The United States and the world economy since recovering from the recession in April 2009 have shown amazingly consistent ongoing growth.
This year, 2011, the U.S. and the world economy as a whole appear positioned for another 1 to 2 years of consistent growth with attractive interest rates. This is quite simply an amazing outlook for the U.S. and the world’s economies.
What is problematic for U.S. and global growth is that the financial crisis continues, especially the huge debt burden of the United States and Europe.
The obvious question is why isn’t the Financial Crisis over? A simplistic explanation, under normal times a U.S. recession is caused by tight monetary policy, so as the U.S. economy decelerates and stalls the Federal Reserve will provide levels of stimulus through lower interest rates and other activities that will promote economic activity. Normally, this leads to the U.S. economy regaining self-sustaining economic momentum and maintenance of job growth.
Our ongoing U.S. economic problems are caused by a number of factors, but chief among the factors is a level of debt that is not sustainable without a “Cinderella Economy.” Throughout history these once in a lifetime financial crises have come and gone, but not without pain and today is no exception.
How long will it take to for U.S. and global economic activity to return to normal? Think about burdensome debt. For an individual, business, or local, state or national governments when crushing debt burden exist, and a historic number of all types of burdensome debt situations currently exist, it simply takes time and financial discipline to repair and rebuild a solid balance sheet and regain financial stability.
The last global financial crisis, the Asian Financial Crisis, lasted from 1997 into 2003 or about 7 years. Today’s global economic challenges significantly exceed the previous 1997 financial challenges so it’s a reasonable assumption to assume the U.S. and global economic activity will regain economic sustaining momentum in 2 to 5 years or it could simply take a little longer.
People ask. What is your approach to financial management in uncertain economic times? My answer is simple whether an individual, businessman, government servant or elected official: I would pay down debt, be frugal and save till it hurts.
The next obvious question is. Wouldn’t that prolong the crisis? An individual, business or governmental body during a historic financial crisis will financially suffer the least and financially gain the most from a sound conservative financial position. If one bets the farm on anticipated future inflationary expectations then you may be very disappointed.
Economic Outlook: Always remember that many of the world’s best analysts and money managers during the 2008/09 collapse in equity markets and commodity prices would have failed in a major way without governments intervening with borrowed taxpayer dollars to stabilize the economy.
Seek Professional Assistance: Markets are treacherous and dangerous for professionals, so non-professionals should seek guidance.
Why? One reason massive ongoing economic stimulus has created inflationary pressures which have and will create considerable economic uncertainty and accompanying price volatility.
Let’s build a case for our commodity price expectations:
First, The trend in U.S. economic momentum as measured by the S&P 500 stock market into mid-year and likely for the remainder of this year remains sideways to up with a possible five, 10 or 15 percent correction along the way.
Second, The trend in the world economy as measured by developing countries’ equity markets appears to have some price softness for the next few months. Beyond the current ongoing price correction the overall price trend remains up.
Third, if the ongoing global economic momentum is sustained with no more than healthy corrective activity then oil prices are likely to remain firm especially with the added North Africa and Middle East turmoil.
Corn and Soybeans: The corn and soybean price trend remains up as the two commodities battle for acreage. The trend will remain up until the trend is broken.
Corn and soybeans could be topping, but increasingly corn and soybeans appear set to match their 2008 highs in the next one to four months.
If they match their 2008 highs then the next obvious question becomes. Does the corn and soybean market have the current momentum to exceed those highs now or some later date in the future?
There is no magic answer which is why the pros study the economy and market fundamentals and analyze the price action on a daily basis.
Wheat: Wheat has been a fascinating and frustrating commodity market to watch since late June of last year.
First, wheat exploded to the upside from around $5.50 per bushel to above $8.00 per bushel and then proceeded to consolidate with the wheat price slowly moving sideways to up until now. The price trend in wheat remains up and will likely follow the lead of corn and soybeans. This type of price activity could move wheat into the $9.50-plus per bushel area sometime in the next one to four month time period.
If corn and soybeans prices are topping then I would expect to see like price weakness in the wheat market.
Corn, soybeans and wheat are markets where the price action may further correct the upside move before moving to final highs over the next one to four months.
Livestock: USDA’s Chief Economist Dr. Joe Glauber said. “Total U.S. production of meat and poultry is forecasted to remain flat in calendar year 2011, with slight growth forecast in supplies of pork and poultry but reduced supplies of beef. Stable production, increased exports and some recovery in domestic demand should help maintain livestock prices near last year’s historic highs.”
Dr. Glauber further stated, “while livestock prices are expected to remain strong and further improvement in milk prices is likely in the months ahead, higher feed costs could lead to below average margins for livestock and dairy producers in 2011.”
Live cattle, feeder cattle and lean hogs have joined the rising commodity price party with new record high prices. In December 2011, I expected live cattle and feeder cattle to make new record high prices this year, and at the time lean hogs appeared to be stuck in a multi-decade channel chart pattern.
Lean Hogs: Lean hog prices are now at new record highs and have the potential of moving up another five to 10 percent from current levels over the next few months. The economic rhythm of the economy could move lean hog prices higher.
Live Cattle: In December 2009 live cattle had a low of $79 per cwt and now they are in the $111 per cwt area. Given the extended time period and the magnitude of upside price movement then this upside move should be close to a period of consolidation.
Given live cattle fundamentals and other primary expectations discussed in this article then live cattle prices after a period of consolidation could take its time over 1 to 2 years and move sideways to up to new price highs. This outlook would assume a continued ongoing inflationary economic environment without any emerging economic trauma.
Feeder Cattle: In December 2009 feeder cattle had a low of $90 per cwt and now they are in the $130 per cwt area. As pointed out about live cattle given the extended time period and the magnitude of upside price movement then this upside move should be close to exhaustion.
Given the cattle fundamentals and other primary expectations discussed in this article then a correction of the upside move would be in order for a period. Assuming an ongoing inflationary economic environment without any emerging economic trauma then there could be another leg up in feeder cattle prices, probably following the price lead of live cattle.
Closing: Everyday is a new day in the market. The world’s absolute best analysts and money managers are challenged to manage their portfolios and show a return in today’s markets. Most would say their risk exposure is much higher than in normal economic times.
Navigating markets successfully takes a skilled professional. For example putting on a hedge has never been more difficult. Go to a marketing conference and some analysts are very bearish the economy and markets, while other analysts are very bullish, while other analysts fall somewhere in between.
If you needed brain surgery then you would seek a skilled brain surgeon. Cultivate a relationship with one or more skilled professional market analysts and/or money managers and then have ongoing communication. For example I say if we are not talking on at least a weekly basis it is very unlikely you know my current thoughts on the economy or a given market, especially given today’s turbulent domestic and global economy.
At the end of the day each one of us is responsible for our individual, business and market decisions, so study hard and carefully select professional economic and market assistance WISELY.
Robert “Bobby” Coats, Ph.D. is an Extension Economist and Professor – Economics with the University of Arkansas, Division of Agriculture, Department of Agricultural Economics and Agribusiness.
