Friday, April 25, 2008


The Food Train Wreck

Comments in PURPLE.

Blogger Encik Wan said...

What do you suggest? Cut liquidity to curtail demands? Speed of production of commodities cannot match rate of increase in demands. You cannot ask emerging countries to go back to old days, right?

The biggest problem, which many are still not aware, is that unlike the subprime crisis and the credit implosion, a food crisis cannot be solved or minimised by pumping liquidity or having more bailouts. You cannot just plant more rice or coffee overnight. Hence the headline: its a train wreck waiting to happen. It will happen. There is nothing much we can do to stop it. How's that for being optimistic?


Blogger Wai Kit said...

question is, what's the best way to position our portfolio during inflation environment? invest in gold, palm oil, stocks related to food production, O&G etc?

Gold.


Blogger Smart Money said...

What's your thoughts on the effects of inflation on property prices? Are they sure to increase in value? What's the effect of restrictive monetary policy on the property values? Do rentals go up during inflation? The effects on equities are quite predictable. But real estate?

Inflation = Higher interest rates = Lower affordability. Hence spiraling food inflation does not necessarily equate to corresponding property price jumps. Even in those supposedly good sectors with positive black swans (food manufacturers, plantations), their earnings jump will be regarded as an anomaly and would not get a long term hike in PER valuation. What can the governments do? Put more funds into subsidy. This is a case of people getting richer but clamouring for reduced supply. Prices get bidded higher. Unlike oil which affects companies a lot more, food prices affects a much larger crowd. We all will have to live with much higher food prices, not to mention fuel prices. Governments will have to pay higher salaries for civil servants. Countries like Malaysia will be net beneficiaries as we have oil royalties and plantations to help cushion the blows. It will hit resource poor nations a lot harder. Developing economies with high poverty levels will be hit especially hard. Even the aid in USD have depleted in value and can only buy a lot less of things costing a lot more.

A looming food crisis = spiraling inflation = restrictive market policies = higher interest rates to curb spending = not so good for equities.

A looming food crisis = Mounting government subsidy = Controlled prices break loose = Social unrest & riots = not good for equities.

p/s photo: Niki Chow

6 comments:

Encik Wan said...

My comment is "Cut liquidity to curtail demands?", not "Increase liquidity". For example, reduce money supply to induce slower growth.

Opine said...

Dali,

May i get your opinion on the best method to invest in Gold?

Thanks :)

Salvatore_Dali said...

wan,

cut liquidity means selling bonds, but this will have the effect of lowering rates (not what you want)... or you can do it via raising interest rates, which was what I suggested will happen to rein in the economy and spending ... the artful types will want to hold interest rates steady and sell more bonds (soaking liquidity), but how many central banks can sell aggressively while keeping rates flat??

opine,
go to trade bursa malaysia and ask boon... the chicago merc ex or even some independent but respected futures/spot trade sites on commodities/currency ... what would be a good idea is to buy out of money call options, e.g. gold at US$1,200 Dec 2008 etc...

Opine said...

Here's an interesting blast from the past :-

http://www.abc.net.au/insidebusiness/content/2006/s1632456.htm
(note the date of the article)

Also note from wikipedia :-

"In general, gold becomes more desirable in times of:

-Bank failures
-Low or negative real interest rates
-War, invasion, looting, crisis "

Sounds kinda bleak, hope i am wrong.

Thanks Dali for the reply.
Wonderful Blog :)

John Lim said...

Whether gold is a good hedge against inflation, it's questionable !

Gold price has been increasing since 2000, but on overall for the last 30 years of gold prices, it wouldn't make much differences.

In 1981, gold price stood at about US$700 per ounce but today it only priced at about US$880. Looking the price in this way, if this is consider a good hedge against investment......I don't think so !

You'll notice gold price had hit the lowest in 2000 at about US$270 per ounce before 1981. If you would to invest in 2000, your investment value has tripled.

Looking at the current trend, gold price is on the down trend. Look like it's a good buy sign. Whether gold price will achieve another new high....it's very subjective.

Like any other investment, gold price is still determined by demand and supply. China and India have very strong demand on it but on the supply.....I'm still doing my researche !

see said...

Thot recently gold has been influenced by fall in USD although traditionally it has been hedge against inflation. These are interesting times