HOWARD SCHULTZ EXPLAINS HOW QE IS HURTING STARBUCKS
Great commentary right now on CNBC by Starbucks CEO Howard Schultz. He succinctly summarizes what QE is doing. He says it is “artificially” causing higher prices. Coffee prices have risen almost 50% since QE2 rumors first began in August. Schultz says the price rise is hurting his business and that he will not be passing the costs along to the consumer. He says the only people benefiting from this price rise are the commodity speculators because the consumer remains too weak to accept the price rise.
So what do we have? It’s quite literally a ponzi scheme. We have a Fed that has openly admitted that they want prices “higher than they otherwise should be”. And speculators are taking them up on their offer by borrowing in dollars and buying any and all inflation hedges. Meanwhile, the real economic benefit of this all is nil. In fact, it is doing nothing but generating margin compression, excess volatility in financial markets and promoting the financialization of this country – the same thing that nearly destroyed it just two years ago.
Updated:
Source: CNBC
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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31 Comments
dang – predictions ala Mccloughlin – WIll Ben Bernanke be tarred and feathered, adn kicked out of the Fed. ???
Can’t wait for the video. Does he mention that margins can be maintained by closing marginally performing stores, staff reduction, and reducing benefits to remaining employees? Capitalists are survivors!
Naturally, your fundamental work appears to be 100% prescient and accurate. But when will the market come around to this realization? That is what really matters.
I assumed it would be last week according to my account statement!
TPC:
I got a question.
What do you think Kyle Bass’s comment that they can’t raise interest rates until government debt is reconstructed? But James Bullard said they can raise rates and QE at same time.
Just trying to calculate the odds of a sudden interest raise.
Bass is wrong. The Fed could raise the rate paid on reserves at any point they want. See Bernanke:
http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
“Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on banks’ holdings of reserve balances. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.8 “
Thanks so much!
Watching tape I feel traders leverage like crazy. Guess any negative surprise will make market crush.
These are amazing comments. He basically confirms that QE is causing a speculative ramp in prices that has nothing to do with fundamentals. Amazing times.
I can only say Ben, good luck with this bailout for banks as the oil is going over 100 bucks soon and J6P will go into the defensive mode or in worst case, he wont be able to repay his debt, therefore even banks will be loosing.
There is no free lunch.
That idiot will rather destroy real economy in false attempt to save the banks.
Cullen,
Do you have any sense (that you’re willing to share w/ readers) when this speculative QE2 run will have run its course? In other words, if it doesn’t stop tomorrow, could it go on for tens of percentage points to the upside?
Scott,
My thesis has been that the market is overdone, but could definitely rally up to these levels. What is alarming is that the psychology here is super bullish. That means this is unlikely to end well, but we could literally be in a bubble in many markets.
I seem to have a special knack for shorting bubbles close to their tops, but I’ve ridden through some pretty painful moves higher during the course of those moves. If you aren’t properly managing the position and/or a highly experienced short seller I would definitely stay away from this market.
If you are thinking about buying I’d say you’re insane. You’ll get a better chance later this year or early next year to buy stocks cheaper.
This is a great interview.
Who would have ever imagined the CEO of SBUX would be out criticizing Fed policy! Amazing.
Also, kudos TPC, you have had an unreal amount of great content on the site over the past week. I am literally spending half my day reading it all.
So educational.
Thanks Ferro.
This is a really great interview. Schultz perfectly summarizes my whole thesis. QE has no real impact on market fundamentals. All it does is drive prices higher. It’s not sustainable.
Many people that I know…older 50′s & 60′s are not in the market. When these people get in is when I’ll get out.
Do you really think most people believe this is a ponzi scheme? Because Cramer, CNBC and all the other talking heads appear totally oblivious. They’re eating up Bernanke’s commentary like it’s the gospel.
Do you think most of the people on CNBC have any idea how our monetary system works? 99.99% of the public has no clue about this stuff. Bernanke is a puppet master. MASTER.
I’ve noted I am marginally net short. I will buy on a major breakout though.
As I think about this I’m beginning to wonder if the market has cornered Bernanke, much like Trichet, and is going to try calling his bluff.
It is almost as if the market has cornered Bernanke and QE as a policy.
Like the Euro, which is inherently flawed and is acknowledged by the market as such in the form of surging CDS and yields, I can’t help but believe the market’s surge is an admission that you are in fact RIGHT about QEs flaws TPC.
Think about it…stocks are telling Bernanke, “Ok, so you want higher equity prices, fine you can have them. But be aware, you’re going to much higher and deleterious increases in all the bad stuff, like coffee. How much damage to real people and to the real economy are you willing to take to see your wish come true?”
If this is the case it becomes a disasterius and reinforcing cycle as markets bet Bernanke is willing to go as far as needed until he is stopped by some exogenous factor. More QE = more commodity inflation = slower economy = more commodity inflation….all while stocks surge.
That’s the most painful part for me. Every argument I’ve made in recent weeks (that this is not inflationary, that it does nothing for the real economy, that it hurts corporations, etc) have all been confirmed in the last 24 hours.
The only non-confirmation is from the stock market and you may very well have it 100% right. The market knows this won’t work, they know it’s reckless, they know it’s not inflationary, and yet they know it can drive prices higher. Sounds irrational, but entirely plausible.
The market will sure humble a man. Even when you have the fundamentals nailed you can still manage to be wrong!!!!
I think most people reading realize that you’re right and have been right. Getting the trade right is a different matter. In terms of judging the policy that is going on right now you are making an enormously positive contribution to society. You have expose Bernanke as a fraud. You’ll be right about this in the end. The market always comes around to the fundamentals in the end.
Exactly!
By the way emerging countries (Brazil, China among others) seem to be getting nervous about all those extra dollars: http://www.bloomberg.com/news/2010-11-04/asia-girds-for-stronger-currencies-asset-bubble-threat-from-fed-stimulus.html
And Europe seems to be getting confused too: http://www.bloomberg.com/news/2010-11-04/trichet-faces-600-billion-roadblock-as-bernanke-clouds-currency-outlook.html
Are we quickly going into real trade wars, capital control and the end of globalization as we know it? Has Bernanke ignited a global collapse?
And the stock is up another 3% after 5% gain in normal hours. Again details don’t, atter right now. It is 1999 redux but not just nasdaq but everything.
crazy times. I own stocks, but then again I always own stocks. But I am starting to feel uneasy about owning stocks and that’s kind of unusual for me.
Nope, I don’t agree with him. It may have some prompting from the cheerful QE-type bonhomie, but has more to do surely with the supply of mild coffee being graded onto the exchange. There is an undersupply of the coffee we all like to drink. Demand has gone up for the mild coffee popularised by the coffee chains around the world, increasng consumption. On the supply side, the Columbian droughts a few years back have not only reduced the typical 10-15mm bags a year to the latest result of under 10mm, but also haven’t reproduced the same quality. The exchange warehouse stocks have also been reduced, so it’s clearly not QE. Similar supply/demand factors exist in sugar.
The CRB since June is up 1/2 the amount of coffee, and 1/4 the amount of sugar…..
TPC, I haven’t been around much this week to comment but wanted to echo B Ferro’s comments above. Great content this week; you have nailed the fundamentals. Input price pressure / margin compression is the cardinal piece of economic data at this point.
I got short equities a little early and am considering averaging down; even though I am not usually a fan of this strategy.
This is absolutely frigging ridiculous. Yeah, QE is causing higher coffee prices to such an extent as we see on that graph.
And I’ve got a bridge to sell you.
IT’S NEW AND INCREASED demand coupled with drop in supplies.
Come on man, BB may be powerful but he’s not that powerful.
Howard-Schultz-with-one-W should at least be aware that it works both ways. On days when the market goes up enough for me to take some profits, I’m more likely to stop for coffee after work. Heck, in the right mood I might even stop at Starbucks. Of course, I can make trading profits either way, but my 401(k) only benefits me in one direction.
Whether you think it’s morally correct or not, and even if you don’t think it ultimately can be gently unwound, the wealth effect is real and meaningful in our current situation.
Did you ever stop to think that someone sold you that stock and did not make any money today? If you cashed out of stocks today at 9AM, someone bought them. That person is 2% richer than you are and you’re just sitting there in cash. Yeah, that other person might go out and spend their paper gains, but what about the other guy?
This is basic stuff. Why do people fall for this nonsense in the media all the time? “cash on the sidelines”, etc etc. Learn from friggin economics before you open your fat mouths.
SS – Really don’t understand your point. The seller may have made a 50% profit. That’s why he can stop at Starbucks. The buyer who’s up 2% on the day, may be down 20% next week. That buyer is not 2% richer than the seller today – He bought at the top. What’s the likelihood of him making a 50% gain? The point is, he doesn’t have a “realized” gain until he cashes in at a profit. I’ve cashed in a lot of gains lately and have 25% cash on the sidelines. Next time the market drops I can put those gains to work. Could it be you that has something to learn from “friggin” economics?
The stock market is a zero sum game in the short-term. Every dollar you make is a dollar that someone else put into the market. The only time you actually make money from someone outside of the game is when you get a dividend or there is a stock buyback. Other than that you’re just swapping money with other players in the game. When you make money that is money that someone else has already lost or will lose. It’s as easy as that. There is no wealth effect from all this. You might feel richer. You might feel better. But there’s a whole lot of people out there who don’t.
Hi SS,
How about stock trading funded by increased margin loans. And people spend (Ok, in Ben world anyway) when they feel rich. Also, stock prices changes at the margin, so not really one dollar in one dollar out in term of the wealth effect it caused.
So, if you bought 10000 shares of ACME corp at $1. Someone came in to buy 100 shares at $1.10, now you think you have $11000 and the other guy think he has $110 too. So, now the total ‘wealth’ are $11000 + 110 = $11100 (despite only $110 of new money is put into the market). Now, you feeling rich, you go out to spend money on your AMEX..
higher commodities prices benefit also the producers of these commodities, not only speculators… producers can lock higher prices for future sales…
also, what is the price of commodities in non-dollar terms? their rise is less important in that case…
isn’t the currency devaluation an important thing to note here?
best,
A