Shrimp Inflation

Sadly it appears that shrimp inflation is upon us. A recent report has identified a spike in the price of shrimp in the high teens and land-based protein inflation running into the mid-single digits. Indeed, even a basket of groceries notched a 2.4% increase in the second quarter. For an economy in many respects still emerging from the 2008/2009 financial crisis, this isn't good news.

We're now seeing solid evidence of food inflation. Add that to increases in health care costs, housing, and most notably eduction, and we have the beginnings of an inflationary environment. Some argue true inflation is currently running in the mid-single digits; if your personal consumer price index (CPI) includes food, housing, medical care, and education it probably is, if you prefer to use the established CPI like the Federal Government of tons of soybeans and computer processing power, you probably haven't seen a cost of living increase in decades.

Although the prospect of shrimp inflation may seem laughable to many readers, those who wish to Invest Like A Farmer should pay heed to inflationary signals, even in such small data points as shrimp; these can have jumbo implications for the financial farmer. Inflation eats away at your real returns; even a 27% increase in the S&P 500 eventually succumbs to inflationary pressure. This has the possibility of impacting both the wallet and palate of the average investor. Inflation is truly an enemy of the Republic and is most notably the sign of a fiscal and monetary policy run amok.

I read this shrimp inflation report as a solid signal that wholesale food costs are going to be rising markedly, which means REAL purchasing power is decreasing. The ability for retailers to pass along price increases depends largely on the type of customer; large chain-based restaurants are going to have trouble passing along meaningful price increases, whereas higher-end restaurants will have considerably less pushback. Along those lines, the same school of thought should also hold true for grocery retailers; the high-end retailers should have the ability to pass along prices increases whereas the lower-end shops are going to see their revenue and profit lines narrow. Keep in mind however, this isn't the whole story; inflation is insidious in that it has butterfly effects among asset classes.

Luckily, it appears that energy costs (especially in North America) are falling. Recent news out of Mexico indicating a push towards privatization of many of the resource-rich country's fields may further increase the supply and push prices down further. Notably, we're also seeing significant production increases in the United States which suggest even more pricing pressure to the downside. This impacts food pricing positively, meaning theoretically in North America it should be cheaper and cheaper over the coming years to product land-based protein and potentially harvest more ocean-based protein at a lower price point.

Nonetheless, I would argue that shrimp prices are a useful leading indicator similar to the lipstick index; it is something we at first smile and laugh about, yet often proves to be a harbinger of things to come.

The Grand Canyon is...closed?

Indignities of indignities, the Grand Canyon is closed? How is this possible? Resources are being spent to arrest "trespassers" (i.e. U.S. Citizens) hiking in their own National Parks? Yikes! What is a financial farmer to do?

Well for one, we can take a historical look at the other 17 shutdowns for some clue to what has happened in the past. Typically after several days, a compromise is reached and we go back to business as usual.

My major concern is the possibility of escalation. What I mean by escalation is that the government shutdown leads to a default which triggers several possible butterfly effects; but rather than the soft beating wings of a pretty butterfly causing ripple effects in the slightest of air currents, we see a cataclysmic pulse wave.

The way I can best relate to this is with a stock trade gone bad; at first the volume to exit the trade is low, and then everyone wants to get out; the probably being by that time there is no counter-party buyer. If you haven't had a chance yet to read The Crisis of 1837, now would be a good time to check it out.

A default would gravely affect the global financial system. The fact that the largest mutual fund company in the world, Fidelity Investments, has liquidated ALL of their short-term U.S. Government debt is very telling. These are smart people. What is the lowly financial farmer to do? Long-term holdings of the oft-discussed "boring" equities should wait out the storm; inevitably just when things look the worst, there is a recovery. Nonetheless, given my current prediction of a 50/50 chance of the U.S. defaulting, the fact that the National Parks are closed to U.S. Citizens, and other weird behavior on behalf of our government, rounding up some cash is a good idea. Will there be value in that cash? At least initially there should be as it is the de facto standard for conducting trade.

I see several outcomes if we default on the debt, none of them are good. Interest rates will undoubtedly spike (who wants to lend to a deadbeat?), the electronic funds transfer systems may lock up, and probably the most damaging and sustained effect will be a reputation hit to the United States. If things get bad enough, i.e. no Social Security payments, Medicare, etc. I see the situation quickly devolving.

Although we have been given a drop date of Oct. 17th, the reality is probably November 1st, as that will be when a majority of payments will come due. The first chink in the armor was on October 1st, the next test will be on the 17th, and if we don't have some type of resolution by the 1st of November, watch out. As it stands now, considerable political damage has been done to both sides of the aisle, and we're about a week away from triggering some very unpleasant consequences.

PS--A new Chair of the Federal Reserve was announced today; Dr. Janet Louise Yellen. She will be replacing Dr. Ben Shalom Bernanke whose appointment expires in January (assuming we still have a functional government in 2014!)

Capital and Butterfly Effects

Lights out? It sure looks that way! Without an approved legislative proposal, the U.S. Government shut down today for the 18th time in history. While I’m actually fine with this situation, as long as the IRS is shut down first, what can be gleaned from this situation? All kidding aside, something very, very farmer-like; namely, without capital and self-discipline, little else matters.

It is also crucial to consider the potential butterfly effects this shutdown generates. Aptly pulled from chaos theory, these “butterflies” often result in unanticipated, and consequential, results. In the social pecking order, what is going to be shut down first? Why? And what repercussions may arise or opportunities present themselves? 

Let’s see what the coming days bring, because the reader who wishes to Invest Like A Farmer knows well enough that some of the most meaningful changes to his or her portfolio actually occur thousands of miles away from the farm; a speech, legal change, or regulatory movement can all have significant long-term impacts on your portfolio and underlying capital. Which by the way, is a very nice segue into talking about about the first thing any investor who wants to Invest Like A Farmer learns about; capital.

Chapter 1

Capital

“Capital is that part of wealth which is devoted to obtaining further wealth.”

--Alfred Marshall, English Economist, 1842-1924

Capital is capital, from whence it is obtained varies greatly.  Maybe you’ve inherited a large sum of money.  Perhaps you’ve worked your entire life putting aside money every month.  Or maybe you’re just starting out and wondering what to do when you DO make some money.

Capital in our discussion will refer to a very specific type of money.  Planting money.  Planting money is money in excess of your day-to-day living money.  Some people call it “disposable income” and that’s just what they use it as; but I see it for much, much more than that pejorative description.  I see it as seed money.  The proverbial seed money that hopefully you’ll be able to plant using some very farmer-like techniques to eventually harvest a much, much larger crop.  Throughout this discussion, let’s remember the definition of planting money.  It is money that is largely in excess of your day-to-day expenses.  It is not rent money.  Mortgage money.  Emergency savings.  Vacation funds.  My friend, it is none of those things.  Planting money is money that you are going to use for building wealth, and it might be tied up for some time.  Months, but more likely years.  Many years.

Take pause for a moment, and even reread the above paragraph.  A fundamental and truthful understanding of capital is of utmost importance.  Having the understanding also implies having the self-discipline to utilize capital correctly.  A breakdown in self-discipline can and will cause serious, even disastrous, effects on your investing farm.  This theme, of self-discipline, will run its course throughout this book and hopefully impart its value.  In regards to capital, self-discipline often dictates whether capital is increased or decreased, how it is used, and probably most importantly, how long you as an investor can withstand a downturn.  It has been said the markets can remain volatile far longer than an investor can remain liquid, and that is true.  And it is also precisely why the concept of capital, an understanding of its use, and associated constructs, are so important.  Self-discipline, consequently, is of utmost importance to the investor at all times.  At all times.

With a sacrosanct understanding of what capital is and its value to the investor, and possibly its holding period as well, let’s start thinking about what type of farm, or more specifically, what type of farmer you plan to be.  There are all sorts of considerations for the modern gentleman farmer; soil, seeds, knowledge of weather, farming methods, and a host of other concerns.  But this all can get pretty complicated.  Let’s go through a couple of these thoughts in the upcoming chapters step by step, row by fertile row.

That my fellow financial farmers is a brief description of capital; at least that’s how I define it. Hopefully this concept of capital can help you run your own financial farm efficiently and profitably.

Although the lasting economic effects from the previous 17 shutdowns have been dubbed "negligible" by the major media outlets, I wouldn’t be too sure that they have had “no” influence; a well-oiled and running tractor plows many acres on the field, while the idle machine accomplishes nothing but to till the smirks other farmers.