It has been evident for the past three years that the central banks are the backstop to prevent a global debt deflation because of wildly excessive sovereign debt levels. As a result, we have witnessed a massive expansion of balance sheets (money printing) of the four major central banks . The ECB is right in there in the big leagues of asset expansion, having taken ECB assets from 16 to 32% of GDP over the past 4 years. It is now planning further expansion to an extent as yet unknown.
In our recent Special Report, A “Two Euro Solution” to a Terminal Illness, we argued that France straddled the divide between the over-spending and over-borrowing periphery and the more disciplined core of the eurozone.
In this special report we summarize the recently released annual report of the Bank for International Settlements (BIS)1 which contains some important warnings. We also reproduce the recent and highly significant speech of Mario Draghi, President of the European Central Bank (ECB).
The problems of the euro have been eloquently re-hashed by the press, market letters, economists, policymakers and politicians. All kinds of suggestions, both good and bad, have been offered. At the end of the day, it seems obvious that the problems of the eurozone are intractable and the disease is terminal.
Price inflation has softened recently in a number of countries. Headline price inflation in the U.S. has slipped from 4% p.a. to a little under 3%, in the eurozone from 3% to 2.7% and in the UK from over 5% to 3.4%. China’s non-food and producer price changes have actually moved into negative territory.
Virtually all developed countries need to deleverage. However, the distribution of debt between sectors varies widely among different countries. For example, Japan has a government debt problem, but private non-financial sector debt is fairly modest. The reverse is true for Canada.
Fracking and horizontal drilling have unlocked access to vast reserves of gas, oil and associated liquids, most notably in North America. This could represent a sudden and profound transformation of energy markets, the implications of which are only beginning to be understood. There are three primary issues:
The 1945-2007 period was wonderful in almost every way, particularly for investors and it was common to assume that this was “normal”. However, it was anything but in historical terms for many reasons. One of the most important reasons is that over most of those 62 years, there was a debt-fuelled artificial growth in incomes and particularly wealth in the form of housing and equity asset inflation.
A Look at Canada, China and Japan
The U.S. subprime mortgage crisis of 2007-2009 has morphed into a full-scale global banking and sovereign debt crisis. No one knows how far the shock waves will travel because it is widely perceived that many countries no longer have the resources to backstop their undercapitalized banks. Political paralysis in Europe continues to feed the accelerating decline in confidence. Money continues to flee Europe, driven by weakening economies, very high unemployment and the lack of adjustment of economic imbalances.
In this letter, we take a step back from the global financial crisis to examine various agricultural investment themes: futures, equities, managed funds, ETFs and farmland. Agricultural investments have become a hot sector in recent years due to a combination of rising food prices and the perception of stability and inflation protection provided by this asset class.