The New Oil-Food Link

Posted On Oct 1, 2012 By Addison Wiggin

October 1, 2012

  • A Wall Street truism in reverse: How food prices could soon become the prime driver of oil prices… with one clear investing take-away
  • The post-Fed effect: Good economic news finally drives stocks up, not down
  • Uh-oh: Three of the nastiest letters of the 2008 crisis stage a 2012 comeback
  • Government official’s Facebook faux pas: Economic stupidity is OK, but insufficient jingoism? Unforgiveable!
  • “How dare you?”… “Are you serious?”… along with a few genuinely thoughtful replies to our “stick Obama with the bill” provocation


  “Oil prices drive food prices,” goes one of the old saws of Wall Street.

Makes sense: “Increased oil prices drive up costs for transportation, fertilizer, plastic packaging and inks used to print packaging,” says Steve Odland. He should know. He cut his business teeth at Quaker Oats and Sara Lee before taking on CEO gigs at Office Depot and AutoZone.

 The old saw is about to be stood on its head.

“Here’s a thought experiment,” writes Vancouver veteran Stephen Johnston, chief of the farmland investing fund Agcapita. “Are we in a global environment where food prices can drive energy prices, rather than the more typical relationship where energy prices tend to drive food prices?”

Mr. Johnston directs our attention to this table of two dozen countries around the world, and the percentage of income the typical household spends on food…

Mr. Johnston has helpfully highlighted several countries where oil production is essential to the local economy. Many of these governments subsidize gasoline for their citizens. In Iran, a gallon of premium costs $2.80.

“Residents in such places are heavily exposed to price increases in basic foodstuffs.” And when those prices reach a certain level, those people start to riot. It happened in 2008. It happened again with the “Arab Spring” in 2011. “True, much of this is backlash against corrupt and/or authoritarian regimes,” we wrote at the time. “But it took empty bellies to finally bring the rage to the surface.”

You can almost plot it on a chart. Indeed, researchers at an outfit called the New England Complex Systems Institute did just that. “The timing of violent protests in North Africa and the Middle East in 2011,” they write, “as well as earlier riots in 2008 coincides with large peaks in global food prices…. Specifically, food riots occur above a threshold of the FAO price index of 210.”

Readers with keen memories will recognize this monthly metric issued by the United Nations Food and Agriculture Organization. It presently stands at 213.

  The index is set to shoot up to a record 245 by the middle of next year, according to a forecast out today from the Dutch-based Rabobank.

Blame it on the drought in the United States, South America and Russia. “Unlike the staple grain shortage seen in 2008,” says Rabobank’s report, “this year’s scarcity will affect feed intensive crops with serious repercussions for animal protein and dairy industries.”

Thus, “it would appear that unrest in the Middle East is set to continue,” getting back to Agcapita’s Johnston.

130  Here’s the key question Mr. Johnston poses: “Does this mean higher oil prices are ahead as investors are forced to price in even higher risk premiums and importing nations deal with potential and perhaps real supply dislocations?”

That’s how food prices — and food riots — could drive up oil prices.

It gets back to Byron King’s guidance in this space two weeks ago today: “Investmentwise, get the heck out of the Middle East. Go elsewhere, where the oil is.”

Byron has carefully constructed a portfolio of oil producers and service companies with little or no Middle East exposure. The best opportunities of all, he suggests, will be found surprisingly close to home. He shares the intriguing thesis — and how to act on it — at this link.

  The nation’s factories are once again in expansion mode. After three months of sub-50 numbers, indicating contraction, the ISM manufacturing index registered 51.5 this morning.

The most optimistic guess among dozens of economists surveyed by Bloomberg was 50.6. So much for the “expert consensus,” again.

Within the big number, new orders are back in expansion territory, and the pace of hiring is picking up.

 The moment the ISM number came out, the major stock indexes rallied.

Had the number come out before the Federal Reserve unleashed QEternity on Sept. 12, traders would have panicked because the news would have made a new round of easy money less likely. But now that the new round is a fait accompli, they can hit “buy” with confidence.

At last check, the Dow is up 100 points, to 13,538. The S&P is at 1,446. Small caps are lagging, and the Nasdaq is slightly in the red.

 The manufacturing numbers from the rest of the world are also looking up… although, as usual, the United States is the proverbial best-looking horse in the glue factory.

China’s official number inched up to 49.8. Europe’s number also moved up to 46.1. Despite the improvement, both numbers still indicate a contracting factory sector.

  Spot gold hit a seven-month high this morning at $1,791, only to give it all back later. At last check, the bid was a patriotic $1,776.

Similar story for silver. The white metal popped above $35, but has now settled back at $34.75.

  One of the most odious abbreviations of the oh-oh decade is staging a comeback.

“Deutsche Bank,” advises Lifetime Income Report’s Jim Nelson, “is preparing to bring back the catalyst for the 2008 financial collapse… collateralized debt obligations.”

Ah yes, the CDO.

“In the first half of last decade,” says Jim by way of refreshing the memory, “the ‘too big to fail’ banks were packaging mortgages in a way to hide the most risky of them with the seemingly safer ones… and the credit agencies looked the other way and stamped AAA on them.”

So along comes Deutsche in 2012, planning to package near-junk-rated commercial mortgage bonds with some higher-rated ones to disguise the risk and goose the yield.

“The comeback of the CDO,” says Jim, “is not a good thing. Less diligent investors will likely get burned… yet again. So it’s even more important for you to make sure you are getting what you pay for these days. The vulture Wall Street culture might be on its way back.

“In our business, which is all about yields, we know you can’t just trust an investment to actually pay you what it promises. That’s why we study every aspect of a company, down to its products and pipelines, before we ever recommend you grab its dividend.” You can share in the fruits of Jim’s due diligence here.

  “Help the economy and bolster consumption,” reads a Facebook post by Hu Yu-wei.

Ordinarily we’d pay no nevermind to a bit of Keynesian claptrap like this… except that Mr. Hu is the information minister for the Taiwanese government.

Mr. Hu finds himself in very hot water today. Alas, it’s not because he buys into the loopy notion of “aggregate demand,” best summed up by the sentence, “If people would just buy more stuff, we’d solve all economic problems for all time.”

No, Hu is in trouble because his remark wasn’t sufficiently protectionist enough. See, the comment was accompanied by a picture of that most iconic consumer device — an iPhone 5.

Taiwan, as it happens, is home to its own smartphone maker — the struggling HTC.

“As a government official,” tut-tutted the United Daily News, “Hu should have done whatever he could to promote the domestic economy at a time when it is in trouble.”

Bonus points for idiocy: It turns out many of the iPhone’s components are “made in Taiwan”…

Mr. Hu now finds himself — to borrow the hideous beltway euphemism — “walking back” his post.

“I use HTC, and so do most Cabinet officials,” Hu now says. “The accusation of my being not patriotic was a misunderstanding.”

Heaven forfend…

  “How dare you?” reads the first trickle of an email flood that hit us after we suggested on Friday that “if you insist on voting, you’d better hope Obama wins.

“By 2014, we will be slaves under Obama,” the reader vented — a mere 12 minutes after Friday’s episode arrived in readers’ inboxes.

“I’m amazed,” says another, “that you would even consider another four years of someone violating your constitutional right, circumventing legislature and putting our country in debt that many generations will be strapped for years over another choice.”

“I see a very large war and an economic depression hit full tilt if President Obama wins. Romney will just be a few years later,” a third suggests.

  “So did the Russians in 1919” writes a reader in response to our suggestion that “at least with Obama we know what we’re dealing with.

“It took them 70 years to correct their error,” the reader goes on. “I don’t think I want to wait that long, because things will have to get very much worse before most people will take any action. Worse might include doing without food, electricity and water. Martial law would almost certainly be declared in that case. If they shut down the telephones and Internet, how will any kind of opposition get organized? How far will you get with whatever fuel you have in your tank? If you are hungry and THEY offer you food, will you do what they tell you to get it?”

 “I have to take issue with your assessment,” writes a Reserve member, a tad more respectfully.

“I agree with the concept that Obama and his policies are pure poison for any kind of economicprosperity. In fact, to anyone with an IQ larger than their waist size — which is likely to get larger at first from government-encouraged and subsidized junk food, and then much smaller when financial reality kicks in — it should be painfully obvious that there is a train wreck in the future.

“The other party, I admit, has a great host of problems as well. The issue, though, is that under a socialist-driven White House that takes itself all too seriously, it may crash harder and not as fast as you guys think, and it may stay crashed for far too long. At least with a semblance of support for real business, some of the smaller firms that actually can keep us from revisiting the joys of old Soviet Russia might have a chance to pull off enough small miracles to keep the majority of those who would like to earn their own way in the world off the freeway ramps.

“Who knows? Maybe Romney actually learned something from those (admittedly short) Ron Paul speeches during the debates. I know Obama wasn’t listening.”

The 5: As long as you bring up Ron Paul: “I refer to the Rothbardian strictures when weighing the pros and cons of presidential candidates, and Murray was very clear about this: Foreign policy was the main determinant,” writes Justin Raimondo today at

“The president, after all, has minimal control of what comes out of Congress, and his role in determining our course on the home front is very far from omnipotence: Bernanke has more actual clout than Obama does. When it comes to foreign policy, however, the president wields absolute control. He can take us to war on a whim.”

Awful as Obama is, Romney sure doesn’t listen to Ron Paul when it comes to foreign policy.

“Take a look at Romney’s foreign policy team,” Raimondo writes: It’s the same old neocons who brought us eight years of bloody misery under George W. Bush. With Romney in the Oval Office, the neocons would return to Washington in triumph, empowered to unleash a new strings of wars that would make Iraq and Afghanistan look like child’s play.”

  While I’m not sure that a failure of Obama’s policies will wake up the people in this country, as you posit,” another reader writes, “I think that having him in office when the house of cards blows up is better than having Romney there.

“If Romney were elected (and I’m not for Romney — in fact, your don’t-vote message resonates with me) and in office when everything went south, the argument would then be that capitalism failed. And I truly believe most people would fall for that.”

The 5: Indeed, President George W. Bush was bad enough when it came to supporting a free market. For just two examples, you need only look into the steel tariffs he imposed arbitrarily and his cheerleading for the Medicare Part D benefit — which the GAO estimates show will alone add $8 trillion to the unfunded liabilities on the federal balance sheet.

For “free market” ideas to get further tarred and feathered under Romney would just be salt in our wounds. Romney is a crony capitalist. Not a free market guy. His running mate is just as bad. He supported Medicare Part D because that was the party line in 2003… and then bills himself as a “fiscal conservative”. Oy.

Let Obama take the fall for failure of central planning… he’s the candidate who openly supports it.

  I agree that an Obama win will bring on the ‘coming insurrection’ sooner, rather than later, but don’t think we won’t see the riots and strikes here as well. The government is already making plans to deal with this — NDAA unlimited detention, martial law authorization, ammunition and checkpoint enclosure purchases for the Department of Homeland Security, etc.

“Historically, this type of collapse leads not to more freedom, but to less, to establish order. I quote from Dan Amoss in the same issue of The 5: ‘Do you think many investors will hold Spanish bonds while whole regions are threatening to secede, fighting a central government that might morph into a military dictatorship?’

“Do you not understand that some fiscally sound states might band together to secede? If you sit back and wait for the crash, thinking we will come out with more freedom, you probably should do it from some other country, just in case.”

  “Are you for real?” writes an incredulous reader on our further suggestion that voting only “encourages the bastards.”

“I have been trying to convince my adult children for years to vote and have not gotten their cooperation yet. It is our civic responsibility to choose one way or the other even though all the choices are not good — life is made up of such choices — commit, damn it! What’s the worst thing can happen—at least you won’t be alone in your decision — or your misery.”

The 5: “If you vote,” said the late George Carlin, “and you elect dishonest, incompetent politicians, and they get into office and screw everything up, you are responsible for what they have done. You voted them in. You caused the problem. You have no right to complain.

“I, on the other hand, who did not vote — who did not even leave the house on Election Day — am in no way responsible for what these politicians have done and have every right to complain about the mess that you created.”

Likewise, the only way politicians get elected these days is by promising to loot the public treasury… under what “civic duty” does that fall?


Addison Wiggin

The 5 Min. Forecast

P.S. A word from the wayward Dave Gonigam: “Overheard in a motel lobby along the Indiana Toll Road the morning after the Federal Reserve announced QEternity…

“Guy holding a newspaper: ‘So the Federal Reserve is going to spend $40 billion every month to buy mortgage-backed securities now…’

“Other guy: ‘Where are they going to get the money for that?’

“Alas, that was all I heard of the conversation. But it was enough to give me a glimmer of hope…”

More tales from the road when Dave returns on Thursday.

The 5 goes on hiatus for two days starting tomorrow. As we near the end of Fed bailout and currency regime — not to mention the obvious folly of borrow-and-spend politics in Washington — we expect we’ll need a whole new array of solutions to help keep you out of harm’s way.

As such, tomorrow morning, we begin gearing up for a big change in the way your daily e-letters arrive in your inbox.

When the transition is over, you’ll receive The 5, The Daily Reckoning and Laissez Faire Today on a much more reliable schedule… and you’ll have the chance to customize the information you receive. Watch your inbox for important details tomorrow!

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