Thursday, May 22, 2008

Bill Gross: Inflation Underplayed, & Higher Food Prices for next Decade?

It is nice to see more and more people (of importance) finally calling the government out on one of my favorite subjects - the total fiction that is government reporting of inflation - and how we somehow are the only country on the planet able to avoid inflation. I have a litany of pieces on this subject from day 1 in the blog. Sometimes I feel like we are entering an Orwellian novel with the peons (us) trying to be kept in the dark (so far pretty successfully). I mentioned Bill Gross in this piece [May 13: News of the Day - Inflation] I wrote

Now the government has this thing I love to talk about called the substitution effect; put simply when the cost of steaks gets too high they assume you move down to hamburger - so they substitute steaks for hamburger in their measure (seriously) and hence inflation disappears. So in the government's eyes we are going to be a world of bicycle riding, barefoot, and beltless (or using string to keep pants us) people. Because otherwise, inflation would go up. You think I am exaggerating right? Well the most respected man on the globe in terms of bonds is named Bill Gross - he works for a small firm called PIMCO. I'd like to directly quote him from this story about the farce that are government numbers that more and more people are waking up to each week. He calls the numbers a "con job".

I can only wonder what seniors on fixed income are wondering when they get their 2.3% cost of living increases in today's day and age. Gross is back out chirping today... via CNBC
  • Americans are fooling themselves if they think U.S. inflation is under control, the manager of the world's largest bond fund said.
  • Bill Gross, chief investment officer of Pacific Investment Management Co (PIMCO) said in his June investment outlook that he has been arguing for some time that inflation statistics "were not reflecting reality at the checkout counter."
  • He said statistical practices in calculating price growth had favored lower U.S. inflation over the last 25 years and called for change. "Being fooled some of the time is no sin, but being fooled all of the time is intolerable," Gross said.
  • "Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market's assumption of low relative U.S. inflation in comparison to our global competitors."
  • He added that Treasury Inflation Protected Securities (TIPS) were difficult to value because of the "artificially low inflation number" arising from statistical quirks. (yes, "quirks")
On to another favored story we were early on [Jan 18: One Lonely Voice Agrees with me on Food Inflation], agflation (inflation in food prices) - remember our key themes here - agflation (higher prices), social strife, and protectionism (countries hording their own food resources instead of joining free trade). This won't just happen in food, but I believe across a scope of natural resources. But let's focus on food... these high prices should fix themselves soon right? 1 year? 2 years? Ummm... not so much.
  • High food prices will continue for at least a decade even if they drop from the levels that sparked street protests or riots in Africa, Asia and the Caribbean in recent months, government-backed international agencies say.
  • High prices, caused primarily by demand from fast-developing countries such as China but also by rising investor interest in food commodity futures markets, will hurt the world's poorest countries most, and also the poor in rich countries.
  • Though the outlook for crop harvests in 2008 was generally positive, the OECD and FAO experts said supply and reserve stocks will still not be enough to satisfy needs this year, and likewise in the forecast period, up to 2017.
  • As for the impact on developing countries, the conclusion of the FAO and OECD in the document was grim: "For the urban poor and the major food-importing developing countries, the impact will be strongly negative as an even higher share or their limited income will be required for food."
  • Every 10 percent rise in the price of all cereals including rice added $4.5 billion to the food bill of countries that are net importers of such basic food commodities, the document noted.
  • Overall, joint OECD/FAO report forecasts the nominal prices of cereals, rice and oilseeds heading between 35 and 65 percent higher between now and 2027 than the average in the past 10 years, the document said.
  • The impact on richer, developed countries would be more modest because agricultural commodity prices amounted to a smaller amount of final retail prices for food. "Of course, these averages mask the much more significant impact on lower-income consumers. In addition, and to the extent that high prices persist and hence do not reduce the future rate of inflation, indirect economic impacts might also be important," the document said.
Conclusion: If you're in the bottom 40% economic status within richer Western countries, I urge you to hurry up and move to the top 25%. If you are in a poorer 2nd or 3rd world country.... well the globe is going to be a very tough place for many in the coming years - try to get into the top 3-5% in your country. With the continued loss of arable land through urbanization, continued climate change (I know, I know - let's not get started on that arguement), the continued movement of people's from self sufficient farming to living in larger towns and cities across the globe, a population growth rate going from mid 6 Billion to 9 Billion by 2050, and the mounting stresses/shortages of fresh water... well let's not worry about it. We have stocks to bid up with new found Federal Reserve money. Keep printing Ben. Keep stoking inflation - and buy stocks. We have NYC bankers 5th homes to worry about - keep the bailouts coming. Nevermind the rest of the world - if its not on ABC Nightly News, it is not happening. Congress? Keep doing your job paying US corporate farmers subsidies to not grow crops. We have SUVs to feed with our corn! Go team 'Leadership USA'!

Long Powershares DB Agriculture Fund, iPath DJ Livestock ETN in fund; no personal position

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