Back of the Envelope Financial Analysis

I don't care IT"S SPECULATION!

2008-05-28T19:29:00.000-07:00

Guys, it's speculation that is driving up the price of oil. I don't care what the so-called appoligists say about the price being more demand, peak oil, or whatever.

Simple math.

Dollar is worth 20% less than a year ago. Last year's price 60 bucks a barrel. That means, this year, it should be 72 bucks a barrel.

That doesn't explain the 60 dollar premium on each barrel of oil. Some say it's demand from China and India. Ok, their economies grew about 10% each, so let's say it's now 87 bucks a barrel. What else? War with Iran? Problems with Nigeria? Ok, give it another 20 bucks a barrel. That's 107 or so.

130+??? It's speculation guys. It's greedy industrialists and financiers who are moving out of the real estate market and into the commodity market.

Are gasoline prices driving you to the poor house?

2008-05-26T19:30:00.000-07:00

Are you feeling the pinch?

Devaluation of the US currency coupled with speculation within the market is driving the cost of fuel into a very dangerous area. The economy has pitched into the recession/depression cycle, and the more that gasoline costs, the deeper we will dive into the recession/depression.

On the surface, it's about the price of gasoline for your car. However, so many things depend on oil that all sorts of hidden costs are going to be pushed into your budget. Just think about bringing a Veggie to market. Something simple, like corn.

Corn is primarily grown in the mid-west of the US. Oil products are used in all stages of growth. Seeds are transported to the farm. Loaded into a harvester. Planted. Sprayed with pesticide . Harvested. Sent to a silo. Processed for market. Transported to market. Placed for sale. Bought. Transported home. Prepared. Each stage of this process takes fuel, electricity, and petroleum products. The price of oil effects every stage of this production and consumption process.

What can you do about it? Here are some simple steps you can take

1. Use bike or walk for local errands when possible

2. Turn off unnecessary lights and devices at home

3. Try re-usable bags at the grocery store

4. Plant a food garden

5. Go to bed earlier

6. Eat less

7. Buy locally produced products

Sounds like what I was telling you a bit earlier in the blog... hmm.. interesting how that works out.

Credit Cards under attack

2008-05-07T18:41:00.000-07:00

Fallout from the credit crunch is the shrinking availability of credit for consumers and small businesses. Traditionally, a credit card is considered as a bank loan, all be a revolving credit account. This draws on the same pool of credit that is shared with homeowners and other folks.

Normally, this is not a problem. But with the number of foreclosures and bad loans the banking industry has made, the pool to spread the risk of credit card borrowers is shrinking. While wildly profitable, the credit card industry has been rather predatory when it comes to credit cards.

This is the excuse the Federal Reserve is using to grab even more power. They want to regulate credit cards for the "good" of the consumer. You have to ask, "They did such a fine job with the banks, why not let them grab power over credit cards".

It almost seems planned, how the Federal Reserve is systematically destroying the purchasing power of the middle class. First, homes. Second, currency devaluation. Third, credit availability for the majority of America.

What's going on there?

Spinning up

2008-05-05T17:30:00.000-07:00

Just getting back into the swing of things. It's interesting to me to see how people are reacting to the high food and energy prices. Folks like to blame the housing credit crunch for all the problems they are having today. I suppose, in an indirect manner, the housing crunch is causing the problem.

It's primarily caused by the devaluation of the US dollar. Bernanke has been lowering interest rates for about 9 month now. It's 2%. You can't get much lower than that. That is causing the US dollar to be worth less, and because of that, oil prices are going up, and food prices (basic supply and demand) are going up at a similar pace.

So, when you fill up your tank, instead of cursing the poor station owner or the oil companies, you should curse that Bernanke jerk who keeps shoveling our money into a ravenous hole of greed and sin. He's just feeding the beast, and starving us of our hard work.

So, I'm just spinning up. I'll get back into the swing of things pretty soon.

Glad to be back!

Back to Back of the Envelope

2008-05-04T19:37:00.000-07:00

Welcome to Back of the Envelope. Or should I say, I'm back to BOE.

As you can see, it's been a rough ride for the economy. Many of the things we talked about since the blog started have come true, such as rising food prices, the (slower than anticipated) credit impact, and the economy going into a recession. Some of the things, such as the price of gold and the banking failures have either been wrong or the impact has been less than I expected.

That's part of the fun of doing back of the envelope analysis. There is a story, from Wikipedia, about doing Back of the Envelope calculations. I won't repeat it here, but the gist of it says it's a general estimate that gets you in the ballpark. Back-of-the-envelope_calculation

You might have wondered what happened to me since mid-Feb. It's much simplier than some of the emails/posting I got about it. First off, thanks everyone for your kind words. Secondly, I did not become financially ruined, I was not kidnapped by the New World Order, I did not die in an accident. (I leave that to the DC Madam and her ilk.)

I got into an accident in mid Feb. I was not hurt, but the overhead of getting a "new" (used) vehicle and dealing with the insurance took up my attention. While taking care of this, I had to switch to "Extended Work Weeks" for my job. This means, long hours. So, for the last several months, I've been working long hours and travelings. The combination of these events caused me to chose not to work on BOE. Besides, all the good stuff was already in the mainstream news.

Now, that things appear to be settling down, I think it is time to start again. The economic storm has made landfall, and we now are in the eye of the hurricane. The other side is coming to hit us, usually the back wall of a hurricane is much stronger than the front wall.

I look forward to posting again. Please drop me a line anytime.

Still here - on extended work weeks

2008-03-18T21:36:00.000-07:00

Hi Guys,

I'm still here, watching in horror all the stuff that is going on. I have to work EWW (Extended Work Weeks) for about another month. I'm working hard so I don't get laid off, so I'll be back as soon as things settle a bit at work.

Lehman Bros. I was wrong on precious metals, but it's kinda late to figure that out.

Cya soon! Hugs!

JP

Short Break - Taking a few weeks off

2008-02-17T17:28:00.000-08:00

Hi Guys, I'm going to take a bit of time off. I had an auto accident over the weekend and need some time to take care of personal business that has accumulated.

Thanks!

The Money Grab - Boomers get their retirement stolen

2008-02-15T07:14:00.000-08:00

In a few years, it will become obvious. The liquidity crisis was engineered to clean out the retirement accounts of the Baby Boomers. The Baby Boomers have been the majority shareholders in our economy since the 1960s. Reluctantly, they have been saving up for retirement.

We find ourselves five years before the first of them hit 65, the big target goal for retirement. Their portfolios are stuffed with bonds, stocks, and 401K ready to carry them through the next 20-30 years of their life. They are hanging like the Sword of Damocles over the head of the financial markets.

Now, as the first Boomers start to retire, the market collapses. All their fat little accounts are wiped out, either through devaluation, failure, or collapse. The fund managers, who are leveraged to the hilt in rotten assets, are hiding the failure and hoping the Boomers don't figure it out. But... it's too late. The sub prime rot has invested every aspect of our economy.

Let's hope they do not realize it or we'll see the largest transfer of wealth in the world's history.

But I'm going to tell my Dad.... ;)

Do you know where your money is?

2008-02-13T19:45:00.000-08:00

It's 8pm, do you know where your money is?

Some of the older folks might remember this type of question on the television or radio to check on their kids. Since it is a pretty quiet news day, it's a good time to check your portfolio and where you are.

If you've been following my discussion, you'll be in this type of position:

Physical US Dollars on hand
Physical Euros on hand
Credit Union insured checking/savings account
6 months of food
Preps, solar power, water filtration, and tools
IRA
Roth IRA
No debt
Three credit cards with large credit lines
401K Matching account (balanced)

Right now, you are posed to take advantage of the market rebound. Hold tight until June. (I'm not a financial adviser, go get a certified one before doing anything with your finances.)

Buffet swoops in for a Buffet

2008-02-12T22:04:00.000-08:00

Buffet proved how weak the mortgage insurers are....

As you probably know, Warren Buffet swooped into the Monoline insurers with a bailout. However, what you might not know is that Warren Buffet is doing a vulture run on the remains of the Monoline insurers.

What's not really well publicized is the deal includes a 9 billion dollar cash grab the Mr. Buffet will get if he starts the deal but no matter if he completes the offer or not.

Buffet is famous for coming in with hard deals when companies are weak so he can maximize his benefit. When Mr. Buffet comes to dinner... he's coming for your company.

Let's see if they let him dine...

Stalling foreclosures

2008-02-11T19:23:00.000-08:00

Financial Industry: "Hey, it's hurts when I foreclose properties."
Regulators: "Then don't foreclose."

Ahh.. looks like the next tricky thing is being worked out. It's pretty obvious that they are going to stop foreclosures by... not foreclosing on the property. The Japanese did this when they had problems with overextended companies in the 1980s and 90s. They would carry underperforming and virtually bankrupt entities on their balance sheet at full value until they recovered.

It appears, from the rumors and a Countrywide ad on KFI640, that once again they are going to bend the rules of financial sanity to maintain solvency. The new plan is to not foreclose on people, but to carry them until they are able to pay again. Wow, talk about really nasty.

In California, people can walk away for the value of the house and nothing more. So, they have an incentive to walk. But if the bank doesn't foreclose on them, those protections don't come into play.

I think they are going to keep increasing the balance that people owe without foreclosing on them, causing them to get into complete financial bondage.

It's an evil plan, but the financial industry is doing everything it can to not have to pay for it's excesses.

Over 5 trillion dollars lost in January 08 - The world economy implodes.

2008-02-10T14:02:00.001-08:00

In summary: Get your cash out of the banking system and put it into physical goods or cash on hand. Don't use the banks to hold your cash, it will be seized. (I'm not a financial adviser, talk to a licensed financial adviser before making any decisions with your money.)

Evidence of the continuing deflation of the world's fiat assets.

http://news.yahoo.com/s/afp/20080209/bs_afp/worldeconomystockssandp

What this means is that the underlying assets the world have shrank by 5.1 trillion dollars. It varies by country, but the losses are consistent except in a few small players.

This is consistent with my theory about deflation and collapse. The inability of the financial markets to repackage debt into a salable commodity is forcing the financial insititutions to carry debt for longer periods of time. Traditionally, they had "bridge" loans to finance the securitized debt over the period it took them to sell the debt instruments.

This time, they have taken the debt on to their balance sheets (or placed them in regulation Q off balance sheet places!) and they can not get them off. I've heard the term "Pier loans", because these loans were going to be bridges, but they have no place to land.

The compounding facts will cause additional contraction of the money supply and force the finanical industry to reach for additional more expensive money, such as the money used to finance consumer debt or short term corporate debt.

The pressure to maintain enough cash flow to keep their institutions operating with higher cost debt will force the financial industry to reduce the amount of cash or demand deposits available for withdrawal. We should have all seen that with the ongoing restrictions on getting your cash out of the banks.

As this unfolds, we'll continue to report what we find.

I'd like to hear how your credit card or banks have reduced your access to money.

Where are all the stores?

2008-02-10T05:32:00.000-08:00

Have you taken a look at your local mall in the last few weeks? I haven't visited in a while, as I do most of my shopping at the farmer's market and the local ethnic stores. I live in one of the worst parts of Los Angeles (appeals to my frugal nature) and I do my shopping with local vendors.

I visited the strip mall near my place. I don't visit it often, as it's mostly small retailers for things I don't need. The mall was nearly empty. With the notable exception the anchor stores Starbucks, a CVS, Lowe's, and a IHOP, the entire strip mall is empty. From what I can see, it looks like around 20 retail spaces are open and for rent.

Today, I went to SCALE, the local Linux conference, which also appeals to my frugal nature. I drove into more upscale parts of LA around the airport. It was amazing, outside of the businesses directly supporting the airport, retailers are shutting down their stores.

I'd like to know how the stores are doing around your area. From my admittedly short drive through the Long Beach area, it appears that 10% of anchor stores and 25% of the small retailers are shutdown or shutting down.

I got a distinct late 70's feeling from the view...

Bond Auction failure - first time in 28 years

2008-02-08T20:40:00.000-08:00

For the first time since 1991, insured and public municipal bonds have failed to sell at auction.

http://www.businessspectator.com.au/bs.nsf/Article/Municipal-bonds-on-the-nose-BHUDK?OpenDocument

What does this mean? Wall Street is so cash strapped they could not step in and purchase these municipal bonds when no other buyers were available. They've done it in the past a couple of times. However, they let them fail now.

This demonstrates both the unwillingness of investors to purchase debt based securities and the inability of the financial industry. While I think, if things do not change, that the banking industry will fall apart, it's not going to happen.

Have you ever been on a project that was too important to fail? That's our banking system, it's too important to the world trading systems that it won't fail. On those big projects that can't fail, they change the definition of success in order to declare victory. As you can see, the banking system is having it's definition of solvency changed in order not to fail. These changes only hurt us more.

Just today, I got a notice from my credit union that they are limiting withdrawals to 2500 dollars a day. It's only 1500 on my debit card. I don't use my credit union much, as I am in a more liquid position.

Scary stuff.

Worse than Brittany Spears!

2008-02-07T18:20:00.000-08:00

"Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, will be allowed to buy loans worth as much as $729,750 for loans made between July 31, 2007 and Dec. 31, 2008, an increase over the current $417,000 loan limit, a move that could help struggling homeowners to refinance large mortgages at a lower interest rate. It will also allow the Federal Housing Administration to insure loans as high as $729,750 in expensive markets."

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahxT2LhBjCvY&refer=home

Can you believe this? It's like watching Brittany getting let out of the hospital 2 days into her 14 day hospital stay for mental illness. Changing the limits are going to throw the valuations of the previously securities mortgages into chaos. It's currently almost impossible to judge the value of the debt based security, changing the limits will make it impossible.

How can you, as a debt purchaser, determine what type of mortgage that is being purchased?

Placing this type of confusion into the debt market is only going to decrease the amount of available credit, accelerating the problems we already have. I never thought the financial markets would be so out of control, like a drug addict trying to restart something they know is going to fail.

Thanks to the love of my life for showing catching this little doozy.

Credit Unions

2008-02-06T19:45:00.000-08:00

What about the Credit Unions? I was talking to a good friend of mine this morning. She was 1/2 laughing 1/2 serious about my layoff timer. (Julian 125!) She suddenly was serious and asked "What about my credit union?". Good question.

Credit Unions, the well run step sister to the banking industry, are under a different insurance program than the FDIC. Did she get her self stuck in the subprime mess? I have only found a few articles, mostly from the August 2007 credit crunch. (Hmm.. Where are these interesting metaphors coming from? I guess I'm lonely or something.) Some journalists were savy enough to check up on them. So far, they look like they might be OK. If you guys find out something that I don't know, please let me know.

It might be a good choice to move your primary banking over to Credit Unions. (Cavet: I am not a financial advisor.)

89 days to bankrupcy and layoffs

2008-02-05T21:20:00.000-08:00

The credit market has seized up. We are right back at August 2007... again.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aCk0Qr1f2Eew

Ok, here's the drill.

1. When the credit market for commodity debt instruments lock up (securitized loan) then the banks or the holders of debt have to borrow high cost money in order to stay solvent. This in turn, sucks up the available consumer and small business credit. That's why you are seeing more credit limits being reduced or accounts dropped.

2. The normal users of the higher cost money, such as Corporate paper or folks who sell accounts receivable don't have any buyers of their short term (89 day or less) loans.

3. Within 10-29 days, the short term floats are used up. People lose the early payoff of accounts payable. Profit goes down the drain.

4. Within 30 - 59 days, people carry the cost on their balance sheet. Day 60 is usually when the account is turned over to collections.

5. From 59 - 89 days, companies can't make payrolls, bounce accounts payables, and generally do not service their debt. This causes a ripple effect in the economy, resulting in:

LAYOFFS and BANKRUPTCIES. The clock is running... 89 days and counting.

Today is Julian Day 036 (05FEB08). Starting around Julian Day 125 (05May08), the layoffs will start. Bankrupcies will follow on day 155 (04JUN08).

Can B-52 Ben bomb the credit markets into liquidity? Stay tuned... same Bat Time, same Bat Blog.

Reader's question

2008-02-04T18:52:00.000-08:00

> I wondered if you could answer a question....

I like questions. Please ask away.

> I saw that the fed has something called term auction facilities, and that these are new instruments (invented in December?) to improve liquidity or something like that.

Here is the Fed's press release about this subject.
http://www.federalreserve.gov/newsevents/press/monetary/20071212a.htm

It's a 28 day loan that is at a reduced interest rate below the cost of money at the normal discount window. It's because other banks won't loan money because they can't get it back if the bank goes bankrupt. So, the Federal Reserve cooked up a new scheme to get more money into the system.

> what are the implications of this?

The most significant implication is that the banks won't loan each other money. It also implies that there isn't enough credit made available at prices the banks can afford to keep out of bankrupcy. It also means that previous efforts to increase the liquidity of the credit markets are failing, even with the reduction of reserve requirements to 0 and the discount window being throw wide open.

> Is it normal for the fed to invent new ways for the banks to find money (as it seems that this is) OR is this yet another REALLY bad sign (as opposed to other signs that are bad but happen occasionally and things turn around eventually)?

It's not normal. Matter of fact, it's quite troubling. As the Comptroller of the US mentioned, these risky approachs are going to cause the failure of banks. We have already had our first bank go belly up this year. Our financial system is tapped together with hope and cheap money. The fed only has a few more points and it's going to be free money. The dollar continues to decline against other currencies as the interest rates go up. I remember complaining last year about 1.36 Dollars to the Euro. It's 1.48 dollars to the euro.. a huge difference. The price changes are starting wind their way through the economy, causing more pain to people on the lower social/economic scale. It's going to be rough. Check out the tent cities in Ontario that are causing the problems with the folks on the lower scale. People can't afford to livelike they have in the past anymore. All thanks to irresponsible greedy and reckless schemes like this.

> What effect will having debt have?
Debt is bad in general. You are exchanging your freedom for a good or service. In some cases, like a home, it makes sense. When it doesn't make sense is when you can't pay it back and you are "teased" into the debt. Examples include giving credit cards to people who can't repay or offering extremely low rate ARMs knowing that the person can not repay.

> One more question--what are the risks for the average joe who has some debt (say credit cards or mortgage or car payments) in this financial hurricane that seems to be approaching?

Losing your house, car, and falling into bankrupcy. The bankrupcy laws changed recently, thanks to our subprime champions like Washington Mutual and Countrywide. Now, you have to pay it back. You don't get to walk away from your debts anymore. The ring is now complete, once you get into the spiral, you never get out.

> Right now this seems to be a lot of action in the stratosphere of financial "stuff", and there is a little bit of trickle, but mostly the average person does not seem to see much effect so far.

The average person is completely unaware. They just don't know how big the tidal wave of debt is. A few people see it and are putting out boats to escape it. Cast off your debts.

Comptroller of US - Expect Banking Failures.

2008-02-04T07:04:00.000-08:00

As I mentioned a few days ago, the banking system is bankrupt. From their own data, they have to borrow all of their reserves from the Fed in order to stay solvent.

In the comments, people kept telling me I'm being overly dramatic. Ok... let's look at what the Comptroller of the US says:

http://www.ft.com/cms/s/0/db2badd6-d05c-11dc-9309-0000779fd2ac.html

My... isn't' that familiar? He must be one of those wacked-out conspiracy theorists preaching doom and gloom.

Interesting how people who just point out the emperor has no clothes are being marginalized.

Living with blinders

2008-02-03T22:08:00.000-08:00

I find it interesting how strong people cling to their beliefs. I was speaking to a single mom today. She was telling me of her plan to move to Florida and how much better it was going to be in Florida. She gushed about the availability of property, how cheap the land was, and how easy it would be to get work.

The same thing happens here on our blog about Precious metals. You notice that a lot of folks spend time on my Youtube and here telling me about how great PMs are, especially gold. So, I started checking around a bit. I do listen to what folks say, even if I don't agree.

Here is a telling article in the Financial Times.
http://www.ft.com/cms/s/0/d9614eca-d2c3-11dc-8636-0000779fd2ac.html?nclick_check=1

To paraphase: The private bond insurers are too risky to re-capitialize.

The underlying net of security is giving way. The basic assumptions that you can insure your losses are failing. It will be riskier to lend money for debt based assets, such as mortgages and capital expenditures. It can't be reflected in interest rates, because the borrowers are under no compulsion to pay back the money. The insurers are going to bankrupt out of paying the money. The bankers are going to be stuck with huge amounts of worthless mortgages

Out of curiously, I looked up the housing stats for the woman. I like housing stats, they give you a pretty good idea of how well an area is doing. Well... it's the highest foreclosure rate in the United States. The economy is primarily based on tourism where she wants to live. As you may have noticed, not as many folks are doing Disney world these days as last year. Finally, the crime rate in the area she wants to live is rising. Of course, she blamed me pointing out these facts and casting doubts. Sometimes I wonder why I even bother, but here I go again.

Ontario California has the first Tent City, just like the Great Depression. It formed about 6 months ago. It's coming. Did you see this place? Have you heard about it? Or are your blinders on?
http://fourstory.org/pages/stories/081-interview-tentcity.htm
http://www.latimes.com/news/local/la-me-tentcity3feb03,1,5945483.story

Here is a graphical representation of where I think we are today. Our economy is the old man, the wall behind him is the insurance failure and banking failures.
http://www.dvdbeaver.com/film/DVDCompare6/deepimpact/144.55-old.JPG

Monkey Business - A parable for our time

2008-02-02T11:25:00.000-08:00

Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

In the absence of the man, the assistant told the villagers. "Look at all
these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."

The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant ever again, only monkeys everywhere!

Now you have a better understanding of how the stock market works.

The banks are bankrupt

2008-01-31T23:33:00.000-08:00

Hi Guys...

Look, the banks are bankrupt. They can't even accept large value checks anymore. Don't believe me, read the market traders.

http://www.elitetrader.com/vb/showthread.php?threadid=116240

I can provide other ones if you want.

Lowering the interest rates is only going to suck up more of the very little capital that is left. It's going to be just like last August/Sept, when the credit market locked up. And it's doing it for the same reasons: Nobody trusts anyone else anymore. Everyone lied so much for so long that nobody believes the ratings, the insurers, public auditied books, nothing. Welcome to Capitialism of the 1800's. Huzzah!

The underlying trust in the system is gone.

Giving candy to fatties

2008-01-30T18:38:00.000-08:00

I wonder what sort of father Ben Bernanke was to his kids.

Like a pentulant child, the market has found that Big Ben is a softey. He's willing to pour cheap money into the economy at the slightest downward twinge. His easy money approach only encourages the market not to rally because they can try to get more and cheaper money by not reacting in a positive manner when he puts money into the market.

You don't give into a tantrum with a child, you just ignore them until they realize that it is a lot of work to have a tantrum and not get any result. This way, you help your children understand that bad behavior is not rewarded. In teh case of the economy, the bad behavior is pricing interest rate cuts into the market before they are announced. We've rewarded the estimatation of Ben's softness on

While Bernanke might be an expert on the Great Depression, he's ignoring the reality that our government and our financial industry are effectively bankrupt. The false subprime securities sold as assets to investors are falling apart, and only his relaxation of the regulations have kept the financial industry afloat.

For the amount the government is investing in the stimulus program, they could have bought the bad loans from the banks and provided much needed good valued assets to both the government and the banks. Instead, we are going to inflate the size of the problem by stimulating more false loans on bad property. Not to mention destroying the US currency as a store of value.

Long term food - Great investment (While we are waiting for the fed..)

2008-01-30T07:53:00.000-08:00

The financial market, based on the low volume, is waiting for the Fed lower interest rates. Until then, here is a discussion about precious metals and food. I think food is a better investment for a person who does not normally deal in precious metals on a week to week basis.

I’m practical about precious metals. I think they are fine investments and if you want to own them, that’s great. I’m not knocking them. However, I’m not on the bandwagon that they are going to hit 2000 dollars or more. That’s the same type of thinking we had when the real estate boom.

Food, on the other hand, has not traditionally been a store of value in the 20th century. The ability to produce food has skyrocketed with the introduction of petrochemical farming. Petrochemical farming is farming that uses petrochemicals to produce the food. This includes the tractors, the trucks, the fertilizer, the insectides, and the other items that directly depend on oil to be in existence.

In addition to the petrochemical farming boom, there was the boom in corporate farming. This form of farming drove the cost of food down and increased it’s availability through volume production and distribution. The efficiencies gained in corporate farming force more people into the cities to seek employment. They put, with the help of the banking industry, the family farmer out of business.

So, for most of our lifetimes, food has been extremely inexpensive and available. This is why, unlike our forefathers and Mormons, we do not store food in our homes anymore. In the recent past, our grandparents and great grandparents had large stores of food available in their homes. This is because they remembered the times when food was not available and had learned that you need to have a store of food for the bad times.

Yet, in today’s culture, this is looked at as outrageous and potentially dangerous behavior. Only extremists, such as religious fanatics or whacked out survivalists, kept food stored for more than about a week. Why would anyone keep food around? Food was always available at the supermarket or fast food joint at a low price just around the corner. You could drive over and pick up as much as you wanted day or night.

The behavior, molded by the corporate farmers and food producers, is based on efficiency. It’s more efficient for the corporations to keep the minimum amount of food in the pipeline, so they could charge the actual price of product plus (outrageous?) profit. The constant demand for food allowed them to lower their cost of transportation and storage. If the consumers did not consume food at a steady rate, they had no way to assure a certain amount of profit to their shareholders. Therefore, they molded the behaviors of the consumers to make them constantly demand food products instead of storing them.

The availability of reliable transportation, refrigeration, and international commerce has allowed corporate farmers in other parts of the world to supply food to the United States when the growing season is out of season. The seasonality of our diet has reduced to the point that it is possible to get oranges in the dead of winter.

The underlying assumption of system is the availability of petrochemicals. Every portion of this system depends on petrochemicals: from planting to harvesting to processing, distribution, and even purchasing. The system is highly dependant on the price of oil. It effects every portion of the food chain. The higher the cost of oil, the more your food costs.

If you look at the price of oil and the price of food, you see a small lag, but the prices move in harmony. The price of food goes up with the price of oil. In the last several years, we have seen a ~25% increase in the price of oil. This has increased the cost of food proportionality. The price of fresh items is the most effected by the increase of oil costs, because they are often shipped from other parts of the world to meet our needs during the seasonal changes. The processed foods can hid the oil hikes easier, as long as they do not stay in place for longer than a growing season.

The investment into food has now become a good investment. With prices increasing at 25% clip, the food that was purchased several years ago has had an appreciation of 25%. Additionally, you now have a store of consumables that allow you to be more flexible with your money. You can switch to your stored food instead of having to purchase items from the store. It also provides a cushion for bad times, when the economy is fine but you are unable to purchase food, such as job losses, weather, or medical problems.

Overall, food is a good investment. I think it’s better than gold. Of course, you should diversify. A little gold, a couple years food, some silver, some dollars, some investments, makes a sound mix to me. However, that’s for a financial advisor to help you with. I’m not a financial advisor, so don’t think my commentary is financial advice.

Which way are the markets going?

2008-01-29T21:08:00.001-08:00

I'm guessing the Bernanke will make a .5% drop in the interest rate and you'll see the markets stay about the same way.

Let's see how it turns out...