Food Inflation in China
The word "inflation" is appearing in the headlines more and more. For emerging markets, inflation is getting a bit scary. China is expected to show 5% inflation for the first two months of the year. That's clearly a big problem for China. And the situation is similar in other emerging economies, like Brazil and India.
Each of these three countries has raised interest rates to fight inflation. They will certainly have to do more. Especially China. China's currency is undervalued, kept that way by an artificially imposed exchange value known as a "peg." China pegs its yuan to the U.S. dollar.
That means that the U.S. Fed's monetary policy affects China. And right now, Fed policy is not helping China. In fact, it's making the inflation situation worse for China. But I don't feel bad for China.
As Bernanke said last week at the National Press Club, foreign central banks have the same tools to fight inflation as the U.S. does. Sure, China can raise rates. But it needs to end its dollar peg. That's the only thing that's really going to change the inflation picture there.
The U.S. and Chinese economies are very different. We've seen prices rise for food, but nothing like what China has seen. And there are structural reasons why, barring natural disaster, the U.S. will likely never see the kind of food inflation that China is seeing right now.
The U.S. has the most productive agriculture in the world. We are exporters, not importers (unless you count organic Peruvian blueberries and other seasonal produce). Even with the recent rise for some food prices, the percentage of a household budget that goes to food is a fraction of what it is in China.
*****When we look at the inflation problem in China, it's important to understand exactly what's driving prices, especially food prices. China is the biggest wheat importer in the world. It's also experiencing a drought that has affected 42% of China's own wheat crop. That means even more imports.
And as we know, rising demand usually means rising prices. China is in need, and things get more expensive in free markets when there is need.
This is the dynamic that forces imbalances to be addressed. And in addition to raising interest rates, China is also investing $2 billion to improve wheat and grain production.
*****We can make see a similar situation for oil prices. As I said yesterday, part of the reason that oil prices are rising is that supply is limited. The only supply that can increase is unconventional, like oil sands and deepwater. These supplies require a price above $65 or so a barrel to be viable.
*****We could argue whether the current prices for food energy conform to the traditional definition of inflation: that is, "too much money chasing to few goods."
It's not a very productive argument. Higher prices mean consumers have less money to spend on other things.
*****The U.S. dollar has likely put in an important bottom for the foreseeable future. When you compare the dollar to other currencies, well, it's the most attractive. That may not be so much an endorsement of the dollar as an indictment of other currencies. But with inflation threatening growth in many of the faster growing economies, the U.S. is looking pretty good right now.
Economic data has been steadily improving, and interest rates are not likely to rise for another 12 months. GDP estimates are moving higher, I've heard 4% for the year.
For stability and strength, there's no better investment than U.S. stocks. And that will mean a stronger dollar and lower real interest rates.
*****Stocks are actually in the red today. That's been pretty rare lately. But as Jason Cimpl told his TradeMaster Daily Stock Alerts members this morning:
"...the bears are pathetic, and have let opportunities handed to them on a silver platter slip away before."
Still, Jason recommended a few downside positions in anticipation of a move lower like today's. But given his thoughts on the bears, we'll probably hear about another round of profits for TradeMaster Daily Stock Alerts members later today. Jason is clear that the bears have not shown the resolve needed to start a more significant correction for stock prices.
