Inflation begins - food inflation is the start

When does serious inflation really start? Well, if you had to pick a point, it might be at a point when many pundits believe deflation is likely, as has been widely discussed this spring and summer by professional money managers.

Two to three years ago, many investment talking heads (myself included) spoke of the potential for emerging and developed countries stock markets to diverge in, at least, the strength of their upward market trend. The idea being that the developed country markets would move sideways, while emerging markets would continue to thrive.

The credit crisis which culminated in the stock market plunge of 2008/2009 of course showed how correlated these markets could be during times of panic. However, there is nothing wrong with the general divergence thesis during normal times, with many emerging markets getting close to re-testing their 2007/2008 price levels. Divergence is or will be here, and remains as real a prospect as ever.

However, there is one place where divergence currently exists: the "anticipation" of inflation/deflation. In developed nations, the worry is that future deflation will set these rich economies on a two-decade Japanese-style slump. In developing economies, the worry is the opposite and, rather than an intellectual debate about the future, the issue is immediate and proximate: inflation, which IS (t)here. Especially food inflation.

Large developing nations, such as India, China, and Russia, have all recently reported jumps in their inflation rates, headlined by significant jumps in food inflation (see here, here, and here). This has even resulted in an overall significant jump in global food inflation too (see here). This is the result of climate change generally, which of course plays out via specific "natural events", such as drought, flooding, and "rainfall dosing" (which is a term I am using to describe the phenomenon of growing season rainfall remaining relatively the same, but is concentrated in far fewer days [but does not consist of "flooding", per se]). This is in addition to the lower yields that are produced from heat-stressed plants. Climate-change induced food issues are here, and they are here to stay for some time.

The only reason that inflation remains off the radar screen of many professional investment types is that, in the western world at least, the food budget typically consists of a very low proportion of overall income. Whereas, however, the opposite is true in the developing world (or more so, even, in the undeveloped world), food budgets constitute a much higher proportion of the total income. So, food inflation has a much greater effect in those countries and feeds into the total inflation picture very quickly. In food, the principle of substitution (the idea that, during inflationary times particularly, folks substitute cheaper but roughly similar items for more expensive ones) has only limited applicability: after all, everyone needs to eat.

Food inflation also enters the general inflation cycle very quickly too (especially farther down the income ladder a country is) because, aside from an inflationary element of its own, the inflation knock-on effect is very pernicious, as the factory worker, et.al, marches into the boss' office, and demands a raise to deal with his deteriorating ability to feed his family. This scene plays out exactly the same way, hundreds of millions times, in hundreds of thousands of bosses offices.

The dream that (some may have that) food inflation emanating in one part of the globe won't spill over somewhere else is likely to be met by the insistent ringing of the morning's alarm clock: free trade in food. As pricing for food rises - there and here - the knock-on effect will also be felt as like looking into a mirror - here and there.

Climate change, and its resultant outputs, will have effects ranging from the evisceration of the capital value of, particularly, long-dated low-yielding stripped bonds, to the more pragmatic, of the renewed popularity of the high-yielding home garden.

So, the weather issues of this summer's northern hemisphere's growing season provide a glimpse into the future: a future which is coming fast. For those who want to understand it better, there's no better place to point your binoculars than at the emerging market countries.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Two years out: Deflation or Inflation?

Everybody is talking about deflation these days as the flavour of the month. Commodities guru Jim Rogers makes the point that - virtually always - inflation follows monetary stimulus ... buy hard assets he recommends, to deal with the inflation which will inevitably follow the very significant stimulus being added world-wide to deal with the banking issues/financial crisis.

He says they are printing "gigantic" amounts of money, and "massive" ("terrible") inflation is coming, 6, 12, 24 months down the road, and the only way to get out of the way of this is to get out of paper assets.



Video Date: October 24 2008.

Further points he makes are that he expects agriculture also to continue to outperform given the very low stores of food globally. This is something to think about and study for your own portfolio.


JW

The Confused Capitalist

Agricultural, it's all about the diet ...

Agricultural-related investments remains one of the big, visible, themes going forward over the next ten years. While there's been some mainstream acknowledgement of these major food issues going forward, for the most part, the media has been relatively quiet about the food inflation.

Maybe that's because many countries focus on "core" inflation, which ignores volatile changes in energy and food. These, especially food pricing, are likely to continue to ramp upwards over the next five to ten years.

Feeding the world continues to develop into one of the biggest stories of this century. The supply and demand curves for food, especially due to changing diets in the Far East to have more dairy and meat, continues to favour higher prices for these commodities. Other drivers of agricultural prices are:

- Strong population growth, expected to reach 7 billion by 2013;

- Rising income in developed markets and increased demand for soft commodities in developing markets;

- Climate changes challenging agricultural production processes and product quality;

- Arable land per person is decreasing;

- Demand for agricultural products from Bio-energy (sustainable energy resources) market adds an important and competitive new demand source. Agricultural commodities are getting
more and more important for energy generation.

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This is something I have written about here (provides some specific suggestions, which I continue to support) and here. I re-iterate those calls to make agriculture-related an important part of your portfolio. In Canada, you can now also consider a recent Claymore Investments ETF product, COW, which invests in agricultural companies.

Despite recent run-ups in prices of companies serving the agricultural sector, and the underlying commodities themselves, I consider that this investment theme is still just early in the third inning of a ballgame; a ballgame that itself may even go into lengthy overtime.


JW

The Confused Capitalist

The Upside of Declining Consumer Confidence

The Conference Board reported that consumer confidence dropped in August, giving up nearly all of its July gains.

As the Conference Board reported it ...

"A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."

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It was reported that this was a prime cause of weakness in the stock market today. Despite notions to the contrary, declining consumer confidence is a good, healthy response to the indebtedness of both the consumer, and the federal government.

Acting otherwise would be a denial of reality. For those soundly in the bullish camp, let's review some facts:

1. Household debt at unprecedented levels;
2. A negative household savings rate, something never seen in the midst of an economic expansion;
3. Federal government debt at the highest levels in recent memory, and still growing;
4. The continuing trade deficit;
5. The prospect of a continuing decline in the currency, meaning the Fed has to continue to walk the tightrope between importing inflation on the one hand, and managing the orderly decline of the currency on the other. All the while trying to massage the debacle in the credit markets. An undertaking fraught with short and/or long term risk. Take your pick.

Yes, there's times to be confident, like when things are humming along really well. This isn't one of those times. Then there's the confidence that comes from having been in a place of despair, but when the trends are moving in the right direction. This isn't one of those times either.

Now is a time to make sure you get your own financial house in order.

Start with the basics - your household budget. Review it for unnecessary expenditures. Trim your debt levels, with the most expensive interest rates first. Save some money! Use a high yield account, or find some solid blue-chip stock prospects, or broad-based ETFs. Save (anyone remember the word?) ... save ... save ...

In short, the upside of declining consumer confidence is the ability to not to be a monkey brain - to recognize the potential for trouble (like now), and put some preventative personal actions in place. While the trouble may or may not materialize, planning and acting like this will serve you well in any case. Now isn't the time to be an overconfident consumer - its' the time to be a confident saver!

Don't be blind to reality - open your eyes, look around, think, plan, and act. Are you a monkey?

JW

The Confused Capitalist

Food Shortages and Food Inflation: Malthusian future?

Image: Food skyscraper of the future?


Although Malthus has long been laughed at by those convinced that technology will solve any problem, in any finite system, one must reach some sort of system limits, as demand for a resource outstrips that method of producing it.

Although it may happen for slightly different reasons than postulated under the Malthusian catastrophe scenario, it appears this is starting to happen with food and will soon be found in a supermarket near you, via food inflation.

There is a confluence of forces that make serious food inflation, at the minimum, particularly likely over the next five to ten years:

Factor number one is the bee die back, and the effect it is likely to have on food prices over the next few years, as yields are curtailed due to a reduction in pollination. One economist figures that this will put over $15 Billion in North American crops at risk, all adding to potential for food inflation.

Factor number two is the growing wealth of emerging markets, and their propensity to emulate a western-style meat-heavy type diet, as wealth grows. This puts increased pressure on grain crops in particular, as it takes anywhere from about 5-20 pounds of grain to produce a single pound of meat. As large populations in China and India move further away from vegetarian or semi-vegetarian type diets, this strains limited global food stores even further, adding to food inflation.

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Factor number three is the changing climate. Scientists have long known that food yields can come under pressure in at least two ways as global temperatures climb. Firstly, at higher temperatures, some plants - despite ample water - either cease production, or lower production. In either case, yields are lowered. Secondly, changing climate results in more extreme weather, including droughts, hurricanes, extreme rainfall etc. Total yields are obviously reduced under those circumstances too. (Alt citation, PDF)

This was recently brought home to me by an Australian cousin, who laments the drought his country has been going through for some time: he tells of kids in some parts of the country now entering high school, who have never seen rain.

Factor number four is the number of lunatic politicians, in their bid to never offend anyone while running for office, avoid telling the truth about ethanol from corn: it's doubtful it actually produces any additional (net) energy after it's energy inputs are calculated, AND it's going to (in fact, already has) further increased food costs.

I watched a shameful 20/20 series where every single presidential candidate at a town-hall type meeting claimed that ethanol was part of the solution, rather than more likely to contribute to an even bigger problem. Whatever happened to a "give 'em hell", Harry Truman style candidate? Are they all too meek, too bland, and too gutless for even one of them to stand up and tell the truth? And the truth is, is that ethanol, bio-diesel, or any other fuel made from food sources is only going to add to food inflation, possibly to serious food inflation.

One article also discusses many of these issues and interestingly points out that China, to feed itself, should be adding a quantity of arable land equal to Maine, every year. Instead, it has lost that amount every year over the past decade. Another article, in the respected Popular Science magazine, discusses these looming food questions.

There are, of course, always those head cases who are convinced that technology will solve any problem. However, increasing technological solutions have coincided with increased energy demands and, in a global warming world, one of these trends most likely has to give.

I read a recent article suggesting that food skyscrapers may be the way of the future - but these won't be coming any time soon and, due to costs, may end up with all those other strange Popular Science ideas that never see the light of day due to cost or technical issues that can't reasonably be overcome.

The Confused Capitalist will provide some practical and investment advice on how to deal with this over the coming while.

More reading sources:

• Vertical Farming Dream


• Deeper Thinking About Serious Issues


• Making realistic interim changes


• For the more personally ambitious


• What changes are really needed & how to go about it

JW

The Confused Capitalist

Next Fed Move will be up, not down! Inflation not quelled yet.

After an extended break to see my brother get married in Los Angeles, including a visit down to Sea World and Disneyland, some time away for training, and just a general break, the Confused Capitalist is back.

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The Confused Capitalist has been busy reading the tea leaves, as well as a very interesting book on the process of "intuitive" thinking, and in the Blink of an eye, realized that the Fed will have to move interest rates up, rather than down.

Inflation is not yet quashed, and inflation around the world also appears to be moving towards the upside. A declining US currency won't help things either, as inflation will be "imported" in addition to domestic pressures. The Fed will most likely begin to move rates up in nine to 15 months, and it won't just be 25 basis points until they stop. Where they will stop, I'm not certain, but it will be at least 50 basis before they pause again, but possibly as high as 200 basis points, looking out over the next 24-36 months.

Well, that's my tea leaves reading for this quarter. These days sure feel like the 1970s in many ways.


JW

The Confused Capitalist

Editorial: Why a Responsible Fed Won't Lower Rates Anytime Soon.

Notwithstanding the perceived subprime "crisis", a responsible Fed can't lower rates anytime soon. Why?

Because the consumer is finally being told, in no uncertain terms, to smarten up, stop spending more money than you have, and save a little bit. With this message, (and a puncturing of the home-ATM cash-machine) inflation will finally begin to get tamed.

Any loosening of the money supply at this point, while mitigating the short-term damage that will soon become evident in bloated housing markets, will only move that day of reckoning into the future. A future time which which would then have bleaker, more uncertain and more unstable fundamentals, from which to try making essentially the same maneuver.

No, dear readers, this is the medicine that great-great-grandmother used to force down great-grandmother's throat: a nasty-smelling, foul-tasting, herbal concoction that nearly gagged the dear girl. But medicine that helped the patient recover sooner, and more robustly.

To lower interest rates at this time is the equivalent of turning up the heat in the house, so that the feverish patient may feel comfortable. Foolish. Understandable to some, with the child whining so loudly but, all the same, foolish.

And a responsible Fed just won't do that.


JW

The Confused Capitalist

Long Term Investing and Fighting the Tape

Left: 7' 2", 450lbs, wrestler Andre the Giant. b.1946 d.1993

There's a saying in the stock world, that goes, "Don't fight the tape." What it means is that when there's powerful selling going on against a stock, only the foolish step in and start buying, because the price is likely to continue to decline.

While there's obviously some point at which the selling will stem, and the "tape" may turn (provided there's some underlying positives to the stock), the short-term investor is well-advised to take note. To some extent, it would be like trying to fight Andre the Giant.

While I generally pay very little attention to "fighting the tape" in my own investing over the short term (hey, if I'm willing to buy the stock at the price offered, I don't particularly care whether I've bought at the precise bottom anyway), it makes sense to pay attention to "fighting the tape" over the longer haul.

Where I think one has to be very careful "fighting the tape", is when powerful long-term forces are at work against your investment. In my opinion, an example of this includes things like the computer industry, where costs keep getting driven down, as do margins. Investing in businesses in the midst of commoditization are situations where above average caution is warranted. That's not to say don't do it, just be aware of the forces at work, and be cautious.

I think that this is something to particularly keep in mind these days, as commodities themselves have risen from the ashes, to become a very popular asset class - and commodity oriented companies - and their stock prices - have thrived.

One day this tide will turn (probably when inflation is seen as a benign future factor - unlike today), and commodities and commodity-oriented company's stock will "return to earth". In the interim, some careful thought is warranted, to ensure that you're happy with your level of exposure to any situation based on a commodity product.


JW

The Confused Capitalist

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Groovy man! Are the Seventies Back?

Now, I've been saying this for just about two years. For those old enough to remember, do these times remind anyone of the 1970s (sans hippies, of course)?

We've got an increasingly unpopular war, that seems increasingly like it's going to last longer and longer, consuming more and more money. A war that started in a fervor of patriotism, increasingly questioned by the populace at large.

We've got foreign companies nipping at the heels of American companies - in the 70s, the re-emergence of post-war Germany and Japan; today, the rise of China and India.

A flood of liquidity into the market, that seems to be fuelling inflation beyond that recognized by "the powers that be".

A real estate market in ascendancy.

Gold on the rise. A large federal deficit.

Fuel costs spiraling ever upwards, it seems.

Now, I remember how it all ended ...

Is it just me, or is this the 1970s redux?


JW

The Confused Capitalist

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