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It's not only the
energy markets that threaten the 'low inflation' data now encouraging
bondholders to keep buying...
THE PUBLISHED
INFLATION DATA are surprisingly unsophisticated in so far as they
compare current prices with a snapshot a year earlier.
Just over a year
ago, oil was every hedge fund manager's favorite speculation. In summer 2008
a barrel got to well over $140, before falling sharply back.
That summer's
high oil price had the effect of cancelling out the deflation which was
occurring elsewhere in the economy, as the first phase of the credit crunch
started to bite. It helped keep inflation up.
But by summer
2009, after hitting a trough of $30, the price was back down around $65
representing an annual fall in the oil price of over 50%. Now it was keeping
the inflation figures down. Oil would continue to be below the price of 12
month previous throughout the period from January '09 to September '09.
Now – in
the fall of 2009 – prices are more or less where they were a year ago,
but 12 months ago they were falling fast, while now they are rising. So for
the first time in over a year the effect of oil prices in the inflation
figures, in October/November 2009, will be up again. And by January, even if
prices don't continue to rise from here, the low prices of winter 2008/9 will
form the base. Oil will again be at twice the price it was a year earlier.
This will have a marked impact on inflation data.
It's not only the
energy markets that threaten the "low inflation" data currently
encouraging bondholders to continue buying government debt paying little more
than 3.0% per year. There are well over two billion Chinese and Indians who
used to make the unwelcome but necessary market adjustments on the demand
side when world grain prices rose:
Some 30% of the
world's population went hungry.
Until the current
decade, that was an important part of how world demand came into line with
dips in world food production, before big price rises would cause Westerners
to feel the sharp pain of a world food shortage. But this has now changed,
and permanently.
The wealth and
dollar reserves of the Asian countries are now large, and their people are
not going to go hungry in future (and quite right, too). Instead they will be
competing on world markets, and the price of grains will start to show the
very sharp spikes associated with unreliable supply and a newly inelastic
demand in critical commodities.
You may remember
the food riots of early 2008, and how they seem to have disappeared. Well,
that occurred after a small dip in world grain production in 2007.
Fortunately, by its end, 2008 had turned into a bumper year for the global
food harvest and a serious crisis was averted. That bumper harvest brought
global food prices down again – but for how long?
Rice gives us a
hint of the nature of price movements we should learn to expect. From a
stable base it spiked viciously upwards (by 300% and more) as it sucked in
speculative money during the 2008 panic. But when it fell back as panic
subsided, it still remained twice the original base level. It is from here
that the next upwards spike seems to be starting.
In a similar
pattern sugar has already started to cool off a bit, but pepper is in the
earlier stages. At the end of August '09 it rose 17% in a week on news of a
poor crop arising from adverse weather in South East
Asia.
Unlike
camcorders, food is not a discretionary purchase and under the harsh law of
marginal utility – together with the new inelasticity of Asian demand
– even modest food shortages will cause sharp price spikes, and maybe
more riots, which indeed started to appear in Asia in September 2009, with
tragic consequences.
When necessities
are in short supply people behave in the opposite way to normal. Instead of
reducing demand they tend to panic and stockpile food for safety, perversely
increasing demand on those higher prices...
This excerpt
comes from a presentation made last month at the CLSA
Investors' Forum in Tokyo,
Hong Kong and Singapore.
Other speakers included Marc Faber, Robert Fisk, Niall Ferguson and Jim
Rogers. You can receive the full report – Towards Hyperinflation – for free
today, plus a complimentary gram of gold, stored securely in Zurich,
Switzerland. Simply register with
BullionVault here...
Paul Tustain
Director
and Founder
Bullionvault.com
Also
by Paul Tustain
Paul Tustain is
director and founder of BullionVault - the world's
fastest-growing gold ownership service, where you can buy gold today
vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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