The Era of Cheap Food, Energy and Credit at an End

Rob Mackrill - Thu 24 Apr, 2008

Eight years into the new millennium it feels like the end of an era. An era of cheap credit, cheap food and cheap energy

Eight years into a new millennium, it feels like the end of an era.

The end of the eras of cheap credit, cheap food and cheap energy. Will they be back? Even Pollyanna might swallow hard before giving the nod to that one.

On the credit front, banks around the world may have lost somewhere in the region of a $1trn between them, so something has to give. Namely loans to customers. Whether they be first time buyers trying to get a foot on the housing ladder, a business needing finance or some private equity house putting together a leveraged buyout. Subprime has blown a large hole in the banks, and that means credit rationing for customers.

On the subject of mishaps... The one-time claim of Swiss banking conservatism looks again to be a claim as hollow as their Emmental today as Credit Suisse revealed anything but credit. They notched up a first quarter loss after a $5.2bn write-down.

But fear not. Central banks are on the case. They’re cutting interest rates. The Fed has cut rates from 4.5% to 2.25% in double quick time and is expected to lop another quarter off next week. The Bank of England is trying to ease too, though in a much more sedate fashion as suits the Old Lady of Threadneedle Street, while she squints in alarm at the potential wrecking ball of food and energy inflation.

Who’d want to be a Monetary Policy Committee member today? For the past decade a tweak here a tweak there, some good lunches and plenty of kudos. Today, a full blown crisis on your leather-bound desk. Stuttering growth in the blue corner. Pugnacious ‘flation in the red corner. The MPC as referee looking for a fair fight according to its own Queensbury rules. The problem is you need to help your old fighter in the blue corner back on his feet, but that is only going to wind up the bruiser in the red corner. That help is principally interest rates. But if you keep cutting them while a loaf of bread is £1.20 and rising and a litre of petrol is £1.09 and rising - £1.12 is anticipated next month - then that escalates the risk of ‘flation going berserk and flattening all in sight.

But if you don’t cut rates to choke inflation you risk a ‘70s style housing crash, says Edmund Conway of The Telegraph. This dilemma is taxing the nine member MPC and has created an unusual split in their thinking. Last time around, the majority voted on a quarter point cut, one voted for a half point cut and two voted to keep on hold. The good news is Lombard Street Research note is that although food/fuel prices are on the march, this has not yet shown up in higher wage growth. To us, the key caveat there are the two words ‘not yet’. Today there’s a teachers strike today for the first time in 21 years as they bid for an inflation-proofed pay deal. Will more follow their example?

As for the era of cheap food, its return looks unlikely unless there’s a catastrophic reversal of the long-term economic and demographic growth trends in place. Or agricultural production revives once again confounds global warming and the Malthusians. China will one day boast a middle class whose numbers will equal the entire population of the US. Will they want to subsist on a bowl of rice a day? No. They’ll be wanting hamburgers, pizza, steak and sushi... or the cultural equivalent thereof. The rich world will just have to learn to share with the nouveau riche world and bid more for it. Food rationing in the east. Food rationing in the west. Mighty US retailer Walmart is limiting the purchase of rice, reports Bloomberg, and another US retail giant, Costco, is considering a similar move. Elsewhere, Irish Banana importer Fyffes reports higher import costs are accelerating fruit price inflation.

And then there’s cheap energy... Well, maybe one day we’ll be saved by science, but the quest for an alternative to finite hydrocarbons remains a live one. And until that day comes we’ll continue to be pay close attention to the oil price, now retreated to $117 from its recent relentless march up to $120 high. And on the idea mentioned recently of what price oil has to hit before people start giving up on the car, a reader writes...

“Oil at 200 bucks within the next five years? Quite probable, but down to 80-85 first as this spike runs out of steam. Overall when peak oil ( maximum daily supply exceeded by minimum daily demand - not the stuff in the ground ) hits us then the price will go as high as it can ($400) before the global transportation infrastructure grinds to a halt and with it the global economic infrastructure . Global warming just doesn’t stand a chance because we won’t see 2100 as a civilised planet.”

*** An item of business news catches the eye this morning...

Britain ’s largest housebuilder, Persimmon plc. reports sales have slipped by 24% this year and warns it faces the worst mortgage market since the ‘70s. News that has had investors running for cover and sent the shares more than 8% lower together with the broader market, down more than 100 points. But what did they expect? If you can’t get a mortgage how can you buy a house even if you’re brave enough to want to. The sector is facing a “triple witching” says Merrill Lynch:

"Worryingly, it is clear that the UK housebuilders are entering a new and potentially volatile period characterised by significantly constrained mortgage availability, buyers deferring purchases in anticipation of price falls, and, most recently, their growing concerns about employment security."

Finally, a chart tracing the decline of an ancient habit quite possibly making a comeback. It’s called saving for a rainy day...

Though it’s possible the data might be missing something. One in ten prefer to stash cash under the mattress, according to the latest findings from the Newcastle Building Society.

Regards,

Rob Mackrill
The Daily Reckoning