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And what struck me most forcefully from this analysis – aside from the usual, horrific litany of bank woes – was just how much trouble is quietly brewing in corners of the commodities world.
Never mind that oil prices are high; that problem is already well known and gallons of ink have been spilt debating that, along with the pressures in metals and mineral spheres.
Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: “We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.”
Now, to some readers of the Financial Times, that observation might seem odd. After all, inhabitants of the western world typically spend far more time worrying about the price of petrol for their car, rather than the price of wheat or corn. And when western investors do think about “commodity shock”, their reference point typically tends to be the 1970s oil crisis.
However, as Mr Currie observes, this is a dangerously blinkered view. Back in the 1970s, famine touched a much bigger proportion of the world’s population than the energy crisis, he says. And even today, rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west.
Indeed, there is already ample evidence that political tensions are building: the World Food Programme, for example, now thinks a third of the world’s population lives in countries with food price controls or export bans.
However, Goldman Sachs thinks this is just part of a much bigger problem of capital and resource misallocation. After all, Mr Currie argues, if the world today was a rational economic place, then regions such as the Gulf which are food-constrained ought to be investing heavily in agriculture. And since the US is the world’s biggest agricultural supplier, this implies that the Saudi Arabians, say, should be snapping up farms in Wisconsin – as America secures oil in the most efficient manner by sending teams of Texans to Riyadh.
But in practice numerous investment controls prevent Saudi Arabians from buying Wisconsin farms and Americans owning Saudi oil wells. And these controls are not being dismantled now. On the contrary, mutual mistrust is now rising. Hence the fact that Gulf leaders are currently considering desalinating sea water to plant wheat in the desert – while the US and Europe are trying to turn corn into fuel.
Such exercises might make sense in domestic political terms; but they are apt to be fiendishly expensive. Thus the upshot of this misallocation, Mr Currie would argue, is even more inflation – even if the world does experience some form of growth slowdown.
Now, for any investor who is long on commodities right now (and I would guess that club includes Goldman Sachs), such trends might seem to smack of good news. For anybody who is dirt poor in the developing world, however, the picture is disastrous.
A WFP official, for example, recently showed me the red plastic cup that is used to dole out daily rations to starving Africans – and then explained, in graphically moving terms, that this vessel is typically now only being filled by two-thirds each day, because food prices are rising faster than the WFP budget.
But leaving aside this very real human tragedy, what should also be crystal clear for investors is that this is not a picture that points to 21st-century capital markets progress; nor is it likely to breed stability in the medium term. Anyone who thinks this decade’s problems start and end with credit, in other words, may yet receive a rude shock; sadly, we live in a world where soyabeans may yet pack as painful a punch as subprime.
Copyright The Financial Times Limited 2008
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