The Declining Quality of Dollar Menus

With food prices soaring, you’d expect to see those "Dollar Value Menus" at fast food restaurants begin to disappear. Well, guess again. Apparently they’re here to stay. But don’t expect to get exactly what you used to. The Mighty Mogambo explains…

Speaking of inflation, Michael Pento of Delta Global Advisors reported that McDonald’s, the fast-food giant, "stated it has no plans to tamper with its highly successful dollar menu, which accounts for 14% of the company’s sales."

Naturally, Junior Mogambo Rangers (JMR) everywhere laugh mirthlessly at the concept that McDonald’s, or anybody else, would sacrifice profit by not raising prices to offset higher costs.

Mr. Pento is careful not to agree with me about motives or anything else I say, and writes instead that the problem of higher priced food is becoming universal, as "Indeed, the price of food ingredients has risen sharply in recent years. Since the start of 2006, rice is up more than 200%, wheat more than 130% and corn has increased 125%. Meanwhile, the World Bank has stated that average food prices are up 250% since 2002." Yikes!

To show you how things really work in the real world, Mr. Pento says that nobody is sacrificing profits, as "In the case of McDonald’s, it may be necessary to reduce the quantity or quality of items on the dollar menu in order to maintain the price." Hahahaha! No fooling? Hahaha!

In the old days – at this rise in food costs, thanks to the blatant assault on our currency by our own Federal Reserve – we would have rallied behind a charismatic leader such as the Charismatic Leader Mogambo (CLM), and made a big fuss about the outrage of charging the same price, but delivering less quantity of a lower-quality product! A double affront!

And the newspapers, and radio news, and television news people would have all given it extensive coverage, with powerful headlines that boldly declared "The Brave And Handsome Mogambo (TBAHM) Is Right: We’re Freaking Doomed!" accompanied by strident editorials to immediately abolish the Federal Reserve and return to a gold-standard economy, as required by the Constitution, but which the corrupt FDR, and the corrupt Supreme Court in 1933, and upheld by every corrupt Supreme Court since then, has ruled to be invalid!

Instead, my loud and righteous denunciation of FDR, the Federal Reserve, Supreme Courts, inflation in burgers and lack of a gold standard as required by the freaking Constitution got just a tiny little blurb at the bottom of page 19 that reads "Police Confront Local Lunatic". And they spelled my name wrong, too.

But the point remains; we are paying for every dime of inflation in prices, either by higher prices, by smaller portions, or by cheaper ingredients, usually all three, and more, such as food companies trying to invent a tasty way to make us consume industrial chemicals directly, instead of just adding them to our food.

But even that is getting to be more expensive, as the Wall Street Journal reports, "In a move that may fuel inflation in consumer goods ranging from plastic wrap to diapers to food, Dow Chemical Co. said it will boost prices of its products by as much as 20% because of soaring energy prices." Yikes! A 20% rise in prices!

This is especially significant to Dow Chemical, as it is "one of the largest chemical manufacturers in the world" that "uses oil-based products and natural gas as raw materials and is also a heavy user of energy to power its manufacturing plants." So they get hit hard by inflation in prices, and now Dow Chemical is showing how inflation, like taxes, are always passed along to the final consumer – which is, as it turns out, me – because every freaking day somebody comes along and wants more of my money in exchange for food, beer and pornography. Bastards!

And food prices seem destined to get worse, as I discern from Junior Mogambo Ranger (JMR) Terry L., who sent a copy of the essay, "The 1930s Dry Spell Was a Walk in the Park" by Robert Morley, which is not to be confused with JMR Dan K. interpreting Ben Bernanke’s remarks that "The Great Depression was an example of an adverse feedback loop"! Hahaha!

Mr. Morley ignores my little attempt at humor to lighten the mood, and starts out by noting that "Due to soaring demand and natural disasters, global food reserves of corn, wheat and rice are dangerously low. In fact, depleted U.S. wheat stockpiles are at levels not seen in over 60 years."

What makes this so significant is that "during the Great Depression, America had a population of less than 130 million, as opposed to over 300 million today."

And this is made even more chilling when you realize that "Forty percent of the world’s corn supply is grown in the Midwest. Plus, America produces 36 percent of all soybeans, 32 percent of coarse grains, 25 percent of the five major oil seeds, 20 percent of sorghum, 16 percent of cottonseed, and 9 percent of global wheat output."

The worse news is that he cites Donald Coxe of Harris Investment Management as saying that the chances of rebuilding those stockpiles is slimmer than commonly thought, as "despite reports of localized droughts, North America as a whole has experienced great weather for the last 18 consecutive years, which combined with improvements in agriculture, has resulted in near-record harvests."

This is so remarkable that Mr. Coxe refers to a report titled "2,000 Years of Drought Variability in the Central United States" by Connie A. Woodhouse and Jonathan T. Overpeck (1998) that "you have to go back hundreds of years to find a period of such favorable weather for so long a time", as "paleoclimatic data indicates that during the last 400 years, the U.S. has probably received some of the best weather North America has had to offer over the past 2,000. Even considering the dust bowl of the 1930s, which sent over 1 million people fleeing, the last 200 years have been exceptionally good in comparison to historical norms."

Suddenly, I get the feeling that things will get worse. A lot worse. Lots and lots worse! Gaaahhh!

Welcome not only to the hell of inflation in prices after decades of inflation in the money supply by the detestable Federal Reserve, but having it made indescribably worse by Mother Nature reverting to norm! We’re freaking doomed!

Until next time,

The Mogambo Guru
for The Daily Reckoning
June 9, 2008

The Mogambo sez: Today, a poem…

"Silver and gold,
So nice to hold.
And oil and commodities, too!
So get some of each,
You son-of-a-beach,
Or one day you will be standing there with a surprised look on your face and fistfuls of worthless stocks and bonds in your hands while you watch all the people who ‘got some of each’, and now they are wealthy and happy, and who look at you with pity and contempt because you didn’t; now you aren’t wealthy or happy, and you realize to your horror that you made a Big Freaking Mistake (BFM) by not doing likewise."

Reading over what I wrote, I suddenly realized that it doesn’t rhyme there at the end, proving that not only is this another example of the usual Sub-Standard Mogambo Work (SSMW), but that you get the point, so SSMW doesn’t matter, anyway.

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

In the war between inflation and deflation, Friday was a bloody day.

It began with a shot from the Labor Department; unemployment registered its biggest increase since 1986 – from 5% to 5.5%. Then, all Hell broke loose.

Immediately, investors figured that there was no way the Bernanke Fed could follow through on its half-promise to give up the fight against deflation and begin fighting inflation, alongside the European Central Bank. Central banks do not increase rates when unemployment is rising. At least, that’s the ways it’s gone for a long time.

The Fed, we remind new readers, has a "dual mandate." It is supposed to do two contradictory and incompatible things at once – protect the dollar (guard against inflation)…and maintain full employment (guard against deflation). The two are mortal enemies. Generally, lower rates help stimulate employment; but higher rates are the way to protect the dollar. Of course, in the period known as the Great Moderation, it didn’t matter. The feds could stimulate employment all they wanted and not worry about inflation. Meanwhile, the Chinese were protecting the dollar by exporting cheaper and cheaper goods to the United States.

Now, the inflation rate in China is 8.5%…labor costs are rising…energy and raw materials prices are soaring; the poor Chinese have no choice. They’re exporting price increases…not price cuts. All of a sudden, the war is on!

Yesterday, amid the smoke and dust of the battle, in rode the ‘crude oil vigilantes,’ guns blazing. The news from the Labor Department seems to have set them off, but they seemed to be itching for a fight anyway. Soon, they had driven up the price of oil more in one day than ever before. A barrel of crude rose $11. To put that in perspective, that’s about the whole price of oil 10 years ago. At the end of the day, the oil price was at a new record high: $139.

As we’ve been saying, there is no clear winner in the battle between inflation and deflation. There is just a clear loser – the U.S. householder. He gets blasted no matter which way he goes. Higher unemployment means lower earnings. And a higher oil price means higher consumer prices. And don’t forget the falling housing market. His earnings and his major asset go down; his cost of living goes up. Heck, even Ed McMahon says the bank is trying to take his house – and he’s got a lot of company. Aretha Franklin and Michael Jackson are said to be facing foreclosure as well.

Lately, most of the news has been about inflation. The threat of recession was thought to be past. The oil price has been setting records…and we’re getting more and more consumer inflation-sighting reports from all over the world.

"Inflation is biggest threat to global economy," a Bloomberg poll of business executives discovered.

But last week, according to the Wall Street Journal, "recession fears [were] reignited."

Adding to deflation’s firepower last week was an announcement by the European Central Bank on Thursday. Unlike the Fed, the ECB only has one job – to protect the euro. And when the inflation numbers in Europe came out higher than hoped – remember, inflation is now a globalized phenomenon – Jean Claude Trichet, head of the ECB, stepped forward to tell the world to get ready for higher rates. This, of course, had the effect you’d expect – the dollar fell, which puts additional pressure on the Bernanke forces, who had hoped to be able to talk the dollar up.

Of course, everyone knows you can’t fight inflation and fight deflation at the same time. And everyone knows that when push comes to shove, the Fed will throw its weight in inflation’s direction. That is, when its back is to the wall, the Fed will lash out at deflation…and let the dollar go whither it wants – down.

How much difference it makes is open to question. Because, when the shooting really starts, the Fed’s policy changes often get lost in the fog of war. Even as the Fed was being pushed towards the wall…so close it could scratch its back on the aluminum siding…investors sold off stocks. You might have thought that the prospect of lower rates would be good for stocks. But now, with the crude oil vigilantes in the saddle, investors know that being soft on inflation is no guarantee of lower rates and a growing economy. Instead, they’ve come to see that higher oil prices…and higher prices generally…shoot so many holes in consumers’ budgets, the economy goes into decline anyway.

*** Stocks sold off on Friday, sending the Dow reeling by 394 points. The banks were hit hard. You’ll recall that everyone thought the banks had seen the worst back in March, after Bear Stearns collapsed. Investors expected the banks to lead the following rally.

But once a bubble pops, the hot air goes elsewhere. Instead of going into the financial sector, now it’s going into prices for oil and commodities. Not only did oil hit a record on Friday, by the way, so did corn – at $6.50 a bushel.

The banks have been almost cut in half since last year’s high. You’ll recall that they were "adding value" by "allocating capital more efficiently" than their predecessors. Well, for some reason, they don’t seem to be allocating capital very efficiently anymore. All the value they added to their own shares, ever since the merger and acquisition boom of the late ’90s, has now been wiped out.

Aren’t there some good bargains in the financial sector, thanks to the collapse of share prices? Yes, almost certainly…just as there were some good buys on the NASDAQ after the collapse of the dotcoms…and good buys in tulip bulbs after the blowup of the bubble in the 17th century. But don’t expect to see the whole sector reflate anytime soon. Now, it’s on to the NEXT bubble…

*** It looks to us as though the next bubble is in oil and commodities.

As we pointed out on Friday, markets work. And now they’re working their magic on the oil market. High prices discourage consumption…and encourage new production – which is just what we’re seeing.

The weekend news brings more details.

For example, Brazil has a huge new oil find. Trouble is, it’s offshore and six miles down. It will cost $240 billion to get the oil to market, say current estimates – making it the most expensive oil deposit ever exploited.

Meanwhile, there’s the huge Bakken field in the United States. It’s huge too. But it’s deep, and in a thin layer of dolomite, which makes it hard (expensive) to bring out.

As we reported last week, the bubbles in natural resources and food coincide with an even bigger bubble – the mother of all bubbles – in human population. Yes, there are more of us every minute. And as near as we can make out, we are now growing as Malthus predicted – faster than supplies of oil, food and water. The really big question is: which bubble will pop first?

This is not the first time that question was posed. Malthus himself posed it and answered it – incorrectly, as it turned out. Then, Paul Ehrlich put the question to himself in the 1970s; again, he came up with the wrong answer. Both thought millions of people were destined to starve, since it seemed to them a mathematical certainty that supplies could not rise fast enough to keep up with population increases.

Now, most free market economists believe the matter settled. ‘Seek and ye shall find,’ they say, adding a caveat, as long as you have a properly functioning capitalist economy.

We’re not so sure…more to come…

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*** It was an odd week. We were on the train from Munich to Zurich, when we noticed a group of fully grown men in what looked like Boy scout outfits, including shorts and knee socks. Then, three of these men crowded into the tiny toilet and closed the door. Time passed; we forgot about them. Then, a half hour later, they marched out.

*** Zurich is a marvelous city. Clean, prosperous…pretty. Unfortunately, it was a soccer weekend…the beginning of an important European soccer championship…somehow involving the city of Zurich. There were huge TV screens set up around town…and temporary stands selling hotdogs, beer, won tons, pasta – practically anything you could want.

Late at night, the soccer fans were still going strong…singing, drinking, falling into the lake. The Swiss had to call in extra policemen from Germany to help control them.

"It is very un-Swiss," said a friend. "Zurich is a small town – only about 600,000 people…with a single main industry, banking. There are plenty of restaurants, but people usually go to bed early. It is a very quiet place."

But Zurich has a rich history…

We went to dinner at a famous restaurant, the Kronenhalle. On the walls were original works by Chagall, Picasso and others.

"Zurich has quite an intellectual history," Elizabeth reported, studying a guidebook. "In the early 20th century, this was the place where the Dada Movement was born. Apparently, Tristan Tzara, the founder was here. And Lenin lived here…and James Joyce…and Picasso and others…philosophers…artists…revolutionaries. Switzerland, then as now, was neutral. So, they must have felt safer or freer here."

"The key to understanding the Swiss is to realize that the place is very hard to conquer and rule," said another friend. "The Romans…or the Holy Roman emperors…or Francois Premier…or the Bourbons or the Hapsburgs could invade. But they couldn’t really control Switzerland’s remote valleys. It was too easy for the Swiss to ambush a foreign army in the mountain passes. So the Swiss acquired a very independent attitude and a reputation for being very warlike. Later, since they were also very poor, the Swiss hired themselves out as mercenaries. Then, no country wanted to attack Switzerland, because their Swiss mercenaries wouldn’t allow it.

"The Swiss have never been part of an empire…and never had any real imperial ambitions themselves. Switzerland is not even a nation-state. It is a collection, a confederation, of cantons. The German-speaking cantons don’t really like the French-speaking cantons. And the Italian-speaking cantons don’t like anyone. So, it’s very hard to get any cooperation for national-level policies. We don’t even know who our president is…because we don’t vote for him directly; it’s a post that rotates among different cantonal representatives.

"Now, there is a lot of pressure for us to join Europe. But I think it would be a big mistake…we’d lose our independence."

*** European Union bureaucrats are forever telling people what to do. You’d think the Europeans themselves wouldn’t put up with it. But in Europe as in America, TV and popular democracy have lobotomized the whole race. They’ll go along with anything.

The latest EU directive forces fortunetellers and astrologers to warn the public that they are "For Entertainment Purposes Only"…and that their métier is "not experimentally proven."

Which just goes to show what cement heads EU functionaries are. Everyone knows perfectly well that fortune telling is a hit or miss business. Astrology and religion, too. You hardly need to warn people away from them.

But there are dozens of expensive preoccupations where a warning might be valuable – where people believe there is some "experimental proof" even though there is none at all. Central banking, for example. Psychiatry. Marriage counseling. Fund management. Stock broking. Economics. City management. Drinking 8 glasses of water. Elliott Wave theory. Global warming. Unemployment, inflation, productivity – and all the numbers put out by the Labor Department. Political science. The War on Terror. Image advertising. Higher education. Colonoscopy.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning