Global Food Warning

  • Key Commodity Rise Signals Global Food Warning
  • The End of Growth Through Currency Debasement
  • The Real Villain Behind the Curtain in the LIBOR Scandal

food security and the global shortfall in agriculture…the currency war has led to the same place…taking steps to protect your wealth…the biggest impediment to free markets and growth…

Key Commodity Rise Signals Global Food Warning

We enjoyed some great winter sun down in Melbourne this weekend.

On Saturday the thermometer hit a balmy 17°C!

I took my kids down to the park in the morning, and met up with colleague Greg Canavan and his family. After recently moving from Sydney, they are still getting used to Melbourne’s crazy weather. I’ve been here ten years, and I’m still getting used to it!

What was even crazier was that on Saturday, Melbourne was a degree warmer, in the depths of its winter, than London was on Saturday, during the ‘height’ of its summer.

The UK’s ‘summer-time‘ has been a total washout so far. With the London 2012 Olympics round the corner, the Brits are not happy with the freakishly bad weather.

But it’s not just the UK dealing with extreme weather.
The US has been under a heatwave for weeks. The US National Oceanic and Atmospheric Administration is now saying that the US is in the middle of its worst drought since 1956.

The country’s agricultural sector is suffering badly. The corn harvest in particular looks like it is going to be a disaster.

Less than a third of the national crop is in good shape. We’ll have to wait until the harvest to see just how bad it will be, but prices are already soaring in anticipation of a huge drop in production.

The US agricultural secretary was quoted in the Financial Times saying:

‘I get on my knees every day and I’m saying an extra prayer right now … If I had a rain prayer or a rain dance I could do, I would do it.’

Hearing comments like that from the top of the agricultural sector hasn’t helped calm market nerves. The corn price has gone off like a rocket. Since the start of June it has jumped by 45% — setting a new record high.

Corn Price — Up 45% in Just 7 weeks

The US is now looking to Brazil to help bridge the shortfall. The result is that there won’t be much left over for other countries hoping for some corn this year. The corn market will be very tight.

This highlights the issue of ‘food security’: the increasing threat of inadequate or volatile food supplies for global population. This will be something we will hear more about if this harvest is as bad as they fear. The FT also reported:

‘”I’ve been in the business more than 30 years and this is by far and away the most serious weather issue and supply and demand problem that I have seen by a mile,” said a senior executive at a trading house. “It’s not even comparable to 2007-08.”‘

We could well see another swathe of food riots around the world — mostly in poor countries that bear the brunt of supply shocks — like we did the last time the corn price was at these levels, in 2008.

Then, after the market is reminded of the tragic human cost of crop failures, the global conversation will focus on food security once again.

Part of this conversation will be highlighting the importance of fertilisers to increase production rates.

In short — each year the world tries to feed more mouths with less farmland, while enduring more volatile weather. So farmers need to use fertilisers to make every hectare count.

A Key Resource

Potash (a potassium salt) and phosphate are two of the key raw ingredients for the fertiliser industry. And both of them are produced by mining.

The potash sector had been wallowing since the start of last year, despite potash prices holding firm.

However, the major potash stocks have finally turned around over the last 2 months — roughly in line with the corn price.

Majors like Potash Corp (NYSE:POT) have all jumped more than 20% in this time, while the rest of the mining sector crashed around them.

Potash was the darling of the Aussie market a few years ago, after BHP made a bungled bid for Potash Corp. As the excitement passed, the prices of ASX potash stocks slowly fell, as the hordes moved on.

But while the market has been looking elsewhere, some of these potash stocks have been very busy. I’m still following one of the stocks that I tipped for Diggers and Drillers readers, and the price is less than half of what it was when I tipped it. There is hardly a shortage of under priced resource stocks on the market today, but the value in this stock is remarkable.

Generally, Aussie potash stocks move up and down closely with the Canadian majors.

But so far the Aussie market seems to have completely overlooked the fact that the Canadian potash majors are now rallying.

So we may have a double opportunity here.

At some point, and probably soon, the Aussie potash juniors will start playing catch-up to the 20% rally seen in the Canadians. Meanwhile, the market should also start pricing in the progress made by those stocks that have been quietly getting on with things.

I’ve been watching and waiting for this turnaround, and for some potash stocks it looks like we might be witnessing the very start of it right now. Let’s hope so.

Dr. Alex Cowie
Editor, Money Morning




The End of Growth Through Currency Debasement
By Dan Denning, Editor, Australian Wealth Gameplan

The Plaza accord was initially set up in 1985 and included five countries; the United States, West Germany, Japan, France and the United Kingdom.

What was it?

The US dollar was strong against all the major currencies towards the end of the seventies, giving American trading partners, like Japan, and Europe a competitive advantage when it came to their exports. This was becoming a political problem for the US. Car manufacturers lost market share and jobs to Japan.

What’s more, Europe and Japan were so addicted to export led growth that domestic consumption fell off a cliff. Economies in Europe, much like Japan, ran huge trade surpluses with the US but actually experienced economic contraction.

The solution was now what’s known as the Plaza Accord of 1985, so called because it was negotiated in September at the Plaza Hotel in New York. Back then it was just the G-5. All five countries agreed to intervene in the currency markets to orchestrate a weaker US dollar.

The point of the whole exercise was to transfer growth from the US market to the rest of the world. The world has stopped growing. The monetary authorities agreed to engineer some growth by weakening the dollar (especially against the Yen and the Deutschmark) and encouraging consumption and investment in the rest of the world. It worked.

It worked too well.

By 1987, the G-5 had expanded to the G-6 to include Canada. The G-6 gathered in Paris to sign the Louvre accord. This time their goal was to strengthen the dollar in the name of stability. Global growth had been rebooted, but the dollar’s slide had resulted in too much volatility in currency and financial markets…

The Start of the Currency War

A currency war is fundamentally an attempt to improve economic competitiveness at the national level. The self-defeating aspect of such a war is that you can only do so at the expense of your neighbours, whom you hope to make your customers. Your growth comes at their expense. They must consume in order for you to save.

This was fine back in 1985 with the Plaza accord. The US could effectively ‘lend’ growth to Japan and Europe. The US ran large current account deficits. But the key difference between then and now was that there was a strong currency (the dollar) which could be weakened, and weak currencies which could be strengthened.

The US could let the dollar slide because the economy was booming. Jobs were plentiful. The government deficits were growing but not huge. Devaluation hurt, but only to the national pride, not in any noticeable way on a purchasing-power basis.

Today, there is no one currency against which all others can strengthen to everyone’s mutual benefit. Competitive devaluations have become a zero sum game, always costing one country jobs and exports. This is why Brazilian Finance Minister Guido Mantega said in 2010 that the world was in a new currency war. He knew that interest rates were being used by central banks as a weapon to deal with domestic debt problems and boost export competitiveness.

Effectively, everyone in the world is trying to boost their own economic growth by weakening their currency so they can sell their goods to other countries. This has led Europe, Japan, and the US all to the same place: zero real interest rates.

These countries have chosen to deal with deflating asset bubbles and low growth by lowering real interest rates. They’ve avoided a reckoning. But in so doing, they’ve zombified their economies, sucking out all the life of a dynamic market and injecting it with the formaldehyde of unproductive debt. They have also trod the path of currency devaluation down to its logical conclusion.

Protecting Your Investments

What I’m almost certain of is that this is just the beginning. If the currency war moves from interest rates and monetary and fiscal policy to cyber weapons, price manipulation and an attack on the financial architecture of the modern world, then a threat exists that is neither fully understood nor appreciated. So what can and should you about this emerging threat?

How do you create non-financial wealth and personal security?

Short of opting out of the current system and dropping off ‘the grid’ — a radical option that most of us are not in the position to choose and probably wouldn’t choose anyway — what can you realistically do to hedge against major losses in the share market as a result of deleveraging and major disruptions to the economy as a result of the evolving currency war of all against all?

Well, I think the answer lies in thinking about what wealth really is. I don’t mean to get philosophical. But really, it doesn’t hurt to think about why we bother to invest and protect and grow our wealth. Is it for the love of the game? Is it because we enjoy the challenge?

It may be for those reasons. But fundamentally, wealth creation and preservation is about having the freedom to live the life you’ve imagined for yourself, a life of purpose and creation and value, whatever value means to you. Financial wealth helps us achieve those ends. But it is not an end in itself.

Building non-financial wealth means taking steps to improve your quality of life and personal security. For me, that means appraising the financial system with honest and sceptical eyes.

It then means reducing the amount of my wealth at risk in financial markets and converting it into tangible assets that have utility.

For some people it may mean living a simpler financial life with less risk and fewer day-to-day decisions (peace of mind). This is probably a demographic trend we’ll see anyway. As the baby boomers approach retirement age, I expect those that are able to will begin liquidating their retirement portfolios and living off their accumulated savings.

Dan Denning
Editor, Australian Wealth Gameplan




The Real Villain Behind the Curtain in the LIBOR Scandal
By Shah Gilani, Contributing Editor, Money Morning

There’s nothing like pulling back the curtain on the fraud that’s centre stage in the LIBOR manipulation scandal and finding the levers are really being pulled by central banks.

It’s not about the banks doing what they did. The revelation is this: Central banks are the biggest impediment to free markets and the reason capital markets have become casinos.

And until the tyranny of their grip is broken, the majority of public investors are going to rightfully sit on the sidelines and long-term economic growth will be impossible.

The LIBOR scandal is just a sideshow. There’s nothing new there.

Banks manipulated LIBOR (the London Interbank Offered Rate), the benchmark for over 800 trillion dollars in interest rate-sensitive loans and financial instruments, to jack up profits on trading positions they held.

Bankers scheming, lying and cheating for bigger bonuses at the expense of anyone in their way…that’s news?

No, but here’s the real inside scoop…

They were told to do it – both implicitly and explicitly – by the central banks that are supposed to regulate them (as is the case with the U.S. Federal Reserve Bank) and provide a safety net that facilitates capital formation and commerce on a global scale.

The Birth of the Housing Bubble

Let’s not get overly technical here.

Suffice it to say that global credit expansion due to artificially low interest rates caused the build-up of leverage in a yield-starved investment environment and led to the housing bubbles that burst from sea to shining sea.

Who orchestrated the low interest rate environment? That would be the Federal Reserve Bank and central banks across the globe.

If there was no manipulation by central banks, the free market for credit would have walled off a lot of speculators from access to credit they didn’t deserve.

Central banks, especially the Federal Reserve Bank as a regulator, knew the health of the banks, knew they were leveraging themselves, knew they were piling up under-collateralized, securitized “assets” in off-balance sheet special-purpose vehicles.

They also knew they were forcing banks to lend at low rates. They themselves manipulated the rates to be that low and wanted the banks to extend their articulated policy throughout the economy, like a pox on the population.

And when we ended up in a financial crisis and found out the banks were all insolvent, what did the central banks do?

They winked and nodded to the banks to manipulate LIBOR to prove to the world that there was no crisis and the system was still functioning as reflected in the low cost of interbank lending.

In fact, central banks were lying to the public and more than tacitly acknowledging that bank CEOs were also lying to the public’s face, saying they were in good shape when in fact they were borrowing hundreds of billions (trillions globally) from central banks.

Because the truth is if LIBOR wasn’t manipulated it would have gone through the roof and the whole world would have come to a standstill, which it did anyway.

And now to fix the mess they created by manipulating banks to keep interest rates low, central banks are adding “stimulus” (which is nothing more than giving banks more money) to keep interest rates low.

It never ends.

Breaking the Grip of Central Banks

The tyranny of central bank manipulation and the suffocation of free markets has to stop.

There’s only one way to do it. Dismantle all the big banks and limit the size of banking institutions so that any one or two or five or six that fail won’t implode the global financial system. Let them fail and resolve ring-fenced fiascos under existing bankruptcy laws.

If we get banks down to a sensible size, we won’t need central banks. Sure, we can still have them, but they should be run by academics (not bankers) with a singular mandate, price stability, that’s articulated in advance and achieved with total transparency.

The truth is that central banks are shills for the banking behemoths.

They manipulate politicians, overrun fiscal discipline at times (not that there’s much of that anywhere in the world these days) and use their limitless powers to feed profitability pools at banks.

The LIBOR scandal is a window into the workings of central banks and how they’ve aided and abetted the casino capital markets that serve the banks at the expense of long-term capital investment and sustainable economic growth.

It has to stop.

Shah Gilani
Contributing Editor, Money Morning

Original Articles at 2012 Port Phillip Publishing Pty Ltd

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