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:
“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.
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.