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.
I need to be convinced that these goods that Russia provides cannot be replaced by substitute goods with relatively little effort. A lot of people simply start with the assumption that “Russia is a big deal in the economy.” And then proceed from there. But I very strongly suspect that Russia is *not* a big deal, that this perception is a hangover from an earlier era (an earlier era when, by they way, they *also* were not a very big deal in the world economy).
Is fertilizer so difficult to produce that others can’t fill the gap? It is not a semiconductor. It’s a raw material. And are there no substitute ways to raise crops than to use fertilizers. It seems that everything I buy is “organic” which implies reduced fertilizer use. Can the world not adapt by some combination of increased output from other areas and different farming practices? Commercial producers will be slow to react because they won’t want to over-invest in capital equipment, so there are a bunch of factors that could contribute to the near-term price hike. But if the sanctions look to be permanent, they will invest.
I can’t say anything about the stock market, although from my perspective the economy is doing quite well. But I am not going to believe that removing Russia and Ukraine as economic contributors to the world economy is an important factor in the overall health of the world economy without some really convincing arguments using facts and figures.
Certainly I’m aware that the war could create instabilities that damage the world economy in other ways.
I didn't say people should go whole-hog on organic farming... I just said that there are probably alternatives to whatever people get from Russia, and organic farming may be part of that response. There could be synthetic fertilizers made from petroleum fracked from the native habitat of narwhals... I don't know. The point is that I have to be really convinced that, deprived of Russian fertilizer, there truly is no creative response and that it will lead to mass starvation. I'm just not buying this idea that you remove Russian fertilizer and the world starves. I suspect people have responses, and that the Russian fertilizer crisis isn't going to turn out to be much of a crisis.
‘Instead, Zeihan predicts that the war will result in a scarcity of food…’
Added to reduction of cereal supplies out of Russia/Ukraine there are other factors. Russia is biggest producer of fertilisers and these are now in short supply and two or three times the cost. It’s planting season. There will be a shortage of seeds and fertilisers. Food shortages will come along down the road… end if 2022/start of 2023. Food price increases also due not just to reduced supply, but increased fossil fuel costs needed in agriculture for machinery and heating.
“[T]he war cuts into global wealth, and that should show up as lower share prices.” Lower, that is, than they would otherwise have been, not necessarily lower than they were a few months ago. And how much lower? Maybe not much. “I keep seeing reasons to be bearish.” They are always there! But so are reasons to be bullish.
Peter Zeihan may be right about a food shock to the world economy. So, we should expect large changes in relative prices associated first with the energy shock (which started earlier) and second with the food shock. The two shocks are happening after Covid but the world economy is still recovering of the terrible government responses to Covid.
Yesterday I had to explain to my grandchildren (under 14) the nonsense that the Chilean economy had recovered from the government response: a month ago, when leaving his position, the outgoing President (Ph.D. in Econ, Harvard University) said that the economy had been GROWING since the last quarter of 2020 but that's not true. If GDP in 2019/4Q was 100 in 2020/4Q was 60 and in 2019/4Q maybe 80 but he argued that GDP increased one third in 2021 (from 60 to 80) while ignoring that it had dropped 40% in 2020. I bet that so far few OECD countries have recovered as much as Chile so I assume that most have yet to complete the recovery. Indeed, Chile's recovery in 2021 was accompanied by domestic shocks with relative price changes. Most recently, in the past 6 months the world shocks in energy and food markets have aggravated the increase in Chile's CPI --today, it was announced that it had increased close to 10% since March 2021. Indeed, it's expected that the increase will be higher than 10% in the next few months but given that the recovery relied on depleting the stocks of public and private holdings of financial assets and spending the windfall gains from copper (its world price has been at a record level in the past 6 months), I expect increases in CPI to return to less than 5% by the end of the year.
Is that relevant to Americans? Yes, it's. I challenge you to compare what has happened in Chile with the experiences of each of the 50 states. To compare Chile and the U.S. makes no sense. Once you have completed the analysis at the state level, you can introduce the federal government as a mechanism to redistribute income (in the national accounts, the value added by the federal government is quite low because today its main function is to redistribute income). BTW, you can forget about the Fed whose main function today is to finance the federal government by borrowing not by printing money (although soon it may be true that the cost of borrowing increases so much that the government cannot rely on additional borrowing to finance its deficit and refinance its debt).
It's worth remembering that money isn't wealth, and neither the stock market nor GDP measure success. Government and banking support will prevent a crash, but they don't actually make more stuff. I predict that measured inflation will be high but manageable, but experienced price rises will show almost everyone that we're not as rich as we think, and nowhere near as rich as the published statistics indicate.
This won't mean literal starvation in "rich" countries, but it will mean a reduction in lifestyle - fewer fancy vacations, more camping trips. Less going out for entertainment (even as COVID becomes less constraining), more streaming.
It _WILL_ mean literal starvation for marginal groups and regions.
Arnold, you should know better than to try to make sense of the stock market!
Inflation and supply constraints are real. My opinion is this phenomenon is mainly due to bad government policy - people get paid for not working and regulations constrain the development of new capacity.
Notwithstanding these problems, my feeling is equities will stay elevated until capital moves from incumbent corporations to new ventures, or a depression hits and money becomes scarce.
The USA uses about 1/4 of its corn crop for ethanol added to gasoline. The area needed for this is the size of Iowa. If that could instead be used for growing food, there would be a lot more food available for people.
This isn't as easy as it might sound. Refineries are set up to blend in ethanol, this can't be changed overnight. Also the farmers are set up to grow corn, not wheat or other more directly eatable cereals.
Still though getting rid of the ethanol mandate, something we should do anyway would help.
Maybe this is offbase, but it sure seems to me as though the US has a lot of underutilized farm capacity. There are a lot of old family farms in rural areas in the northeast and the Mid-Atlantic (the areas I'm most familiar with) that became economically unviable at some point over the past 30 years or so, and which haven't really been repurposed in any meaningful way since then, but which, at least to my untrained eyes, probably could be used in some capacity relatively quickly and easily.
That could be interpreted to mean I might be right or I might be completely wrong, depending on how you look at it. If there isn't much slack in the system, or at least not much that can be utilized quickly, then the value of existing farmland should rise. On the other hand, if there is a lot of slack in the system and Gladstone owns a chunk of it, then that would also become more valuable in the event of a global fall in grain supplies.
Property Description: 16,595 gross acres with 11,742 farmable acres consisting of one contiguous tract located in Colorado’s Baca County
Crops: Alfalfa
Water: Six irrigation wells on the property; primarily dry farming with full water and drilling rights as needed
What are the other 5,000 acres of this property doing? That's over 7 square miles; it can't all be useless. Would part of it be farmable with another well or two drilled? How easy would that be? Questions abound.
If General Mills sees grain prices go up it can increase serial prices. If all its competitors have the same price pressures, General Mills will be in the same competitive position. I suppose customers could substitute other foodstuffs for cereal, but...
1) Everyone has got to eat
2) Cereals and basic foodstuff are already the low cost substitute for a food budget
3) If I was going to save money I would cut out restaurants and prepared foods (labor) rather then basic groceries
So at least in the General Mills case I don't see a case for a negative impact. In fact consumer staples is the traditional sector to allocate into if you think the economy is going to do bad.
As far as stocks go, their prices are nominal. It seems to me that what the Fed does matters a great deal more than the real economy in terms of determining nominal prices for stocks.
The obvious market to worry about is real estate. 5% mortgage rates and climbing, yikes!
Stock markets are a lagging indicator, not a leading. Housing prices peaked in 2006 and the S&P peaked a year+ later, and was down 10% from its peak in early May (after a surge) which was ~6 weeks after Bear Stearns had to be rescued. Enron's stock price peaked 16 months before their bankruptcy. The stock market is the 2nd last to know, ahead only of the people who rely on the stock market to tell them something is wrong.
It seems possible that other countries not producing as much food will be relatively good for American food producers. If prices double and their output isn't effected that should all basically go to profits. If stock market guys think that the big farms already have their stock of fertilizer ready for the year (having bought it, hopefully stored it, before the outbreak of war) then it makes sense that they wouldn't be valuing farm and food producers less. If Toyota were to go out of business suddenly it would be bad for the world's wealth, but good for the wealth of people who own GM or Subaru.
I note also you don't knock Zeihan for using the word "shortage". Any particular reason you don't expect prices to rapidly adjust such that there is no such thing as a shortage in this case?
The stock price of Nutrien, a Canadian fertilizer producer, is up almost 50 percent since the start of the war. That makes sense to me. But General Mills, which I assume is a buyer of grain, is up 10 percent since the start of the war. I don't understand that.
As for Zeihan using the word "shortage" in lieu of "price spike," I am willing to be lenient. A rapid price adjustment will equate supply and demand, but it won't feel good to consumers.
Zeihan is actually predicting a shortage, his thesis is that current production can't be sustained without pax Americana keeping conflict down, and his estimate of the productivity of farmland without the modern industrial agriculture setup with fertilizers and pesticides being shipped around the world will cause a deficiency of calories to the tune of 1-1.5 billion people potentially starving. He is literally predicting not enough total calories to keep the current population alive.
If food prices go up 50 percent, we affluent Americans suck it up and pay. But it seems plausible to me that people who cannot afford those higher prices will face the prospect of starvation.
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.
The people in the US will not be the ones starving, nor those in Europe, Japan, or Australia.
I need to be convinced that these goods that Russia provides cannot be replaced by substitute goods with relatively little effort. A lot of people simply start with the assumption that “Russia is a big deal in the economy.” And then proceed from there. But I very strongly suspect that Russia is *not* a big deal, that this perception is a hangover from an earlier era (an earlier era when, by they way, they *also* were not a very big deal in the world economy).
Is fertilizer so difficult to produce that others can’t fill the gap? It is not a semiconductor. It’s a raw material. And are there no substitute ways to raise crops than to use fertilizers. It seems that everything I buy is “organic” which implies reduced fertilizer use. Can the world not adapt by some combination of increased output from other areas and different farming practices? Commercial producers will be slow to react because they won’t want to over-invest in capital equipment, so there are a bunch of factors that could contribute to the near-term price hike. But if the sanctions look to be permanent, they will invest.
I can’t say anything about the stock market, although from my perspective the economy is doing quite well. But I am not going to believe that removing Russia and Ukraine as economic contributors to the world economy is an important factor in the overall health of the world economy without some really convincing arguments using facts and figures.
Certainly I’m aware that the war could create instabilities that damage the world economy in other ways.
https://foreignpolicy.com/2022/03/05/sri-lanka-organic-farming-crisis/
First Dri Lanka ran out of dollars, then, as a result they couldn't get fertilizer. In otherwise a whole lot of crisis was going on anyway.
I didn't say people should go whole-hog on organic farming... I just said that there are probably alternatives to whatever people get from Russia, and organic farming may be part of that response. There could be synthetic fertilizers made from petroleum fracked from the native habitat of narwhals... I don't know. The point is that I have to be really convinced that, deprived of Russian fertilizer, there truly is no creative response and that it will lead to mass starvation. I'm just not buying this idea that you remove Russian fertilizer and the world starves. I suspect people have responses, and that the Russian fertilizer crisis isn't going to turn out to be much of a crisis.
‘Instead, Zeihan predicts that the war will result in a scarcity of food…’
Added to reduction of cereal supplies out of Russia/Ukraine there are other factors. Russia is biggest producer of fertilisers and these are now in short supply and two or three times the cost. It’s planting season. There will be a shortage of seeds and fertilisers. Food shortages will come along down the road… end if 2022/start of 2023. Food price increases also due not just to reduced supply, but increased fossil fuel costs needed in agriculture for machinery and heating.
A counterpoint to Zeihan https://twitter.com/sarahtaber_bww/status/1507776806090584065
“[T]he war cuts into global wealth, and that should show up as lower share prices.” Lower, that is, than they would otherwise have been, not necessarily lower than they were a few months ago. And how much lower? Maybe not much. “I keep seeing reasons to be bearish.” They are always there! But so are reasons to be bullish.
Peter Zeihan may be right about a food shock to the world economy. So, we should expect large changes in relative prices associated first with the energy shock (which started earlier) and second with the food shock. The two shocks are happening after Covid but the world economy is still recovering of the terrible government responses to Covid.
Yesterday I had to explain to my grandchildren (under 14) the nonsense that the Chilean economy had recovered from the government response: a month ago, when leaving his position, the outgoing President (Ph.D. in Econ, Harvard University) said that the economy had been GROWING since the last quarter of 2020 but that's not true. If GDP in 2019/4Q was 100 in 2020/4Q was 60 and in 2019/4Q maybe 80 but he argued that GDP increased one third in 2021 (from 60 to 80) while ignoring that it had dropped 40% in 2020. I bet that so far few OECD countries have recovered as much as Chile so I assume that most have yet to complete the recovery. Indeed, Chile's recovery in 2021 was accompanied by domestic shocks with relative price changes. Most recently, in the past 6 months the world shocks in energy and food markets have aggravated the increase in Chile's CPI --today, it was announced that it had increased close to 10% since March 2021. Indeed, it's expected that the increase will be higher than 10% in the next few months but given that the recovery relied on depleting the stocks of public and private holdings of financial assets and spending the windfall gains from copper (its world price has been at a record level in the past 6 months), I expect increases in CPI to return to less than 5% by the end of the year.
Is that relevant to Americans? Yes, it's. I challenge you to compare what has happened in Chile with the experiences of each of the 50 states. To compare Chile and the U.S. makes no sense. Once you have completed the analysis at the state level, you can introduce the federal government as a mechanism to redistribute income (in the national accounts, the value added by the federal government is quite low because today its main function is to redistribute income). BTW, you can forget about the Fed whose main function today is to finance the federal government by borrowing not by printing money (although soon it may be true that the cost of borrowing increases so much that the government cannot rely on additional borrowing to finance its deficit and refinance its debt).
It seems to me that the stock market and real estate market are presently just proxies for declining salaries...
It's worth remembering that money isn't wealth, and neither the stock market nor GDP measure success. Government and banking support will prevent a crash, but they don't actually make more stuff. I predict that measured inflation will be high but manageable, but experienced price rises will show almost everyone that we're not as rich as we think, and nowhere near as rich as the published statistics indicate.
This won't mean literal starvation in "rich" countries, but it will mean a reduction in lifestyle - fewer fancy vacations, more camping trips. Less going out for entertainment (even as COVID becomes less constraining), more streaming.
It _WILL_ mean literal starvation for marginal groups and regions.
Arnold, you should know better than to try to make sense of the stock market!
Inflation and supply constraints are real. My opinion is this phenomenon is mainly due to bad government policy - people get paid for not working and regulations constrain the development of new capacity.
Notwithstanding these problems, my feeling is equities will stay elevated until capital moves from incumbent corporations to new ventures, or a depression hits and money becomes scarce.
The USA uses about 1/4 of its corn crop for ethanol added to gasoline. The area needed for this is the size of Iowa. If that could instead be used for growing food, there would be a lot more food available for people.
This isn't as easy as it might sound. Refineries are set up to blend in ethanol, this can't be changed overnight. Also the farmers are set up to grow corn, not wheat or other more directly eatable cereals.
Still though getting rid of the ethanol mandate, something we should do anyway would help.
Gordon's comment is also a valuable idea
Maybe this is offbase, but it sure seems to me as though the US has a lot of underutilized farm capacity. There are a lot of old family farms in rural areas in the northeast and the Mid-Atlantic (the areas I'm most familiar with) that became economically unviable at some point over the past 30 years or so, and which haven't really been repurposed in any meaningful way since then, but which, at least to my untrained eyes, probably could be used in some capacity relatively quickly and easily.
The stock price of Gladstone Land Corporation, which owns farm land, is also up about 40 percent since the start of the war.
That could be interpreted to mean I might be right or I might be completely wrong, depending on how you look at it. If there isn't much slack in the system, or at least not much that can be utilized quickly, then the value of existing farmland should rise. On the other hand, if there is a lot of slack in the system and Gladstone owns a chunk of it, then that would also become more valuable in the event of a global fall in grain supplies.
Looking here: https://www.gladstonefarms.com/farmland-portfolio
You can click around and see stuff like this:
Property Description: 16,595 gross acres with 11,742 farmable acres consisting of one contiguous tract located in Colorado’s Baca County
Crops: Alfalfa
Water: Six irrigation wells on the property; primarily dry farming with full water and drilling rights as needed
What are the other 5,000 acres of this property doing? That's over 7 square miles; it can't all be useless. Would part of it be farmable with another well or two drilled? How easy would that be? Questions abound.
If General Mills sees grain prices go up it can increase serial prices. If all its competitors have the same price pressures, General Mills will be in the same competitive position. I suppose customers could substitute other foodstuffs for cereal, but...
1) Everyone has got to eat
2) Cereals and basic foodstuff are already the low cost substitute for a food budget
3) If I was going to save money I would cut out restaurants and prepared foods (labor) rather then basic groceries
So at least in the General Mills case I don't see a case for a negative impact. In fact consumer staples is the traditional sector to allocate into if you think the economy is going to do bad.
As far as stocks go, their prices are nominal. It seems to me that what the Fed does matters a great deal more than the real economy in terms of determining nominal prices for stocks.
The obvious market to worry about is real estate. 5% mortgage rates and climbing, yikes!
Stock markets are a lagging indicator, not a leading. Housing prices peaked in 2006 and the S&P peaked a year+ later, and was down 10% from its peak in early May (after a surge) which was ~6 weeks after Bear Stearns had to be rescued. Enron's stock price peaked 16 months before their bankruptcy. The stock market is the 2nd last to know, ahead only of the people who rely on the stock market to tell them something is wrong.
It seems possible that other countries not producing as much food will be relatively good for American food producers. If prices double and their output isn't effected that should all basically go to profits. If stock market guys think that the big farms already have their stock of fertilizer ready for the year (having bought it, hopefully stored it, before the outbreak of war) then it makes sense that they wouldn't be valuing farm and food producers less. If Toyota were to go out of business suddenly it would be bad for the world's wealth, but good for the wealth of people who own GM or Subaru.
I note also you don't knock Zeihan for using the word "shortage". Any particular reason you don't expect prices to rapidly adjust such that there is no such thing as a shortage in this case?
The stock price of Nutrien, a Canadian fertilizer producer, is up almost 50 percent since the start of the war. That makes sense to me. But General Mills, which I assume is a buyer of grain, is up 10 percent since the start of the war. I don't understand that.
As for Zeihan using the word "shortage" in lieu of "price spike," I am willing to be lenient. A rapid price adjustment will equate supply and demand, but it won't feel good to consumers.
Zeihan is actually predicting a shortage, his thesis is that current production can't be sustained without pax Americana keeping conflict down, and his estimate of the productivity of farmland without the modern industrial agriculture setup with fertilizers and pesticides being shipped around the world will cause a deficiency of calories to the tune of 1-1.5 billion people potentially starving. He is literally predicting not enough total calories to keep the current population alive.
If food prices go up 50 percent, we affluent Americans suck it up and pay. But it seems plausible to me that people who cannot afford those higher prices will face the prospect of starvation.
Will they stay in the third world and starve or try to storm the gates of the first world.
They will stay and starve. They starved in India, Ethiopia, Ukraine, China et al. You can't mobilize an cross continental army without food.
It's too late to storm out once you're starving. But I suspect it will be far less than huge droughts have created in the recent past years.
Higher prices - those with gardens will be relatively advantaged.
Sounds good. Make a bet.