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UPDATE February 2012 — The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion | NECSI

UPDATE February 2012 — The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion | NECSI.

Cite as: M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam,
arXiv:1203.1313, March 6, 2012.

Abstract

Increases in global food prices have led to widespread hunger and social unrest—and an imperative to understand their causes. In a previous paper published in September 2011, we constructed for the first time a dynamic model that quantitatively agreed with food prices. Specifically, the model fit the FAO Food Price Index time series from January 2004 to March 2011, inclusive. The results showed that the dominant causes of price increases during this period were investor speculation and ethanol conversion. The model included investor trend following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Here, we extend the food prices model to January 2012, without modifying the model but simply continuing its dynamics. The agreement is still precise, validating both the descriptive and predictive abilities of the analysis. Policy actions are needed to avoid a third speculative bubble that would cause prices to rise above recent peaks by the end of 2012.

NECSI Food Price Update Warns of Crisis by 2013

CAMBRIDGE (March 6)–According to a new study from the New England Complex Systems Institute the next food price bubble will occur by 2013.

“The food price bubble of 2011 caused widespread hunger and helped trigger the Arab spring. In 2013 we expect prices to be even higher and may lead to major social disruptions.” said Professor Bar-Yam President of NECSI, who has just returned from Davos where he presented his findings on speculation in global commodity markets. His paper “The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion” was called by Wired magazine one of the top 10 discoveries in science of 2011.

In 2008 and 2011 increases in global food prices triggered hunger, food riots and social unrest in North Africa, the Middle East, and elsewhere, at a cost to global stability which policy makers can no longer ignore. Over the past decade, world unrest has sharply increased at time of peak food prices; now the long-term price trend is getting close to what used to be episodic peaks.

According to the new study, the next food price peak will take place in about a year. The results will be dramatically higher prices than we have encountered thus far. The study warns that should ethanol production continue to grow according to multiyear trends, even the underlying trend will reach social-crisis levels in just one year.

NECSI’s latest findings reveal that the model from their 2011 paper still fits food price price trends. Their update reveals one important shift, however, in price trends, which might add to, not lessen, global instability. “The current trend of prices suggests that in the immediate future market prices may become lower than equilibrium,” says the study, “consistent with bubble and crash market oscillations.”

Lower prices at first may seem like good news as a reprieve from the extremely high food prices seen in the past, but the study says that the drops are likely to be short-term.

To examine what is driving the rises in food prices, researchers at the New England Complex Systems Institute (NECSI) performed a detailed study in 2011. The Institute, which uses mathematical modeling to reveal social and political trends, drew from the FAO Food Price Index from January 2004 to March 2011, and investor movements—shifting among commodities, equities and bonds. The analysis discovered two key drivers behind the rise: investor speculations and the rush toward conversion of corn to ethanol. The study was presented by invitation at the World Economic Forum in Davos and featured as one of the top 10 discoveries in science in 2011 by Wired magazine.

This month, NECSI is publishing the results of its study update, in which the institute extends its food price model to January 2012, entering no modifications to the model and continuing to use its dynamics.

NECSI’s researchers said the model they have used to examine food prices has proven to be robust and consistent with ongoing behavior of food prices.

Bar-Yam, who co-authored last year’s food-price study as well as the latest study update, said that the fit with the FAO Food Price Index is still “strikingly quantitatively accurate, validating both the descriptive and predictive abilities of the model.

“To extend NECSI’s earlier model ten months out and to still witness a fit is important,” he added. “This means we have validated it for data that was not around when we first made the model. It predicted the burst of the 2011 food bubble at the exact time it happened, when many were saying that high food prices were there to stay. Success in predictive validation is remarkable. The conclusions are reinforced greatly that high food prices are due to ethanol and speculators–with all the relevant policy implications.”

“The current equilibrium value is about 50% higher than the prices prior to the impact of the ethanol shock. And the projected time until the next food price bubble is about a year.” The results will be dramatically higher prices than encountered thus far.

Press contacts

Karla Bertrand, Press Relations
karla@necsi.edu, 617-547-4100

Clare Froggatt, Program Coordinator
clare@necsi.edu, 617-547-4100

Long Term Charts 2: Western Markets Since The Middle Ages | Zero Hedge

Long Term Charts 2: Western Markets Since The Middle Ages | Zero Hedge.

inShare

 

We previously examined 240 years of US market history for a sense of ‘trend’ or sustainability but some were not satisfied. In order to get a truly long-term perspective, we reach back 1000 years to The Middle Ages and look at how stock prices, interest rates, commodity prices, and gold have changed in a millennia (and most notably how the key historical events have shaped those price changes).

 

Western Markets Since The Middle Ages

 

Stock Prices

 

Interest Rates

 

Commodity Prices

 

The Gold Price

 

@Macro_Tourist for these increble charts

 

And just for good measure, perhaps the most important chart going forward –  Nothing lasts forever… (especially in light of China’s earlier comments )

TSX hits highest point since mid-2011 – Business – CBC News

TSX hits highest point since mid-2011 – Business – CBC News.

The TSX was at its highest level in more than 2.5 years on Friday.The TSX was at its highest level in more than 2.5 years on Friday.
World equity risk

World equity risk 7:22

Toronto’s benchmark stock index hit its highest level in more than 2.5 years on Friday as the rebounding gold price and new confidence about the global economy pushed equities up.

Around midday the S&P/TSX Composite Index was up 60 points to 13,891.64. It closed the day at 13,888, up 56.81. Higher commodity prices buoyed the resource-heavy TSX, even in other sectors.

“There’s definitely a will to buy equities. There are very little immediate headwinds,” Manulife director Kevin Headland told Reuters. “Canada seems to be moving higher based on better global economic data and expectation of the demand for resources.”

Seven of the 10 sectors on the TSX were higher. Gold was a particular source of strength, with February bullion up $11.70 to $1,251.90 US an ounce. Barrick Gold advanced 69 cents to $20.61 while Goldcorp gained $1.05 to $25.43

The sector fell almost 50 per cent last year and “I think a lot of people dumped it at the end of last year to get it off the books and now you’re seeing the relief rally,” said Cieszynski.

The tech sector climbed 1.37 per cent as BlackBerry rose 61 cents to $9.98

Closing in on 13,900 points puts the TSX at the highest level it’s been since the middle of 2011, more than two and a half years ago.

The loonie fell 0.42 of a cent to 91.11 cents US.

Canada Should Consider Ending CMHC Mortgage Insurance: IMF » The Epoch Times

Canada Should Consider Ending CMHC Mortgage Insurance: IMF » The Epoch Times.

People walk past homes for sale in Oakville, Ont., in this file photo. The IMF says CMHC mortgage insurance exposes the government to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital. (The Canadian Press/Nathan Denette)

People walk past homes for sale in Oakville, Ont., in this file photo. The IMF says CMHC mortgage insurance exposes the government to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital. (The Canadian Press/Nathan Denette)

 

Further measures should be considered to encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.

International Monetary Fund

The International Monetary Fund says Ottawa should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp.

The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 percent for the country next year.

Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.

Some analysts have credited the system for providing much-needed confidence in Canada’s housing sector during the 2008–09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.

The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.

“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.

“We suspect the fact that banks may benefit from government-backed insurance on mortgages … it sort of makes it easier for banks to do mortgages than other kinds of lending which, presumably, we think, is going to be more useful for the real economy.”

CIBC deputy chief economist Benjamin Tal says he believes the advice may be appropriate for the U.S., particularly prior to the crisis, but not necessarily for Canada, where the mortgage securitization market is a relatively small slice of the financial pie. CMHC can carry a maximum of $600 billion mortgage loan insurance on its books.

“In this case size matters,” he said. “It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy” by contributing to low borrowing rates and liquidity.

The Washington-based financial institution said further measures should be considered to “encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.”

It cautioned, however, that if any structural changes are made, they should be gradual to avoid unintended consequences.

The IMF report, released Wednesday, forecasts that Canada’s economy as a whole will start benefiting next year from a pickup in the U.S. economy, leading to greater demand for Canadian exports and renewed business investment.

In essence, the scenario is identical to the one predicted by the Bank of Canada, which also sees growth rising from the current 1.6 percent level to 2.3 next year.

A slightly more positive estimate was issued Wednesday by the Ottawa-based Conference Board of Canada, which is projecting Canadian real GDP will grow 1.8 percent in 2013, 2.4 percent in 2014, and 2.6 percent in 2015—assuming strong growth in the United States.

The Bank of Canada forecast holds that the risks are balanced—meaning there is as much chance the projected growth rate will be higher as lower.

But the IMF warns, however, that the risks to its outlook are primarily on the downside. The main reason, it says, is that it might be wrong about the U.S. economy rebounding in 2014.

“Renewed political standoff (in the United States) over spending appropriations and the debt ceiling and a faster-than-expected increase in long-term rates in the context of exit from quantitative easing could negatively affect the U.S. recovery and hence demand for Canadian exports,” the IMF said.

“Protracted weakness in the euro area economic recovery and lower-than-anticipated growth in emerging markets would also hurt the prospects for Canada’s exports, including through lower commodity prices,” it added.

On the domestic front, the IMF said the long period of low productivity growth and strong Canadian dollar may have left a deeper dent in Canada’s export potential, especially in the traditional manufacturing base, limiting the economy’s ability to benefit from the projected strengthening in external demand.

Cardarelli stressed the importance of investing in the energy sector, an industry that he said would have a significant impact on the organization’s economic forecasts in the future.

“We really feel that the system is stressed in terms of the transportation capacity—the ability of moving these resources out of Alberta, British Columbia, and Saskatchewan,” he said at a news conference in Toronto.

Among other things, the IMF recommends that Canada’s central bank hold off raising interest rates until there are firmer signs of a sustained transition from household spending to exports and investment, something bank governor Stephen Poloz has signalled he intends to do.

And it warns the federal government that it need not be so fixated on balancing the federal budget in 2015 if there is no meaningful pickup in economic activity.

That is likely to fall on deaf ears, however. Finance Minister Jim Flaherty said this week he is confident he will eliminate the deficit in 2015 and bring in surpluses after that.

With files from The Canadian Press

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