Food Stamps: The Most Accurate Economic Indicator

by: Larry Trefz

Many investors and traders get hung up on the technical parameters of the markets at the expense of the bigger picture, which is right in front of them. The markets are made up of the people who participate in them (wittingly or unwittingly) with all of their biases, emotions, strengths and weaknesses.

With so much data, financial products and technology it is easy to lose focus on the fundamentals of the economy. So long as we continue to exist in a material world, fundamentals will rule the markets at the end of the day.

Since human beings are made of flesh and blood, we require certain elements and quantities of those elements to sustain life. Water, food, shelter, generally in that order.

As it is hard to quantify the price of a human being's water intake accurately, the next most accurate indicator is food. Shelter is quite subjective.

Food is absolutely necessary and rather easily quantifiable. The United Nations has set out a minimum standard of 2,100 calories per day for an adult as being the hunger line, below which a person is technically under-nourished.

Since the 2008-2009 financial crisis, the Federal Reserve has pumped unprecedented amounts of newly created money into the U.S. financial system in an attempt to revive a struggling economy. It has been frustrated at the slow progress made and has continued to amp up its money-pumping efforts (currently the Fed is injecting $85 billion per month). This has had the effect of propping up commodity (this includes food) and asset prices. Meanwhile, real wages and incomes have declined.

Real median household incomes have been dropping over the last few years. --WSJ

In a desperate effort to fight deflation, the actions of the Fed in "printing" money have had the effect of widening the spread between what people make and what they can afford. Forcing this spread wider has had the effect of increasing poverty. Practical economics is largely relative, it should involve a significant element of balance.

Broadly speaking, markets and people function best when there is balance. Gas may be affordable at $10.00 per gal, if you make $200,000 per year. Ten dollars per gallon seems outrageous, however, if you only make $20,000 per year.

Some would argue that the actions of the Fed have brought the unemployment rate down and this will help enable people to buy the necessities. The problem with this is that many of the recently created jobs have been lower-paying jobs, as is evidenced by the wages and income data above. These lower-paying jobs simply do not allow those employed by them to afford the goods that they need, given the cost of those goods (commodity prices propped up by Fed easing). So many of these people are forced to seek government assistance, which in turn adds to the national debt, which requires more taxation and results in a slower economy--seems like a vicious cycle.

The Fed is aware of many of the imbalances being created. One example is the case of: "The Pre-FOMC Announcement Drift".

Since the Federal Open Market Committee (FOMC) began announcing its monetary policy decisions in 1994, U.S. stocks have experienced large excess returns in the twenty-four hours preceding these announcements. These abnormal returns account for more than 80 percent of the U.S. equity premium over the past seventeen years. Other major international equity indexes have experienced similar abnormal returns before FOMC announcements. However, no such return pattern is detectable on U.S. fixed income assets or the exchange value of the dollar. We discuss a few possible explanations for the pre-FOMC announcement drift for equities, none of which appears to be fully consistent with the empirical evidence. Source: NY FED

I am not arguing that central banks should never take action to stimulate an economy. One only has to look back to the boom and bust cycles before the existence of a central bank to see their value. What is dangerous for investors to overlook, are the imbalances created by the Fed's actions and the imbalances created by investor's and trader's perceptions of those actions.

Central banks "printing" of money is little more than an illusion of creating value--"printing" money does not actually create value. However, the injection of liquidity in a crisis can help to keep value from being lost, by restoring confidence.

Since our current form of money is not tied to a commodity (such as gold or silver) it (money) is really only an agreed upon measurement unit of value, which is used to efficiently exchange goods and services. Fiat money, which is now largely digital, has made it possible for the money supply to be expanded and contracted at a keystroke. This power to keep the currency stable has been entrusted to the Federal Reserve by Congress.

When a central bank allows itself to go beyond the point of trying to stimulate the economy by legitimately adding to the illusion of value, for a brief time, to contain a financial crisis by injecting liquidity and instead crosses the line into attempting to actually create value, is where dangerous imbalances will be created and the bonds of society itself can be strained to the breaking point.

Where this line is, between legitimate monetary stimulus to add liquidly in an attempt to alleviate a crisis, and the other side of the line, where an attempt is made to actually add value to the economy by creating more money, is a matter of debate. However, after four years of adding liquidity to supposedly alleviate a crisis and having the result be that more people each month are unable to afford their own food, some discussion is in order.

My view is that the fundamental ability, or lack thereof, of a country's citizens to feed themselves will only be ignored at great peril. If food is not affordable for a significant portion of the population, something is definitely out of balance. Continuing the actions that make the situation worse should be given a hard look. I recommend that investors watch the Food Stamp rolls as an evidence of true economic conditions.

The Unemployment Rate has been put forward as a primary economic indicator, however its relative accuracy is altered by demographic changes such as an aging population (see labor force participation rate) and advances in technology.

I would postulate that real economic recovery will not be felt by the bulk of the population until a greater number of people are able to afford their own food. It is also my view that the chart below is rising, to a large extent, in response to the Fed's extreme monetary easing actions and the imbalances created thereby.

food stamps chart

Source: Business Insider

Given the recent exuberance shown in U.S. stock prices in the face of these fundamental facts, it would stand to reason that a significant correction may be near.

Many indicators point to a correction in stocks, including U.S. Treasury bond yields, which have been falling over the last few weeks and currently trade near 1.70%, on a 10-year note.

I would look at taking short positions in U.S. stock indexes as signs of a rollover in those indexes intensify. Going long the U.S. dollar as indicators of deflation show themselves may also be a profitable trade. In my opinion, a correction of 10% or more on the S&P 500 would be reasonable in the near term.

ETFs that can be used to trade the U.S. equity indexes include: (NYSEARCA:SPY), (NYSEARCA:SDS), (NYSEARCA:DIA), (NYSEARCA:DXD), (NYSEARCA:IWN), (NYSEARCA:TWM), (NASDAQ:QQQ)

ETFs for going long the U.S. dollar include: (NYSEARCA:UUP), (NYSEARCA:UUPT)

Disclosure: I am short SPY, IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Nothing in this article is to be taken as professional financial advice, nor is it a solicitation to buy or sell any type of securities. All financial decisions are your own, seek professional advice before taking action.