Rising Food Prices Push Millions Into Poverty, Study Says

A sharp rise in food prices since June has pushed 44 million people in developing countries into extreme poverty — having to live on less than $1.25 a day — according to a new study by the World Bank.

The bank’s price index soared 29 percent from January 2010 to January 2011 (15 percent just from October to January). Wheat, maize, sugar and edible oils have seen the sharpest price increases in the last six months, with a relatively smaller increase in rice. The rising prices have increased the vulnerability of economies, particularly those that import a high share of their food and have limited capacity for government borrowing and spending.

Link to full article

Buy What the Chinese Are Buying

Joel Bowman, reporting from Taipei, Taiwan…

Metals up. Dollar down. Stocks up. That’s more or less how the last 24 hours played out on the global economic stage.

After digesting Act I of this week’s financial melodrama – the World Bank’s growth forecast downgrade from “soft” to “limp” – investors are bracing for Act II: Bernanke & Co. Will the Federal Open Market Committee (FOMC), who meet today and tomorrow to discuss the fate of the world’s reserve currency, be able to stay investors’ shaky hands? We have no idea, as usual, but it probably doesn’t matter anyway. The world will have to deleverage its house of cards one way or another. Sooner would be easier in the long run; later would be easier in the short term. Either way, tens of trillions of dollars worth of mal-investments need to be wiped from the books. That takes time.

That EZ-credit and over indebtedness are the root causes of the current debacle notwithstanding, most economists expect interest rates will stay put, in the “free to 0.25%” range. If you want to find the source of an idiot’s problem, just look at the solution he keeps applying to try and solve it.

What might our elected and unelected public servants do differently to avoid sinking deeper into the same mess, we wonder. For starters, they might try listening to people who actually got it RIGHT during the heady days prior to the collapse, rather than reenlisting the terminal inadequacy of those who got it so very, very WRONG.

A few months ago, two guys who saw all this coming appeared in front of a panel who didn’t. Here’s how that discussion went down:

“Even if we do everything right…” Nouriel Roubini told a panel of scoffing neckties on CNBC back in February, “we’re still going to have a severe u-shape recession [which will] last two years.”

“Yeah, but that’s not the end of the world, is it?” interjected one necktie from behind the safety of the studio desk.

“No, in that case it’s not the end of the world…but it’s still a recession that is three times as long as the previous two and three times as deep as the previous two. And, if you don’t do everything right, and I think there’s a large probability that’s going to happen, then we may end up in a multi-year near-stagnation or near- depression like the one Japan had, meaning an L-shape recession…and that is ugly.”

Next up, Nassim Nicholas Taleb, author of The Black Swan and another guy who “got it right.”

“What I see here is the same symptom that caused me to worry about the system. We have the same people in charge, who did not see the crisis coming who took humungous amounts of hidden risk, they’re still around; the bankers that got us here are still around, and we’re giving them more money, so I don’t see that we’re doing something to get out of the crisis.”

Mr. Taleb continued, “I would like to see the responsible people [for the crisis] not just punished, but out of office. Mr. Bernanke did not understand the risks the system was taking. I want him out of there.”

The “doom and gloom” tolerance level on the set must have been at fever pitch around this time, because they had to cut for a commercial break. Before they did, however, Mr. Roubini and Mr. Taleb were asked whether they thought Timothy Geithner’s plan might remedy the situation.

Mr. Taleb: “I don’t think much of all that class of people managing these plans in society. They failed and they’re going to fail again.”

Mr. Roubini: “I agree.”

Was Mr. Bernanke flicking through the channels that morning? Did he happen to catch any of that? Again, it probably doesn’t matter either way. Federal reserves do what federal reserves do: enable unsustainable, government-sponsored currency thrashing. It is infantile and delusional to think that the same ingredients will produce a different sausage. And, in an environment where more of the same means more of the same fraud and deceit, the smart few will take their dwindling dollars elsewhere.

In today’s edition Rude favorite, Chris Mayer, investigates what the world’s best savings need and reveals how you can beat the rush to own it first.

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Buy What the Chinese Are Buying
By Chris Mayer

How many entrepreneurs have sat down and thought to themselves, “If only the Chinese would buy my product…Heck, if only one in 10 Chinese would buy my product, I’d be rich!”

Call it the China Dream. It has a long history.

James McGregor wrote a book in 2005 on doing business in China called One Billion Customers. If the title sounds familiar, it may be because a man named Carl Crow wrote a book called 400 Million Customers, back in 1937. You see, the dream only gets bigger over time!

For the most the part, this dream remains a mere dream. But sometimes, someone, somewhere, figures it out. Carl Crow was someone who figured it out, and it made him a rich man.

Carl Crow led an adventurous life. Born in Highland, Missouri, in 1884, Crow started out as a newspaperman. Eyeing his fortune, he started China Press in Shanghai in 1911. But Crow eventually realized there was more money to be made in advertising. In 1918, he launched an advertising agency in Shanghai. As an adman, he helped his clients – mostly Westerners – sell their products to the Chinese.

His agency flourished. Crow’s billboards peppered China, from Shanghai all through the Yangtze Valley and as far north as Hubei. Chances are, if you flipped through a magazine in China between the World Wars, you saw Crow’s work in advertisements for cars, matches, cameras and many other goods.

He had a great run of 19 years. Then the war with Japan began in July 1937. Crow, who was outspoken in his criticism of the Japanese, fled the country. He could take none of his wealth with him. He lost everything — house, business, money. Back in the U.S., Crow penned his classic book, which helped him start over again. It’s still in print today. It’s widely viewed as a classic and is surely one of the most read books on China ever published.

Crow’s book, though, really shows how China was as much a money pit as a place where gold nuggets sprouted from the bushes. It remains that way today, ever tricky and hard to figure out. But for those who find a way, as Crow did, the rewards can be immense.

Let’s face it; a market of more than 1 billion noses is one you shouldn’t ignore. But it’s no small task trying to figure out which facial cream they might buy or what toothpaste they might favor.

However, there is another, more sure-footed way, to tap into that mass of humanity called China. Boiled down to its essence, the tactic is simply this: Buy what China needs, but can’t make enough of for itself.

In other words, as an investor, buy what the Chinese MUST buy. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.

You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

Let me give you a little more color on potash. [Editor’s note: Last December, Chris urged the subscribers of Capital & Crisis to purchase the shares of Potash Corp. (NYSE: POT)]. I recently listened to a couple of presentations by Chinese potash companies. They all confirmed that there are few commercially developed potash reserves in China. The Chinese use 12-15 million tonnes of potash every year, but produce only 3 million tonnes.

Harry Yang is an executive director at Sinofert, of which Potash owns a stake. Yang pointed out that Chinese soil is potash deficient. “China uses enough nitrogen and phosphate because it is self-sufficient in nitrogen and phosphate,” Yang said. (Nitrogen and phosphate being the other two key nutrients.) “But China significantly underuses potash.”

Compared with farmers in the U.S. and Europe, application rates are half on a per acre basis. “Ten years ago, [Chinese] farmers had no idea about potash. Farmers are using more and more now.”

Liu Guocai, chairman of another Chinese potash company, Migao Corp., shared his views. He pointed out that potash inventories are low. He predicts that China’s demand for potash imports will bump up significantly later in 2009 in preparation for the 2010 planting season.

As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.

More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food. It made a $500 million deal for poultry and pigs from the U.S. China attempted, but failed, to buy farmland in Mozambique and the Philippines. You may have also seen reports on Chinese deals in Africa. In Zambia, Chinese farmers already produce about a quarter of the eggs sold in Lusaka, the capital, for export to China.

As China maneuvers to secure its future food supply, one can easily see that the economic axis of the world is shifting from West to East. Understanding the dynamics of this shift will create some wonderful investment opportunities in the years ahead.

Someday, someone will write a book called One and a Half Billion Customers. Why not begin investing alongside the Chinese now, before the next half billion of these consumers arrive on the scene?

World Bank Scorches the Green Shoots

Some of the low-lights of the report:

• Global GDP seen contracting by 2.9% in 2009.
• International trade experiencing the sharpest drop since World War II.
• Subdued recovery in 2010, with 2% global growth expected.
• “[I]ncreasingly grave economic prospects” in low-income countries if capital flows don’t improve

Link to article:

http://www.fool.com/investing/international/2009/06/22/world-bank-scorches-the-green-shoots.aspx

Fall of the West

Fall of the West

Neville Bennett

Is the West in long time decline relative to the rest of the world? I believe it is, and will indicate some sources bearing that out. It is not a new question for me as in my youth I enjoyed reading Toynbee, Spengler and others.

Many of my generation received a broad liberal education at a state grammar school. Science was very strong at my school, where many friends later became engineers, but we were all taught to love literature, art, music (you had to play an instrument), history and 5 years of at least two languages. At school we debated the rise and fall of Rome, plus the British and other Empires.

West below 50% world GDP

“The Greater Depression (NBR 12 June ) has accelerated the decline of Western GDP of 60% to 64% of global GDP over 1995-2004. A British think-tank, CEBR, had earlier forecast 2015 as the date when the West’s GDP would go below 50% of world GDP, but the credit crunch and changes in foreign exchange has brought the date forward from 2015 to 2009. Defined as US, Canada and Europe, the West’s share of global GDP is predicted to decline further to 45% by 2012.

The report identifies an inventory-led recovery conforming to my bullish attitude to oil and metals (NBR May 29). They predict some bounce in 2009, but in 2010 recovery will be held back by fiscal retrenchment and the impact of structural deleveraging. They conclude, the West “has to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way”. China’s recovery is having a marked effect on oil and commodities.

Oil as an indicator

Crude oil prices have increased by 120% since February, at a time when the IMF confirms a recession in the world economy. Normally, falling crude prices would be expected. Actually, the price is about $72 p.b. and the futures market is predicting $88. So the prices defy “demand destruction”, or the idea that price rises lower demand. BP’s statistical review has shown that for the first time in history, emerging market demand has outstripped the West’s. This is significant in our oil-based civilization.

Until now traders have tended to look at US conditions for oil market leads. Henceforth, Western demand can slump while overall consumption is rising. Perhaps this is one reason why oil prices are strong now. 2008 oil consumption fell in the US by 6.4%; in the BRICs consumption grew y-o-y by 3.3% in China, 4.8% in India, 5.3% in Brazil, and 3.1% in Russia.

The BRICs

The BRICs now muster 20% of global GDP, about the same as the USA. These are rapidly changing societies with a large propensity to consume oil and commodities. Presumably their oil demand will burgeon, as industrialization proceeds at pace. One tends to think of them as financially undeveloped, but they have at least one huge advantage: they save.

Collectively their currency reserves are half of the global total. A recent Telegraph article said G7’s reserves’ (excluding Japan) has only 6% of world reserves. This makes it a little odd that the US dominates the IMF, World Bank etc. How can that last?

The BRIC’s are holding their first formal summit this week in Yekaterinburg, Russia. Curious that it gets little reported because the BRICs could stop lending the West money and deepen the recession. Their agenda includes ways to reshape the financial system and perhaps produce a new reserve currency. The Brazilian President wants the BRICs “change the political and trade geography of the world”.

The Chinese premier arrived as I went to press. I imagine that China will be much less confrontational than Brazil and Russia. China holds the most US Treasuries and does not want to undermine the dollar. It merely wants to supplant the USA as the world’s biggest economy, as it may do in 20 years.

World Economic Forum

Readers may recall an earlier article in which I outlined the briefing for the upcoming Davos meeting. The article specifically questioned the western model of development, and adopted the spirit of Asian capitalism with stronger central direction, saving and heavy capital investment. The report went beyond extending current trends and explicitly discussed “critical uncertainties”, and “potential discontinuities”. It also stressed rapidly shifting geo-economic power. (NBR Jan 23). Changing demography is a factor: “western” populations are shrinking, but emerging country populations are not.

Philosophers: Oswald Spengler

Spengler insisted in the 1920’s, when he was extremely influential, that we were living in the winter time of the Faustian civilization. His description of the Faustian civilization is where the populace constantly strives for the unattainable—making the western man a proud but tragic figure, for while he strives and creates he secretly knows the actual goal will never be reached. His “unattainable” is materialism.

Spengler asserted that democracy is simply the political weapon of money, and the media is the means through which money operates a democratic political system. Politics becomes an unprincipled struggle for executive power. Instead of conversations between men, the press and the “electrical news-service keep the waking-consciousness of whole people and continents under a deafening drum-fire of theses, catchwords, standpoints, scenes, feelings, day by day and year by year.”

Philosopher: Arnold Toynbee

Toynbee wrote magnificent Annual reports during the 1930’s are which I often set as required reading for graduate students. I had the joy once of meeting him. He dropped into Hong Kong University and asked if he could help. I took him to a tutorial, where unforgettably he raged against the state but lauded the polis (city).

Toynbee predicted the decline of the west. All civilizations are surrounded by peripheral countries of greater resources. Once the periphery absorbs the civilizations superior technology, especially military technology, it conquers.

Conclusion

Two centuries of western dominance has passed. The emerging world has caught up in terms of development. The West still has cutting-edge technology and military power, but it is being challenged on every front.

World Bank: Whoops!

Joel Bowman, reporting from Taipei, Taiwan…

Wait…scratch that…make it negative 2.9%.

Somebody must have slipped a few Rude pages to the honchos over at The World Bank. It seems the Washington-based lender is hedging its bets. A 2.9% contraction in the global economy this year is a far cry from its March estimate of 1.7%. But growth will be back to 2% next year, the bank assures us, slightly down from the 2.3% they originally expected.

What went wrong during the springtime, we wonder? Didn’t unprecedented levels of stimulus flow from government taps around the world? Weren’t Bernanke and Geithner manning the pumps? Didn’t the global media confirm sightings of green shoots? Or were they recovery saplings? Your editors were too busy “calling B.S.” to keep up with all those flowery euphemisms for delusion. Still, shouldn’t we be smelling the turnaround tulips by now, on our way back towards bull market springs?

Not just yet, says the bank of the world. The following adjustments must be made to the March forecast:

* Output in the U.S. will drop by 3%…not 2.4%,

* Japan’s gross domestic product will shrink 6.8%…not 5.3%.

* The Eurozone will have it a bit tougher too, contracting 4.5%…not 2.7%.

* And the globe as a whole? Uh…eh…it won’t decline 6.1%, as predicted. Better expect closer to 9.7%.

The lender also called for “bold” actions to hasten a rebound (an urgency upgrade from “tough” actions) and said the prospects for securing aid for the poorest countries were “bleak” (adjective upgraded from “slim”).

Does that mean the “delude-a-bulls” are spent? Is the sucker’s rally over? Insiders seem to reckon so. Bloomberg reports that, “Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.”

Worldwide markets did enjoy a pretty nice rally over the past couple of months. Perhaps that’s the end of the first suckers’ rally. Maybe last week’s 3% mini-selloff on Wall Street was only a harbinger of things to come.

Personally, we wouldn’t expect any hope of a sustainable turnaround until The World Bank downgrades its forecast from “bleak” to at least “apocalyptic.”

And now, back to restate his ever-strengthening case, we present Mr. Bill Bonner…

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Déjà vu All Over Again. Once More.
By Bill Bonner

Rarely has The Daily Reckoning been criticized for understating trouble. But trouble keeps getting ahead of us. We can barely keep up with it. So often have we anticipated ‘disaster’ or ‘catastrophe’ that the words now fall like empty shells. We light the fuses; they don’t go off. Alas, we have become alarmists with no bell or siren. We break the glass and pull the lever every week, but no sound is heard…except the familiar words whispered with in a hoarse, weary voice…watch out!

So today we turn to the dead for eyewitness accounts:

Otto Freidrich described the period of German hyperinflation and its effects: “… People carried wages home in huge crates; by the time they could spend even their trillion-mark notes they were practically worthless… There was not a single girl in the entire middle class who could get married without her father paying a dowry… They saved and saved so that they could get married, and so it destroyed the whole idea of remaining chaste until marriage…the girls learned that virginity didn’t matter anymore.”

“Against my will,” wrote author Stefan Zweig “I have witnessed the most terrible defeat of reason and wildest triumph of brutality in the chronicles of history.” Zweig lived through the hyperinflation in Germany during the ’20s and sold stories to survive. Later, he moved to Brazil and blew his brains out.

Brutality triumphed because civilized life was smothered by inflation. The Treaty of Versailles condemned the Huns to pay more than 47,000 tonnes of gold in reparations. Taking that amount of real money out of the economy left the Germans with no choice. They had no money left. They had to create it. Result: hyperinflation. The size of the banknotes rose with the crisis. In 1922, the highest denomination was 50,000 Mark. By 1923, the highest denomination was 100,000,000,000,000 Mark. By December 1923 the exchange rate was 4,200,000,000,000 Marks to 1 US dollar.”

The German middle class was wiped out. More importantly, the handrails and guideposts wobbled, so there was nothing to hold onto and no way to know where you were going. Businesses, banks, military, police, even the government itself – everything tottered and fell down. In the tumult, war-hardened rabble rolled towards Herr Hitler like loose nuts.

“In economics,” begins the Wikipedia description, ” hyperinflation is inflation that is very high or out of control… Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses.”

Who’s the biggest borrower today? The United States of America. At 12% of GDP, its deficit is more than twice as large as that of France. It already owes Japan and China as much as Germany owed its former enemies in reparations – adjusted to today’s money. But America’s debts are far grander than those of Germany in 1923 – even relative to the size of the US economy. Where Germany owed a little over $1 trillion; America – if you include private debt, official government debt, off-budget obligations and internal commitments – owes 100 times as much. And the United States keeps borrowing more. In a single year – 2009 – it will borrow $1.3 trillion, again, just shy of the debt that sank the Weimar Republic.

While the private sector during the bubble years brought U.S. debts to a record 3.7 times the entire nation’s output, now it’s the public sector that does the borrowing. The Obama Administration is adding to the accumulated U.S. debt at a suicidal pace – four times faster than the record set just last year. And America’s central bank hands the borrower a loaded pistol; it is adding bank reserves – which allow the money supply to expand geometrically – at a 4,500% rate.

That last number is not a typo. It’s an alarm. If the Federal Reserve were a heart patient, the defibrillators would be on already. If it were a normal bank, it would be closed down immediately.

But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don’t do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the ’20s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it.

“The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts,” writes Nobel winning economist Paul Krugman in the New York Times this week. “Those demands should be ignored. It’s much too soon to give up on policies that have…pulled us a few inches back from the abyss.”

“It’s déjà vu all over again,” he concludes, referring to the Japanese in the ’90s and the Americans in the ’30s. In both cases, he thinks their economies died because they turned off the juice too soon. But people come to think what they must think when they must think it:

“To follow the good counsel of stopping [the inflation machine] would mean… that in a very short time the entire public, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped.”

Karl Helferich, Chairman, Central Bank of Germany, 1923.

Déjà vu, all over again. Once more.