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Preparing for Higher Food Prices

Tuesday, January 3, 2012, 1:48 PM

Preparing for Higher Food Prices

by Gregor Macdonald, contributing editor
Tuesday, January 3, 2012

Executive Summary

  • How urbanization is accelerating the loss of the world's arable land
  • The three major trends that will impact global food prices and potentially create even more volatility in the next few years
  • How virtual water introduces a new threat of resource conflicts
  • Why our government's actions to revive the economy translates into higher prices for food and other hard assets
  • Why greater volatility in food prices lies ahead
  • Defensive strategies against higher food prices

Part I: A Punch to the Mouth: Food Price Volatility Hits the World

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Preparing for Higher Food Prices

Close-up: The Loss of Arable Land Per Capita

Recent data from the World Bank shows that arable land per capita has been declining globally for 40 years. This has been true in most countries, especially the juggernauts of India and China. But we have compensated for that decline with fertilizer. As Julian Cribb points out in his book (page 72), it has been asserted that “over two billion people would not be alive today, were it not for the invention of the industrial process for making nitrogen fertilizer.”

Indeed, we know that 2008 was an important milestone in the history of humankind: That was the year that the majority of the world population, for the first time, lived in urban centers. The rapid urbanization -- and therefore loss of farmland -- in Non-OECD countries may have produced wonderful stock market returns for the past two decades as developed-nation capital hooked in to such rapid growth. However, it is not clear that this process has upgraded humanity’s overall quality of life. Energy inputs do upgrade diets. And energy inputs also can reduce the suffering of burdensome, human-powered labor. But the associated pollution and environmental destruction exacts a heavy price for such a transition.


Off the Cuff: Predicting 2012

Thursday, December 29, 2011, 2:05 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish dig into:

  • Europe
    • Developments are happening quickly after last week's liquidity flood.
  • The US
    • Will it continue to outperform in 2012?
  • Forecasts for 2012
    • Which factors are most likely to influence events next year?

This is *not* your typical sleepy end to the year. Market developments are happening at a fast and furious pace, especially over in Europe. This week, Mish and Chris seek to sift through all the dust in the air and predict what is going to matter most in the coming year. It's important to note that of what could happen in 2012, the vast majority of the probable outcomes are weighted to the downside. So make sure you're starting off the new year with a good defensive plan in place.

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Hard Times Ahead for Assets

Tuesday, December 27, 2011, 9:38 AM

Hard Times Ahead for Assets

by Charles Hugh Smith, contributing editor
Tuesday, December 27, 2011

Executive Summary

  • Understanding the leading indicators for commodities prices
  • Either bellwether copper is cheap or stocks are expensive
  • S-curve analysis suggests we're entering a corrective phase for commodities
  • Why those long on on resource investing should take a defensive stance

Part I: Are Commodities Topping Out?

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Hard Times Ahead for Assets

Are commodities topping out? Since we know commodities are physically limited in supply even while demand continues to rise, common sense suggests that commodities will outperform over the long term for as long as industrial civilization continues its consumption of those commodities.

However, it is also clear that the global economy is either slowing or entering an actual recessionary contraction. Thus it behooves us as investors to ask what that contraction of demand might do to the prices of commodities over the near term (i.e., the next 24 months, 2012-2013.)

In Part I, we examined the connection between stock markets and demand for commodities as reflected by the chart of the Reuters/Jefferies CRB Index, the commonly used bellwether for the commodities market. We determined that if the stock markets of China and India are indeed leading indicators of demand for commodities, then the market for commodities will likely weaken.

We also found that margin debt seems to be far more closely correlated to the US stock market than demand for commodities as reflected by the CRB, meaning the US stock market may not be an accurate leading indicator of commodity demand or pricing pressure.

In Part II, we examine a key technical correlation that has withstood the test of time, that of copper and the stock market, and explore a potential key dynamic which may exert outsized influence on the demand and pricing of commodities over the next few years.

As a side benefit, our examination of the commodities may also shed light on the direction of the stock market — another key interest for many investors.


Off the Cuff: Trust Is Becoming a Precious Commodity

Thursday, December 22, 2011, 12:26 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish chat about:

  • The ECB's Latest Liquidity Move
    • What impact will the recent flood of hundreds of billions of euros have on the European debt crisis?
  • Counterparty Risk
    • MF Global's actions and the government's reaction to them are eroding critical trust in the system
  • Housing Prices
    • Does the recent admission by the NAR that it has been overstating housing values provide any signal that we're getting close to a market capitulation?

This week's theme is hidden risk. It's everywhere. The only thing keeping the financial system together right now is people's confidence in it. As more and more people realize that banks are being subsidized at taxpayer expense, client assets can be confiscated without notice, and the 'experts' guiding us have been wildly wrong for years, this critical confidence may wane to a point where there's not enough left to keep the system from seizing.
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Get Ready for Worldwide Currency Devaluation

Wednesday, December 21, 2011, 11:03 AM

Get Ready for Worldwide Currency Devaluation

Wednesday, December 21, 2011

Executive Summary

  • The risk of cascading derivatives failures is the "nuclear option" scaring central planners into doing everything in their power to prop up the financial system
  • The loss of small investors leaves market prices more vulnerable to the growing percentage of fickle, short-term, "hot money" trading systems
  • Removal of China's 'deep pockets' from the EU and US credit markets could easily cause them to seize up
  • Why currency devaluation via inflation still seems the likely endgame
  • Recommendations for increasing your financial and personal resilience to this outcome

Part I: Worse Than 2008

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Get Ready for Worldwide Currency Devaluation


You'd think that after AIG blew up spectacularly and Lehman choked on a hairball of tangled derivatives (one that is still being picked apart), the lesson would have been learned and derivatives reduced in both size and complexity.

Unfortunately, that lesson was not learned, and we have to square up to the fact that derivatives are now roughly $100 trillion larger in aggregate than they were in 2009:


More Myths and Illusions: Corporate Cash & Debt

Monday, December 19, 2011, 7:17 PM

There are several hard things about this particular crisis, especially for the aware. One is the waiting for the other shoe to drop, as we all know it must. The vast imbalances that led to the 2008 crisis are mainly still intact, and in many cases are larger than they were before.

Another difficult thing is constantly reading all the horribly wrong and misleading information out there that is designed to shape opinion almost universally in the direction towards more profligacy and consumption. Statistics are constantly bent, and other bits of information running counter to the idea that a new round of robust consumer expansion is nearly upon us are conveniently buried or overlooked. » Read more


Why It's Now Easier to Predict the Outcomes of the Coming Recession

Monday, December 19, 2011, 3:55 PM

Why It's Now Easier to Predict the Outcomes of the Coming Recession

by Gregor Macdonald, contributing editor
Monday, December 19, 2011

Executive Summary

  • Western economies are more sensitive to oil prices than the developing world.
  • Global oil supply is extremely tight by historical measures.
  • Oil prices will likely not go much higher in 2012, due to the failing global economy.
  • The next oil-price induced recession (coming ASAP) will have predictable outcomes on the economy and its key sector.
  • Understanding these predictable economic outcomes resulting from oil supply dynamics
  • Prediction offers more value to the investor than simply betting on oil prices (which will likely be extremely volatile).

Part I: Why Oil Prices Are Killing the Economy

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Why It's Now Easier to Predict the Outcomes of the Coming Recession

The Oil-Sensitive West

Consumption of oil in the West started to flatten out as early as 2004. And readers of my previous essays know that after the crisis started in ‘08, both Europe and the US shed even more oil demand. Let there be no doubt: Oil demand in the OECD has been highly elastic (responsive) in the face of oil prices above $80. In the data, you could even see some early signatures of reduced demand coming in 2004, when oil prices rose above $40.

One of the paradoxes that repeatedly trips up analysts, because it’s so counter-intuitive, is the fact that the wealthy Western countries are hurt more by high oil prices than the poorer, emerging market countries.

Your average Westerner is consuming quite a lot of oil, per capita. It's embedded in shipped goods and in shipped foods, and also comes via high penetration of automobile ownership. Westerners drive lots of miles, comparatively. But people in emerging markets have only just begun to use oil. It hardly matters whether petrol is $4.00 per gallon or even $8.00 per gallon if you have just upgraded from a rural existence, and for the first time ever your family is consuming 4-6 gallons of petrol per month (enough to power a motorbike each day for a short distance). This is precisely what Bernanke is alluding to, when he allows that we have no control over emerging market oil demand.

More vexing is that emerging market economies are primarily running on coal, so they are able to produce and align their consumption with the power grid, while being more discretionary about liquid fuel use for mobility. This is really perplexing, as I said, to Western analysts but I do want to point out that its empirically true (see Stuart Stanford’s post on the subject, Wow, Just Wow, from earlier this year).


Off the Cuff: Don't Get Pessimistic on Gold

Thursday, December 15, 2011, 3:55 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish discuss:

  • Where to now?
    • There's a whiff of deflation in the air as central banks posture and pontificate. Is this a harbinger of things to come, or a head-fake before the money printing resumes in earnest?
  • Gold
    • It's been a rough few weeks for holders of the yellow metal. Has there been any fundamental shift affecting the reasons for holding gold?

Cross-currents and volatility define the period we're in now. For investors, vigilance and defense should be the main priorities. But, it seems we're closer to the end of this stage than the beginning, so be positioned for action soon.
» Read more


How Low Will Housing Prices Go?

Monday, December 12, 2011, 11:13 AM

How Low Will Housing Prices Go?

by Charles Hugh Smith, contributing editor
Monday, December 12, 2011

Executive Summary

  • The three macroeconomic factors that will suppress employment -- and in turn, housing prices -- for years to come
  • Expect an overshoot as housing prices revert to their historic mean
  • Why those who are buying now are likely "catching a falling knife"
  • Relative valuations for determining when the housing market will have hit bottom

Part I: Headwinds for Housing

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How Low Will Housing Prices Go?

It’s a truism that “all real estate is local,” and to the degree that the ultimate price of a property is only truly “discovered” when a specific buyer purchases a specific property at a specific point in time, this is certainly true. It is also true that many key inputs to real estate valuation are locally derived, such as employment, wage levels, demand for rental housing, the attractiveness of neighborhoods, and so on.

But to say that interest rates managed by the Federal Reserve or subsidies provided by the Federal government have no influence on real estate valuation is clearly untrue. Valuation is directly influenced by global, national, and state economies, and by the policies of the central bank and government.

In attempting to answer the question When will housing hit bottom? we might start with the coarse-grained systemic inputs and then move to the more fine-grained local inputs.


Off The Cuff: Planning to Plan for the Plan

Thursday, December 8, 2011, 2:17 AM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish debate:

  • Rescuing Europe
    • There seems little reason to have optimism that the latest announcement of a plan to save the Continent will be any more fruitful than the many previous ones. A better question is: Can Europe be saved?
  • Fuzzy numbers
    • Reports of Cyber Monday record sales and lowering unemployment are in the media. Time to break out the champagne?

The leaders of Europe are showing Herculean talent in kicking the can further down the road. The key question now is when does the road end?
» Read more