One of the worst side effects of QE2, besides sharing the name of the luxurious boat to England, is the effect the stimulus measures are having on global food prices. Soybeans were up another 1% last night, which was dwarfing the gains in the stock index futures again -- Friday's 2% advance paled in comparison to the advance in the price of grains. How much longer can the prices of beans and wheat rise faster than the prices of stocks? If soybeans doubled, for example, I find it hard to believe stocks could also double from these prices. So the parabolic move higher in grains to me suggests that the Fed will have limited options to help the stock market while facing big inflation risks in food prices.
How the Fed will handle the increase in grain prices will determine the course of the stock and commodity markets ahead. If the Fed continues its low interest rate policies, stocks should gain but the debasement of the currency will likely push grains even higher and could do so faster than previously experienced. This is very worrisome to me because the only tool the Fed has to cure the economy's ills are the same tools causing the poor worldwide to go hungrier and starve when food prices rise.
I have written several blogs about the subject of Monetary easing and its ill effects on the poor and hungry, but now I am beginning to think that the economy is so bad that the Fed is most worried about a stock market panic and will not stop at any cost to improve the ratings over at CNBC (which are awful in bear markets and amazing in bull markets). What is the prudent investment? I believe it is to be long undervalued companies with strong global brands and short the overvalued "sexy" names that appear on TV almost daily with the highest debt loads and most astronomical P/E ratios. Furthermore, I would want to be 10-20% invested in grains, and at least 40% levered to commodity prices somehow, with oil being no more than a 20% weighting of my commodity exposure. I also feel the actual commodity makes for a better hedge then do commodity businesses on a stock exchange. Can stocks move higher while grains climb vertically?
Clearly there are some large bull markets out there... I am kicking myself for not ditching stocks and buying beans earlier. Now I will likely have to wait for a pullback before buying. Hopefully we can find a way to fix the economy without starving out the poor people of this world at the same time. Maybe we should think of QE2 as the luxury liner carrying our wealth abroad. Certainly makes some sense to me.