A couple of days ago, I reviewed SigFig and declared it “The best way to track your investments.” In the review, I opened up my retirement accounts for the world to see. One thing that I didn’t address was the top recommendation SigFig made. Specifically SigFig attempted to scare the poop right out of my bum with a “DBA performs poorly AND charges you $74.89 more in fees to boot!” (Hey if I’m going to have a family-friendly website, I might as well write like 5 year old, right?)
No one wants to be in poorly performing investment and pay large fees to do it. Why did I choose DBA in the first place? I believe in Hedging Rising Food Prices and the PowerShares DB Agriculture Fund (NYSE:DBA) was the most obvious way to do it. DBA’s goal is to track commodity prices. So if wheat and soybeans get more expensive the stock should go up.
So if SigFig doesn’t like DBA, what does it suggest? It suggests Market Vectors Agribusiness (NYSE:MOO). Part of me wants to buy in on the ticker symbol alone. I looked into MOO a little more and here are the top holdings according to Morningstar: Monsanto Company, Potash Corporation of Saskatchewan, Inc., Deere & Co, Syngenta AG, Wilmar International Ltd, Archer-Daniels Midland Company, Mosaic Co, BRF – Brasil Foods SA ADR, Agrium Inc, Yara International ASA.
You know what I don’t see in MOO’s holdings? I don’t see corn, wheat, soybeans or any of that. I see companies like Monsanto and John Deere. The difference between what I own and the recommendation is pretty large. In SigFig’s defense, they are pretty clear that the recommendations are just suggestions.
Ask the Readers: If one is going to try to hedge against rising food prices, should he/she diversify within the category investing money in the commodities itself as well as the companies that help bring that food to your table? Let me know in the comments?
“You know what I don’t see in MOO’s holdings? I don’t see corn, wheat, soybeans or any of that. I see companies like Monsanto and John Deere”
Sygenta and Monsanto sell seed corn, and ADM has many corn-based products products. Although you’re not owning the crop commodity, you could still profit from increased demand that drives prices higher.
For example, if corn prices are expected to be higher, it makes sense for a farmer to pay a premium for seed corn that can produce a higher yield (more bushels of corn per acre). Monsanto, for example.
Lazy Man says
Good points, that’s one of the reasons why I’m thinking of diversifying a little bit there. Of course the more I overweight different areas, the more I’m just back to owning a big total index fund like VTI.
BuckTrak Budget Planner says
Only because I’ve been around the transportation business in the past: I would invest in the larger trucking companies – which I believe are seeing increased shipping volumes anyway as the economy (tentatively) improves. Buffett has big coin in railroads, FWIW. All that food has to get to your table somehow. In a semi-related note, I’ve read recently that the Asian countries that used to rely heavily on grain-based diets have populations that are eating more and more like (gasp!) Americans…
Lazy – at the core of your thesis for hedging is the assumption that we are going to have price inflation. This is the majority opinion (which is almost always wrong) and by every measure makes perfect sense when you consider we have profligate entitlement spending, 16 trillion in debt, and the Fed running the printing presses 24/7. However I’d suggest we will have a serious bout of deflation BEFORE we get price inflation.
Here’s my thesis: The deflationary cycle will begin with falling demand, leading to falling prices, debt defaults, followed by lower corporate profits and bankruptcies, leading to layoffs and wage reductions, which causes more falling demand. The Fed holding interest rates artificially low helps business which feeds overproduction, but it reduces if not eliminates the income of savers, therefore the spending of savers, which reduces real demand (consumption) and only feeds the deflationary cycle described above. Governments and central banks show their ignorance of peoples ingenuity and basic human survival instinct when they believe they can pull the right mechanical lever at just the right time with the appropriate amount of torque to control the markets. When the misguided and arrogant academia at the central banks double down on their efforts to stop deflation by trying to manipulate market-pricing mechanisms with monetary and fiscal policy they only end up distorting the prices of assets (homes, cars, stocks, etc.) that the free markets are attempting to ascertain at any given time, and as a consequence they unleash dynamic forces they cannot control. The policymakers are desperate to avoid deflation. Unfortunately there isn’t a damn thing they can do to stop it. Mr. Market always wins in the end.
So, what we get with deflation is falling prices (not inflating prices), meaning that your hedges (MOO and DBA) will fall right along with the rest of the market. As for gold, my wager is it will likely fall as well (giving anyone interested a great buying opportunity) before inflation takes hold and then it will make a historic run higher.
In my opinion we should be holding cash and avoid getting seduced into the market in search of a return ON our money. We should be happy in the next few years with a return OF our money.
Cash will be king and provide the single best hedge when the deflationary death spiral hits. There will be great buying opportunities (real-estate, cars, stocks, jewlery, everything) in the coming years for those who keep it simple and hold good ole’ USD.
@Kosmo – you assume those credit cards aren’t already maxed out? And if not now, how quickly will they be at their credit limit when they’ve been using them to pay for basic living expenses for 4-6 months as a result of being swept up in massive lay off’s wave of corporate downsizing? Remember, the days of tapping their home equity as an ATM machine are over. When credit is maxed they will be forced to liquidate any and all asset. Forced liquidation’s in all assets (real-estate, cars, stocks, gold, etc.) drives those prices down, hence my “cash will be king argument”. Nothing new about this … history is replete with examples of where those with too much debt and leverage loose it all, and those with cash end up as the beneficiaries.
Americans have not learned from the 2008 crisis (neither have the banks or the bad actors on Wall Street). You hear a constant drum beat from the cheerleaders and talking heads in the media about Americans deleveraging and saving more. Any statistical increase in the savings rate or drop in household debt should be appropriately attributed to forced deleveraging, not a change in behavior. Americans have been booted from their homes en mass over the last few years and the banks stopped lending so they could no longer borrow so much money. During the crisis, Americans have simply responded to the realities. There has been no fundamental change. $200 billion of the $1.2 trillion of “household deleveraging” was credit card write-offs. The vast majority of the remaining $1 trillion of “deleveraging” is as a result of 5 million completed foreclosures since 2009.
The storyline that the American consumer has been delaying their gratification, practicing self restraint, denying themselves and paying down debt is completely 100% false. The proliferation of this big lie has been spread by Wall Street and their mouthpieces in the corporate media. The purpose is to convince the ignorant masses they have sacrificed and deprived themselves long enough and deserve to start spending again. It’s all part of the big lie to get us to consume, buy stuff, buy stocks, drive up risk assets to keep the bubble inflated. It won’t work this time. No question the bubble is about to blow…. only question is when.
Kosmo @ The Soap Boxers says
“but it reduces if not eliminates the income of savers, therefore the spending of savers, which reduces real demand (consumption) and only feeds the deflationary cycle described above.”
What would stop people from simply using credit to fund their spending?
In practice, investing in some of those agribusiness companies – particularly monsanto – is one of the best ways to get exposure to rising food prices. I think SigFig had it right, here. For example, Monsanto sells (very expensive) seeds that need less water, are resistant to pests, etc — it only makes sense for farmers to invest in these seeds when prices for the commodity are high.
@ Kosmo – congratulations on your “insane amount of credit”. ;-) Do you have a contract in place with your creditors preventing them from lowering your credit lines or canceling your credit entirely? I doubt it.
Imagine for a moment that the next 30 years looks nothing like the last 30 years. Instead of low unemployment, low national debt/GDP, easy credit, and rising home prices, the future brings just the opposite. Let’s pretend that the Fed and central planners around the world are not the omnipotent gods and the saviors we’d love to think they are, and they are unable to hold the rickety financial structure together while staving off trillions of debt. Instead their arrogant actions cause unintended consequences that spin out of control and credit bubble bursts. In this (highly likely) scenario a deflationary depression is born which is something we haven’t seen since the 1930’s. Because none of us have seen anything like this in our lifetimes our life experience is no longer a reliable guide to the future. Suddenly we are at a moment in history when the things that have been true for our entire lifetimes is no longer true. Cognitive dissonance prevents us from accepting any new evidence or considering a certain event simply because it conflicts with everything we know to be true about the world and about money.
In this scenario the world would be forced to pay for its sins of excess of the debts accumulated for the past 30 years – the bill is due and it must be paid. All prices of goods and services will begin to fall in response to a lack of demand – this compresses corporate profits, so companies do what they’ve always done and begin to manage costs by laying people off, causing unemployment to soar. Lenders are seeing more of their customers fall behind on their payments or default on their loans so in response they cut everyones credit lines to mitigate thier risk. No doubt the consumers want to spend but at this point can they? Without a job or access to easy credit they stop spending and are forced to delever putting even more downward pressure on demand. 80% of the US economy is based on consumption but now this is severely constrained causing asset prices (real-estate, autos, etc.) to fall dramatically. In response the banks stop lending because they know the thing that is securing the loan is going to be worth less in the future, this puts even more pressure on consumer spending, causing companies to lay off even more people, causing more defaults, less tax revenues for local, state, and federal agencies, so tax rates rise as desperate governments scavenge for revenue. The pain exacerbated and the depression is extended. And the central planning fools are shown to be nothing but emperors with no clothes.
This is the deflationary death spiral that the central banks and policy makers around the world are desperately trying to prevent. If you believe they can manipulate market forces and prevent a system wide collapse with monetary interventions, well then, you have far more faith in government that I do. Unfortunately we have gone beyond the tipping point and there are no good policy choices left … only bad ones. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time. This is the unconventional view – the transition from a levering, asset-inflating secular economy to a post bubble delevering era… and it is as difficult for most people to imagine as our departure into the hereafter.
The conventional view serves to protect us from the painful job of thinking. -John Kenneth Galbraith
“@Kosmo – you assume those credit cards aren’t already maxed out? And if not now, how quickly will they be at their credit limit when they’ve been using them to pay for basic living expenses for 4-6 months as a result of being swept up in massive lay off’s wave of corporate downsizing? Remember, the days of tapping their home equity as an ATM machine are over. When credit is maxed they will be forced to liquidate any and all asset.”
I personally have an insane amount of credit that I could tap (not that I would ever do this, but the ability is there). I’m not saying everyone does, but I think the number of people who have significant credit would be enough to stave off large scale deflation. People like to spend.
Au contraire, when you have no credit, no job, and no money you may “want” to continue shopping and consuming but that option is no longer available to you. It’s called math and it is highly logical.
Anyways, thanks for the debate … I’ll catch you on the next post.
Tommy Z says
The case for investing in agriculture is two fold:
1. Real demand from emerging markets (as China gets wealthier, they will want to eat more and eat better).
2. Nominal demand from the federal reserve’s printing press.
I believe that the larger factor of the above two is the latter. Assuming this is true, keep in mind that as we get more inflation, the cost of everything goes up (priced in dollars). The companies selling agriculture products may get more money with higher crop/livestock prices, but it also costs them more money to produce those crops/livestock. So the two wash eachother out.
Assuming you agree with me so far, it would make most sense to own the commodities directly and avoid the companies towards the end of the inflation. Once inflation eases up, look at moving out of the commodities and back into the companies.
OK, let’s watch and see how it develops. But I’m betting consumption doesn’t decrease.
I’m not saying that you don’t make sense. I’m just saying that an awful lot of people and organizations act irrationally, and I don’t think a change in behavior is forthcoming. In other words, you’re applying logic to a situation where none exists :)
I’m not sure unemployment is the crux of it, but if you insist on being pummeled by the facts I feel compelled to oblige: First, it wouldn’t take much of a bump in the “real” unemployment rate to tip our shaky economy into a serious deflationary recession. Second, the most recent BLS (Bureau of Labor Statistics) statistics are totally crap. The BLS intentionally omitted an entire segment of our population who’ve dropped out of the labor force, thus rendering them “non-persons”, and making the official unemployment rate of 8.3% nothing but a statistical mirage. If you add back the 1,1777,000 people “not in labor force” the true unemployment figure would have actually increased to over 12%. But let me tell you, in an election year the puppets at the 24/7 cable outlets will never tell you this because they want to their man to get elected. That’s a fact Jack!
Policymakers in government and Fed know how perilously close we are to falling into the abyss, so they are using every tool at their disposal (QE, Harp, Operation Twist, liquidity injections, Tarp, etc.) including manipulating the data with optics in the hope of seducing unwary participants into buying something of no value. The policymakers are engaged in the great game of perception management. Their plan is to put lipstick on the pig and spin the story just right so that everyone will think that happy days are here again. They are trying to get you and me to feel good about the economy so we will get our money out of our mattresses and into circulation. They desperately need us to spur on the economy by buying stuff … cars, homes, stocks, etc. figuring if the we (the suckers) get back to consuming this will prevent prices from falling while goosing the economy and the markets. This is not a sustainable plan.
Bernanke and Obama are doing the same thing Madoff did to keep his Ponzi going. The game is all about confidence and perception management. If people loose confidence and start pulling their money out of the Ponzi faster than people are putting it in then the entire house of cards implodes. The US Government’s Ministry of Propaganda is using the same Orwellian style logic (WAR IS PEACE. DEBT IS WEALTH.) that prevailed during the Soviet Union – outright lies and deceitful reports painting a rosy picture of the economy and its glorious leaders while masking a dismal reality.
As for your bet … we are going to get deflation which means that cake donut will cost you a lot less than it costs today. On the other hand, if I’m wrong and we get inflation, your jelly donut will cost me $55 bucks! This hardly seems like a fair bet. :-)
Kosmo @ The Soap Boxers says
Ah, OK. There’s the crux of our disagreement.
From my viewpoint, the unemployed represent a statistically small portion of the population. Even if they cut back spending dramatically, it can be offset by a considerably smaller increase by the rest of the population. I’m not trying to minimize the plight of the unemployed – it sucks to be without a job – I’m just looking at the raw ratio of employed to unemployed.
I’ll bet you a donut that we don’t have deflation. A jelly donut for me if I win, but a cake donut for you if you win … since a cake donut is “deflated” :)
Kosmo @ The Soap Boxers says
Let’s assume that 12% is the correct number. If the 12% cuts spending by 50%, this can be offset by the employed (88%) increasing spending by 6.82%.
Seriously, Kosmo – with all due respect my friend, reasonable people can disagree on the inflation vs. deflation argument, but good grief, where in the hell did you pull those numbers from? Okay Lazy, time for you to get off the hammock and chime in here (maybe a good fodder for another post?), either save me or shoot me and put me out of my misery :-)! HaHa! Reminds me of Mark Twain when he said, “Most folks use statistics like a drunk uses a lamp post … more for support than illumination.”
Lazy Man says
You guys were doing so well with the discussion that I thought I’d go at it. Plus, I’ve got lots of MLM discussion going on to keep me busy. I’ll try catch up tomorrow morning and bring my thoughts to the table.
Kosmo @ The Soap Boxers says
“Seriously, Kosmo – with all due respect my friend, reasonable people can disagree on the inflation vs. deflation argument, but good grief, where in the hell did you pull those numbers from?”
I took a bad situation for the unemployed (having to cut spending by 50%) and just used simple weighted average to show that a relatively small increase by the rest of the population could offset it. It’s an example, not the exact figures.
In reality, the 6.82 number is likely too high (among other things, you’d need to take into account the difference in unemployment rate between today and earlier times, rather than the absolute number).
My main point is that the employed population can affect the economy, too – and that impact shouldn’t be overlooked.
Could we leave the insults at the curb, please?
@ Kosmo – I know it’s hard when a beautiful theory is killed by a brutal fact, but don’t be so damn sensitive … my retort was not personal nor intended as an insult… just jabbing my opponent. ;-)
To your point, you are correct, if the unemployed cut spending by 50% and the employed increased spending by 50% to make up for the loss the net effect to the economy would be zero. But unfortunately in the real world it doesn’t work that way and if history is any guide it won’t work that way in the future. Every part of our economy is inextricably connected and the all worlds major financial are markets are all linked, so for your theory to play out economies and markets would have to live in a vacuum. They don’t. They are linked like mountain climbers tied together as they are scaling the side of the mountain. If one climber let’s go of the mountain then his hanging dead weight puts strain the other climbers. If a second climber is unable to hold on under the stress then he lets go and now we have two climbers hanging. Soon the accumulative dead weight pulls the entire team off the side of the mountain and they fall to their death. This is the reality of economies and markets in the modern world – everything effects everything else – nothing happens in a vaccum.
@Tommy Z – Yes, the Fed will keep printing in the lame hope of inflating assets and preventing deflation (their biggest fear) but it won’t work. Here’s why: As it stands today, total credit market debt is 310% of GDP. We are saddled with the largest accumulation of peacetime debts the planet has ever known and we have no playbook for what happens next. Throughout history, whenever total credit market debt breached 200% of GDP, it was commonly due to deficit spending fueled by borrowing as nations prepared for and fought wars. To the victor went the spoils (with the spoils they were able to pay off their debts) and to the looser went the defeat and default. All lending schemes designed to lend into an intractable debt problem is destined to fail miserably. There is no savior large enough with a magical pool capital to stave off the unfortunate conclusion to the global debt super cycle. This means an economic collapse causing forced selling/deleveraging which creates deflation – NOT inflation.
The central question is where does credit go when it dies? Answer: It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. Bonds, stocks, real estate, commodities, everything will delever because of excessive “risk” and the “price” of money at the zero-bound. Our 30-50 year virtuous cycle of credit expansion and asset inflation which has produced outsize paranormal returns for financial assets is over. It’s already checkmate but the policy makers don’t want to admit the game is over. It’s just a matter of time now. Of course we will see another “bazooka” with an eye-popping headline number put forth in a last ditch attempt to goose the stock market higher, stabilize housing and calm the market participants, but defaults are imminent. Politicians, bankers, and regulators refuse to acknowledge that they have lost control and there is no way to put this genie back into the bottle.
Tommy Z says
Contrarian – do you define deflation as a decrease in the money supply or a decrease in prices?
Because the dollar is backed by nothing, there is nothing stopping the federal reserve from printing. If they really wanted to, they could set the tax rate to 0, send everybody a check for $1 million, and spend as much as they wanted – all with printed money.
I just do not see the deflationary scenario happening. Also keep in mind that as the economy gets worse, prices will go up, not down because:
a. The Fed will print more money which creates more nominal demand.
b. Production (supply) goes down.
Kosmo @ The Soap Boxers says
Opinions =/= fact
Length of post =/= validity of argument
Tommy Z says
I do not necessarily disagree with everything you said. The economic situation we are in will cause selling which will result in some deflation. However, the selling of assets will include everything include the assets that make us productive. For example, factories may be sold off as scrap metal and people will go back to building things by hand because we cannot afford to buy the capital needed to produce things efficiently.
When that capital gets destroyed (selling of assets), it drives the costs of things up.
Additionally, there is nothing stopping the federal reserve from printing at full speed to counteract the effects of deflation. The result is that we will experience deflation in terms of real money (gold and silver) but inflation in terms of the paper money we have today.
For example, let’s say a new car costs $25,000 today which is about 15 ounces of gold. In a few years time, I bet the equivalent car would sell for $75,000 but for around 10 ounces of gold.
@ Tommy – I think you are about 1/2 right. We will get inflation, there is no doubt, maybe even at some point we will even see a Weimar Republic style hyperinflation in our future where there our currency eventually becomes worthless. After all our fiat currency (credit) is a matter of belief, coming from the Latin, credere, “to believe”. Government central planners and policymakers at central banks are destroying belief in the paper currency, and when people lose belief/faith in the fiat paper there will be a flight to Gold and other real assets as we’ve already began to see. This is the gold bugs and inflationists case. To this I agree, however ….
Nothing in my arguments has made the case against inflation, my argument has only been about the timing of inflation. The point I have been emphasizing is we will get deflation FIRST… followed later (maybe even 10-20 years later … see the history of Japan over the last 20yrs) by inflation as central banks and governments respond with even more radical policies in an all out desperate attempt to reverse economic course, and it will be these over-reactions from government central planning fools that will force the pendulum to swing from deflation/depression to out-of-control inflation. But before inflation happens we should expect a crash in prices of everything, and yes, that even means gold prices will fall too representing a great buying opportunity for those with some dry powder.
The historic tower of debt we’ve accumulated will collapse BEFORE we see a flight from our paper currency and inflation. In fact, as counter-intuitive as it may sound, the USD will likely rise as the worlds reserve currency and safe haven. So when our debt-Ponzi scheme implodes this will NOT cause a flight from paper money into real assets … this will cause a crash in prices because if will force widespread liquidations across all asset classes. Prices will fall on the most basic economic model = supply vs. demand. When there are far more sellers than buyers this will drive prices down even of the beloved precious metal.
We saw a small-scale version of our economies reaction to a debt/credit bubble bursting in 2008 when if you recall home prices fell 30%, auto prices were marked down, banks failed, the financial system seized up, and DJIA dropped in one month (Oct 08′) crashing from 10,831 down to 8,451. This was a deflationary NOT inflationary reaction to a massive credit bubble bursting. This deflationary response to a bursting of a credit/debt bubble will happen again, only next time it will be far worse (maybe even cataclysmic) because the debts we’ve accumulated today are now 7 trillion dollars bigger, the too-big-to-fail banks are much bigger, and the credit derivative market is bigger, etc. National Debt is rising by $3.7 billion per day and will continue to do so for the foreseeable future. At this pace we will easily break $20 trillion by 2015. This is unsustainable.
Today we’ve seen prices recover and the DJIA is up over 13,000 and the talking heads at CNBC and all those with a stake in the big debt-Ponzi scheme are parting like it’s 2006 all over again, but the most recent snap-back in prices/markets is NOT because of the fundamentals improving, and NOT because anything got fixed and our problems are now behind us – to the contrary, everything is much, much worse today. All our problems have been masked, covered over, and hidden – the can has been kicked down the road and the game that is being played by market participants and governments is called “extend and pretend”. This phony baloney artificial “recovery” has been totally rigged by FED and government programs, liquidity injections, and more debt, etc.
This is why I believe the stock market is uninvestable at this point, because this historic debt bubble cannot remain inflated indefinitely. It WILL pop, and when it does we will get deflation. This is why I have invested and prepared myself to capitalize on deflation …. but of course I could be wrong, reasonable people can and do disagree, and my theory is the minority opinion, but that’s what makes a market (or horse race), right?
Tommy Z says
You might be right, but I think 2008 was the scenario you are describing and now we are moving into the inflationary portion of the timeline.
If I’m wrong, it still makes sense to buy gold. It’s simply impossible to time the market with 100% precision. Nobody knows what happens in between, but in the end, it is inflation that will win out.