A few weeks ago, a reader sent me an article featuring some thoughts by Don Coxe, an economic strategist for Bank of Montreal. [One Lonely Voice Agrees with Me on Food Inflation] Since then, I try to see if I can find an article from him here or there, as we seem to be "on the same page". Again, I also try to read items that are in complete disagreement with me as well, but frankly those people have been so wrong for the past 9 months, I am having a hard time reading some of their stuff with a straight face. But I continue to try.
Coxe seems to agree with me on the stagflation thesis I have presented over the months. I have also noticed some people are pointing to potential deflation which is a more sinister affliction - pointing to housing values and the contracting credit markets. While this could be a potential future event as well, it would actually be a far more sinister outcome than stagflation, which in and of itself, will be debilitating. So I am going to stick with a 1970s/early 1980s scenario (stagflation) for now, and keep the 1930s scenario (deflation) still on the back burner.
Stagflation also works with my World of Shortages theory the best. Either way, we have some of the most interesting economic times ahead of us I believe, in many generations. Keep in mind, all the data used below is "official government statistics" which I find to be baloney, especially when having to do with inflation, so when I read articles like this I overlay real inflation numbers like we see from companies themselves [More Economic News from Companies Themselves] or realistic trade figures which show for example imported goods are up >11% year over year [Real Inflation Showing in Reports Not called CPI/PPI] or quite frankly just walking around this country in an upright position, with a heartbeat, and observing reality. As always, I am early, and probably considered an outlier. Just as my "recession" calls were both early, and an outlier last summer. There is a lot of talk below of my new favorite term - 'agflation'
- Inflation, that retro economic scourge of the 1970s, has embarked on a bit of a comeback tour. While core inflation figures remain low in the U.S., the consumer price index (which includes food and energy) rose the most in 17 years in 2007, jumping to 4.1% from 2.5%. That lends credence to the warning by a group of economists that the road ahead will be marked by good old-fashioned ’70s-style cost-of-living increases once the current downturn is done.
- It’s been a generation since general increases in annual prices were a part of the national conversation. But back in 1979, when inflation hit double digits and drove the purchasing power of $100 down to just $87 in a year, it was a major concern. Middle-class citizens fretted about the clear and present danger to their standard of living, and policy-makers worried Western societies were going to be gutted economically.
- But Armageddon never arrived. Inflation relaxed through the early ’80s and eventually faded as an issue in the ’90s — the result of a combination of factors, according to Donald Coxe, global portfolio strategist of BMO Financial Group. The mining and oil boom during the ’70s brought a flood of energy, metals and food onto world markets; Ronald Reagan tamed the unions; and there was plenty of low-priced goods manufactured offshore coming into the West. All of which put a cap on price increases and ushered in a 25-year golden age of low and stable prices that has stretched almost to the present day.
- The problem now, though, says Coxe, is that this era of disinflation is coming to an end. In a new report, Commodities After the End of Deflation, Coxe updates the prescient call he made five years ago about the beginning of the commodity bull market that has dominated this decade. Resource investors will be glad to know he still thinks the current bull has another five years to run, but now that run will be in an inflationary environment, rather than a deflationary one.
- A recent trip to India convinced Coxe that 25 years of global trade has allowed many of the world’s formerly poor to increase their consumption of food and energy and take on a more Western lifestyle. A global boom in protein consumption means more grain is fed to animals to manufacture meat, causing a structural change in the demand for those food grains. “The burgeoning Chinese middle and upper classes’ demand for meat and dairy products means that growth in China’s consumption of feed grains is much faster than its famously growing demand for oil and metals,” reports Coxe.
- The result is that global grain prices are rising even though the world has just experienced two bumper crops, something that hasn’t happened since the Second World War.
- The result? There were food riots last year in Yemen, China and Mexico, while all-in inflation has been running ahead of core inflation (a measure of inflation that doesn’t factor in food and energy) in North America for some time.
- And while food may not make up much of the average western household budget, the larger worry is that the globalized trade networks set up over the past 20 years have also begun to pass along inflation. “The ability of China and India to continue to export deflation is being weakened by the high percentage of foods in their CPIs (consumer price indexes),” says Coxe.
- There’s also a global boom in biofuel production. “The supply in relation to consumption is at an all-time low in terms of grain. And now corn for ethanol is crowding out other crops, and so you have a situation where you have even more limited land for wheat and rice and whatever,” says Coxe. “In an environment that is already very tight, that’s a recipe for increased food prices, food inflation.”
- U.S. food inflation is already running at 4.9% in the consumer price index, the highest since 1990. But Avery Shenfeld, an economist at CIBC World Markets expects that to go even higher. “By the end of , we predict that food inflation will be running well over 5%, and as ethanol production rises to nine billion gallons in 2009, food inflation will rise to 7%, its highest level in more than 25 years,” he says.
- Taken together, the strange entanglement of macro forces — rising living standards across the developing world, new biofuel production, depleting traditional energy sources and attempts to cut greenhouse-gas emissions — suggests the world has become inflation prone in a way it hasn’t been in a generation, says Coxe. “It won’t be as bad as the ’70s,” he assures. “But there is a real worry we could see over the next couple years the most painful global inflation we’ve seen in three decades.”
- No less an authority than Alan Greenspan, former Fed chair, has suggested as much. In his recent book, The Age of Turbulence, he states his replacement, Ben Bernanke, will have a tougher job than he did. Poor Bernanke will have to manage through an era in which rising living standards around the world will lead to real inflation, volatility and economic instability, and possibly, according to Greenspan, double-digit inflation.
- Oddly enough, that change in focus will add to the problem ahead. Some suggest that M3 U.S. money supply — a broad measure of the total of money outstanding (no longer calculated by the Fed, much to the consternation of conspiracy theorists everywhere) — is expanding at its most rapid rate ever. And that has to be taken into account by inflation watchers. “There is too much of the ’70s to ignore here,” says Coxe. “Now we’ve got banks like the Fed forced to print more money to try to restore liquidity at a time we’ve got the money supply growing faster than the production of goods and services, which, by the way, is the technical definition of inflation.”
- Worse yet, the Chinas and Indias of the world are cranking up the money-printing presses to keep their currencies from rising too fast against the U.S. dollar. “Russia, the world’s seventh-largest economy, is realizing monetary supply growth of over 40% now,” says Coxe. “Anybody who thinks inflation is still going to be measured between one and three percent 12 months from now isn’t reading the story. This is going to become an inflation reality show.”
- A World of Shortages, especially food
- Printing presses across the world going full steam as countries refuse to allow the business cycle to happen (the Greenspan rule), and due to "financial innovation" it is almost a necessity in the USA to flood with liquidity as US bank balance sheets are eaten way by the bacteria of their own devices.
- M3 Expansion at record levels - while hidden away from view [What is M3 and Why do you Care?]
- All the while government reports telling you nothing to worry about - as long as you exclude the volatile energy and food component, it's all good.
- People's wages increasing 3% in general, and falling more and more behind each year in a cost of living adjusted world
What does it mean to you dear stock investor? It could mean a rising stock market (world full of worthless paper dollars chasing a fixed amount of stock), while the economy continues to crater. A true dichotomy. In the meantime, as I've been stating crop commodities are due for some correction (nothing goes straight up), but each correction I believe will need to be bought - for many years.
Fertilizer should also rise in tow, but I assume at some point farmers will push back on fertilizer and say enough is enough on the price increases... I just don't know when and at what price point. Keep in mind, if we have a drought in the US heartland one of these growing seasons, we will have a true catastrophe in the globe. Stockpiles are already at multi level decade lows, even with the "best of times" of late in terms of growing seasons here in the US.
Disclosure: Long DB Market Vectors Agribusiness in fund and in personal account