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Why The Fate Of The Global Equity Rally May Rest In The Hands Of Soybeans

Tyler Durden's picture





 

In last night's very disapponting data release from China there was one notable piece of data: CPI dropped to a 30-some month low, yet it came above the expected level of 1.7%, instead printing at 1.8%, in the process dousing many hopes that the PBOC would immediately succumb to even more interest rates cuts, including a reduction in the far less material RRR. We have long claimed that when it comes to monetary easing, the PBOC is far, far more sensitive to blunt, shotgun approaches such as monetary easing for one simple reason: food prices, which in a nation of 1.3 billion has the potential to lead to very adverse side effects if left alone to spike on its own devices. And yet, with both the ECB and the Fed now likely out of the picture for a while - due to Rajoy's unwillingness to cede sovereignty to the Troika and Germany in order to activate another futile episode of ECB bond buying, and because the Fed does not want to be seen as a political organization and do more QE 2 months ahead of the election - the market's pent up hopes for more easing remain with the PBOC, which has in times of need, always been the marginal driver of global demand. Such hopes may be dashed for one simple reason. Soybean prices.

The chart below shows the stunning correlation between the all important Chinese food inflation and CBOT soybean prices. What it also shows is what Goldman thinks Soy will do in the coming months. It does not take a rocket scientist to explain the imminent spike in soy prices - in fact, we showed two days ago why in the aftermath of an abysmal soybean crop, it is only a matter of time before soy prices persist far higher not so much due to demand issues (i.e., liquidity), but supply constraints. One can be certain that the PBOC is very well aware of this chart and its implications as well.

Goldman's take?

Potential pass-through of a sharp rise in food prices (due to Chinese domestic flooding and the US drought) to inflation, although so far we expect the impact to be manageable

Which, considering the source, means it will be unmanageable.

So barring some last minute miracle, with Soy prices set to surge on a Y/Y basis, and drag Chinese food inflation with them, will the PBOC ease, and add to incremental food demand, just as supply considerations are about to send Chinese food inflation soaring?

Of course not (naturally, this assumes the wheels of the global economy do not come completely unglued, in which case all bets are off).

For those still unconvinced, below is a reminder just how different the food price component is as an input in two very different CPI calculations: that of China, where it is above 30% of the entire CPI basked, and in the US, where it is the lowest in the entire world at under 8%.

So there you have it: a PBOC whose hands are tied, an ECB whose hands are tied, and a Fed whose hands are also tied (there is of course the BOJ but nobody cares about the BOJ any more).

And still the market keep hoping and praying that despite, or maybe due to, collapsing corporate revenues, and lower corporate earnings guidance, that central banks will come in and save the day.

Maybe they will. But not if soybean prices have anything to say about it...

 


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Thu, 08/09/2012 - 13:04 | Link to Comment malikai
malikai's picture

Here's how it looks to us today.

https://www.quantsig.net/img/com_soybean.png

Thu, 08/09/2012 - 13:13 | Link to Comment Skateboarder
Skateboarder's picture

You mean in the hands of Monsanto...

Thu, 08/09/2012 - 13:17 | Link to Comment Abraxas
Abraxas's picture

Beware! Do not mention the name of the Evil One aloud.

Thu, 08/09/2012 - 13:32 | Link to Comment Debtonation
Debtonation's picture

buy low eat high

Thu, 08/09/2012 - 13:48 | Link to Comment Skateboarder
Skateboarder's picture

Advanced nonlinear modeling techniques my ass. They can't even get it right whether it's gonna rain today or not lol.

A usual day goes like this:

Reporter: "And today, we should see mostly cloudy skies with occasional showers around most of the bay..."
Me: *goes outside and looks up*
Weather: "Sup bitches, it's a partly cloudy, kinda breezy day. Go skate son, roll free."

Thu, 08/09/2012 - 16:06 | Link to Comment Flakmeister
Flakmeister's picture

You clearly do not understand the difference between climate and weather....

Thu, 08/09/2012 - 14:29 | Link to Comment Flakmeister
Flakmeister's picture

Any chance I can get some of what you're smoking?

Thu, 08/09/2012 - 14:51 | Link to Comment El Viejo
El Viejo's picture

Uuuh, there was no HAARP in 1934 and since there have been almost exactly 7 solar cycles since then

(2012 - 1934 = 78    and   78/11 =  7)  maybe it has to do with solar cycles. The Farmers Almanac has been based on solar cycles for decades. Just sayin.

Thu, 08/09/2012 - 15:35 | Link to Comment Flakmeister
Flakmeister's picture

There might be just a wee bit more than that to the story....

Thu, 08/09/2012 - 15:50 | Link to Comment El Viejo
El Viejo's picture

Maybe, but HAARP is wearing a little thin.

Thu, 08/09/2012 - 16:05 | Link to Comment Flakmeister
Flakmeister's picture

Agreed....

Thu, 08/09/2012 - 13:05 | Link to Comment Young
Young's picture

Soon children - SOON!

Thu, 08/09/2012 - 13:06 | Link to Comment mrktwtch2
mrktwtch2's picture

yet another boring range bound day..what do we have to do to get some volatility here?? nuke china??..lol

Thu, 08/09/2012 - 13:06 | Link to Comment buzzsaw99
buzzsaw99's picture

lloyd and jamie don't eat soy so why should they give a flying fig?

Thu, 08/09/2012 - 13:07 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

 

 

Thu, 08/09/2012 - 13:08 | Link to Comment doc_in_the_house
doc_in_the_house's picture

HIGH FOOD PRICES (soybeans et al)

= are a bear's best friend. 

QEorganizer = uuuh, uuuh, uuuh, uuuh, PRINT BABY PRINT??? well oil is @ $94 and corn $ $800 and gas @ $4.50+/gallon...

BANKRUPTCY BABY BANKRUPTCY !!

INFLATION BABY INFLATION !!

REVOLUTION BABY REVOLUTION !!!

QE anyone?? QE stupid organizer = underwater basket weaving c student idiot !!

Thu, 08/09/2012 - 13:11 | Link to Comment doc_in_the_house
doc_in_the_house's picture

DROUGHT BABY DROUGHT !!

all commodites traders (corn, soybeans, pig bellies) please report to the guillotine, bc odummernomics STUPIDnomics, RAPE-O-NOMICS will give u your rightful punishment, for MANIPULATING the WEATHER market...LOL !! ROFLAMO !!

Thu, 08/09/2012 - 13:09 | Link to Comment ebworthen
ebworthen's picture

"A block of tofu in every pot."

Thu, 08/09/2012 - 13:51 | Link to Comment Skateboarder
Skateboarder's picture

Cut corn and soy out of your diet for a month and see how good you feel. You'll literally cringe the next time you taste HFCS.

Thu, 08/09/2012 - 13:12 | Link to Comment Squid Vicious
Squid Vicious's picture

High soybean prices = bullish

Low soybean prices = bullish

Total failure of US soybean crop = extremely bullish!

Thu, 08/09/2012 - 13:13 | Link to Comment magpie
magpie's picture

quite an eery feeling right now

Thu, 08/09/2012 - 13:25 | Link to Comment Paul Atreides
Paul Atreides's picture

The calm before the storm, finalize your preps.

Thu, 08/09/2012 - 13:53 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

the benocide?

Thu, 08/09/2012 - 13:59 | Link to Comment magpie
magpie's picture

A disturbance in the Force

Thu, 08/09/2012 - 13:16 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Food inflation is lowest in the US? Has anyone been grocery shopping lately? It's here bro.

And growing worse by the day.

Thu, 08/09/2012 - 13:33 | Link to Comment NotApplicable
NotApplicable's picture

No, it's the lowest in terms of percentage of CPI.

Luckily for the US, there's still lots of iPads to eat.

Thu, 08/09/2012 - 13:41 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

I understand that it was a relative calculation that created the graph.

But it was based upon "official" stats from a "state" whose own best interest is to lie to it's own population. I believe nothing the US Gvt (nor its enablers and supporters) tells me.

Luckily I have an iPhone to nibble on between very expensive meals. :)

Thu, 08/09/2012 - 14:06 | Link to Comment NotApplicable
NotApplicable's picture

Very true.

Thing is though, the chart (and its accompanying story) still tells a very scary tale, laying out the order of the upcoming food riots.

Remember the corn riots in Mexico? Just wait until ethanol increases the amount of corn used by 50% (E90 -> E85). Then the fun starts all over again.

Thu, 08/09/2012 - 14:11 | Link to Comment zhandax
zhandax's picture

Those things are nasty; the capacitors get stuck between my teeth.

Thu, 08/09/2012 - 13:43 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

Yes but this chart doesn't include the very recent MOAR BRAINS weighting, which puts the overall food basket in the US right about at the western world average.

Thu, 08/09/2012 - 14:02 | Link to Comment Dr. Engali
Dr. Engali's picture

I just went out for a weekly lunch with a group of freinds. Normally I will bring home something for my wife howver I didn't this time. But what I noticed by not doing so is the sandwich I get every time I go was a full two dollars over what I was paying last year.  

Thu, 08/09/2012 - 14:35 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

When Mrs. Cog and I were renovating the Plan B place this spring several times we had to eat lunch and/or dinner on the road. It'd been a while since we'd done that and we were amazed how much more expensive it was in just a few years. And we're talking fast food and casual (sit down) dining.

What was immediately obvious was how so much of the meal had been de-coupled from the rest. For fast food often the drinks that were formerly part of the meal were now separate with the core meal now as expensive as the grouped meal was two years ago. With sit down, $7.99/$8.99 meals were now $11.99/$12.99. And the soft drinks were another $2 each.

Thu, 08/09/2012 - 13:15 | Link to Comment govttrader
govttrader's picture

forget beans....look at those 30yr treasury bonds go!!!!

http://govttrader.blogspot.com/

Thu, 08/09/2012 - 14:32 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The Gvt bond elevator has reversed course and is headed down. All aboard the TBT train?

I suspect this will usher in QE quicker than anything else.

Thu, 08/09/2012 - 20:15 | Link to Comment DeadFred
DeadFred's picture

There's always been an easy way to get people to buy bonds but it doesn't mesh well with the desire to ramp stocks.

Thu, 08/09/2012 - 13:17 | Link to Comment reader2010
reader2010's picture

Isn't it true all prices are manipulated? To a certain extent, any food commoditiy price can be used as a military weapon.

Thu, 08/09/2012 - 13:21 | Link to Comment magpie
magpie's picture

It's delusional to believe that manipulation can be kept up indefinitely. Crops and commodities will be hoarded and smuggled during price controls.

Thu, 08/09/2012 - 13:30 | Link to Comment kito
kito's picture

the u.s has the lowest "food' price component in the entire world because the vast majority of americans dont actually eat "food"...they eat highly processed chemistry projects.........

Thu, 08/09/2012 - 13:36 | Link to Comment LFMayor
LFMayor's picture

I'd wager they're lowest because this is where most of the damn food gets grown.  Lower logisitic cost.

Thu, 08/09/2012 - 13:42 | Link to Comment kito
kito's picture

most of the food may be domestic, but the 95/bbl oil that is so vital to the crop production certainly is not....................

Thu, 08/09/2012 - 20:17 | Link to Comment DeadFred
DeadFred's picture

Too much of that domestic food it being converted back into 95/bbl oil.

Thu, 08/09/2012 - 13:32 | Link to Comment madcows
madcows's picture

Well, Goldman is the king of disinformation, right?  Nobody can believe anything they say, b/c they are generally trying to misguide everyone so that they can steal from them.  So, I call bluff.  Soy is going to plummet.  Bumper Crop.  GS is playing muppets again.

Thu, 08/09/2012 - 13:35 | Link to Comment Meesohaawnee
Meesohaawnee's picture

http://finance.yahoo.com/blogs/breakout/market-bears-tale-171701891.html

but but jeff macke one of the biggest embarrassments on the planet is saying Bears are whiners.. . Check out what the latest clown hour show says .. of course bears are whiners in a rigged market.

Thu, 08/09/2012 - 14:01 | Link to Comment Squid Vicious
Squid Vicious's picture

Too bad he's not on live TV anymore, I was hoping for another coke-fueled meltdown like he had on CNBS a few years ago...

Thu, 08/09/2012 - 13:38 | Link to Comment Joshua_D
Joshua_D's picture

Well, to be fair, it probably takes a long time for hundreds of millions of Americans and Europeans to collectively move through the five stages of grief. But, Reality will come.

Thu, 08/09/2012 - 13:43 | Link to Comment Flakmeister
Flakmeister's picture

So price rises due to drought induced shortages are now termed inflation?? Go figger...

BTW, just wait until an El Nino of moderate strength hits.... I'd grab pop-corn but it I might not be able to find it....

Thu, 08/09/2012 - 14:29 | Link to Comment dark pools of soros
dark pools of soros's picture

you'd better turn in your prepper membership

Thu, 08/09/2012 - 13:59 | Link to Comment Whoa Dammit
Whoa Dammit's picture

The Ukraine (wheat exports down 25%), India, and Australia (wheat crop down 40%) have also suffered droughts this year. China imports 1/2 of all the world's corn crop. The world wide winter of our discontent is coming.

Odd source, but good article:http://www.wsws.org/articles/2012/aug2012/drou-a01.shtml

 

Thu, 08/09/2012 - 14:20 | Link to Comment DOT
DOT's picture

Soybeans are looking good out there ! Drove around in the rain near Evansville, WI.

Be -you-tee-full !

 

edit:

Please allow me to add: Corn looks like shit.

Thu, 08/09/2012 - 14:45 | Link to Comment au_bayitch
au_bayitch's picture

After last nights rain, did the same in central Indiana. Soybeans looking good and the corn still looking terrible.

Thu, 08/09/2012 - 16:34 | Link to Comment Flakmeister
Flakmeister's picture

Just drove from Chi-town to NYC... Along I-80, the corn was pretty much stunted except where there was obvious irrigation.. Soy beans looked ok, there was evidence of some corn fields having been recently replanted with soybeans...

Thu, 08/09/2012 - 14:24 | Link to Comment astoriajoe
astoriajoe's picture

can't the fed just print more soybeans?

Thu, 08/09/2012 - 16:23 | Link to Comment GERxit
GERxit's picture

yeah... i guess that's why 3D printer shares are such a highflyer

the fed buys them all as they hope to be able to keep their printing monopoly but this time not only to print toilet paper (paper currency) but all the real stuff too!

IMAGINE: WORLD DOMINANCE FOR THE BERNANK!!!

 

Thu, 08/09/2012 - 14:24 | Link to Comment dark pools of soros
dark pools of soros's picture

Can't China just get a JPMorgan issued EBT card?

Thu, 08/09/2012 - 16:42 | Link to Comment Dareconomics
Dareconomics's picture

When the US prints money, our trading partners are forced to do so as well in order to keep the value of their own currencies stable against the dollar. If they were to permit their currencies to rise, they would lose valuable export dollars. China, in particular, plays this game well. If you divide the figures for any country by 8, you a number which shows the relative effect of food prices on the nation's inflation.

Poland is the easiest example because its number is 24. Now, divided 24 by the US' 8 and we get 3. Therefore, food price rises in Poland will raise their inflation rate 3 times more than a comparable rise in the US. The number is 4 for China, and a whopping 6 for India. Food shortages have led to riots and the Arab Spring, so perhaps the Fed should be careful before unleashing more unrest in the world with it money printing. 

 

http://dareconomics.wordpress.com/

Thu, 08/09/2012 - 18:07 | Link to Comment Flakmeister
Flakmeister's picture

I'll give you a hint... that world wide unrest is coming whether the Fed prints or not....

Do NOT follow this link or you will be banned from the site!