The IMF has a report out supporting the predictability of my food riot/revolution index. It seems the rocket scientists there equate a 10% increase in global food prices, to a 100% increase in antigovernment protests. That makes sense. They add an important consideration concerning the US and other developed countries that addresses the large and growing third world population within those nations. In this case the bottom quartile spend 35% of their income on food. With 45 million in the US on food stamps I’d say that data is now understated and dated.
Source: Bank of Japan
If we look at the increase on foodstuff commodities since last November of 25% and up 45% since last year, there is little wonder increasing parts of the planet are unstable and troubled. Per IMF, this would equate to a tripling of the increase in protests, riots, revolutions and civil wars. In spirit that seems to be precisely what has happened! With the index near breaking out once again to new highs, we may be soon looking to add another 50-100% factor (from another 5-10% food price increase) to the already sky high riot and revolution indicator. In effect we go from a 8 magnitude earthquake up to a 9, and set the stage for a long, hot summer.
The Bank of Japan is out with a report examining the financialization of commodities. The amounts involved go far beyond normal economic demand considerations and that is a key distinction to make here. I thought 2008 was bad enough, but today the open interest in futures markets in the US markets exceeds the 2008 CUB (crack up boom). In global markets exposure far exceeds 2008. The net position of commodity index investors/speculators far exceeds 2008. With endless commodity account commercials and talking head commentary on busimerical TV and radio, the whole world looks all in and rather fearless on this central bank hyped-crowded-get-rich- quick trade. You can’t turn on one of these networks without some “expert” droning on about materials and commodities.
Source: Bank of Japan
Perhaps showing a bit of concern about the monster they helped create, the Fed rolled out so called moderates Lacker and Kocherlakota Thursday with more “talk” about the need to review the QE2 fuel being thrown on the fire, and perhaps take it off the table early or defer it. The market, and especially the commodity sector totally ignored this in the last half hour of trading and in overnight trading. After the news broke, CNBC ran another (“I am going to trade the world.”) commodity trading account commercial .
This illustrates the problem with this feeble talk loudly and wield a soft stick Pinocchio grow-your-nose gambit by the Fed. There is a universal belief is that they don’t have any inflation fighting credibility and use incredulous dog-ate-the-homework excuses like “global demand” and “weather” to explain the carnage. Then when they fail to follow up with real decisive action this just adds to the relentless crack up bid. In fact given this psychology, should the central banks now act to counter this, especially given the historical volatility of commodities, a large pool of investor and financial institutions could face a large scale liquidation and resulting turmoil from their large exposures.