Tuesday, March 04, 2008


People around the world are feeling the squeeze of higher food and energy prices. The short term and largely phony financial numbers make the situation look worse than it is but, that said, the squeeze is real and it is being felt. BCA Financial reports that US consumers are now paying 56% of disposable income for "necessities"; food, energy, medical and financial payments. With the poorest countries of the world growing the fastest, Moises Naim, Foreign Policy Magazine, has asked the question, "Can we afford a middle class?"

The irony is that great prosperity is causing the angst this time around. In the "old days", Thomas Malthus had good data to support the concept that the world would periodically suffer very large food crunches in which millions of people would starve during the worst of times. Today, there are only a few areas left in the world which are in a constant battle to grow enough food. The problem today, a growing middle class which has pushed up the price of food for everyone. Moises offers the following statistical summary: the total world population has grown by about 1 billion people over the past 12 years, during that same 12 years the size of the "middle class" has grown by 1.8 Billion people. Since the middle class consumes several times as much production as do the poor, the demand for food and other goods has exploded.

Poor people eat lots of grains. Middle class people feed much more grain to animals and then they consume meat. It takes about 8 pounds of grain to produce one pound of beef. Meat consumption on the planet has doubled in the past 20 years. The production of grain required to produce that meat has also doubled. Recently, we enjoyed saying, "So What? we now produce crops far more efficiently". Eight times the amount of rice is grown per acre than what was grown just a few years ago! The more recent problem is that countries around the world have been led by "group think" and misguided "junk science" to practice silly strategies such as using food supplies as fuel for vehicles. Group think causes us to leave oil in the ground while feeding our cars corn oil.

The good news is that even the most brain washed people eventually "wake up to reality". Paul Krugman just wrote in the NY Times that ethanol is "bad for the economy, bad for consumers and bad for the planet". I have forgotten the persons name, but one of the leading proponents of ethanol some years ago, is now a member of the "Clean and Safe Organization" that is promoting the renaissance of nuclear power. There are now 30 nuclear plants on USA drawing boards. Nuclear power plants produce very little greenhouse gases and the power can be used as a substitute for oil, leaving our corn and soy beans as food.

Based on the numerous announcements of auto companies around the world, the type of auto that is going to see an explosion of growth is the electric and the electric hybrid. Even many of the new hybrids will be plug-in models. At the same time, the pace of construction of coal and nuclear power plants is ready to kick into third gear. The beauty of the plug-in hybrids is that they are part of the "off-peak" or "load shaving" system. Once started, it makes sense to run coal and nuclear plants 24/7. Thus, the cost of electricity at night is very cheap and very expensive at peak hours. By charging car batteries at night and by leaving them plugged into the grid during the day, infrequently used cars could actually earn an income as a "power shaving device". It might even make sense for hybrid engines to be run at peak power times just to supply energy to the grid.

The competition for alternative energy solutions is moving forward quickly. All the competing solutions will help expose the silliness of using food products as fuel. The food squeeze is on but it will not last. The worst is upon us because the past couple of years of tighter interest rates has done its intended job to slow production. Since inflation is a measure of money chasing goods, the slow down of goods leads to a "J Curve" effect where inflation is high in the short run.


Russia has once again asked Iran to comply with UN resolutions. Iran is stubbornly resisting but the weight of the world is getting to heavy, Iran is feeling the squeeze. Turning Iran away from the sponsorship of terror is going to be an important time in history. The various terror groups spread out around the world will wither away on the vine after the roots of this terror sponsor are pulled up.


To each action there is an equal and opposite reaction. The pressure being put on the markets today will result in a recoil reaction in the near future. Get ready! Get Set! Go!