Them belly full, but we hungry;
A hungry mob is a angry mob.
A hungry mob is a angry mob.
Watch here: BOB MARLEY 'THEM BELLY FULL"
As I review January's returns, while watching the events unfold in Egypt, it becomes very clear just how interrelated the markets and geopolitical events are. In January the S&P 500 was up a very respectable 2.32%, but that paled in comparison to how some individual agricultural commodities performed; corn up 7.76%, wheat up 5.63%, rice up 10.08%, hogs up 10.16%, sugar up 5.64%, orange juice up 3.33%, and cotton up 17.08%...all this in just one month! The commodity ETFs we own, DBC, MOO, & CRBQ, were up 3.56%, 3.03%, & 2.40% respectively. Not a bad way to start the new year.
The UN's food price index has just hit an all-time high, but of course Ben Bernanke and the BLS (Bureau of Labor Statistics) continue to tell us there is no such thing as inflation. Soaring food prices impact the poor much more than they do the rich. The spark that ignited the Tunisia revolt was a college educated street vendor setting himself on fire as a protest after being harassed by police for selling vegetables without a permit. While many Egyptians talk about freedom, the real story is food. Nearly 20% (18 million) of Egypt's population lives on less than $2 per day. In fact, the World Bank estimates that over a third of the worlds population lives on less than $2 per day. These are stunning numbers.
The reasons for this inflation are many. Some believe that Ben Bernanke's easy money ways are creating inflationary spikes. Some believe that China's emergence as a global consumer is causing shortages in all commodities. And some believe that our agricultural output has simply not kept up with global population growth. In reality, all of these are factors.
Cost of livin' gets so high,
Rich and poor they start to cry:
Now the weak must get strong;
Rich and poor they start to cry:
Now the weak must get strong;
While revolutions were spreading, the top 0.1% of the worlds wealthy met at the snowy mountaintop of Davos, Switzerland. Here they congratulated each other over not only surviving the financial crisis, but actually prospering. Certainly there were many well-meaning meetings (with Bono) at Davos, where they talked about feeding the worlds poor, and keeping unrest from spreading. The solution for keeping unrest from spreading is simple, pacify the poor. Wealthy countries can pacify the poor by subsidizing their food. An extreme example is Kuwait, who just announced that they will give every citizen $3,500 and free food for a year, if they keep calm. I would expect similar bribes to take place in Saudi Arabia. This is not all that far removed from dropping money from helicopters, or infinitely extendable unemployment insurance. The leaders of the worlds wealthy countries will do whatever they have to to keep their poor calm and stay in power. Poorer countries like Egypt, or Pakistan don't have that luxury.
As a human, this global hunger and unrest is very troubling. But as an investor just trying to protect and grow my humble savings, I am compelled to look for ways to prosper. It really comes back to diversifying our risks. If food and energy inflation are a risk, then you need to find ways to protect yourself. If the devaluation of your currency is a risk (that's what inflation is), then you need to find ways of protecting yourself. Just as Bob Marley says, "Now the weak must get strong," those weak portions of your portfolio need to be strong. These types of global events are why we have a 10% allocation to commodities, and a 10% allocation to gold.
Where we stand today:
1) Cheap Money = Speculation - The Fed's zero rate policy and quantitative easing have clearly increased investors risk appetite. This was reflected in equities significantly outperforming bonds in January.
2) Inflation is the Fed's Destination - The Fed is hoping that all of this excess liquidity finds its way into capital spending and job creation, and it appears that some of that is happening. The problem arises in the fact that they can't control where that liquidity ultimately flows, or where the jobs may be created. Unintended consequences (like a revolution in Egypt) are one of the nasty side-effects of a loose monetary policy. This is resulting in inflation (sometimes rather dramatic) in consumable resources (sugar, cotton, rice, oil, etc).
US Equities --
Bullish, stocks are showing no signs of weakening yet.
Int'l Equities --
Bullish, both emerging markets, and developed markets.
US REITs --
Bullish, but showing some signs of tiredness.
Int'l REITs --
Bullish, but nearing neutral.
Gold -- Bullish, but moving towards neutral with recent sell-off.
Commodities --
Bullish, but overbought.
US Fixed Income -- Bearish, minimal weight in US fixed income but neutral in TIPS.
Int'l Fixed Income -- Neutral, after a recent rally.
Cash Equivalents & Currencies -- Currently at 13%, divided between US, China, Australia, and Brazil.
The government assisted rally in equity markets and commodities may continue, but I wouldn't be at all surprised to see a noticeable pullback over the next several weeks that may knock us down to neutral exposures in those markets.
Be careful out there, and keep the light's on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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