Several big-name investors have started raising concerns about market bubbles, identifying frothy behavior in certain asset classes, from technology stocks, to SPACs, to small-caps and Bitcoin.
But there is one bubble that seems to be flying under investors' radars: food prices.
Société Générale's market strategist, Albert Edwards, thinks there is a bubble forming in food prices and it could have major consequences.
The long-time market bear first flagged the issue in a December 17, 2020, research note. Now he is reiterating the message on January 14.
Edwards has been watching the UN's Food and Agriculture FAO Food Price Index (FFPI), an index that tracks changes in the international prices of the most globally traded food commodities, such as oilseeds, dairy products, meat and sugar.
The FAO Food Price Index has been surging. In December 2020, the index hit a three-year high, following a consecutive increase across seven months.
Global food commodity prices also rose to a near six-year high in November 2020, according to a United Nations report.
Edwards is particularly concerned about the rise in grain prices.
"Off-the-radar agricultural prices generally and grain prices specifically have rocketed higher," said Edwards, in a research note. "Grain prices have risen over 50% in only the last six months, way ahead of industrial metals like copper (see chart below)."
The rise in food prices can be attributed to the Federal Reserve's quantitative easing program, Edwards said. He believes the liquidity will be sucked into whatever fundamental-driven trade emerges as a leader, which in turn moves the asset into a price-momentum bubble.
The last time food commodities were the focus of investors attention was in 2011, Edwards said.
"Annual inflation in cereals reached 20%, the highest annual rise since mid-2011 when the Arab Spring was in full flow!" Edwards said.
The Arab Spring
In January 2011, a fruit seller named Mohamed Bouazizi set himself alight outside the provincial headquarters of his home in Tunisia because police had seized his cart and produce. This event triggered a chain reaction of social unrest with a wider pro-democracy movements across the Middle East, which became known as the Arab Spring.
The unrest, protests and revolutions predominantly came down to a desire for democracy and long standing grievances with politicians and corruption in their countries.
However, many economists believe high global food prices from the end of 2010 were the trigger, Edwards said, highlighting that high food prices also contributed to the French and Russian revolutions, as well as the 1989 unrest in China.
Several economists have said the Fed's quantitative easing program played a role in hiking up food prices in 2010. However, former US Federal Reserve chairman, Ben Bernanke denied this.
"The truth though is that central banks have no control over which financial bubbles will ultimately emerge as they spray QE into financial markets," Edwards said.
Abdolreza Abbassian, a senior economist at the FAO, told the World Socialist Web Site food inflation is a reality. There is a real impact in the access to food, highlighting there are a lot of unhappy people and this could be a recipe for social unrest, he said.
"If [people] realise the vaccine won't solve the problems in the near term and they don't have food, then things could get out of control," Abbassian said, in the interview. "Although I still doubt we will hit those [previous] peaks, we will see volatility in the coming year."
The World Bank states COVID-19 will increase extreme poverty by around 150 million.
Rising food prices tend to have a bigger impact for emerging market countries, which are large net importers of food and where households spend a greater percentage of income on food, Edwards said.
However, food insecurity has also become a major issue in developed countries, particularly in the US amid the pandemic.
What does this mean for the US?
As a result of the pandemic, Feeding America estimates that 1 in 6 Americans could face hunger. The impact of the pandemic could mean that more than 50 million people may experience food insecurity.
According to the United States Department of Agriculture's latest Household Food Insecurity in the United States report, more than 35 million people in the United States struggled with hunger in 2019, compared with 14.3 million in 2018.
Rising food prices alongside the rise in food insecurity could be a deadly combination.
"One of the most dangerous features of the current situation is surging food prices," Edwards said. "History suggests a hungry population quickly becomes an angry, rebellious population."
On the brink of civil war
Edwards isn't alone. Legendary billionaire investor and founder of Bridgewater Associates, Ray Dalio, has been warning that the US is on the verge of civil war as he releases chapters of his new book, The Changing World Order, online.
The book is based on Dalio's study of the rises and declines of empires, their reserve currencies, and their markets. He became interested in the subject after seeing a number of unusual developments that hadn't occurred in his lifetime, but he knew had occurred numerous times in history.
In the most recent chapter released on December 4, he highlights the US is currently positioned at "stage 5", the stage before civil war.
"Stage 5 is the period during which the inter-class tensions that go along with worsening financial conditions come to a head," said Dalio, in the chapter. "How different leaders, policy makers, and groups of people deal with conflict has a major impact on whether the country will undergo the needed changes peacefully or violently."
Dalio breaks down the three forces he believes brings about big internal conflicts. Firstly, the country (including states or cities) and the people are in bad financial shape. Secondly, there are large income, wealth and value gaps. And thirdly, a severe negative economic shock.
However, Dalio is not saying the country is heading in the direction of civil war. He just believes that the US is close enough to the worst-case scenario that investors should be aware of what could happen next, based on historical analysis.
"To be clear, I am not saying that the United States or other countries are inevitably headed that way; however, I am saying that now is an especially important time to know and watch the markers in order to understand the full range of possibilities for the period ahead," he said.
Rising food prices and food insecurity could continue driving a wealth and income gap amid the severe economic shock that has been the pandemic. This aligns with the two of three forces that drive the 'classic toxic mix' for internal conflicts outlined by Dalio.
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