All this time everyone’s been looking to gold and silver prices as indicators of runaway inflation. But what about cabbage, corn, bread, garlic, and tomatoes? You can’t get more tangible – or edible – than that. It feels familiar, doesn’t it?
Back in 2008, soaring rice and wheat prices (driven in part by speculation in financial markets) began leading to social instability in the developing world. The onset of the Global Financial Crisis led to falling agricultural prices and the crisis seemed to go away. Now it’s back.
Of course not all price increases are the result of inflation. For example, with rice back in 2008, it was the hesitation of exporters to send product abroad which led to soaring prices. There was plenty of rice. But the expectation of higher prices led to exporters withholding product from the market. Prices zoomed up.
You might say that the hoarding of real goods is clearly an example of inflation fears contributing to a cycle of higher prices. You’d probably be right. But food prices are also influenced by other factors like arable land, the price of fertiliser, and government incentives and subsidies that influence what crops a farmer plants and this distort supply. All that said, what do you think the chart below tells you?
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Well, the chart above doesn’t look so bad. But that’s mostly because it does not show the current rise in the Ag Index in relation to the 2007 run up. So let’s look at that too!
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Ahh. There we go. With a little longer time-frame, you can see that the current run up in agricultural prices is even sharper than the increase in 2007-2008. It has not yet made a new all-time high, or anything like a double-top. But you get the idea…food prices could again be telling us of an interest-rate driven speculative melt up in the futures markets.
The difference between now and then is that the U.S. Federal Reserve has expanded its balance sheet by several trillion dollars and U.S. interest rates are at historic lows. What’s more, investors are all expecting the Fed to deliver a stunner when it meets next week to announce what everyone hopes is at least $2 trillion new Quantitative Easing.
Our old friend Marc Faber says the markets could sell off if they are disappointed with the Fed’s figure. But he reckons that if the markets are temporarily disappointed by Ben Bernanke losing his nerve, it does not mean a bear market and new lows for stocks. In fact, he reckons the other side of the trade might be worth a punt.
He told Bloomberg TV, “Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly.” This observation would square with the Goldman Ag Index preparing to make an assault on its all-time high.
Stocks moving up on a “crack up boom” may also explain why yesterday’s auction of five-year inflation adjusted U.S. Treasury notes (TIPS) delivered a negative real yield to bidders. It sounds complicated. One simple way of explaining it is that you’re more or less paying the government as you lend it money.
Why on earth would you ever do something like that?
TIPs are adjusted to move up with consumer prices. If you reckoned that massive consumer price inflation was in the pipeline, you’d be willing to pay a premium today for a security that moved up with inflation. Not many fixed-income instruments are worth holding in an inflationary environment, though, which may be why Faber says stocks, along with precious metals, are your best bet if you’re sure the Fed is going to thoroughly ruin the U.S. dollar by printing trillions of new ones and buying assets.
Speaking of metals, did you see that for the last three years officials at the Commodities Futures Trading Commission (CFTC) have been investigating the manipulation of the silver market? The articles on the investigation are unclear. But it looks like this time, the CFTC might be investigating groups who tried to suppress the price of silver, rather than replay of its investigation into the Hunt brothers manipulating prices higher (a subject we wrote about last week.)
For Markets and Money