–Uh oh. The price of your Grand Angus meal at Macdonald’s could be going up. It used to be that “The Big Mac Index” published by The Economist magazine measured currencies on a purchasing power parity basis. The more expensive the Big Mac, the lower your purchasing power. But when all paper money is declining in value relative to real things, the Big Mac Index isn’t as useful.
–In a world of competitive currency devaluations, we propose the Grand Angus Index, in which food increases in value relative to paper money are measured. According to today’s Wall Street Journal, “The United Nations Food and Agriculture Organization’s monthly food price index rose for the sixth consecutive month to 214.7, topping the previous peak, 213.5, reached in June 2008.” The U.S. dollar is also going down, in food terms.
–Food prices last spiked like this in 2008. That’s when the subprime compost really hit the fan in the financial world. At that time, it was a combination of bad harvests, bad weather, bad trade policy (export quotas) and bad monetary policy that drove the move. And the move drove people in the developing world – where food is a large part of what you spend your money on – into the streets with anger and, presumably, hunger.
–Food prices matter because they represent a kind of social limit on loose monetary policy. If low interest rates and money printing drive food prices up for people, that’s the bad kind of inflation. The good kind of inflation – a rising stock market and rising house prices – doesn’t make people angry or hungry. It appears to make them rich.
–But rising food and fuel prices are warning signs. Of what? Of the bear market in nearly all fiat money globally, not just the U.S. dollar. How do we know this? The chart below.
Click here to enlarge
–This is an expanded version of a chart we showed at the Gold Symposium in Sydney in November last year. And you’ll see that a green line has been added. That’s the U.S. dollar index. The black line is the Goldman Sachs Agricultural Index (spot prices). What does it tell you?
–Even after the bear market in stocks began in late 1999, the U.S. dollar stayed strong. It took two solid years of falling stock prices to reverse at least a little of the momentum from a 20-year bull market. But when the dollar fell, it fell hard.
–What’s interesting is that even though many major crops like wheat and corn and sugar and soybeans are priced in U.S. dollars, dollar weakness did not lead to surging food prices globally. In wasn’t until late 2007, in fact, that food prices (measure by the GSCI) really want stratospheric.
–Since then, you can see a pretty compelling correlation between dollar weakness and food strength. But the perplexing aspect of the chart is that the recent rally in the dollar index has been met by a new high in the Goldman Ag index. Food hasn’t fallen on dollar strength. It’s gone higher. Why?
–The dollar index measures the greenback versus other currencies. The green line tells you relative to other currencies, the dollar is trading a bit stronger now than it was in November (the Aussie dollar excepted). But here’s the important point: the dollar strength against other currencies has masked the decline of nearly all paper currencies against real goods like food.
–If we’re in a global bear market for fiat money – and not just a bear market but a kind of endgame for this kind of money – then real goods will continue to climb in value against government money, even if the U.S. dollar exhibits periodic strength relative to the Euro, the British Pound, or even commodity currencies like the Australian, New Zealand, and Canadian dollars.
–Is there an investment angle here? Well, even though they fell again yesterday, gold and silver are still handy tangible assets to own if we are indeed in a secular bear market for paper money. Lower prices are chances to lower your average purchase price and add to your position. This is a kind of “big picture” currency trade (paper for metal).
–But what about food? Well, if the food story is not really a story about shortages and droughts, and instead it’s a story about a global currency crisis, the investment angle is not as clear. You could keep it simple and invest, when possible, in arable land. In a world with six billion people and counting, food seems like it would a long-term winner.
–Yet as we’ve seen here in Australia with Timbercorp, straight-forward investments that correlate to higher food prices are few and far between. The idea seems simple. But if the investment vehicle isn’t properly structured, you can lose a lot of money. And even more straightforward angles like fertiliser and pesticides have been less than stellar over the last three years.
–The safest bet? Stock up on canned goods! And sugar and salt, which as you may know has been used as money in the past (a medium of exchange). Just keep it dry!
–Of course that recommendation that you exchange paper things for real things is part of the rough plan we have for 2011 to “definancialise” life. What it really means is to place reliance and confidence in the systems and axioms of wealth that have more or less worked for the adult life of the Baby Boomers.
–Modern portfolio theory…the efficient market theory….the stock market as savings account…the idea that over 20% of a nation’s population can spend a quarter of its adult life not producing anything…these are all unexamined assumptions about modern life that will turn out to be bogus in the next years.
–Tomorrow, we’ll have a closer look at what ‘definancialisation’ means to Aussie banks. If they’re required to keep more of their balance sheet in high quality, liquid assets like, ahem, government bonds, what will it mean to their ability to expanding their balance sheet with new loans? If loan growth declines as capital requirements kick in, what will that mean to bank shares and to the economy?
–It’s quite a bit to ponder. We’ll go stock up on some calories and protein and think about it…before the Grand Angus meal gets more expensive.
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