Economic Complexity and the Price of Food

Quotes of the week:
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -

The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...

Commentary for the Week:
Economic Complexity and the Price of Food:

Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?

One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.

Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.

So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
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MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here


Finance News:

1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here


Economic News:

1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here

2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here

3. Home sales in the US fall 2% in March ... read more here

4. The property market in Spain falters as well ... read more here


Islamic / Middle East / Emerging Markets:

1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here

2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here

3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here


Interesting but not Finance:

1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here

2. The economics of the federal government's despicable policy on the seal hunt ... read more here

The Price of Gold

Quote of the week:
"You have to ask yourself why OFHEO is letting them take on more mortgages. The last thing the Fed, or the administration wants is for the companies to go out and buy more mortgages and blow up." - David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management.
David connects the War on Terror with mortgages. Personally, I didn't think it could be done.
I can just picture it now ... Person A looks up and says 'What was that Noise? Was it a bomb?'. Person B replies, 'What world are you living in friend? Bombs are so 90's. It was a mortgage company!'


Commentary for the Week:
Why is the price of Gold so high?

The price of Gold has recently shot up above $970 US. Many intelligent people have opined and argued that this is because of the shortage of supply and the increase in demand from Asia. What they really mean to say is that at the rate people from China and India are growing up, getting married and buying jewellery for the aforesaid marriages, the shiny stuff going to be all gone before you and I will be able to say 'I do' in Mandarin or Hindi. This is of course, not entirely accurate. Not only is it quite easy and beautiful to say 'I do' in Mandarin and Hindi, it is also inaccurate because they have framed the question the wrong way around. While it may be true that the price of Gold is getting higher and higher by the day due to demand and supply pressures, it is more true that it is the value of the printed paper we call money that is actually falling drastically. The market for Gold is just one of the areas where we are seeing the effects first.
What evidence do I have for this, you ask? One's innate genius aside, there is of course, the price of oil, the price of bread, the price of wheat and the price of milk that we can take a look at. While I haven't actually been grocery shopping in a while and am surviving on the various flora such as mushrooms that are fed to me by my better half; and I haven't actually filled in any gas in months because the car is in my garage protesting the unprecedented severity of Winter, I am told by reliable sources that the price of things that are Real is rising quite quickly. What this means of course, is that while we feel it is the price of our consumables that is rising, it is actually the fact that intangibles such as paper money and the hours we spend at work that are being devalued in terms of purchasing power. This is even worse for our elders and seniors, or those who are on a fixed income, who get a certain dollar amount a month to spend but are being confronted with prices that have risen beyond all recognition. While I don't mean to be alarmist, the time when Gas Pumps prices and Ittihad's toll free phone no. below will perhaps contain the same number of digits. So what does all this mean for you anyway? You already know that prices are going up. Here are a couple of suggestions for you to think about:

1. To ensure that your paycheque keeps current with reality, I suggest that you ask your HR department at work for an extra zero at the end of the monthly paycheque. To argue your case, you can share with them your pop-corn receipt from the last movie you saw and observe to them gently, but with the air of an Expert, that if this keeps up, we as a society might have to add a couple of zeros to the five dollar bill for it to be enough to buy pop-corn.

2. While you may be tempted to call your broker (who btw did not tell you to short Insurance stocks) and demand some Gold in your portfolio, perhaps you should make a call to your MP instead. You should demand that the Bank of Canada stop 'loaning' money hand over fist to subprime lenders because that excess printing of money is costing you some good pop-corn.

Alternatively of course, you could not believe me and move to China, find someone to marry and learn to say 'I do'. I am thinking then that the Gold would just magically appear, and all the political machinations at our Central Bank would just be a memory, just like $0.50 gas.


Finance News:

1. As I suggested not-so-humbly two weeks ago, the largest Insurance company in the world confesses to huge losses of untold proportions ... all you short-sellers out there owe me a dinner ... read more here

2. The largest IPO in US history is going to be a credit card company ... go figure ... read more here

3. For all those that thought Ethanol was a good investment ... read more here


Economic News:

1. Corporate bankruptcies are forecasted to rise in the next year. Now, remember the recent investments that GCC sovereign funds made into banks? What effects will these bankruptcies have on bank stocks? Not positive I fear. Much better not to have invested of course, but if they had to invest, better to have waited a bit more, let them sweat a bit more instead of jumping in at the first sign of trouble ... read more here

2.

Islamic & Middle East Finance:

1. Funny how most outbound Middle Eastern money is going to the UK, but UK is the worst positioned country vis-a-vis the US$ ... read more here


Miscellaneous:

1. 1% of the US population is in prison ... Wasn't the difference between the Republicans and Democrats less than 1% during the last election? And don't people in prison vote for Democrats? Hmmm ... if only I was a conspiracy theorist ... read more here