The Rise Before the Fall

Food prices keep rising.

Last month, world food prices were the highest in more than 10 years according to the Food and Agriculture Organisation’s (FAO) food price index.

The index was up 31.3% in October compared to the same month last year, mostly because of weather and labour shortages affecting the harvest, along with high demand.

Vegetable oils saw some of the largest increases, up 9.6% since last month, and are at an all-time high. Cereals were also up 22.4% in the last year. As an example, global wheat prices hit a 38.3% increase in the last 12 months.

And we may see high food prices spill over into the next year.

That’s what David MacLennan, CEO of Cargill, one of the largest producers and distributers of agricultural foods, told Bloomberg. As the industry fights to get workers and processing plants aren’t running at full capacity, he’s warned he’s changed his mind on inflation:

I thought inflation in ags and food was transitory. I feel less so now because of continued shortages in labor markets. That’s one of the inputs to the supply chain that we’re watching most carefully.

Inflation is here.

In the US, inflation shot to 6.2% in October, the biggest jump in more than 30 years.

Over in Europe, inflation numbers are also in. Annual inflation in the European Union came in at 4.4%, up from 3.6% in September, with most of the increases coming from food and energy.

In the UK, consumer prices hit 4.2% in the last 12 months, the fastest surge in close to 10 years.

Costs of living are rising so fast that the Bank of England even issued an apology earlier this month, and an interest rate hike is already looking very likely.

The European Central Bank, on the other hand, has spent some of its time calming inflation fears.

ECB’s Vice President Luis de Guindos pushed on with the view that inflation is transitory. As he told Bloomberg:

The reality check is going to be the evolution of inflation next year. If inflation starts to go down, the views of the central banks will be reassured and reaffirmed. if you look at the drivers, the transitory nature of these drivers of inflation are quite clear and are going to become tangible and evident next year.

Yet he admitted that ‘the decline and the intensity of the slowdown in inflation will not be as intense and as rapid as we projected only some months ago.

ECB President Christine Lagarde doubled down and doesn’t see a rate increase until at least 2023. As she said at a hearing:

We still see inflation moderating in the next year, but it will take longer to decline than originally expected.

If energy prices keep rising or supply constraints persist, inflation may remain higher for longer than we currently anticipate. This could feed into higher wages and subsequently higher prices. But so far, we see no evidence of this in the data for negotiated wages. We do see wage growth next year potentially rising somewhat more than this year, but the risk of second-round effects remains limited.

Let’s be clear, inflation is a danger to your finances. Inflation takes a while to hit. You feel richer in the beginning, but by the time central banks admit inflation is out of hand, it’s too late.

And of course, there’s the danger of what happens if central banks start tightening. If ultra-low interest rates and quantitative easing have inflated asset prices, a reversal could really affect values.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

In an everything bubble, where do you invest?

Real things, like gold, are one of the big areas for me.

The other is investing into a megatrend, an investment theme that will last for decades. And in my mind, the biggest one at the moment is the energy transition.

On that note, value investor Jeremy Grantham, who thinks US stocks are in a ‘magnificent bubble’, had something to say about green investing this week:

This is going on as far as the eye can see. It’s an unfair advantage for green investing. There may be a bubble that will affect this for a year or two, but it will come back bigger and better than other groups because of this tailwind. This is going to be the most important investment theme for the rest of your life.

A driving force has been the technology, which is getting better and cheaper. The costs of solar, wind, and batteries have gone down massively in the last decade.

And then, as COP26, the United Nations Conference for Climate Change, clearly showed last week in Glasgow, governments, businesses and the public are all, in general, in agreement of the path when it comes to decarbonising the economy.

That doesn’t happen very often.

Best,

Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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