More Kindling

Macro Perspectives: Fri 25 Mar 22

Yesterday we talked about the prospects of a gas subsidy. On cue, the governor of California presented ideas late yesterday for a number of transportation subsidies - including a $400 a month gas card.

To reiterate, a subsidy would only sustain the demand dynamic for oil. Apply that to a world that is undersupplied and underinvested in new supply, and the price of oil will continue to rise.

It's unlikely to stop there. Next up: bigger government handouts in the name of broad "inflation relief." It's already being proposed at the state government level and on Capitol Hill.

So, here we have the Fed raising rates, and as Powell said this week, they are doing so with the explicit intent of bringing down demand. Conversely, we have governments, which have broken supply through bad policy, looking to sustain demand through subsidies (more bad policy).

If you didn't believe the inflation problem was going to get worse, these actions (if taken) ensure it will get worse.

Let's talk about food...

Earlier this month, we talked about a coming food crisis. It was a topic at the NATO Summit - here's an updated look at the food price index, which is now on new record highs...

If we adjust this chart for inflation, current prices are at levels matching the record highs of 1974. That year might sound familiar because it was the last time we had a major global food crisis.

From the looks of this chart above, it appears that some saw this coming very early. Deere has nearly quadrupled from the pandemic lows and continues to make new record highs.