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Financial meltdown: What next?
Financial markets melted down this week, with the banks posting some huge losses
that are far from being over, with Lehman Bros and AIG going down this week
after Fannie Mae and Freddy Mac crashed last week. The US gov't is forced to
take over almost every failing bank (they didn't with Lehman and the threat to
the US/World economy worsened considerably). This is a disastrous situation for
the banks, and is wiping out huge chunks of wealth in the US economy.
inflation was a real threat with soaring commodity values and a declining
dollar, now the possibility of a collapse in the US economy is at stake. The
huge amount of wealth lost by banks (very publicly) might be paled in comparison
by the amount of wealth lost by US homeowners (especially those not foreclosed
upon). At some point, this is going to slow consumer spending as the 'wealth
effect' takes over. The 'wealth effect' is the slowing in consumer spending
caused by consumers knowing they don't have any wealth left, and thus dropping
their spending as a conservative response.
The largest danger to the US economy
is a loss of confidence in consumer's future - that could kill consumer spending
and everyone knows that the US economy (and thus the world economy) is driven by
US consumer spending.
The rush to quality wealth preservation is on as the world pulls money out of
the US economy and puts it into precious metals, as gold has soared $100/ounce
in the past 30 hours to this writing and silver has soared almost 10%. What
else can store value today? Many commodities like grains, livestock, and energy
are driven by a strong world economy and heavy US consumer spending (even China
and India depend on US consumers to spend money on their Walmart goods). So if
the US economy crumbles and the world economy follows, what has value? Banks
used to be considered a safe haven investment, but no more!
The uncertainty facing the US economy, and thus the world economy, is causing
some very wild trade in commodities as well as equities. With every hiccup by
the US gov't in their response to bank failures (especially when they don't back
one like Lehman), the world economy and stocks are rocked! Pro Ag sees the US
gov't as having no choice but to bail out every failure in the next few weeks,
or the confidence in the US financial system will fail. This unprecedented move
by the US Bush administration (a conservative group indeed) indicates to Pro Ag
that there isn't a bank in the world who wants a shot at ownership. This could
be the story of 2008, as US banks are virtually make into public entities owned
almost entirely by the US gov't. Its uncertain where this ends, but so far it
looks like most major banks will fail in 2008, an almost unimaginable results
just 10 months ago! And if the banks fail, imagine how much wealth was lost by
the US homeowners, who bore the first loss in most cases before the bank lost
While this situation unfolds in the marketplace, grains continue to move towards
maturity in what was considered an almost certainty to lose bushels due to frost
this fall. As of today, it looks like the entire US (minus a few minor areas)
will remain frost free into October, essentially adding bushels to what was a
fairly immature crop. With a long, slow maturation process in corn and
soybeans, typically test weights are large.
USDA seems to be tilting heavily towards vegetation satellite imagery in
projecting their monthly yields (satellite imagery predictors were dead on in
the Sept. report), but now that we pull into fields in Sept. all that matters is
what shows up in the combine hopper. We could see a 2-4% swing in yield
numbers, but given the ideal frost free fall weather, these numbers could
increase rather than decrease. Interestingly, while soybeans/wheat push to new
lows, corn remains above recent support levels!
NOTE: The signup for disaster program 'buy-in' ended Sept. 16, but now the
disaster signup for 2009 begins as forages, winter wheat, rye, rangeland/hayland
rainfall indexes (ND), and rangeland/hayland vegetative indexes (SD and others)
acres must also ALL be signed up by Sept. 30 for 2009 disaster eligibility.
Call Pro Ag for a timely seminar in your area on how this mess will work in
practice, but make sure you get this done or there is no disaster coverage for
your farm in 2009!
The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable. The
opinions and recommendations contained are based on our judgment and do not
guarantee that profits will be achieved or that soles will not be incurred.
Recommendations should not be construed as an offer to buy or sell
commodities. There is substantial risk of loss in trading futures and options
Financial markets melted down this week, with the banks posting some huge losses that are far from being over, with Lehman Bros and AIG going down this week after Fannie Mae and Freddy Mac crashed last week. The US gov't is forced to take over almost every failing bank (they didn't with Lehman and the threat to the US/World economy worsened considerably). This is a disastrous situation for the banks, and is wiping out huge chunks of wealth in the US economy.