Date: 4/27/2021
Author: Mr. X
The Federal Reserve is expected to continue its commitment to low-interest rates this week, even as the economy heats up. If it doesn’t, that will truly shock the market and we will be in an entirely different trading environment. Still, I don’t see a surprise here. Indeed, for the first time since the pandemic began, a Gallup survey of Americans’ confidence in the economy has hit a net positive. Going into the midterms, the best card the Biden Administration could play is to claim credit for a strong economic recovery.
The decision by the Federal Reserve to keep interest rates low is an implicit admission that it is not worried about inflation. However, former U.S. Treasury Secretary Larry Summers recently suggested that the Federal Reserve should at least begin thinking about it. He also said that its projection that it won’t raise interest rates until after 2023 doesn’t make sense.
I’d argue that inflation is already here, at least in some products. Last week, I wrote that lumber prices are soaring. What’s coming next is something even more basic to human survival – food.
Global food costs have increased for 10 straight months. Corn prices doubled in a year, and wheat and soybeans have also increased. The Bloomberg Agriculture Spot Index, which is a good measure of farm products, hit its highest level in almost nine years just a few days ago. In March, the Labor Department reported that consumer prices have risen 2.6% from the year before, the highest level since August 2018.
You’ve probably already noticed that prices at your own grocery store are up.
Some of this, as with lumber and semiconductors, is simply a matter of a disruption of the supply chain. The market will eventually adjust and prices will decline as supplies increase.
However, I’d argue there’s something more fundamental at work. A loose money supply, a potentially massive infrastructure bill, and political momentum behind more redistributionist policies all mean that the dollar could be in trouble.
This doesn’t mean it will lose its spot as the world’s reserve currency – other currencies are in far worse shape. Yet it does mean that at home it simply won’t purchase what it once did.
The Federal Reserve has also talked itself into something of a corner. If economic growth continues and inflation inevitably accompanies it, it would make sense for the Fed to raise interest rates far sooner than 2024. But that alone would be a sizable shock to the stock market – especially if President Joe Biden’s proposed capital gains tax also is in place.
President Biden, a far cannier politician than most give him credit for, must know this. He won’t want to fall into an obvious Republican trap about a “recession caused by tax hikes.” Thus, the political temptation will simply be to avoid the issue altogether and downplay inflation, trusting in the soaring housing market and the stock market to keep Americans’ confidence in the economy.
None of that will change the prices at your grocery store from increasing. Prices around the world are potentially increasing even more, with countries even restricting exports to protect their food security. For example, Russia is placing restrictions on grain exports and Bolivia is banning exports of beef.
How can you benefit? Like with lumber, the best way to play this market is to go low-tech in a high-tech age.
The PowerShares DB Agriculture Fund [DBA], which tracks 10 key commodity futures contracts, has been growing over the last month, but hasn’t spiked to an absurd degree. The Teucrium Corn Fund [CORN] is up more than 10% over the last week, notable, but not crazy. The Teucrium Wheat Fund [WEAT] is up 11% over the last week.
What’s interesting about these stocks is that none of them saw triple digit gains over the last year, while many tech stocks did. In other words, there may still be an opportunity to get in before the major rise in prices.
Global factors are also important here. Say what you will about former president Donald Trump but he was right and most media commentators were wrong about vaccines. They scoffed when he predicted that America would have them within a year, and here we are.
Indeed, America, which once looked like a global embarrassment handling the crisis, now looks like a model. China’s vaccines are of doubtful effectiveness, the European Union’s distribution procedure has been a disaster, Russia’s caseload numbers appear underreported, and Brazil’s situation is so bad it threatens the government itself.
Many nations will sacrifice the money that can be gained from exports to protect the food supply. The supply chain disruptions that destabilized the market over the last year may last longer than anticipated. Even these “artificial” distortions that aren’t caused by monetary policy could be with us for some time depending on government policies, virus mutations, and the effectiveness of certain vaccines. While some areas of America already seem almost normal, countries like India are worse off than ever. In Florida, people are going to packed UFC events. In Germany, they could be facing lockdowns until June.
In cases of global uncertainty and market disruptions, I turn to things that have permanent value and primal importance, things that surpasses even precious metals. Agricultural products, including staples like corn, wheat, and soybeans, are those things.
Prepackaged food companies including General Mills [GIS], Campbell Soup [CPB], and Kraft Heinz [KHC] are another possible way to play this. Yet their performance has been disappointing. All are down even over the last week. It might be better to go straight to the source and invest in agricultural products directly.
The last year has been a boom for many tech stocks, some of whom (like Tesla [TSLA] and Amazon [AMZN]) have reported or will be reporting earnings soon. There may still be gains here, but we can’t go back in time to capture everything that could have been won. Instead, we need to look to what comes next.
At a time of geopolitical competition, uneven rates of pandemic control, and political uncertainty, I’d look to the most fundamental equities that exist. It’s said an army marches on its stomach. I’m beginning to think that rule will apply to portfolios.
