–To paraphrase Leo Tolstoy, sound money is always sound in the same boring way. Unsound money is always unsound in an inflationary way.
–Okay. Maybe it’s a stretch to say that Tolstoy would have anything to say about sound money. He was, after all, in favour of getting rid of private property. But as a farmer, he might have something to say about wheat prices. That something might be, “Wow!” or the Russian equivalent of, “Wow!”
–You can see from the chart below that wheat prices are in rare territory. Only once before has the monthly closing price for a bushel of wheat in the spot market been this high. That was back in early 2008 when wheat traded for nearly US$12 a bushel. The average price in the spot market for January was $8.52.
–Bread jokes aside, rising grain prices are no laughing matter. Egypt, for example, is the largest wheat importer in the world, according to the Wall Street Journal. One in five people make less than $1 a day in Egypt. Bread is a subsidised commodity.
–People are not gathering by the millions in Cairo complaining of high bread prices. But what’s happening in Egypt is really, at its core, a currency story. It’s the story of the disintegration of the global dollar standard. The great unravelling of the greenback has unleashed higher food and fuel prices. Those increases are seen and felt first (and most) in places where those commodities are still relatively scarce.
–If wheat strength was really just U.S. dollar weakness, would you have anything to worry about? Well, yes! Why? We’re glad you asked.
–If the origin of record grains prices is in a weak dollar, it won’t stop there. The weak dollar has driven up base and precious metals. Now it’s pushing up food prices. Next and most destabilising of all is energy.
–True, Brent crude prices fell slightly yesterday. But they’re still over $100. And more importantly, there is this possibility: oil prices will spike as traders, speculators, and governments realise that the dollar standard is convulsing in its death throes and that physical ownership of energy is the most important strategic consideration now.
–A simpler formulation of this idea is one we’ve been making for years: sell paper, buy stuff. But now it’s getting pretty elemental. The paper with which the world trades commodities, the U.S. dollar, is in real strife. That strife is causing geopolitical wealth quakes. And what’s worse is that it may get worse!
–Kansas City Federal Reserve Bank President, Thomas Hoenig, says that a new round of Quantitative Easing—cleverly dubbed “QE3”—“may get discussed” if U.S. economic data stays weak, according to Reuters. And Hoenig is a hawk. He was at least verbally opposed to the first $600 billion monetisation of government debt.
–But really, if it’s resolved to be self-important and protect the interests of its banker owners, the US Fed has no choice but to keep buying government bonds. That keeps U.S. interest rates low, for now. And that keeps the U.S. housing market from total implosion. Also, the Fed is the buyer of last resort for U.S. Treasury Debt. And if the Japanese and Chinese choose not to fund U.S. fiscal deficits, someone is going to have to.
–And you wonder why prices for real goods are now moving toward an inflationary tipping point?
–Our colleague Dr. Alex Cowie gave his take on the food/agriculture story in the latest issue of Diggers and Drillers, published earlier this week. We can’t tell you what share he recommended to his readers. But we can say that Alex agreed with the investment sentiment of BlackRock founder Larry Fink that you should, “Go long agriculture and water and go to the beach.”
–Fink reckons food and water are even better sector bets than energy. We’re not so sure. It takes energy to grow food. And as an investment prospect, food and water are a lot harder to invest in than energy.
–This is why we’re focussing on the energy story in our own newsletter, the Australian Wealth Gameplan. If higher energy prices are the imminent result of the ongoing global currency quake, there MAY be a way to speculate on it and buy select Aussie energy stocks for a short-term gain.
–The emphasis above is on speculation. Sadly, this is what the manipulation of the price of money turns investors into. When the money printers run over-time, all you can really do is keep track of what you think things are really worth and buy them if they look cheap. That’s if you’re an investor (this is what Greg Canavan does in Sound Money. Sound Investments and why we’re so glad he agreed to join our team this year).
–But if you’re buying Aussie energy stocks based on gains you reckon might come from higher oil prices and a re-rating of local stocks, you’re speculating. You can make money speculating, of course. But it’s a reminder that Ben Bernanke has effectively turned the world’s financial markets into a giant casino, in addition to triggering inflation in commodity markets.