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"The overwhelming ignorance of the masses regarding fundamental economic principles is one of the reasons why the beef checkoff program exists."
Copyright 2002, Slanker Productions, Powderly, Texas
Just MANAGING to get by . . .
by Ted Slanker
Economics and Markets: A Short Course
Economics and markets are frequently discussed and reviewed in rural coffee shops, professional livestock publications, and cattlemen events of all kinds. When the discussion focuses on longer-term cycles, in most cases symptoms, myths, and hearsay frame the analysis. The majority of commentators have very short-term perspectives, do not convert price action to constant dollars, focus on one commodity or one stock rather than whole market sectors, do not know that commodity prices and stock market valuations are contracyclical, believe that the government and its Federal Reserve (Fed) can control economic activity and the markets, and are influenced by the moral suasion of the masses. Thus we can say the masses help frame the analysis and are duped by it.
People are rarely interested in the truth. They want events to fit their beliefs. That way they can have excuses or blame others for their failings and get all the credit for their successes. When the mob is not interested in the truth, wisdom is scorned. When that happens and decisions regarding market regulations and economic policies are made by mob rule, the stage is set for unsustainable behavior on a mass scale, which always fails in time, causing whole societies to pay high prices for ignorance.
Certainly you donít think youíre a member of the mob. No one ever does. But if you feel comfortable with the majority in everyday discussions involving economics and markets, youíre in the middle of the mob.
For instance, many agricultural producers (the mob) believe that the government controls the level of economic activity with its rules, laws, spending programs, and subsidies and that it can even maintain market stability over time and minimize losses and maximize gains for all participants. Many cattlemen (commodity producers) believe that packers (processors of commodities) control the price of cattle (the commodity they produce). And many commodity producers believe that if they promote their commodity its price will increase relative to all other things and they will be more prosperous compared to other commodity producers and manufacturers.
Cocksure and Naive
Between 1994 and 2000 the mob grew very cocky about the stock market. By 2000 the mob had become so cocky nearly all of the high-profile agricultural economists and educators were telling me (and everyone else) that buying land and cattle was beyond ignorant compared to investing in the stock market. One prominent educator, whom I lampooned in this column right after I heard him speak at a TAMU Beef Short Course a couple of years ago, told folks that beef demand was going to soar this decade because as wealth increased with the markets people were going to eat more expensive meats. Today those same misguided clairvoyant soles who were bullish on the stock market are telling us the stock market always bounces back and that most bear markets donít last much longer than two years. Consequently, theyíre telling us this is a good time to buy while prices are ďdepressed.Ē Below Iíll explain why these prominent economists and educators are just as naive today about the stock market as they were two years ago.
The other point I want to make in my ďshort courseĒ is that the checkoff canít work for producers. A lot of folks who own cows and write articles for beef publications claim that by promoting beef, consumers will eat more and the increased demand in the face of a constant supply will push up the price of cattle. Some go so far as to say that without the checkoff the price of cattle will collapse.
The beliefs paraphrased in the two preceding paragraphs are just a spattering of the many misguided beliefs that are common knowledge (beliefs of the mob). A thorough interpretation of the analysis regarding the economics and market responses involving those two beliefs would be too lengthy for this column, which editors tell me is already too long for the attention spans of most readers. So I can only briefly touch on several key points, and that always leaves lots of room for nay sayers to nitpick around and bring up distantly associated points that seemingly discount what Iíve said.
Markets and Economies Cycle
The Fed was created in December 1913. A secular bull market for stocks started in 1914 and lasted 15 years. A secular bear market started in 1929, which was the Fedís first experience with a bear market, and it lasted 20 years. The 1949 bull market lasted 17 years. The bear market that commenced in 1966 lasted 16 years. The 1982 bull market lasted 18 years. I think the current secular bear market will be with us until at least 2015.
Experienced market technicians (chart analysts) can easily discern the aforementioned major market cycles. If historical stock price charts are adjusted for inflation, even the most inexperienced novice can see the dramatic cycles. Heíll easily notice that from market bottom to market bottom the stock market cycles of the past have taken approximately 34 years to make a complete cycle. Obviously, the stock market has long-term bear market cycles no matter what the Fed and/or the government does. Yet as simple as it is for all of us to see the cycles of the past, the mob can see only for the moment. Thatís why most market observers were bullish at the top and canít comprehend that we are now in a bear market that, in constant dollars, will drive the DJIA down to 1200 or less sometime between now and 2015, proving once again that history repeats itself.
Economic activity can cycle too. There are many reasons why. Debt is a big one. In an economy that has little or no government intervention, debt expands and then contracts to the baseline in long rhythmic cycles. In the United States, our interventionist government and the Fed have spent the past 70 years working together to diligently promote an ever-higher debt load in order to spike economic activity to ever greater heights. This is an unsustainable activity, and it is very long in the tooth. Numerous additional factors are involved in the governmentís debt-based perpetual prosperity program. They include our countryís hemorrhaging balance of trade and its irredeemable currency. Years ago, economic cycles were well understood by the masses. (Thatís when and why folks had substantial savings accounts.) Today the mob has convinced itself that the government and the Fed control economic activity so it doesnít have to worry about such mundane things as debt levels, trade deficits, and a fiat currency.
Checkoff: Ignorance in Action
The overwhelming ignorance of the masses regarding fundamental economic principles is one of the reasons why the beef checkoff program exists. For sure the primary beneficiaries of the checkoff, feedlots and packers, understand how it helps them. Thatís because it could cause an increase in the volume of cattle that flows through their operations. They are choke points through which all cattle flow on their way to the American consumer, and more volume usually means more profits.
But the commodity producer, that is, the cattleman with the large capital investment in land and the cows that produce the calves that supply feedlots and eventually the packers, gains no permanent advantage from the checkoff. The reason for this is that cattle are a commodity and all commodities have fixed relative values. In other words, over the long term there will be virtually no changes in the relative values of corn, wheat, oats, cotton, potatoes, cattle, sheep, pigs, gold, silver, copper, oil, and the list of commodities goes on and on. In spite of ample historical evidence to the contrary, proponents of the checkoff say it will increase the price of cattle relative to all other thingsóand the increase will be permanent. Therefore, because of the checkoff, proponents say cattlemen will prosper while other commodity producers and manufacturers of all other things are left in the dust. Folks, THAT IS IMPOSSIBLE. Eight thousand years of domesticated livestock production clearly demonstrates that agricultural commodity producers are very responsive to market signals. If the price of cattle increases relative to other commodities produced on the land, agricultural commodity producers will switch from producing less profitable products to producing cattle. Because producers are flexible in what they produce, the valuation relationships among all commodities are, and always will be, constant. Thatís why the checkoff canít work for producers, yet it can work wonders for feedlots and meat processors.
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Copyright 2002, Slanker Productions, Powderly, Texas
Ted E. Slanker, Jr.
RR 2, Box 175
Powderly, TX 75473-9740