Malthusian nonsense never goes away

Over the nearly 200 years since the good Rev. Malthus published his famous hypothesis that food supply can't keep up with population growth, the facts have shown, over and over again, that he got it wrong. Yet, every time food prices rise, neo-Malthusians rise up and say that this time it'll be different.

Well, today's Malthusian Chicken Little is none other than celebrity Harvard professor Niall Ferguson (see here, hat tip to Economist's View). Sure, food prices have risen over 20% as he states. And yes, per capita grain production has not kept up with world population growth over the last two decades. So, is he right that food will be increasingly scarce and expensive in the future?

Nonsense. The IMF's commodity food price index has risen 23% over the last 24 months. (Not all atributable to ethhanol, weather and oil prices have also played their part). But they're only 7.7% above their level in 1980. So even if we assume a modest world inflation rate of 2% a year on average over the last 27 years, in real terms food prices are actually 37% below the 1980 level.

How about the grain supply? According to the FAO, world grain production rose 32.5% between 1979-1981 and 1999-2001, while the world's population rose 45% over the same period. Yet, during this time, meat production jumped 72% and fruit/vegetable production rose 91.7%. Folks, this is a sign of greater affluence and better nutrition.

While there's no denying that climate change will pose challenges, I have no doubt the world will be able to feed itself in the future, as yields rise in many emerging economies and the genetics revolution spreads. And I'm just as sure that uninformed doomsayers like Dr. Ferguson will keep appearing every time food prices rise.

Emerging markets have arrived

Last week, developed world stock markets fell 5%, according to MSCI. Traditionally, emerging markets would fall twice as much on your average market panic (like this year's China scare or 2006's big May sell-off). But last week the MSCI EM index fell just 5.7%.

While I would be reluctant to declare the end of emerging market crises, this certainly shows just how much their risk levels have fallen due to fundamental improvements and, just as important, that developed nation investors have come to know and recognize this fact. As a veteran of nearly 30 years of economic upheavals in the developing world, this is as welcome as it was unexpected a decade ago.

How inept can a ruler be?

No, I'm not thinking of George W. Bush right now. Guess which long-standing national leader uttered this infamous phrase recently:

"Where money for projects has not been found, we will print it," xxx was quoted as saying.

The answer is: Robert Mugabe of Zimbabwe. Not surprisingly, inflation in that country, currently over 4,500% a year, is going to infinity and beyond. If I were a betting man, I'd wager Mugabe's regime will collapse in less than a year.

If you're interested in why Zimbabwe technically got into this mess, check out this paper.

Economic tortoise, financial hare

Other than in soccer, Latin America has (mostly) lagged behind (east) Asia in nearly all indicators, specially in terms of economic growth. But, as BCA Research recently noted, Latin American stocks have outperformed their Asian peers by a wide margin over the last 20 years. Capital Spectator looks at some explanations, but finds no clear answer.

Actually, there's a pretty simple explanation.

In the 1980's, Latin America was stuck in a huge economic and financial crisis after many nations defaulted on their foreign debt and commodity prices plunged. At the same time, the Asian Tigers were roaring along quite nicely. Hence, Latin American stocks at that time had very high risk premiums incorporated into their valuations. Those risk premiums have fallen dramatically as LA has put its finances in order during this time frame. Thus, starting from a lower base, the region's stocks have outperformed.

One could aslo add that the LA sector is dominated by a few fantastically profitable monopolies/oligopolies and that Asian markets were and are much more liquid, so that a falling liquidity premium might be helping LA stocks.

Contagion in the credit markets?

The markets were once again singin' the ol' sup-prime mortgage blues today. However, I believe that fears of a meltdown in the credit markets are way overblown. For one, corporate balance sheets are pretty healthy after years of record-high profits and modest leverage. In fact, spreads between BAA corporates and Treasuries have stayed pretty stable (however, I don't have data for the past couple of days).



The real problem lies with consumers and certain financial firms, where leverage has grown strongly, as this graph shows.



Outside the financial sector, my one big worry is what impact falling home prices will have on consumers. So far, American consumers have, as always, withstood the storm. But for how long? Only time will tell, but in the meantime I'd avoid stocks exposed to U.S. consumer demand.

A bubble in emerging market stocks?

This graph says yes. It compares the evolution of the Nasdaq Composite between June 1994 and June 1999 and the MSCI Emerging Markets index between June 2002 and June 2007.




We know how the Nasdaq story played out after a few more months of spectacular rises. But appearances can deceive. The main difference between these two? The Nasdaq's P/E was well north of 100x at its peak, while the P/E for emerging markets as a whole is around 15x today.

Of course, this doesn't guarantee that emerging market stocks are a good investment opportunity today, but at least they're not obviously overvalued.

The red economy and the red metal

No one doubts that China's dramatic growth spurt over the past 4 years has been the driving force that has pushed commodity prices higher. Even though the Chinese economy is still going at full blast (industrial output is growing 16% yoy), past experience has taught us that there are limits to how much commodity prices can go up.

For one, with higher prices there are more incentives to ramp up production. In addition, price increases blunt demand, as buyers turn to cheaper alternatives (for example, according to INCO, the nickel content of stainless steel has fallen in response to higher prices for this metal).

The market for copper offers a great example of how these forces work, sometimes in a very odd fashion.

While Chinese copper demand has remained robust, in the industrialized nations it has plunged this year due to high prices, leading to an overall drop in world consumption of 1.4%, according to this forecast. According to the IMF, copper prices rose 43% last year and 38% in 2003.

Yet, despite the fact that refined supply is forecast to grow 3.1% this year, prices have risen an additional 36% (up to November).

What gives? Well, in 2003 and 2004 demand --driven by China and other emerging economies--far outstripped supply, depleting existing stocks. With latent demand very strong, the market has needed dramatic price hikes to partially close the demand-supply gap.

Obviously, it's hard to ramp up the production of minerals in the short run. But eventually market incentives lead to the expected response: in 2006, the ICSG forecasts that supply will rise 8%, surpassing demand for the first time in 3 years (although prices will likely stay high while inventories are built back up)

Moving on to football

Don't miss this article by Michael Lewis on how a coach of a minor Texas university is turning football (or American ovoid handball, as a tetchy friend would have it)strategy on its head. Basically, it involves a pass-heavy approach that seeks to stretch the field as much as possible, both horizontally and vertically.

This is definately the wave of the future. Besides the violence, what I really lack about football is that it has a much larger strategic component compared to other sports. Alas, the sad fact is that most NFL coaches stick to very conventional/conservative playcalling, wasting the potential to achieve victory through greater creativity and flexibility (with some partial exceptions, such as the Patriots, Eagles and, until recently, the Rams).

This is not precisely a new idea. Bob Oates, who writes for the LA Times, has consistently favored this approach.

By the way, if you like football, go visit Football Outsiders if you haven't done so already. Aaron Schatz and his crew are doing a great job by applying statistical modelling to evaluate performance on the gridiron. It simply is a must read, although I do hope that in the future they'll also include --to the extent possible--on the impact of stategy.

The manufacturing rat race

Last week, Brad DeLong speculated that one of the reasons that U.S. auto manufacturers faced such daunting legacy costs was that the wages and benefits paid to their employees reflected the expectation of maintaining oligopolistic profits.

I don't know that much about the auto industry, but I reckon that if those profits existed, they couldn't have lasted much beyond the 1970's.

But, in any case, the auto industry does illustrate the degree to which even a relatively sheltered industry (in terms of barriers to entry) is a rat race.

Taking some BLS data, I found that new cars today cost around 60% less in inflation and quality adjusted terms than they did in 1953 (the first year with data). This number is in line with the trend observed for durable goods as a whole.

This basically means that you face constant pressure to become more efficient or develop some type of competitive advantage to protect your pricing (such as better design or some other form of strong intellectual property). Obviously, U.S. car producers haven't kept up, at least with their Japanese counterparts, event though they've surely made huge gains in productivity over the last few decades.

Foreign policy amnesia

Why does the U.S. never learn from its foreign policy mistakes? I can't find a good answer. But to my horror they just keep coming. As if the Irak debacle weren't enough, the idea of treating Mexicans as the Israelis treat the Palestinians is gaining ground.

Let's start with President Bush's big speech this week, in which he laid out (again) his plan to deal with the large flow of illegal immigrants to the U.S.

The President's proposal --a hybrid guest-worker programme that includes the possibility of obtaining citizenship, but also contemplates measures to crack down on illegal immigration---sounds fairly sensible. Nonetheless, it is, as expected, very flawed and it faces substantial opposition from his own party. As a result, it's fairly likely that something far worse than the President's proposal will be enacted.

Why is it flawed? Simple. It assumes that the U.S. can --by itself--fully regulate the flow of immigrants.

Bush's plan aims to admit "enough" workers to satisfy the needs of its farmers and firms while keeping out all others who wish to come by cracking down on the employment of illegals and stepping up security on the Mexico-U.S. border.

Let's start with Economics 101. There is a huge, huge number of people willing to come and work in the U.S. There is no way the U.S. will allow all of them to come, even if there are enough jobs available. In other workds, supply will always exceed (artificially regulated) demand. Hence, the proposal's mechanisms to limit supply.

Will they work? Not likely. As the President himself admits, the greatly increased spending on border security has not made a dent on the flow of immigrants. There is no reason to believe that further spending, short of building a 2,000 mile Israeli-style wall on the border and massive deportations.

Such a wall would, undoubtedly, reduce the flow (but not stop it, by far). But just think for a second about the symbolism (let alone the expense). It would mean that the U.S. is turning its back --literally--on Mexico and the rest of Latin America. (Am I exaggerating? Just read what the people who want to build such a wall say).

Let that sink in. In a world where the U.S. has few friends, it will work to alienate (even more) a region to which it already has significant cultural, economic and ethnic ties.

Is there a better way? Yes. Actually, a very simple way: be more generous. The U.S. provides its "friends" in the Middle East (Egypt, Israel, Jordan) more foreign aid in one day than it has ever given to Mexico. Why not propose a bold development partnership to Mexico and Central America? Sure, it would cost money, but probably no more than the cost of fences and the like. It would engender goodwill and reduce immmigration in the long-run. And it would give the U.S. a lever to push for reforms in Mexico.

A guest-worker programme should be established, but it will only be a net positive if it is realistic (for example, it actually deals with issues such as the workers' families). And, yes, the U.S. whould have more control in areas such as employment.

Sadly, there is little or no chance of something like this happening. Bush never even mentioned talking to Mexico in his speech and the fence-builders don't give a damn about anything south of the border. The only hope I have is that the American people at least seem to recoil at some of the nastier policy options in this area.