Consumer confidence rises in January; Global food inflation concerns mounting

Consumer confidence rises in January

The Conference Board released its January consumer confidence reading yesterday.  The index rose 7.1 points to sit at 88.1, still well below the pre-recession average of +-100, but still much better than would be expected.

The survey questions revealed a bit of a mixed bag:

  • The percentage of respondents who said that their financial situation had improved over the past six months declined to by 0.2% to 17.5%.
  • The share of respondents who answered that their family’s financial situation had worsened delined by 1.8%.
  • The percent of respondents who believed that their financial situation would improve over the next six months rose to 28.1%, an increase of 3.3%.
  • Those expecting more jobs in their communities rose to 21.3% while those expecting less declined to 15.8%.

However, the largest driver of the jump in the index was the major purchase question.  Consumers were asked whether now was a good time to make a major purchase like a home or a car.  After declining steadily for 7 consecutive months, the percentage of respondents answering ‘yes’ rose 5.5% to 44%.  In discussing this unexpected jump, the Conference Board had this to say:

“Whether this sudden improvement on the major purchases question can be sustained remains to be seen.  But, coupled with the increasing optimism about future employment opportunities, it does suggest healthy consumer consumption going forward.”

This bodes well for consumer spending over the short term.  I would question the ability of the confidence index to repeat this bounce in the coming months as the new mortgage rules will remove credit from the system and begin to weigh on real estate and associated sentiment.  Nevertheless, it was an unexpected bounce and suggests that we should see some stronger than expected retail sales in the short term, which is a positive for the overall economy.

Global food inflation concerns mounting

The nightmare scenario for the Western world would be commodity inflation at a time of strong credit deflation.  I’ve discussed this apparent paradox of rising commodity prices amid broad monetary deflation several times before.  The bottom line is that since commodities are traded on international markets, prices can be impacted by strong demand in another part of the world.  The fact that we will see credit-induced deflation here in Canada and the US does not necessarily guarantee that commodities will follow the same trajectory as credit-dependent assets (i.e. real estate) priced in our currency.

We all need food.  But we don’t all need a lot of the other consumer products we purchase.  This means that a rise in food prices hits like a ton of bricks, but a rise in some other commodities has a delayed impact on consumers, but hits manufacturers hard.

As an example, consider that despite rising input costs, the final producer price index has been largely flat in both Canada and the US.  This suggests that many companies are having a difficult time passing on the rising input costs to consumers.  In a period of strengthening deflation, profit margins would be significantly squeezed resulting in much lower business profitability and a significant possibility of rising unemployment as manufacturing businesses would be increasingly unprofitable.

It’s all a significant concern.  For now, let’s focus on the food price inflation occurring in different parts of the world and which has the potential to significantly affect us:

Global inflation fears reach new heights

“Surging inflation in emerging markets, if unchecked, threatens to undermine the global recovery because it would curb growth in those regions, which have driven the global rebound. Countries that export key natural resources, such as Canada and Australia, could be hit hard by shrinking demand if the Chinese juggernaut slows.

Inflationary pressure could also force a hike in interest rates in industrial regions, such as Europe, where the economies are still struggling to climb back from the recession.

Food prices hit a record level last month, according to United Nations statistics, and are forecast to grow by more than 30 per cent this year. In a worst-case situation of critical shortages sketched by Citigroup Inc. analysts, prices could skyrocket by as much as 75 per cent.”

Rapidly rising food prices and social unrest go hand in hand.

Hopefully David Rosenberg’s view turns out to be correct:

“From my lens, any inflation we’re going to see could be a scare,” said David Rosenberg, chief economist with Toronto-based investment firm Gluskin Sheff + Associates. “I just don’t think it’s going to be sustained, any more than it was in 2008.”  At the time, oil soared to $140 (U.S.) and corn prices hit $8 a bushel.

With the Commitment of Traders reports still showing major speculative long positions in many commodities, one must wonder how much of the food price inflation is being driven by increasing demand and a rising global monetary base, and how much is being driven by the speculation of future inflation which proves to be a self-fulfilling prophecy in the short term. 

As one final read on the topic, check out this ZeroHedge article.

Russia Imposes Inflation-Driven Price Controls: Will Use Price Caps On “Socially Important” Commodities

Price controls always prove to be excellent teachers of the law of unintended consequences.  As the article notes,

“Russia does realize just how futile this task of price controls is: “as soon as we introduce price controls, once a deficit, the product disappears from the market, followed by an even higher rise in prices on the shadow, not covered by official supervision, market.” And so a vicious circle in which high prices beget even higher prices begins.”

As Canadians looking to profit or protect from rising food prices, consider investing in the agri-business.  There are several ETFs that allow exposure to the sector.  Investing in commodity futures via an exchange traded product might also be worthwhile.  Also, fertilizer companies and those directly involved in the grain business could be good buys.  Be aware that those sectors are all near their 52 week highs.  There has been a substantial inflow of funds into these stocks and ETFs.  You’ll have to do some homework to find companies that still represent some value.

Conversely, a broad market ETF that tracks the TSX will give you exposure to roughly 50% energy and materials, both of which are very responsive to rising inflation.

Cheers

Ben

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2 Responses to Consumer confidence rises in January; Global food inflation concerns mounting

  1. Dmitri says:

    I fail to see how the trillions in reserves will find their way into the general economy.
    Can anyone describe the mechanics of this ?

    FED can’t inject cash directly (only Congress can do this) and banks are insolvent. So who is going to lend the money and who is going to borrow it ?

  2. Lumpen says:

    Commodity ETFs have their place, but if you’re thinking about owning them, it’s important to understand how they’re built, and how they roll their positions. They will almost always underperform their benchmarks by a huge margin in a buy-and-hold account over a long period. Just take a look at WTI front month vs. USO, or same vs. UNG. The Agriculture ETFs like DBA also suffer from this. Just because corn / soy / etc. double, don’t expect the ETF to do so. I own some DBA, simply because it’s hard to get direct price exposure, but for energy, I’d much rather own the E&P equities.

    See for yourself – click on chart and add USO. It trails the front month future (the price everyone hears about on the news, etc.) by 15 points in the last year – USO is flat while crude is up 15%. Do the same for NG, etc.

    http://www.theglobeandmail.com/globe-investor/markets/indexes/chart/?q=CL-FT

    Also, I’m not certain it’s so clear-cut that Cdn equities will perform well in a high-inflation environment. They did quite poorly in the 70s. More recently, note the poor performance of the large-cap gold miners vs. the actual metal – say over five years. Commodity price increases don’t always translate well to the equities. (AbX, NEM, etc.)

    http://www.tradingeconomics.com/Economics/Stock-Market.aspx?Symbol=CAD

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