Pennies and Dimes and the 99%

It was this time last year that I fell out of love with London.  I was staying in a three story walk-up flat, in Kensington.  Close to shops, tube, and some great pubs.  And walking distance to the Chelsea Flower Show and Q&A amongst other museums.  From my bower window I could sit in the afternoon spring sun and watch the pedestrians far below, hithering and thithering.

Kensington was dirty, and the people grasping.  The young women wore stiletto heals that were reminiscent of the foot binding days of the Chinese.  All the shops had sales, although I am not a shopper, it was noticeable that along the strip the retailers were doing it tough.  Clear signals of a weak economy. 

The fact that it rained most of the week could have also contributed to my gloom.  In one day alone we had boiling heat, torrential and flooding thunderstorm, hail, and a wind storm.  

Across the street from my flat, and a floor lower was a gorgeous apartment.  Decorated and furnished in the old English style it was immaculate, with real old world charm.  The curtains were always open as though the owner was inviting people to glance in and admire.  

The owner himself was of old world charm style, an English gentleman.  Maybe ex military, because he stood tall and ramrod straight despite his clearly many years, and groomed to within an inch.  

As I sat in the evening, it was the only time I saw him, despite having a clear view the entire length of his apartment.  At that time, he would sit beside the window and read the paper, on occasion leaning into the window as the light faded, holding up the paper.  

Maybe I am slow, but it took a few days to realise that he was using daylight to read by rather than turn on an overhead light.  And further, that I at no time when glancing out the window saw lights – either overhead or from a flickering TV – in the evening.  In the kitchen, I only ever saw tin cans on the bench, despite the inviting décor.  It took me a little time to understand that all over London some, like this elderly gentleman living in a million pound apartment, and others less fortunate, were not turning on the lights nor cooking, because they couldn’t afford it from their income.  I wasn’t just the poorer demographic.  The seemingly wealthy were suffering also.  

And maybe like this gentleman, they lived a proud existence, and told nobody for the shame.

I have written about inflation and ivory towers, in which I suggested that the governments would soon (and again) be adjusting how they measure inflation to grab back money on say, pensions.  Inflation is a number on which the whole world spins, whether measuring real investment returns, pensions adjustments, or planning for future expenditure.  

And that the western economies are experiencing stagflation, whereby the cost of essentials – food, water, energy, healthcare – are rising faster than the income on which we rely to meet these essentials.  And I don’t see how it is going to be any better for decades.  (I took my own advice and bought a farm.)

Then a month ago there was this extraordinary article, as if to prove me completely correct.  So that I am sure you have the benefit of reading it (and the following comments) here is the link in full.

http://www.bloomberg.com/news/2012-04-25/chained-cpi-switch-is-a-slam-dunk-even-in-election-year.html

I learnt various things from this article.  First, that Bloomberg now had its own editors publishing editorials.  When did that happen?  Second, that they also posted comments about an editorial.  Again, since when?  Third that Bloomberg is still getting its facts wrong.  Evan when written by the “editors” themselves, whose primary role is, after all, to edit the facts.  

Here is the opening line:  “Sadly, Congress and the White House seem incapable of agreeing on substantive measures to tackle the $10.4 trillion mountain of U.S. debt.”

Now the interesting thing about that line, is that the US debt is in fact US$15 trillion, because I looked it up on Bloomberg.  

The article then goes on (the “slam dunk” in the heading is a tip to its quality) to say that the government should switch to a Chained Inflation measure rather than the standard measure used today.  

Chained inflation is a measure, that reputedly tracks changes in consumer purchasing behaviour.  The example they use is that when the price of a granny smith apple rises, the consumer switches to the lower cost red delicious apple.  

Now, for sure you are getting the drift.  As inflation on food essentials (as an example) keeps rising, people will continuously switch to lower and lower cost products.  Cat food comes to mind, as it did to the many commentators who overwhelmingly mocked this article.  Dog bones anybody?  What inflation?

The “editors” suggested that this would save the government US$300 billion over ten years.  No suggestion how this was going to pay down the debt.  And at 0.2% it isn’t even enough to pay the interest on the debt. 

And you guessed it, the savings came from:  social security and cost of living adjustments;  pensions; and probably food stamp recipients.  The 99%. 

And again this turns to a continuing theme in this blog – penny and diming the 99% whilst the 1% carry on.  As pointed out in prior blogs, taxing the OTC derivative market, US$700 trillion and counting, just 0.1%, would raise US$700 billion.  And if the duration of the OTC market is 3 months, that would be US$2.8 trillion per year, or enough to pay off the USA debt in total plus a huge surplus using Bloomberg’s 10 year measure.  

Of course the USA is not the home to all the global derivatives, but probably a lot of them.  There would be quite a material amount in other financial centres such as London.  

And you guessed it, the Telegraph reports that that government is about to pennie and dime its citizens by adjusting how the RPI is measured.  That's the retail price index.

It reports “A reduction in RPI would save the Government up to £3bn a year on the interest payments it makes on index-linked gilts, but would also slash income for pensioners and those whose pay packages are linked to the measure.”

Like the pension for that charming elderly gentleman living in Kensington.  Or should I say, surviving, just! 

Biflation Triflation Miflation

Banging on about the current world experience of stagflation in this blog, (amongst other in the inflation tag line) it appears only rarely in the mainstream press, and even the blogosphere.   

Whatever it is that we are experiencing, framing the landscape is critical for setting investment strategies for investors and companies, and fiscal and monetary policies.  

Consider the current investment landscape.  If you are twenty years old, you need to know where to put your money for risk returns.  If you are fifty, you need to know where to put your money for capital preservation.  Indeed, in some issues written in this blog, sovereign diversity is one of the key issues whether through migration to growing countries (such as Mexico) for employment if you are young, or placing some of your savings elsewhere if you are older.  

To confuse analysis of what is written, there are arguments raging about, inflation, chained inflation, headline and core inflation, CPI and RPI, and of course my favourite, stagflation.  And all mean something different. 

Inflation, chained inflation, headline and core inflation, CPI and RPI are all manipulated by the government for budget boosting reasons.  So ignore them – other than a vicarious interest into what the majority of the investors are doing.  

Stagflation means (Wiki) the inflation rate (if it wasn't manipulated) is high and the economic growth rate slows and unemployment remains steadily high.  And that has been my position for some time.  But I have added deflating assets and also wage growth sub (true) inflation on the essentials.

And it is inflation in the essentials that is critical as written about here.  Food, water, shelter, health and education services, and important – energy costs.  

However there are some other inflation derivatives.  Biflation for example.  According to Wiki, first coined in 2002 by Dr F Osbourne Brown, it means there is a rise in the prices of commodity / earnings based assets (inflation) and simultaneous fall in the price of debt based assets (deflation).  Further:

“With biflation on the other hand, the economy is tempered by increasing unemployment and decreasing purchasing power. As a result, a greater amount of money is directed toward buying essential items and directed away from buying non-essential items. Debt-based assets (mega-houses, high-end automobiles and other typically debt based assets) become less essential and increasingly fall into lower demand. As a result, the prices for them fall due to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential assets is the price-deflationary arm of biflation.”

Okay, got that.  And it does seem as though some of these criteria for biflation is being experienced today as well.  But not exactly spot on.  For example, mega houses and the assets of the uber rich (very high end brands) are doing very well.  It is the assets of the middle classes and poorer demographics that are deflating in the OECD countries.  So there is another element missing in biflation.

So I have invented a new term, which encompasses both stagflation, and biflation, with the chasm of the polarisation of wealth, and called it “triflation”.  Representing both aforementioned inflation derivatives but includes the effect on the economies from trickle down policies that is polarising wealth.  

Which as I have written elsewhere, ultimately gives rise to trickle up austerity, and then the next phase is “miflation”.  Another invented term to encompass what is being experienced today for the 99%. 

That is when the masses, impoverished through trickle down policies that give rise to stagflation and biflation, that in turn leads to trickle up austerity, eventually migrate to another country (again Mexico comes to mind) for food and essential services security.  

You read it here first. 

Buy Mexico?

Yesterday’s blog looked at the forecast problems of food and borders.  Specifically food inflation and how people will cross borders into different countries to obtain food security.

Tangentially, it also suggested that migrants from the USA could well be on the cards, given its rising food inflation and also low GDP and tragic unemployment figures.  Although not as bad as Greece and Spain – about which it is difficult to come to any conclusion how those societies will continue under such overhanging despair.

Then to this story, about illegal Mexican migrants returning from the USA to their home because the opportunities are greater in Mexico than the USA.  It reports that there were 12 million illegals, and over the five years to 2010 that number has fallen to 11 million.  One professor in the article refers to a net zero immigration for the first time since 1960.  Wow!!  And the 1 million is three times higher than the preceeding 5 year period.  There are some lovely stories in the article and worth a read.  Quite a bit about growing their own food as well, once they arrive home.  

However the article is interesting in other ways.  There is extensive research that shows that high immigration – or a high educated population growth – is a long term boost to an economy.  And that is what is happening as people return to Mexico, essentially.  And Mexico’s children per family ratio has also dropped, to just over 2:1 from 7:1.  This usually happens when you educate women research shows.  Per capita income is also higher as a result, as income and wealth rises.  And education is also rising.

All of which means that this is good for the economy.  And possibly good for long term investment.

And maybe I was wrong yesterday, when suggesting that Americans may be turning up in France!!  Maybe it is Mexico. 

Food and Borders

It is a crazy juxtaposition when the meat in USA is increasingly shifting towards ground beef (mince – burgers) as the hungry shift to lower cost protein;  whilst the meat shipped to the advancing countries in Asia is for steaks as the new middle class upgrade their protein meals.  

Updating the FAO Food Price Index for March, it is always surprising at how results are reported as “benign”.  It is quite correct to say that the March 2012 figure (216) came in barely above the February figure (215).  But as this graph shows, the index has grown by more than 14% per annum in the last three years.  That is not benign.

And of course the index over times shows that global food in both nominal and real terms remains near all time highs.  

Food prices remain critical for the world’s societal security and stability, which has been taking a beating lately (oh you know, the Arab Spring, Occupy, Mediterranean Austerity policies, and my household budget – if I had one).  And I have been banging on about it in my Peak food blogs, and inflation expectations.  

And all these issues have a real – meaning material – input into investment decisions these days.  Far more than they did in the past.  Not just as an indicator to investing in rural assets, or processors, or inputs (such as potash), but also where to put your assets so they will return a reasonable risk adjusted rate, but also protect capital.  My view is that a risk (including liquidity risk) and inflation adjusted return of zero percent with capital preservation over the next 5 years would be a winner in financial assets.  But the return on cattle is up near the 70% per annum.  With capital preservation.  Only subject to disease, which can be insured at a reasonable cost.  

In what countries will your investments be secure if food insecurity starts to rampage?

The CRB Index is down since the beginning of 2011, from a peak of nearly 700 (recorded peak) to 583 at present.  However, the pace of inflation in commodities since the mid 2000’s when it moved from about 250 (a cyclical high / range ceiling) to ~700 in 7 years.  

Commodities represent a significant input to the cost of food in developed economies, and to a lesser extent urbanised countries such as China, which recently passed 50% of the population living in urban centres.  By way of comparison, in the USA, the comparison is 82%.  Why?  Because food needs to be transported, requiring fuel inputs.  Crude oil is off its highs, but still at much higher levels than traditionally, when GDP is so soft everywhere.  

The Economist reported on the urban trends around the world here in January past.  So there are a number of issues pointing to food inflation rising faster than official inflation (which I do not believe for a moment) everywhere.  Increasing global population; shift to more dense protein diets by the new middle classes in the BRIC countries (less the middle classes in the so called advanced economies as their middle classes shrink – but at a slower pace); and rising urbanisation requiring greater input of fuel and energy for delivery and ag mechanisation to meet this growing need.  

In the USA food inflation in 2011 was officially 3.7% per the USDA and forecast to be 2.5-3.5% this year.  Right!   But this Bloomberg report suggests that corn and soy reserves are the lowest in years and could push food inflation to be at the higher end.  As I keep banging on – we have stagflation in the essentials:  food and energy.  

And then of course there is the other side of the story.  The USA’s food banks that feed the nations 49 million hungry people (16% of pop) are reporting they may be unable to feed these people due to higher food costs.  They argue that food inflation was 6% in the last 6 months of 2011 (putting the lie to the official rate), and that the healthy foods (fruits, veges, meat and dairy) provided to them fell 30%.  No wonder burgers are booming. 

And Sarkozy is complaining about the border controls of the EU member countries.  And of course picks on poor old Greece.  But zerohedge is reporting that this flow of immigrants are returning home, because frankly things are better there than in Europe.  Gate and horse bolted comes to mind, Sarkozy.  If you continue to impoverish the Mediterranean  countries with your austerity measures, border control done and dusted!

But the important point is that as the hungry grow, borders will become a problem.  Would Sarkozy be as tetchy if it were Americans arriving in hoards looking for work and a better life?  

Food inflation is going to change how we manage borders, how we manage safety within borders, and how we invest our savings as people and where we invest our capital as companies. 

Inflation inflation everywhere

We have been writing about the quickest way to resolve the Euro crisis, and in the UK and increasingly less so, in the USA.  There is a long history of taking your losses within a broken economy hard and fast.  There is then generally a real hit to GDP, many people out of work, government steps in with funding to finance new job growth as the private sector contracts, and within a short space of time there is a turnaround in the economy and it starts moving up.  Not rocket science.

During this period the central bank cleans out those banks that have made the lending mistakes, supporting those that will survive by pumping funds into the financial system for liquidity purposes, and pushes down official interest rates with the intention that lower rates will flow through the financial system into the economy to bolster consumption. 

So far so normal.  The key point is that there is a sharp contraction, and then a quick turnaround.  The McKensey Global Institute report ran the numbers and proved what us old hands already knew.  

This time round though, there have been a few problems.  First of all the GFC was bigger than previous crisis, so the pain to be taken deeper.  And the central bank in the USA, EU and UK ran out of short term rates to bolster the economy.  In the UK, it was so bad the government stepped in to take over the broken system.  And in Europe, they are taking the proven wrong road of actually taking no losses at all and saving all the financial institutions whether or not they are rotten or not. Plus counter growth policies of austerity. 

And that is how we got the new “normal” central bank economic bolster of Quant Easing.  

Well we all know this right? 

But this will be the outcome.  Inflation.  Written so eloquently by Nick Carn in Prospect Magazine.  He says it is either “bad debts or inflation”.  Meaning, Europe especially, either write off the bad debts and take the pain or expect rampant inflation as you pump money into the system.

And he is not alone, including your scribe.  But the central banks using quant easing (or derivatives of) are all playing along the yield curve, pushing down market expectations of inflation, and inflation is also not being seen in the official data.  As I have written previously.

I believe that the inflation genie is still there.  With the central banks dancing up and down the yield curve, one thing is very obvious:  the extensive money being pumped into the system is not leaving the balance sheets of the banks and entering the whole economy.  Yet.  But it will.  For the moment there is a serious credit crunch in most developed countries.  

Instead, for example, in Europe, UK and USA, the quant easing money is being used by the banks to buy up government debts / gilts.  Some suggest this is for better liquidity buffers within the system.  But that will not fix the broken economies.  Nor the banks for that matter.  The weak should fail.  

So in our view it is inflation delayed not averted.  And there are a host of problems waiting to emerge.  

Of course, as Lord Molson said (1903-1991): "I will look at any additional evidence to confirm the opinion to which I have already come." So I would agree.

So let’s look at another perspective.  Very interesting analysis here on the blog Macrobusiness.

In the blog he applies futurist Ray Kurzweil’s exponential IT curve to the financial sector.  When it has entered other sectors (than IT) it has seen the costs of products reduced to near zero.  Think the music industry and recordings, the price of which are now nearly negligible.

The problem he observes is that the problem with this effect in finance, is that it leads to self referring feedback loops that don’t occur in other industries.  Because the product in financial sector is of course:  money. This is because we measure the value of money, with money.  “And because something cannot be measured by itself, then we have lost the most important role of money — its function as a store of value. To measure the value of something effectively, by definition you have to have something else with which to measure it. “

Well I agree with the latter, and fall into the camp bemoaning the loss of gold as a store of value against which the production of money could be measured.  But it is all too late now, the genie is out of the bottle and being printed like there is no tomorrow.  We are literally drowning in money.

So I am going to take his argument further.  What does this mean for inflation?  If the price of money (unfortunately measured against itself) is going to fall and fall and fall as the price of other sectors that have experienced the IT exponential curve, then there is no inflation unless it can then be measured against what money can buy you.  So you would then expect that it would take more and mroe money to buy the same things, ergo inflation.  But this inflation is not showing up in the official statistics (yet?).

Of course another way to describe that is just devaluing the savings of the population; or deflating values of assets and income.  And we know that is already happening in most developed economies. 

It explains a lot about finance and its massive growth without seeming inflationary effect (so far).  But again I think that this is also illusory. As the value of everything in monetary terms falls in price, so then does the value of essentials rise in my view.  Especially with the rising middle class (in this generation to be 4.8 billion) and the shift in dietary wants to protein dense food.  

So I am going to return to the essentials.  Here I wrote about the potential bubble in farmland prices.  But what of the price of food, water, energy, and health?

I will end on this graph from good old trusty Investmenttools.com for the feeder cattle futures in the USA.  That looks like food price inflation to me.  Click on the graph to see a larger version.

And another tip.  If you put a US$1,000 in the bank you will earn interest rate of maybe 1%.  If you buy a cow for that amount, you will get an 80% annual return from each calf.  Now that is real investment returns, huh!

And social instability rising from this devaluation of all our money?  This erudite summary of what occurs, what has occurred, and the timing, is another of those “why write what has already been written so well”.  But it is not good news.  Although he does argue that there is a consumption strike by the general population who have been so unfairly treated in the distribution of the wealth of the economies in trouble.  That could suggest why inflation is benign, indeed in the assets and revenue of the general population there is deflation.  But he warns so clearly that this dissatisfaction will soon grow into collapses of those economies, whereby the elite also suffer. 

But they will still need food, energy, health services and shelter.  The essentials.

Saving for that rainy day

So what is the forecast for food inflation? One of our needs, not wants.

The agriculture total return index on the Dow Jones [an ETF] is down 20.16% on a year ago.  This suggests that there is an expectation that the returns within listed companies in agricultural segments in the USA are going to drop in the near term or should have already.  This belies the reported data of the USDA that I reported here, where it showed that farm gate takings have increased over 2011. Of course that is not comparing apples with apples, but it does suggest that focussing on the part of the agricultural value chain that is making the money is critical.  

Another important forecast is that farm inputs, which are reliant on commodity prices especially oil, have been falling and that this will do two things.  Either increase the returns to farmers if prices stay constant or, (more likely) the prices of agricultural commodities will drop.  This of course doesn’t mean that the farmer’s returns will fall, because their costs are also falling with the prices on their produce. However when we consider the price of crude oil, it remains elevated and rising, and oil prices and food prices have a strong co-relation.   

FAO Food Outlook, November 2011 sees the food inflation remaining benign during 2012, after allowing for a necessary increase in production to meet rising demand. It also says:  “However, if this demand were to rise faster than currently envisaged, which is a possibility even assuming a slow economic recovery, then a more significant production expansion will be required.”

It also reports that the cost of food purchases to the least developed economies have increased 30% in 2011. 

In other news, it is reported that India’s annual food inflation had dropped to 9% in November, but turned negative in December 2011.  However, this could be relative to the very high peaks of the previous corresponding period.  

Inflation remains high in southern Africa as food pressures remain high.

Quoting The Grocer Magazine, the BBC reports that groceries in the UK today cost one thirteenth of 150 years ago, and represents approximately 10% of income vs 30% back then.  Of course that 30% is what the vast majority of the world population continue to pay. 

And the US reports that food price inflation has dropped to 4.6% in November compared to 4.7% in October. This is after one of the highest food price inflation years on record.

For much of developing Asia, food is an important part of the household income, ranging between 30-40%.  So food price inflation is a major problem when it arises, and hence the riots in Thailand in 2008 when rice prices peaked.  

So when you read about falling inflation in 2012, as forecast by nearly everybody, there are several things to remember.  First, that is not good news, because the slower inflation overall may not reflect price of food inflation.  Second, even a slower rate of inflation in food, should it occur, is still occurring on a higher base rate in the first place.

It is further bad news because inflating food prices, in most countries are well above income, or wage, inflation.  By which is meant, wages and returns on investments are not rising at the same inflationary pace as food (except in China and other boom economies).  And the gap continues to widen. 

Food inflation is here to stay, as the growing middle classes in the new global boom economies switch their consumption ingredients to more protein dense food.  That's why we have a spending strike in most developed economies. 

People usually save more when they think that prices are going to fall.  That is, a recession, and the costs of goods are going to be lower in the future than they are today.  In the converse, they also save when they know that the price of things that they will need to buy - such as food, energy and health services - in the future are going to increase faster than their wages.  Saving for that rainy day is the new mantra. 

Ivory Towers and Inflation

No sooner do I publish than the New York Times publishes confirmation.  Someone has either read, or not read, my Stagflation blog, because in the USA they are again talking about excluding those pesky "food and energy prices" from the inflation calculator because of their "volatility".

Expect to read more and more of this in coming years, in my opinion.  The two most important costs issues for the general population - food and energy - will be manipulated out of reported inflation permanently for political purposes. 

Why?  Because the costs of each will continue to rise faster than income and other costs.  And there is not a lot than can be done in the short term although longer term there could be all sorts of responses to food price inflation, say, similar to those that occured during the food price crisis of 2008,  For example, closing trade borders such as Thailand did for its rice production, or forcefully stockpiling, or price fixing, or, as happened in Latin America, nationalisation of the food production chain.

Most of those actions are (for the moment) politically unpalatable as they affect international trade agreements and property rights.  But that may well change.

As we all know, Maslow's heirachy of needs put food, warmth and shelter up there at the top.  Nothing drives a populace to riot faster than not having enough of each at a reasonable price.  (Again, as happened in Thailand).

I was fortunate to hear a renowned geographer, Professor James Kirkpatrick AO from Australia, and he was explaining where the world is headed within the next two decades as a consequence of this massive food price inflation. He suggested that there will be reversal of the multi decade trend of people swarming to cities from the country to have a career, as people will rush to the country to obtain food.  All the secular indicators suggest this is true.  Taking that literally, people will abandon consumerism and culture and move closer to self reliant sources of food, shelter and warmth. 

Taking that argument further, it won’t just be people from London, New York, Paris or Beijing, say, it will be people from all over the world, leaving countries that have poverty and insufficient food, in their masses, on ships not boats, and moving to those that have food surpluses. Illegal immigrants.

And their origin may surprise you.  For example the USA presently has a reputed 50 million people on government funded food stamps.

Mass migrations, the Occupy groups, the slow manipulation of all appears to be heading in the direction of significant upheaval in the 99%ers. 

So to follow what is happening with inflation and therefore what investment decisions you make, first ensure it includes food and energy costs for the masses.  Otherwise you will be missing the real story.

Stagflation or Bust? Buy Farmland

The ol’ end of year outlook.  However the longer term trends really are the more important ones for longer term investors. Which we all are.  In June this past year, the following was published:

“Let’s talk about inflation. There are two types commonly spoken about and published:  headline inflation and core inflation.  Headline inflation includes goods and services that represent the total inflation in the economy.  For example, it includes the price of an Ipad, the cost vs quality of which has been falling over time, thus representing a fall in inflation for this product. It also includes food and energy costs, such as apples and electricity.

Then there is core inflation, which is what governments and market commentators prefer to use.  That is because it is less “volatile” they say, it theoretically provides a better measure because it excludes “volatile” components of inflation in the economy such as “food and energy”. Thus for forecasters and the elites that manage the economy [and any payment linked to RPI such as a pension] they say it is more “relevant”. 

Now if you are sitting at home and wondering which is the more relevant measure of inflation for you; what would you choose?  Headline inflation of course, after all, as one very wise person in Queens [USA] suggested, “I can’t eat an Ipad”. What concerns us is the day to day living, of which it is indisputable food and energy are critical cost factors.

And any person who shops, drives or gets cold will tell you, energy and food prices have soared.  That is why they have gone on a consumption strike that is hurting the retail sector everwhere. 

And it hasn’t really started yet.  The FAO reports that its global food price index has reached an all time high – a 39% price inflation year on year.  Its cereals index has inflated 71% year on year.  The list goes on and it is important reading. 

And it does not take much research to know that energy costs are going to increase dramatically.  It has been underpriced for decades and some catch-up is inevitable.  Indeed, for energy and food, many credible pundits are saying we have already passed the tipping point of continuous consumption growth in a finite world and it is all downhill from here [if you have to pay for it, that is, not if you produce it]. 

What will make it more difficult for the global baby boomers, is that just when their income becomes reliant on assets and income from those assets, rather than employment income, they are experiencing a period of stagflation – cost inflation whilst income and asset prices deflate.  And many won’t have allowed for it when calculating their savings for retirement because they have never experienced this high inflation for such a sustained period. 

This stagflation is likely to remain for a decade or more as internationally, over indebted people, companies and countries de-leverage and / or go broke.  The consequences of which is that as medical, food and energy costs soar, there are less and less in savings to meet those future expenses.  And generally speaking, people always underestimate their future requirements in any event.”

And I see no reason to change my outlook.  And I have been amongst good company.  PIMCO, the world’s largest money manager went short the long bond because they expected inflation to rise due to the massive printing of money around the world. The inflation outlook is usually priced into the long bond and therefore causes its value to fall. They then admitted their error and unwound their positions earlier this year, and just as well, for the USA bond market has had a huge rally.  Gold itself soared, as punters were waiting for inflation, but is now down 19% since the peak - 1% off a bear market. 

On CNBC an interview of Jim Rogers was also forecasting stagflation in October.

When I wrote that last May, the FAO price inflation data was shocking at 39%.  Here we are in December, and its Food Price Index stands at 215 (Nov) compared to 213 mom a year ago.  Slightly less than 1% inflation month on month.  However if you look at the average for the year, then the index is up 24% compared to the average for 2010.  

Also it is interesting to cross check data.  Food prices received by farmers in the USA, say, are on the whole higher year on year in December when looked at in individual categories.  The Farmers Price Received Index as at December 2011, have averaged 3.7% (simple) over the last 20 years for all products, but 15% year on year.  So if farmers are receiving more for their produce, then that must eventually flow into the cost of food as recorded in inflation.

All over the world central bankers and financial institutions are forecasting lower inflation next year.  And this is the conundrum for investors.  Because when global central banks print money (as the ECB, Fed Reserve and Bank of Japan are doing etc)  that money has to be going somewhere.  And where it usually goes is into an inflationary bubble.

We know it hasn't been going into loans for the masses, or small business who are having a credit crunch.  From the UK, to the USA, to Australia. This report in The Telegraph shows that M3 money supply is contracting in the EU. 

In the end I think all those great investment minds have got it wrong because of Quantitative Easing which is being used by central banks along the yield curve, and a flight from risk by global investors into the USA bond market.  So that instead of bonds spiking in price (losing value as their yields rise to reflect rising inflation), with government money buying up bonds (equivalent) at the three year for EU and long term for the USA, inflation expectations are no longer represented accurately, or is being subverted, in the bond market.  So investors into this market are investing into a manipulated market, manipulated by their own central banks.

On the ground, for the general population, consumption (food, health and energy) prices appear to be rising, whilst jobs are lost, fiscal austerity kicks in, assets prices continue to deflate, and interest rates on deposits is near zeor (negative in real terms).  Whether it is shares, gold, real estate or commodities.  And GDP is in basic contraction just about everywhere.

I see no reason to change my outlook.  How to invest into that outlook.  Buy a farm!!

This is how the USDA reports it:  "Between 1994 and 2004, real values increased between 2 and 4 percent annually, and in 2005 and 2006 increased by 16 percent and 10 percent respectively. Since then, real growth in farmland values has slowed, but is still increasing by 3 to 5 percent annually." Farmland prices since 1969 have achieved an all time high in 2011.  Reuters is reporting that in the 3rd quarter, farm values in the US surged to the highest levels in more than three decades. 

In the UK, farm land values have tripled in a decade, as reported by the Financial Times. 

So where is all that money going?  Where is the bubble?  Maybe it is in farmland.  Or maybe, they are investing because they know that food prices are going to continue to rise as the world meets the challenge I outlined in Peak Food.   That is, stagflation.  No growth, inflationary prices.