By Michael Every of Rabobank
How Dare You
Markets whipsawed yesterday after bad US initial jobless claims and Philly Fed data, with stocks down and bond yields also lower, as was the US dollar. Commodities were a mixed picture, however, and oil prices rose around 5% again from its intra-day low to close over $111. Referring again to a bond yields/commodities matrix, that suggested the Fed falling behind the curve, not getting ahead of it, in crushing demand to fit restrained supply. Lo and behold, we then got the headline, ‘Fed’s George Says ‘Rough’ Market Won’t Alter Fed Tightening Plan’. So, how far down can bond yields go when actual Fed Funds are still going up? Likewise, how far down can the US dollar go when the 1-month Treasury bill is 41bps, and trending lower, when Fed Funds is 100bps, and trending higher – which screams ‘Eurodollar collateral shortage’?
As I tried to flag yesterday, those (valid) questions are desperately small beer in the face of what now confronts us globally – or at they should be. That is because The Economist’s front page and main story this week is ‘The coming food catastrophe’, replete with a graphic of sheaves of wheat made up of human skulls. The summary concludes,
“The high cost of staple foods has already raised the number of people who cannot be sure of getting enough to eat by 440m, to 1.6bn. Nearly 250m are on the brink of famine. If, as is likely, the war drags on and supplies from Russia and Ukraine are limited, hundreds of millions more people could fall into poverty. Political unrest will spread, children will be stunted, and people will starve.”
We are talking about a Biblical famine lasting years, and if we get a bad weather-related crop, perhaps tens, and maybe hundreds of millions of dead.
As The Economist also notes, echoing work by our own Michael Magdovitz (who was already warning of risks of Biblical famine in March 2021):
“It takes a world to feed a world, and the way the world does it is through trade. By some estimates four-fifths of the global population live in countries which are net importers of food. More than 20% of the world’s calories, and more than 18% of its grain, crosses at least one border on the journey from plough to plate.”
That system is now breaking-down due to war in Ukraine – and we in the West are not doing much to help.
Indeed, “Reactions to higher food prices in rich countries are making things even harder. Food prices account for about 1.3ppts of America’s 8.3% inflation rate, and about 1.0ppt of the euro area’s 7.4% rate. They are thus one of the factors driving more aggressive monetary policies. The higher rich-world interest rates which ensue drag down currencies and tighten financial conditions in emerging economies. Falling currencies make food imports costlier still.”
Russia has now offered to reduce these food problems by removing its naval blockade of Black Sea ports to allow Ukrainian grain to flow if sanctions on it are removed. In other words, using food as a weapon, and blackmailing the West into reducing its support for Ukraine. How anyone can condone that is unclear – but some give it a good try “because reasons”.
However, the onus is also on the West rejecting (non-US) imperialism to offer those at risk of starvation something higher in calories than moral superiority, hypocrisy, and empty rhetoric. The recent gaffe by former US President George W Bush decrying “an absence of checks and balances,” and “the decision of one man to launch a wholly unjustified and brutal invasion of Iraq," - before correcting himself to "I mean, of Ukraine," speaks volumes to much of the non-Western world.
There is talk of a food Marshall Plan – but just that: talk. And the clock is ticking down to the point where any action will be too late. The Economist details a list of things that could realistically be done to fight both Putin and hunger. Let’s see if anyone in a position to do anything about it is willing to or not. If you are reading this, and you are one of them – act now while you still can.
Lower down in the pecking order, we have been told endlessly on all manner of other political issues that we all have a part to play. So, play one! If you work in relevant markets, how does it help to ignore the risk of mass death by talking of ‘a focus on clients’ --who are NOT the ones starving!-- or on ‘regulations’? Such stances take one back to the Irish Potato Famine, when the free-trade British government forced the export of food from Ireland while the Irish starved or emigrated en masse. As the Dublin Review of Books noted in 2020, “It was politics that turned a disease of potatoes and tomatoes into famine, and it was politics which ensured its disastrous aftereffects would disfigure numerous future generations.” Imagine the global disfigurement the West will generate talking about Ukraine and Europe while allowing non-Europeans to starve.
Even “failing conventionally” with the rest of the market, as Keynes noted most in finance are happy to do, is not the quite same when instead of saying, “Well, that bubble burst in the end – whocouldanooed?”, you are looking at tens of millions, and maybe up to 3.5% of the global population, starving to death via deliberate action – and inaction. For those who are still pointing to the political/market norms of 2021, or to PowerPoint presentations that took ages to put together, as a moral compass pointing to business-as-usual in this crisis, I say: “How dare you!” Frankly, one starts to understand how the darker chapters of 20th century history managed to transpire: there are always beans to count, windows to gaze out of, or orders to follow – or transact.
With eerie timing, I was recommended ‘Mr. Jones’ on Netflix last night. It’s the usual flat production, but tells the powerful true tale of the Welsh journalist who travelled to the USSR in 1933 and exposed Stalin’s deliberate starvation of millions of Ukrainians to pay for industrialisation by exporting all their grain. The US overlooked this to re-open relations with Moscow so US businesses could gain new markets, aided by Pulitzer-prize winning New York Times journalist Walter Duranty, who lied about what was happening due to his pro-Communist views. Spoiler: Jones was shot by the Soviets in Inner Mongolia in 1935, while Duranty lived on comfortably in retirement in Florida for decades, got to keep his Pulitzer, and still keeps it today despite posthumous calls to strip him of it. I am not advocating anyone take a literal bullet - but do you really want to be remembered as a Duranty?
If that doesn’t move you, consider this: the hundreds of millions of hungry might march on Europe; and even if not, if global labour supply is reduced among a population that never provided much demand, that means higher wages with a lag, as with the medieval Black Death; that means higher inflation; that means higher rates; and that means lower asset prices. You are finally shocked into outrage?! Good! Pity we had to get there the long way round.
More so because we are in an undeclared global economic war: and not one under an economic system, but OVER the economic system. How do the West, liberalism, and democracy --and not using food as a weapon-- win hearts and minds if they cannot fill stomachs for global swing voters? Or are these luxuries, and food, only the preserve of the West as a splendid fortress island? That’s a moral and geopolitical issue – and one with vast importance for all asset prices.
After all, the other side is not sitting still. Russia is offering its wheat and energy to one and all. China just invited new countries to join the meaningless acronym of the ‘BRICS’ ironically created by a ‘vampiric’ US investment bank, as embryonic New World Orders wait in a geopolitical pregnant pause.
China also just arrested a PBOC official for corruption, while "...investigators sternly warned the central bank against any talk of Western-style central-bank independence" (as the PBOC cut its 5-year Loan Prime Rate by a larger-than-expected 15bps to 4.45%, and left the 1-year rate at 3.70%, flattening its own curve); and China will block promotions for senior CCP cadres whose spouses or children hold significant assets abroad, “as Beijing seeks to insulate its top officials from the types of sanctions now being directed at Russia,” both according to the Wall Street Journal. That is as Politico quotes a professor of politics and international affairs at Princeton saying, “There is no question that the perceived reality of the possibility [of a Chinese invasion of Taiwan] is greater than it was three months ago.”
I hope this is food for thought. Because the risks are too many people *only* have thoughts of food ahead. And if you think the world will just chug along as before if that transpires, then you have been reading too much Walter Duranty.
Happy Friday – now please go do something to help prevent mass starvation.