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Poor in Food, Rich in Bits, 4/8
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Poor in Food, Rich in Bits, 4/8

The stock market ignores supply shocks

Arnold Kling
Apr 8
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Peter Zeihan writes,

Whether due to sanctions, war, boycotts or malinvestment, we stand at the beginning of years-long shortages of the stuff we need to feed the world. We’ll chew through the world’s collective wheat reserves before year’s end, and shortly thereafter tip into deep, chronic food shortages spanning multiple continents.

If Zeihan is right, then the world’s wealth has taken a big hit. And yet, if I look at the U.S. stock market, it is only slightly below its all-time highs. Why?

  1. Zeihan could be wrong. Russia and Ukraine are not large as a share of world GDP. Perhaps taking them offline is not as big a deal as he makes it out to be. Perhaps he is exaggerating the significance of the products that Russia and Ukraine used to export. Perhaps he is under-estimating the ability of the market to provide substitutes quickly and at low cost.

  2. The suffering that Zeihan predicts will take place. But corporate America will thrive.

  3. The stock market will crash at some point.

In the Spring of 2020, we experienced the “COVID shock.” The economy was disrupted by the way that governments and the private sector responded to the virus. A lot of small retail businesses, most notably restaurants, shut down either temporarily or permanently.

When COVID hit, the stock market took a deep dive (much deeper than the decline this year), but it subsequently recovered. Why did it recover? Because we used the Internet as a substitute for activities that were curtailed by COVID. And the Internet services we used were provided by corporations with shares traded on Wall Street. The economy shifted in the direction of bits, and this redistributed profits toward shareholder-owned companies. Zoom and Amazon fed on the carcasses of mom-and-pop businesses, so to speak. So even though overall wealth declined, the share of wealth accounted for by large corporations increased, and this buoyed stock prices.

As with COVID, the Russia-Ukraine war and the responses to that war are disrupting the economy. As I write this, though, the stock market seems to be relatively unconcerned. It is as if speculators are saying, “Corporate America thrived on the virus. It can thrive on the war, too.”

But the economic adaptation to the virus was to substitute bits for other means of getting goods and services. You used Amazon to get stuff delivered to you instead of going to the store to get it. You used Zoom to meet with work colleagues or out-of-town friends and relatives instead of going to the office or engaging in travel.

Instead, Zeihan predicts that the war will result in a scarcity of food. It’s not easy to see how we substitute bits for food. I cannot point to a corporation that is positioned to profit from mass starvation the way that Zoom or Amazon were positioned to profit from social distancing.

I have been bearish on the stock market for a long time. I have been wrong for a long time. But I keep seeing reasons to be bearish. In this instance, the war cuts into global wealth, and that should show up as lower share prices.

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Leveller
Apr 8

"Perhaps he is under-estimating the ability of the market to provide substitutes quickly and at low cost."

We suspect this hits the nail on the head. Spending way too many hours behind the wheel than we would like lately, we have been compulsively listening to Sirius 147, Rural Radio. Show after show talks about all of the adjustments farmers are making to their methods. Listening is highly educational and we expect would be enlightening for many economists who seem to have contempt for farmers. Show after show talks about how farmers are strategizing by mixing up their use of nitrogen stabilizers, reducing to 20% the amount of fertilizer normally used but applying it at different times, adopting alternative fertilizer sources, resuming tilling to get fertilizer in the soil faster to avoid dissipation, etc etc. US farmers are highly creative and have always adapted swiftly to changing conditions. We have little doubt that, despite the war's impact on input prices and drought in some areas of the country, the harvest will not decline significantly this year. The same goes for Brazil, another ag production giant. The Brazilian soybean harvest has been steadily increasing over the years, and we would expect that they read the news as well as anyone and will be adjusting their methods and hectares planted accordingly. We believe it would be a big mistake to underestimate the abilities and intellect of farmers in response to this situation.

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Yancey Ward
Apr 8

My grocery bills have increased almost 50% in the last two years, and I buy basically the same stuff every week. This isn't a real problem for me since I am well off financially- food has always been a low budget item compared to my income and wealth, and still is today. However, for someone living in, let's say, Peru that 50% increase takes away all other discretionary income. It will get very, very ugly, and very rapidly if this food inflation continues unabated.

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