedure that is unreliable, especially those occurring abroad and to add insult to injury the original Organic Act's mandate for pesticide testing has been declared optional.

(2) Loophole in the Act. The ability to petition for amendments to the National List are being viewed by many as a big loophole resulting in food producers using the process to their advantage. The original goal was to shrink rather than expand the list. So far, only one substance has been removed whereas more than 60 have been added.

(3) Consumers are not getting what they are paying for. For paying extra, consumers expect food that is free from pesticides and chemicals. If the national organic standards were to be lowered, consumers are actually being "ripped off."

(4) Watered down. Many believe that with the participation of corporate giants in the organic food market, the organic principle has been seriously "watered down". They put this down to big companies' strong lobbying power, forcing NOP to make concessions and lower national organic standards to accommodate them.

(5) Greenwashing. Some groups even go as far as accusing the NOP of greenwashing, that the organic seal is just a marketing ploy. Some specific examples of greenwashing activities include importing organic powdered milk from New Zealand and keeping a larger number of organic cows in a smaller space.

Consumer groups and some organic pioneers say they are concerned that the 'corporate alliance' movement - a response to the practices of corporate food production that promotes a natural chemical-free approach to farming - will eventually create a watered down organic food industry unless firm standards are maintained by the NOP, which is unlikely, in view of its past performance.

Other groups feel that conflicts of interest may arise between conventional and organic food production. Organic production used to be a niche market for small organic farmers. As organic production goes mainstream, these small farmers would be outcompeted and driven out of business.

As people become more and more health and socially conscious, the demand for organic products is increasing. However, as economists point out, "as mainstream consumers are growing hungry for untainted food that also nourishes their social conscience, it is getting harder and harder to find organic ingredients." For the purists, however, the philosophy also requires farmers to treat their people and livestock with respect and, ideally, to sell small batches of what they produce locally so as to avoid burning fossil fuels to transport them.

Economic principles, however, do not coincide with purist organic philosophy. The whole supply chain of organic food production is becoming more complicated as the market grows rapidly. The producers are forced to take short cuts in order to stay competitive. In the US, for example, there aren't enough organic cows to produce organic milk. Even if there were enough cows, there aren't enough grains to feed them. And it is no longer possible to feed cows with raw grass to obtain raw grass-fed milk unless the farmer applies fertilizers to his pasture to make the grass grow faster. Some companies are forced to look offshore for organic ingredients, thereby violating several organic principles, not necessarily in the production process, but in terms of low labor costs and high transport costs.

The organic food industry has clearly outgrown the original regulations meant to protect it and its consumers. And the increased demand for organic food may actually be its own undoing. How 'organic is organic food' is even more important now than in the past!

About the Author

The article "If You Think Organic Food is Organic, Think Again" may be found in its entirety on http://HealthWorldNet.com