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Stocks, Bonds Tell Separate Economic Stories

05/27/2014 @ 8:16am

Why do I pay attention to so many indicators that don't have a direct relationship to agriculture? It's because I believe that you have to have a good handle on what is happening around you so you're better able to manage your farm and future sales. As it stands, your 401k probably has been looking pretty good as long as you didn't sell at the bottom a few years ago when things looked horrible.

What is important is that stocks and bonds may give you a hint as to what is happening around you. Currently, the 10-year treasury bond yields around 2.50%. That is not too good considering most of us expect an average of 7% to 8% over a 10-year investing period. Especially hurt are those of us in an upper age bracket who may be counting on those bonds in a retirement scenario. The plus side to this low yield is that our loans (equipment and housing) are also a lot cheaper and don't cost as much. Something to keep in mind is that when (if) these rates start to go back up, your payments will as well. The reason these rates might go up is if the economy starts to do better, and inflation eases back into the economy. I don't think that is going to happen, and I do believe that this low inflation - almost deflationary environment - is here for longer than we all could ever imagine. So the long and short of it is your retirement income may suffer, but your lower loan payments may help you out. The only problem is that as we get older, we tend to have less debt, so the lower rates hurt a little more.

Stocks have been on a strong rally the last 18 months or so. What has been the key driver? The U.S. Federal Reserve. The low rates and financial accommodation, initially meant to help mom and pop on Main Street, have stopped at the banking level and not the general public. All of this excess cash injected into the system to help grease the cogs of the economy has found its way into the hands of those who believe that the only place to park it is the U.S. stock market. Whether you agree with them or not, it has  turned out to be a self-fulfilling prophecy. Since we declared the 'recession' over in 2009, real disposable income for those on Main Street has risen by 4.80% and for those on Wall Street . . .108.40%.

Not good. Since 2010 we have averaged around 172,000 jobs created per month, but we have lost on average 175,000 people through the nonparticipation rate that have simply just given up looking. We aren't even breaking even.

How does this affect us on the farm? Interest rates are a big deal and need to be managed but obviously the price we get for the crop is another. Can the U.S. consumer pay for these higher priced commodities? Food and energy inflation is a real concern. Crude oil over $103 per barrel and meat prices through the roof all translate to a consumption tax to the consumer. At some point in time, those pockets are empty.

The world is debating this bond market with low rates against the stock market at all-time highs. I say simply, something has to give. I need to see growth that justifies stocks at these values, or I think that we have to pay the piper. Time and time again that 10-year treasury yield has been the truth serum for the American investor and businessperson. The tug-of-war between the bonds telling us that things are not all right in the world against the stock market telling us that things are just fine will define 2014. It's a tale of two economies, and something has to give.

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