While the share market digests the news of collapsing brokers and falling financial profits, the grand poobahs of the world’s economy are wringing their hands in worry. What’s keeping them up at night? The three Fs, each its own kind of crisis: food, fuel, and finance.
“The World Bank met on Sunday faced with a mounting food price crisis that has sparked deadly unrest in developing countries, underscoring the urgency of fighting hunger and poverty,” reports Channel News Asia.
How urgent, you ask? The Prime Minister of Haiti was sent packing this weekend by crowds protesting soaring food and fuel prices. We don’t even know who the man is but reckon he won’t be the last public official to be ridden out of town on a rail before this current crisis is over (and it may not be any time soon).
As usual, it’s the people at the margin (whether lending or with food) that are affected first when surplus turns to scarcity. Despite all the daily signs of abundance here in Australia, let us not forget that there are about four and half billion people on the planet who have little margin for error in their daily lives. If food prices go up, many of these people go hungry.
World Bank President Robert Zoellick, doing his best impersonation of Franklin Delano Roosevelt, wants a “new deal” for global food programs. He’s asked richer nations to contribute US$500 million immediately to help get food to poorer nations.
IMF President Dominique Strauss-Kahn was less pragmatic but more rhetorical. Wrapping up his organisation’s annual spring meeting, he said that, “Food prices, if they go on like they are doing today … the consequences will be terrible…Hundreds of thousands of people will be starving…As we know, learning from the past, those kinds of questions sometimes end in war.”
People often talk about resource wars being a common feature of the coming century (or decade). But it’s usually oil and energy they’re talking about, not rice and wheat. Food is fuel for the body (we’ve been watching the Biggest Loser). If you don’t have access to cheap calories, what good is cheap fuel?
It’s our contention here at the Markets and Money that both food and fuel are getting more expensive. The scary thought is that artificially low interest rates and cheap energy have, for many years now, sent bogus signals to the world about how much and how fast the population can grow. Agricultural abundance is only a very recent (and perhaps temporary) historical phenomenon. It’s no coincidence that it occurred alongside the energy boom from cheap oil.
Not that it’s any consolation to starving people stranded in long petrol lines, but businesses in the agricultural sector are going to boom (provided they aren’t nationalised). Farm equipment, fertilizer, and large producers should all see earnings rise this year. And next year. And the year after that.
The second “f” crisis is in finance. It’s been with us so long now it doesn’t seem like it’s new. But some people are slow on the uptake. The nerve endings of large institutions like the IMF and World Bank are few and far removed from the tiny central brains that direct the movements of these mammoths. Brontosaurus Banks.
Like a bunch of dinosaurs standing under a meteor shower, the G-7 meeting this weekend produced lots of talk and no action. The ministers agreed that concrete steps need to be taken in the global financial system to improve transparency and the way the banks value certain assets. The G-7 statement also paid lip service to issue of credit ratings and how to make sure in the future that garbage debt doesn’t get a Triple A investment grade rating.
Here’s the trouble though…American policymakers are worried about recession and plunging house values. Everyone else-especially the increasingly sweaty Wayne Swan-is worried about inflation. Because of the different concerns, no one can agree on any policy solutions.
The conclusion? There is no one solution to the credit crisis. That is bad news for people who think of the economy like a machine. It’s not just a matter of changing the oil or checking the fuel pump. The engine is sputtering, the drive train is wrecked, the tires are flat, and someone seems to have cut the brake lines. There are no air bags.
As they say in the used car business, it’s not the years, it’s the miles. You wonder if this globalisation jalopy is going to make it.
As for the dollar, Europe would like it to be stronger in order to revive its exports. Dollar-pegging countries in the Persian Gulf would like the dollar to be stronger too, so they don’t import inflation and the political instability that goes with it. Even Japan and China would like the dollar to be stronger. Dollar strength maintains the basic economic model of the last 50 years: manufacture cheap and sell to America.
But the dollar is not strong. And the things that would make it stronger-a lower trade deficit, higher interest rates, lower government spending-are not going to happen. In fact, the opposite will happen. While officials talk up a “strong dollar,” everything they actually do weakens the dollar.
This is why the day-to-day movements in the dollar index and in gold don’t tell you much. The most important fact about the gold price is that that the official policy of the U.S. government is to cheapen its currency. Rates are being lowered. The government is spending money. It’s also giving away money, hoping Americans can spend the country out of recession.
Do you know of any person or any nation that ever spent its way to prosperity? Neither do we.
The fuel crisis hasn’t reached the same acute stage as global food markets. But in time, it will. There were two developments in the clean coal front this that caught our eye this week. First, “Australia is now investing $63 million in developing clean-coal technology in China, our biggest coal buyer,” according to Dennis Shanahan in today’s Australian.
Making the last stop in his first world tour, Aussie PM Kevin Rudd told reporters made the case for an Australian Chinese partnership on coal, “The fact that Australia is the world’s largest coal-exporting country, and that China is the world’s largest coal-consuming country, presents both of us with a fundamental responsibility to act in this area of critical technology,” he said.
You say “responsibility” we say “opportunity.” Now that we are moving into a world of energy “haves” and “have nots,” coal is a realistic source of transportation fuels for oil-poor, coal-rich nations. What coal-rich nations lack is the technology and capital to turn coal into liquid transportation fuel. Australia has several public companies that can help them do it. That’s the opportunity.
The trouble with above ground coal-to-liquids (CTL) technology is that it produces nearly double the carbon dioxide emissions that you get from burning coal to make electricity. In the U.S., green politicians have actually prohibited U.S. government agencies from buying coal-based fuel with tax payer money.
The U.S. has plenty of coal. The Air Force would like private enterprise to turn that coal into fuel for U.S. planes. But California Congressman Henry Waxman introduced a provision into last year’s U.S. Energy bill (section 526) that prohibits government agencies from buying fuels from “unconventional” sources.
Those “unconventional” sources are oil shale (the Pieceance Basin in Colorado), coal (the Powder River Basin Wyoming), and heavy oil sands (found in Alberta in Canada). Two U.S. Congressman are looking to repeal Section 526 from last year’s U.S. Energy Bill and unlock the future fuel from those unconventional hydrocarbons.
Will the section be repealed? It depends on what you think about global warming. We won’t weigh in here. Our main interest is in how governments respond to the dueling crisis of Peak Oil and Global warming.
The old “real politik” answer is to use your domestic resources to achieve energy security. This way you don’t exchange your currency reserves for oil and outsource your supply of a vital industrial commodity to foreign interests. If you have lots of coal but no oil, you turn your coal into fuel.
But hey, if the planet is warming and coal is the culprit, burning more coal doesn’t exactly make things better, does it? What do you do? Go nuclear? Conserve? Go renewable?
All of these options are on the economic table and an intelligent and prompt response is becoming increasingly urgent. You can bet that the government will do something, and probably the wrong thing. Meanwhile, our money is on the firms doing something with coal, wind, waves, and solar.
These three crises-food, fuel, and finance-are a formidable triply whammy for the global economy. It’s bad news for the indexes, which already have plenty of bad economic news to consider. But for a certain class of agricultural and alternative energy firms, this could be the bull market of a lifetime.
Markets and Money