Charts of the Month - February '22

Food Prices

Lost in the events of the Russian invasion of Ukraine has been last year's most heated topic: inflation.

But likely, not for long.

Over the past few weeks, Jacob has been discussing some of the knock-on effects of the invasion in the commodities markets, and for good reason. Russia is the world’s largest supplier of natural gas, and as we’ve discussed extensively before, natural gas is a necessary commodity used to create ammonia, a key input of fertilizer. Without fertilizer, the modern farming complex does not grow enough food. Hard stop.

Add to this the fact that Russia is the world's largest exporter of wheat, while Ukraine is the fifth largest, and we start to understand how this invasion could very easily add to the food pricing pain already felt around the world.

In January of this year, the FAO Food Price Index (a measure of the change in international prices of a basket of food commodities) reached an all-time high before the invasion, and with the price of natural gas back to uncomfortably high levels, we’re likely going to have to get back into the inflation conversation sooner than later.

Speaking of Natural Gas...

This is a push for the complete de-stigmatization of natural gas.

Earlier this year there was a seismic shift in the energy world that not enough people are talking about: aided by heavy French lobbying, the European Union added nuclear to its accepted definition of renewable rnergy.

A huge “bureaucratic” step forward for sure, but it’s not going to be enough.

Yes, by definition, natural gas is a fossil fuel, and burning gas still emits carbon into the atmosphere, but at half the rate of traditional coal-fired utility-scale plants, and given the ease of conversation from coal to gas-fired power production, it’s time we start thinking about natural gas as a far less evil transition fuel that allows for a scenario where policy-induced global energy crisis’ don’t have to become the norm.

Between 2011 and 2019, 103 coal-fired plants were converted to, or replaced by, natural gas-fired plants. This should be applauded, to the highest extent possible.

Instead of simply shutting down coal plants (28% set to be shut down by 2030 in the US), maybe we continue to convert to gas, giving policymakers some additional time to ‘see the light’ and throw their support behind sources that actually make science-based sense (nuclear and hydrogen come to mind), to allow renewables the time needed to meet their promise.

These middle-of-the-road non-extremist views get little traction (which, for a newsletter business isn’t ideal), but hey, someone’s gotta do it.

A few more thoughts on inflation…

“Inflation is always and everywhere a monetary phenomenon… unless it’s a supply chain disruption induced clusterfuck” – Milton Friedman, had he lived through COVID

December 2008 & March 2020 - these two dates mark the CPI lows of their respective post-crisis periods (GFC and COVID).

It’s now been 20 months since the March 2020 low, so we wanted to look at what CPI level (remember, CPI % change gets the headline, but its level that hurts) did in the 20 months after the 2008 low and subsequent 20-month intervals thereafter.

You’d think, given the outsized influence that credit impulses have on the markets and economy, that from the 2008 level, CPI would have grown somewhat more significantly than 2020 with the eye-watering growth in the Fed balance sheet.

Let this not be overlooked - the GFC era saw significantly more credit injected into the economy from a rate of change perspective than did the COVID era injection.

Yes, there was more fiscal stimulus this time around, but TARP was still $800 billion, and the Fed balance sheet this time around was used to finance this crisis’ fiscal stimulus, so the balance sheet growth is quasi-fiscal stimulus.