Connelly on Commerce

Rice is now getting as scarce as credit and almost as expensive; next week’s  meeting of the Federal Reserve may be the first on record to be affected by the travails of the Asian restaurants of San Francisco! (It’s a two-day meeting — do they order out for Chinese?)

Seriously; the price of rice and other foodstuffs may be to the current economic malaise what WorldCom was to financial scandals earlier this decade — the tipping point of the situation from an insiders market scandal matter to a broad market meltdown.  Enron was an elite player’s market nightmare — but WorldCom was one of the top five holdings of all US equity investors. After WorldCom revealed the extent of its fraud, it only took about a month of precipitous Dow downturns to turn Sarbanes-Oxley from a dead letter to the scourge of executive suites (not to mention the savior of the accounting industry as we know it).

So, too, today with the looming recession — likely to be confirmed the very morning of the Fed’s interest rate announcement — do you really believe the Fed will choose that same day to announce NO further rate reduction? (Now THAT would be a story.) The market’s focus will most likely be on the Fed’s forward-looking statement (and there is no “safe harbor” for the Fed as with corporate earnings projections, and hell to pay if the Fed misses its guidance ). But lately the Fed has been on a winning streak, especially with its decision to open a new “window” in its stately loan-office facade for the post-Glass-Steagall investment banks, bringing them into debtor parity with their not-so-distance commercial bank cousins, as well as its Bear Stearns crisis intervention (rather, its $30 billion insurance policy, with a $1 billion deductible, in favor of JP Morgan). These bold actions have enhanced Bernanke’s market credibilty simply because they seem to have worked at turning around around the financials  — at least their equity shares – and allowing  Hank Paulson to breath a very public sigh of relief — always a good move for a Treasury Secretary; like coming out for a “strong dollar”.  And Hank may get his chance to look good on that score soon, too  — see below, about 3 paragraphs.

And given its winning ways, surely it’s not the Fed’s fault that the vaunted Washington “stimulus package” of direct deposits and checks-in-the-mail that will begin flowing next week has morphed from currency coupons for a shopping binge at the local big-box retailer to the functional equivalent of middle class food stamps to counteract the emerging phenomenon of grocery gouging. Or is it?

It is apparent that the price of food is now the most potent “chicken coming home to roost” of the Fed’s policy of lowering interest rates precipitously to mitigate the coming recession, in turn caused by the credit crisis in part brought on by the Fed’s previous policy of lowering interest rates precipitously to mitigate the previous recession bought on by the dot-com collapse, which itself was brought on by the the Fed’s previous policy of…oh, well, you get the drift. Rates brought low in turn brought the dollar all-time lower against the Euro, and brought in turn higher prices for all commodities denominated in dollars, not the least of which oil and jet fuel, which in turn added to the tab for moving all those other commodities around the globe (like, say, rice), and in turn added a fair bundle of digits to the bar codes at our local supermarket.  

So, yes, the Fed’s to blame for your grocery bill – what’s more , it knows it. To put a floor under the dollar and maybe start it back up again, the Reserve Bank seems to have been in touch with its designated leaker this midweek leading to a very prominent story in Rupert Murdoch’s latest acquisition to the effect that the coming Fed meeting may indeed produce  the “one and done” signal on interest rate policy that the inflation hawks (read dollar bulls) have been waiting for. And the well-timed leak did the trick: dollar  up, gold down, and only a little popgun play with the Iranian version of McCale’s Navy (we don’t yet have McCain’s) kept oil from slinking back to the more decent levels –  say, $115, which passes for decency these days.  

So before the new backbones at the rating agencies put the US dollar on credit watch with negative inplications, watch for the Fed to send some signal that, having demonstrated their quick draw proficieny with interest rate cuts, the gun may be back in the holster a while because the credit markets seem to be turning peaceable and any more gunplay might just provoke a run on the US dollar bank, not to mention a worsening  case of rice hoarding. When Costco starts putting a limit on what you can truck out of the place, you know something is seriously amiss!

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