Investors are in a bind.
The global credit crisis has not yet played out, as UBS’s painful 1Q loss today attests. There’s talk that Fed chairman Bernanke is dusting off his academic research into the Great Depression to see what tools he might need to apply in the months ahead. So it’s a time to sit on the sidelines, hoarding cash, waiting to see where the dust settles.Ah, no actually, because the train coming from the other direction is inflation. There are a few reasons that inflation is again spreading its wings, not least are energy and food costs. But if oil stays at around $100 for another year, it will be statistically washed out of the CPI numbers. The real, underlying inflation issue is to be found in China. Since China entered the WTO in at the end of the last Century, Chinese manufacturers and workers have been underwriting the world’s low inflation by producing goods, especially consumer goods, at increasingly lower prices as economies of scale gained traction and at prices well below what could be matched elsewhere. Those days are drawing to a close. The pressures on resources within the Chinese economy, and the weakness of the dollar are leading to increased prices for China’s exports.
The free ride is over. (There has also be some help on prices from Germany, the pre-eminent supplier of machinery, where prices to many regions are down because of the record strength of the euro against the dollar.) The world’s central banks will have difficulty crushing inflation because a) we may over estimated their ability to deal with anyway because it was really the Chinese all along, and/or b) they cannot afford the greater risk of completely drying up liquidity and activity by cranking up interest rates.So cash is not King – or perhaps it is King Cnut, who failed to order the waves to stop. The solution lays in returning to the basic necessities of life – to food and to water. Obviously the third element of basic necessities – shelter - isn’t the place to be, courtesy of the sub-prime bubble. If times get tough I’ll postpone buying the upgraded ipod or the next version of Vista (I might pass on that anyway, come to think of it). But food and water I will not pass on. And notice already how food and water prices are rising. The pressure of more people on the globe seems unlikely to change this any time soon.So here’s the deal: investors should be looking at food and food inputs (like fertiliser, ag chemicals – note too that ag land has been increasing in price) stocks, and at water stocks (suppliers, desalinators).