The misery really is piling up out there, with the papers now full of predictions of recessions, slowdowns and housing slumps.
Don’t get me wrong – I still think that in many ways the papers are still too upbeat. The Independent finally grasped the nettle at the weekend and pointed out that the UK looks like it might be headed for recession, but it’s still a minority forecast.
But anyway, it’s undoubtedly grim out there, which makes it hard to know what to invest in. However, there is one asset class that still looks like a good buy – and it’s also the one that’s causing the central banks of the world the most heartache at the moment.
It is, of course, food, glorious food…
While this may be a tougher year for base metals in particular (see this week’s MoneyWeek for more on this topic), food price inflation is here to stay. The head of Pepsi, Indra Nooyi, tells The Times this morning that she believes that “structural inflation for food” will last for at least another two to three years.
There’s the whole Asian demand story on the one hand – where middle class Asians are trading up for more protein-rich diets. On the other, we’ve got the USA’s misguided (and vote-chasing) support for ethanol as a biofuel gobbling up corn stocks in the country.
What the water shortage means for soft commodities
There’s also another, rather neglected aspect of the soft commodities story – water. We’ve written about the global water shortage before (see here: Why water is blue gold) but something that’s – oddly enough – rarely noted is that water is, of course, absolutely crucial for growing food. Around 70% of water is used for food and textile production. So if we’ve got a water crisis brewing (as Klaus Schwab of the World Economic Forum and Peter Brabeck-Letmathe of Nestle assert in this morning’s Telegragh), you can forget about expanding the global food supply to any significant extent.
That all means that the current bull market in soft commodities is set to continue. And one asset already benefiting is farmland – Russian farmland in particular. As The Times puts it in this morning’s paper, the oligarchs forgot something when they divided up the country’s assets between them at the end of the Cold War – “the soil of Mother Russia”.
Now enterprising foreign investors are snapping up vast swathes of land in Russia, which is still lying fallow, at bargain prices. Richard Willows, of Heartland Farms Penza, tells Carl Mortishead in The Times that “the land and the labour is a tenth of what it costs in Europe but the price of wheat is the same.”
That’s the sort of statistic that gets investors excited – and the good news is that there is a way for retail investors to buy into Russian farmland. A month or so ago, my colleague Eoin Gleeson wrote a piece in MoneyWeek on how to invest in the sector. Subscribers can read the feature here: Cash in on Russia’s bargain farmland
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Northern Rock: robbing Peter to pay… well, Peter
The Government has learned the lessons of the subprime crisis rather well. Sadly, what it’s been learning about is financial tomfoolery and off-balance-sheet borrowing, rather than the eventual impact of indulging in it. I’m talking about this great idea to pay off the money loaned to Northern Rock by issuing Government-backed bonds to investors.
So let’s just get this straight. The Government loaned £25bn of taxpayers’ money to Northern Rock. It’s now going to pay this money back to the taxpayers by issuing £25bn of bonds. Which are guaranteed by the Government – and therefore the taxpayer.
Of course, the benefit to the Government is that the issue is kicked a bit further off into the grass. But the fact remains that the taxpayer is still on the hook for a bank whose biggest business was mortgage lending, just as we head into what could easily be the biggest housing slump the UK has seen in generations.
That’s another fine piece of prudent economic management by Mr Brown and his glove-puppet Chancellor.
Turning to the wider markets…
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Mining rally props up the Footsie
In London, the FTSE 100 index closed almost flat, ending the day at 5,901, as miners rallied somewhat from their recent losing streak. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 fell 67 points, to close at 5,092. And the Frankfurt DAX-30 was down 99 points, at 7,314.
Across the Atlantic, stocks registered a fourth consecutive day of falls, despite US government plans to boost the economy with tax rebates. The Dow Jones fell 59 points to end the day at 12,099, a weekly loss of 4%. The tech-rich Nasdaq was off 6 points, at 2,340. And the S&P 500 was also down, shedding 8 points to close at 1,325.
Asian stocks hammered as markets wake up to recession
In Asia, fears that a US recession will hurt global growth saw Japan’s Nikkei 225 dive 535 points to close at 13,325. In Hong Kong, the Hang Seng suffered its biggest fall since September 11th 2001, dropping 5.5% to 23,818.
Slowdown fears also hit oil prices – crude oil futures had fallen below $90 in New York this morning and Brent spot was at $88.50 in London.
Spot gold was trading at around $875 an ounce, while silver was just below $16.
In the currency markets, the pound was last trading at 1.9511 against the dollar and 1.3462 against the euro. And the dollar was at 0.6902 against the euro and 106.18 against the Japanese yen.
And in London this morning, builders merchant group Wolseley reported that trading profit ws down 25% in the five months to December 31st, as its US unit continues to suffer as housebuilding activity dries up. Meanwhile, Rightmove reported that asking prices for homes in the UK fell for the third month in a row this month, reducing annual asking price inflation to 3.4%.
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