Paul Dietrich's Global Investing Trends Report

Long-term Investment Trends: Higher Inflation – Higher Food Prices

Posted April 26, 2011 · 13 Comments

 

 

WHY ARE FOOD PRICES CONTINUING TO SKYROCKET HIGHER?

On April 15th, the U.S. Bureau of Labor Statistics (BLS) released the latest U.S. Government report on inflation as of March 2011. Each month the BLS calculates the Consumer Price Index (CPI) and the Core Inflation Index, which is how the government measures inflation.

Unfortunately, since the early 1980’s the U.S. government has made several changes in the way they calculate inflation. The end result of these changes has been that each calculation change has resulted in the reported inflation rate being lower than the real rate of inflation.

THE CURRENT “REAL” INFLATION RATE IS NOW 10.2%!

From 1903 to 1980 the BLS used one method of calculating inflation. A company, SHADOWSTATS.COM, takes the monthly raw inflation data as reported by the BLS and they calculate the cur-rent rate of inflation using the old pre-1980 BLS method of calculation.

As of the April 15, 2011 data release, the current “real rate of inflation using the pre-1980 calculation” is 10.2%. We now have double-digit inflation!

While the new official calculation shows we only have 2.7% inflation, that rate does not include food or gas and energy prices. It also includes a 42% calculation for housing and home rental prices that are about the only two things in America that are declining in value.

Below is a graph showing how the current CPI calculation started to diverge in the early 1980’s from the old pre-1980 inflation calculation.

Source: www.ShadowStats.com

 

 

WHAT IS CAUSING FOOD PRICES TO INCREASE?

For thirty years, food has been decreasing as a percentage of family expenditures. Unfortunately, that trend is over. From now on, most analysts predict that each family’s overall expenditures for food are going to dramatically increase over the next few decades.

In case you haven't noticed, the world is potentially on the verge of a horrific global food crisis. At some point, this crisis could affect you and your family.

In a report by economics writer, Michael T. Snyder1, he gives the following reasons why food prices will continue to rise for years.

“Crazy weather and horrifying natural disasters have played havoc with agricultural production in many areas of the globe over the past couple of years. Meanwhile, the price of oil has begun to skyrocket. The entire global economy is predicated on the ability to use massive amounts of inexpensive oil to cheaply produce food and other goods and transport them over vast distances. Without cheap oil, the whole game changes.

Most Americans are so accustomed to supermarkets that are absolutely packed to the gills with massive amounts of really inexpensive food that they cannot even imagine that life could be any other way. Unfortunately, that era is ending.

There are all kinds of indications that we are now entering a time when there will not be nearly enough food for everyone in the world. As competition for food supplies increases, food prices are going to go up. In fact, at some point they are going to go way up.

 

The following are 19 signs that a horrific global food crisis is coming.

1. According to the World Bank, 44 million people around the globe have been pushed into extreme poverty since last June because of rising food prices.

2. The world is losing topsoil at an astounding rate. In fact, according to Lester Brown, "one third of the world's cropland is losing topsoil faster than new soil is forming through natural processes".

3. Due to U.S. ethanol subsidies, almost a third of all corn grown in the United States is now used for fuel. This is putting a lot of stress on the price of corn.

4. Due to a lack of water, some countries in the Middle East find themselves forced to almost totally rely on other nations for basic food staples. For example, it is being projected that there will be no more wheat production in Saudi Arabia by the year 2012.

5. Water tables all over the globe are being depleted at an alarming rate due to "over-pumping". According to the World Bank, there are 130 million people in China and 175 million people in India that are being fed with grain with water that is being pumped out of aquifers faster than it can be replaced. So what happens once all of that water is gone?

6. In the United States, the systemic depletion of the Ogallala Aquifer could eventually turn "America's Breadbasket" back into the "Dust Bowl".

7. Diseases such as UG99 wheat rust are wiping out increasingly large segments of the world’s food supply.

8. The tsunami and subsequent nuclear crisis in Japan have rendered vast agricultural areas in that nation unusable. In fact, there are many that believe that eventually a significant portion of northern Japan will be considered to be uninhabitable.

9. The price of oil may be the biggest factor on this list. The way that we produce our food is very heavily dependent on oil. The way that we transport our food is very heavily de-pendent on oil. When you have skyrocketing oil prices, our entire food production system becomes much more expensive. If the price of oil continues to stay high, we are going to see much higher food prices and some forms of food production will no longer make economic sense at all.

10. At some point the world could experience a very serious fertilizer shortage. According to scientists with the Global Phosphorus Research Initiative, the world is not going to have enough phosphorous to meet agricultural demand in just 30 to 40 years.

11. Food inflation is already devastating many economies around the globe. For example, India is dealing with an annual food inflation rate of 18 percent.

12. According to the United Nations, the global price of food reached a new all-time high in February.

13. According to the World Bank, the global price of food has risen 36% over the past 12 months.

14. The commodity price of wheat has approximately doubled since last summer.

15. The commodity price of corn has also about doubled since last summer.

16. The commodity price of soybeans is up about 50% since last June.

17. The commodity price of orange juice has doubled since 2009.

18. There are about 3 billion people around the globe that live on the equivalent of 2 dollars a day or less and the world was already on the verge of economic disaster before this year even began.

19. 2011 has already been one of the craziest years since World War II. Revolutions have swept across the Middle East, the United States has gotten involved in the civil war in Libya, Europe is on the verge of a financial meltdown and the U.S. dollar is dying. None of this is good news for global food production.”

 

 

WHAT WILL POTENTIALLY BE THE BEST HEDGE AGAINST INFLATION & RISING FOOD PRICES?

After studying the various methods investors used to successfully protect the buying power of their investments from 1978 to 1981, a period of hyper-inflation, I continue to believe the only way that investors could be able to protect the buying power of their portfolios will be with a broad basket of actual commodities, like gold and silver and also by investing in commodity producers like oil and mining companies.

NOW THAT INFLATION IS 10.2% USING THE OLD U.S. GOVERNMENT CALCULATION, HOW CAN I PROTECT THE PURCHASING POWER OF MY INVESTMENTS?

The preliminary results of a yet-to-be-completed study we are conducting at FOXHALL CAPITAL, seems to indicate that one might partially protect the loss of purchasing power, created by double-digit inflation, by investing about 20% of your total investments in commodities and commodity producers like oil and mining companies, if inflation is running about 10%.

This is something serious that every investor, financial planner and investment manager should be talking about.

We are now entering into a new investment environment where cash and fixed return U.S. government bonds have not been the best investments to keep up with inflation.

Investors should start planning today a new investment strategy for their portfolios that could potentially maintain the purchasing power of their investments now that inflation is reaching double-digits using the old inflation calculation.

THIS MAY BE THE MOST IMPORTANT ISSUE FACING INVESTORS TODAY, because even with what I believe is a real inflation rate of 10.2%, I think investors need to start adjusting their total investment portfolio to begin hedging against this inflation and loss of buying power.

At FOXHALL CAPITAL we are thinking through all of these issues to try and help our clients minimize any significant loss of their buying power in their portfolios due to future inflation.

WHAT CAN AN INVESTOR DO RIGHT NOW?

Currently, every FOXHALL CAPITAL equity ETF portfolio has at least 10% of the portfolio invested in commodities or commodity producers.

FOXHALL CAPITAL also manages a pure hard asset commodity strategy called the FOXHALL GLOBAL COMMODITIES & HARD ASSET STRATEGY. This investment strategy is completely invested in physical commodity ETFs and commodity producer ETFs.

I believe financial planners and investors should take a look at an investor’s “total investments,” whether they are cash, bonds, real estate, etc. and after calculating the total value of all these investments, they then should think about adjusting the value of their total portfolio and consider investing at least 2 times the real inflation rate (10.2% right now) in hard asset commodities, like the FOXHALL GLOBAL COMMODITIES &HARD ASSET STRATEGY.

Also, most investors have a significant percentage of their total investments in U.S. government bonds or money market funds or bank CDs. In an inflationary environment these investments have historically lagged behind inflation.

I believe investors should begin to reallocate some of these cash and cash equivalent investments to a broad basket of commodities and commodity producers.

Now that inflation seems to rise every month, I intend to report at least quarterly the current real inflation rate using the government’s pre-1980 calculation that INCLUDES FOOD AND ENERGY PRICES. As the inflation rate rises, I will give my advice as to what percentage of an investor’s total portfolio should be invested in commodities to keep up with any in-crease in inflation.

Every economist knows that inflation changes all the normal rules of investing. We are now entering into a new investment climate.

Many investors, financial planners and investment managers are going to completely miss this newly changing investment environment. They will say, look at the new “official” government inflation figures, we have very little inflation—even though you KNOW THERE IS INFLATION every time you go to the grocery store or buy clothes or fill up your car with gas. YOU INTUITIVELY KNOW THE GOVERNMENT IS UNDER-REPORTING IN-FLATION!

My advice to you is to talk to your financial planner today and give him a copy of this GLOBAL OUTLOOK and ask him or her what their strategy is for trying to protect your in-vestments against the loss of purchasing power from inflation.

Until next time…

—Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053

_______________________________

1“20 Reasons To Be Prepared For A Global Food Crisis” by Michael T. Snyder. Seeking Alpha. April 19, 2011.

Disclosures: The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of future performance.

Foxhall Capital Management, Inc. is a registered investment adviser with the U.S. Securities and Ex-change Commission (SEC) under the Investment Advisers Act of 1940. The firm is defined as the Foxhall Capital Global ETF, 401(k) and Stock Series divisions, which manage a variety of ETF, 401(k) and Stock strategies in bundled fee and non-bundled fee ac-counts for primarily U.S. clients. The firm was redefined as of 12/1/08 due to the creation of the 401(k) Series division. A complete list and description of all firm composites and their com-pliant presentations are available upon request.

Effective January 1, 2011 the Global Hard Assets Strategy was renamed the Global Commodities & Hard Assets Strategy, and the GHA Blended Benchmark was renamed the GCHA Blended Benchmark. Please note the composites of the benchmarks did not change.

Foxhall Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®). Foxhall Capital Management has been GIPS verified for the periods 12/31/99 – 12/31/08 by Beacon Verification Services. The ETF Series composites have received a performance examination for the period since inception through December 31, 2008. A copy of the verification report is available upon request.

 

 

 


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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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