Feast, Famine And The Fed

Time and again over the past several months, I’ve pointed to what could end up being one of the greatest ironies of the Fed’s tweaked mandate aimed at engineering a more inclusive labor market and fostering a more egalitarian version of American capitalism.

And, no, I don’t mean the fact that post-financial crisis Fed policy served to widen the very same wealth gap policymakers are now intent on closing, although that’s pretty ironic too, especially with Janet Yellen at Treasury.

Rather, I mean the tragic irony inherent in a prospective outcome that finds the Fed’s revised policy bent exacerbating global inequality via surging commodity prices.

A Food and Agriculture Organization gauge that tracks monthly changes in cereals, oilseeds, dairy products, meat and sugar is rising rapidly. In fact, it was up a ninth consecutive month in February (figure below). The March read is due on April 8.

The last big jump came a decade ago. At the time, critics suggested the Fed deserved some of the blame for the surge and, indirectly, for the Arab Spring.

“Many economists believe the Fed’s QE2 was the primary cause for the 2010-11 bubble in food prices which contributed to the social unrest and ensuing revolutions in many Arab countries,” SocGen’s Albert Edwards wrote in December.

Ben Bernanke denied the Fed was responsible for surging food prices, but the narrative was rampant.

“It’s an ugly American custom to take credit, or assign blame, for every major event in the world, but if there’s any American political figure who has played a significant role in the Mideast conflagrations, maybe it’s… Ben Bernanke,” The Atlantic wrote, in 2011.

“There are many world leaders who rail against the US central bank’s bond buying spree,” The Guardian chimed in. “Without quantitative easing, they argue, their populations could still afford to buy staple foods without busting their already stretched budgets.”

“How the Fed triggered the Arab Spring uprisings in two easy graphs,” The Telegraph promised, at the top of a 2011 piece.

You get the idea.

Fast forward 10 years and we may be on the brink of seeing something similar play out. The figure (below) underscores the same dynamic shown in the FAO gauge. The S&P GSCI Agriculture Index (it’s a sub-index of the S&P GSCI), is up sharply.

As you may have noticed, analysts have turned bullish on commodities due to a variety of factors, not least of which is the notion that they can serve as an inflation hedge in portfolios at a time when bonds are vulnerable.

At a recent quant conference, JPMorgan’s investors expressed palpable concern about inflation risk. Asked about possible hedging strategies, “42% of participants answered by including commodities,” a note out last month read. In the course of making the case for a new commodities supercylce, JPMorgan said it “expect[s] multi-asset portfolios to add commodity and commodity equity exposure to hedge inflation.”

In a March 16 note, RBC’s Michael Tran and Helima Croft described a self-feeding loop. “Inflation has played a critical role in driving commodity prices higher and has proved to be a significant tailwind for the oil market this year,” they wrote, adding that,

As inflation concerns increase, investors allocate more capital towards commodities as an inflation hedge. As a result, asset managers buy more commodities. This further elevates energy prices and potentially creates even greater inflationary fears. Rinse and repeat.

Is this a problem? Well, as was the case a decade ago, that depends in part on who you are and also where you are. If you’re rich, nothing much matters until the people for whom things do matter get angry enough to ponder taking some of what you have by force. And, as discussed in “What Does It Mean To Starve?,” no one in developed economies is going to die due to a complete and total absence of available calories. At worst, you can always just run into a gas station, grab a handful of Snickers bars, and run off down the street. There’s no chance the police will catch you before you can eat at least one of them. And if you rob a bank and get caught, they have to feed you in prison. (I’m not advocating petty theft, let alone bank robbery, so if you go out and do your best impression of The Town, don’t blame me when the FBI comes knocking.)

Jokes and dark humor aside, this isn’t funny for developing economies. It’s disconcerting for frontier markets. And it’s downright terrifying for failed states.

“Wall Street is an established player in the agricultural commodity space and has room to grow its inflation hedging bets from here,” Rabobank’s Michael Magdovitz and Michael Every wrote, in an expansive note that takes a somewhat grim view of a potential commodities supercycle.

Wall Street is the last “leg” in the process outlined by Magdovitz and Every. They talk supply & demand, politics and China, before noting that,

Funds could easily extend their speculative length, not just in feed, but also wheat. This could help push agri prices up to the 2012 peak 40% higher from here. Moreover, should US ultra-loose monetary and fiscal policy produce significant US inflation, or stagflation, and/or yield curve control to peg the long-term cost of borrowing, Wall Street would again likely increase its agri commodity inflation hedges.

The implications of any self-feeding (no pun intended) spiral are clear enough. Rabobank noted that for MENA countries, “the 30% increase in international wheat prices seen so far in 2021 leaves them just shy of levels seen during the revolutionary Arab Spring.” Asia’s middle class, meanwhile, confronts sharp increases in the price of pork, cooking oil, sugar, and dairy. As for Africa, Magdovitz and Every wrote that “with lower GDP per capita [the] predicament is even clearer.”

In what they call a “lean cows” scenario (a Biblical reference), the percentage of individual incomes spent on food rises from 9.3% to 10.4% for East Asia and the Pacific, from 8.6% to 9.6% for Europe and central Asia, from 11.5% to 12.9% for Latin America (the same for the Middle East) and from 20.7% to 23.2% for sub-Saharan Africa.

On the right (above), Magdovitz and Every showed “the total number of countries in each region that were already at risk of food insecurity using the World Bank’s 2017 data compared to the number projected ahead using [the] ‘lean cows’ assumption.” They cautioned that this only presumes a 12% increase in food prices. If prices were to rise further, the situation would be more acute.

Stepping back from the specifics (and Rabo’s note is extensive, by the way), the salient point for our purposes is just as I put it at the outset, some 1,200 words ago.

“Global food insecurity falls heaviest on lower income, importing nations, who spend a far greater share of their income on food than the richer ones,” Magdovitz and Every wrote, adding that “the Fed would play an ironic role in this process even as it embraces fighting poverty and inequality alongside inflation.”

Of course, that fight at home is seen as necessary to avert further societal breakdown, like that witnessed in 2020.

Irony on top of irony would be if the quest to avert further fraying of America’s social fabric ends up “exacerbat[ing] geopolitical risk, potentially even regarding institutional architecture” (to quote Rabobank one more time) abroad.

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