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Best of the Exchange: Food Prices, Paying the Piper and Middle Class Migration


Government steps in, debate heats up.

With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts have been modified slightly from their original form.)

Minyan Bob Adams contributed another fine piece on the migration of the middle class out of America (and other developed countries) and into emerging countries. Few deny the trend, but the implications and the causes stirred some heated debate.

Minyan Dan:

Eventually, the rich and the expats are seeing the future they've created. It involves revolution among the starving masses that used to work for them in huge, petroleum-dependent cities where life can't exist without the infrastructure that's crumbling day by day. These 'happy' people who leave are simply running scared because they said "Let them eat cake" for too long to too many.

They think by finding a hidey-hole in some dark forest or on an island that the flames will burn themselves out and leave a cleansed world for them to come back to when it is all over.

They, can tell themselves that they're 'seeking new horizons,' but the truth is, they're abandoning the places and people that provided their wealth while those 'ingrateful peasants' wallow in their filthy, polluted ghettos.

Minyan Brecon:

Minyan Dan - ouch! But I fear you're right. Sometimes I look at the madness that is present-day Dubai and wonder whether it's all part of a plan to build a magic kingdom where the rich can live and holiday in an otherwise energy-starved world where everyone else is effectively reduced to serfdom.

Mr. Practical argues the case for deflation and an impending collapse of the rickety framework upon which our financial system is built. The Federal Reserve is intent on inflating our way out of the crisis, but they may just be digging a deeper hole.

Minyan Will:

Mr. P, I appreciate your candor, but respectfully offer "the other side." Perhaps this time is different?

We know now what our government is willing to do, and what they have done speaks volumes, including the recent letter by the SEC to offer a way out to mark-to-market accounting of assets.

As investors, we must be able to adapt to change as this crisis evolves, and with the backstop of the Fed taking on our risk - (we can debate the merits and consequence for years), the fact of the matter is, I believe the entities that must make money will take advantage of the change in demeanor of our government.

Bernanke even said during his testimony that he hoped he would not have to come to the rescue of another failing institute, but he would if necessary. Smart money will take advantage of these new policies, and profits will be made. Sometimes the hardest investment choice makes the most sense in hindsight.

Minyan Fred:

I think this time is "different" but not in the way many people think or are prepared for.

The level of debt and leverage caused by derivatives is staggering and unprecedented and the unwinding of it will produce unprecedented upheaval. As Mr. P so lucidly and ably pointed out, "Debt levels in the U.S. reached six times their usual amount relative to economic production. As the credit began to deflate, liquidity driving asset prices quickly dried up."

Easy credit drove up asset prices to unsustainable levels - the implications of that are now starting to be felt - debt levels are massive and no longer serviceable, the inflated assets purchased with that easy credit are themselves now losing value and a vicious cycle of deflation is taking hold and no government policy is going to be able to stop market forces that powerful. There are no easy fixes, no simple solutions - there is only a steadily deteriorating loss of trust in the honesty & competency of the largest financial institutions, ratings agencies and the markets in general which government (which has its own credibility issues) can't restore.

The only thing I might debate with Mr. P is being short stocks (or long on puts), in particular financial stocks in this market, as I think that there is a very real risk of collapse of the U.S. financial system - the Fed may have delayed it with the arranged "bail-out" of Bear Stearns, but I don't think they will be able to continue to bail-out the next several dominoes lining up that threaten to undermine the entire system.

Professor Limantour discussed rising commodity prices and the implications for emerging economies. Fundamental supply-demand dynamics, coupled with speculation and easy credit have threatened the stability of developing countries around the world.

Minyan Annette:

Just a few days ago, rice prices surged by 30% to a record high. Rice being a staple throughout the world, these kind of increases are causing real-life difficulties for hundreds of millions of people who are at the base-level of subsistence.

In this context, allow me to mention India's situation. There, a proposal is on the table (floated by leftist parties) to ban futures trading in edible oils. Import duties on edible oils have been reduced recently.

Futures trading in wheat and rice has already been suspended as of February 2007, as well as several important pulses (important in the vegetarian diet of the Indian population). Stockpiling of wheat and pulses is being monitored closely by state governments, for example in Gujarat, where strict warnings as to allowable tonnage of stock piles were just issued to traders and millers of these agricultural staples.

The surge in agricultural commodities begs a few serious questions. I am as little opposed to "making a buck" as the next person, but at what point do we have to question what profit in agricultural products means to people at the other end of the stick? This is a complex situation of free markets vs. real subsistence needs. As such it is quite different from making money on non-agriculture investment themes. The ripple effect cannot be swept under the table!

Glad to see you opening the discussion with your article, thank you.

Minyan Christopher:

Oil price increases have not shrunk the human food supply, biofuel production has. The more biofuels we produce, the less food we have to eat, because we grow biofuel crops, even switchgrass, using the same land, water, fertilizer, farm equipment, and labor we use to grow food.

Biofuel production accelerates global warming, creates water shortages, and erodes topsoil. A new study says biofuels from cellulose sources, such as switchgrass, wood chips, crop waste, etc., will never be cost effective.
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