The IMF has a report out supporting the predictability of my food riot/revolution index. It seems the rocket scientists there equate a 10% increase in global food prices to a 100% increase in anti-government protests. That makes sense. They add an important consideration concerning the U.S. and other developed countries that addresses the large and growing poor population within those countries. In this case, the bottom quartile spends 35% of their income on food. With 45 million people in the U.S. on food stamps, I'd say that data is now understated and dated.
Source: Bank of Japan
If we look at the increase on foodstuff commodities since last November of 25%, up 45% since last year, there is little wonder that increasing parts of the planet are unstable and troubled. Per IMF, this would equate to a tripling of the increase in protests, riots, revolutions and civil wars. In spirit, that seems to be precisely what has happened. With the index nearly breaking out once again to new highs, we may be soon looking to add another 50-100% factor (from another 5-10% food price increase) to the already sky high riot and revolution indicator. In effect, we could go from a 8 magnitude earthquake up to a 9, and set the stage for a long, hot summer.
The Bank of Japan is out with a report examining the financialization of commodities. The amounts involved go far beyond normal economic demand considerations, and that is a key distinction to make here. I thought 2008 was bad enough, but today, the open interest in futures markets in the U.S. exceeds the 2008 CUB (crack up boom). In global markets, exposure far exceeds that of 2008. The net position of commodity index investors/speculators far exceeds that of 2008. With endless commodity account commercials and talking head commentary on busimerical TV and radio, the whole world looks all in and rather fearless on this central bank-hyped and crowded get-rich-quick trade. You can't turn on one of these networks without some "expert" droning on about materials and commodities.
Source: Bank of Japan
Perhaps showing a bit of concern about the monster it helped create, the Fed rolled out so called moderates Lackerand Kocherlakota last Thursday with more "talk" about the need to review the QE2 fuel being thrown on the fire, and perhaps take it off the table early or defer it. The market, and especially the commodity sector, totally ignored this in the last half hour of trading and in overnight trading. After the news broke, CNBC ran another ("I am going to trade the world.") commodity trading account commercial .
This illustrates the problem with this feeble "talk loudly and wield a soft stick" or Pinocchio grow-your-nose gambit by the Fed. There is a universal belief that they don't have any inflation-fighting credibility and use incredulous dog-ate-the-homework excuses like "global demand" and "weather" to explain the carnage. Then when they fail to follow up with real decisive action; this just adds to the relentless crack up bid. In fact given this psychology, should the central banks now act to counter this, especially given the historical volatility of commodities? A large pool of investor and financial institutions could face a large scale liquidation and resulting turmoil from their large exposures.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.