The Six-Legged Meat of the Future

The United Nations Food and Agriculture Organization says that beef could become an extreme luxury item by 2050. Marcel Dicke and Arnold van Huis of Wageningen University ask: “will Westerners ever take to insects as food?” [Wall Street Journal]

Commodity super-cycle is back in full swing

Writing in the FT, Roger Jones of Barclays Capital says that the commodity super cycle is still in place.

Commodities usually perform best in the latter stages of economic recovery: it takes time for the spare capacity and excess inventories built up during a downturn to get worked off. But this cycle looks different. Raw materials shortages, infrastructure constraints and resource nationalism continue to hamper production growth for many commodities, while emerging market demand is already soaring. In the west, policymakers, are leaning heavily toward pro-growth monetary policy and appear unusually tolerant of inflation. The expansion phase of this economic cycle looks likely to exert even more stress on commodity supply than ever before.

How oil affects the price of peas in China

David Pilling at the Financial Times talks about the lengths to which governments are going to battle food inflation.

One of the unorthodox countermeasures taken by Chinese authorities has been to allow vegetable trucks to travel toll-free on highways – a sort of quantitative easing for carrots and aubergines.

Cities: the constant tension between expansion and scarcity

Cities exist because they create mass economies of scale. They also facilitate interaction among city dewellers. When a city doubles in size, every measure of economic activity grows by 15 percent, says physicist Geoffrey West in the December 17 New York Times Magazine. But this accelerated growth helps cause a relentless use of resources.

In fact, West sees human history as defined by this constant tension between expansion and scarcity, between the relentless growth made possible by cities and the limited resources that hold our growth back. “The only thing that stops the superlinear equations is when we run out of something we need,” West says. “And so the growth slows down. If nothing else changes, the system will eventually start to collapse.”

How do we avoid this bleak fate? Constant innovation. After a resource is exhausted, we are forced to exploit a new resource, if only to sustain our superlinear growth. West cites a long list of breakthroughs to illustrate this historical pattern, from the discovery of the steam engine to the invention of the Internet. “These major innovations completely changed the way society operates,” West says. “It’s like we’re on the edge of a cliff, about to run out of something, and then we find a new way of creating wealth. That means we can start to climb again.”

But the escape is only temporary, as every innovation eventually leads to new shortages. We clear-cut forests, and so we turn to oil; once we exhaust our fossil-fuel reserves, we’ll start driving electric cars, at least until we run out of lithium. This helps explain why West describes cities as the only solution to the problem of cities. Although urbanization has generated a seemingly impossible amount of economic growth, it has also inspired the innovations that allow the growth to continue.

There is a serious complication to this triumphant narrative of cliff edges and creativity, however. Because our lifestyle has become so expensive to maintain, every new resource now becomes exhausted at a faster rate. This means that the cycle of innovations has to constantly accelerate, with each breakthrough providing a shorter reprieve. The end result is that cities aren’t just increasing the pace of life; they are also increasing the pace at which life changes. “It’s like being on a treadmill that keeps on getting faster,” West says. “We used to get a big revolution every few thousand years. And then it took us a century to go from the steam engine to the internal- combustion engine. Now we’re down to about 15 years between big innovations. What this means is that, for the first time ever, people are living through multiple revolutions. And this all comes from cities. Once we started to urbanize, we put ourselves on this treadmill. We traded away stability for growth. And growth requires change.”

Enjoy the Good Times While They Last

In the November 8 issue of Barron’s, Scott Minerd, the Chief Investment Officer of Guggenheim Partners, warns about the consequences of the lessons that we drew from the 1930s financial crisis.

Barron’s: What lessons do you draw from recent financial events?

Minerd: Mark Twain said that history doesn’t repeat itself, it just rhymes. And the events we are experiencing today look a lot like the same experiences that we had in the 1930s. There are lessons to be taken away from the 1930s that are useful in evaluating both policy and markets today. The lesson that we learned in the 1930s was not to run a restrictive monetary policy and not to allow protective barriers to go up against trade. Those have been the two things that I have kept my eye on throughout the ongoing financial crisis.

And what are you seeing?

There is no doubt that the chairman of the Federal Reserve, Ben Bernanke, is a student of history himself and is very aware of the monetary accidents of the 1930s. And as the chairman of the Federal Reserve during this period, his worst nightmare would be for the United States to fall into a debt-deflation spiral. Therefore, he is engaging in a series of policies that are creating excess liquidity in the system, relative to the mistake that was made in the 1930s. That will probably be sufficient to keep the United States from falling back into a recession. However, he is also setting the stage for events, both in the near term and the long term, that will have a dramatic impact, ultimately, on a lot of things in the United States, including asset prices and interest rates.

That sounds very ominous.

Well, in the near term, with so much liquidity available, asset prices will rise for a number of categories, particularly financial assets like stocks and bonds and commodities. That’s a bull market, which most people enjoy. But in the long run, after an extended period with low interest rates, which I believe the Fed will be able to engineer, the question becomes: How do you reverse this aggressive monetary policy without having a financial accident? And I don’t believe that the Fed will be able to pull that off successfully without some sort of a massive problem down the road. It is the problem that will occur in the next decade. And, in all likelihood, the ultimate outcome will be a paradigm shift in the way we view money. There have been five paradigm shifts in the last century on the definition of money. And it is not unusual for central banks and governments to make a shift when the problems become so big that they can’t resolve them within the financial system they created. (Italics and underlining mine.)

Ants and Us

In a profile in the Economist’s Autumn 2010 issue of More Intelligent Life, E.O. Wilson explains how he believes sociobiology extends to humans and human conflict.

“History is almost certainly colony against individual and colony against colony. If group selection is correct, what you would expect to find is an intense human desire to form groups that attack other groups; bands of brothers, teams.” Then comes the rider. “As shortages in oil and other energy sources increase, we will see insect traits. Group conflict is so deeply endemic that we will never diminish it until we confront it.”

Return of the Vampire Squid

Matt Taibbi, “one of Wall Street’s most vocal populist critics,” cements his reputation in his new book Griftopia, says Barrons magazine.

In Griftopia, Taibbi lays out a long list of heated grievances against Wall Street’s most profitable firm. If Goldman Sachs’ employees are indeed the best and the brightest, Taibbi wonders, then why did the firm need a bailout? And why was it so important for America to preserve the firm? Wouldn’t the best and the brightest be able to get jobs elsewhere, or start new businesses and create economic growth? Could it be that maybe they wouldn’t have been so good or so bright if they worked at a firm with a less glamorous name and fewer political connections? The bailout was probably necessary, Taibbi grudgingly concedes, but its structure prevented the creative destruction that might have made us all better off in the long run.

High Food Prices Emerge as Inflation Risk

Richard Barley in the Wall Street Journal warns about the impact that high food prices might have on the emerging markets.

The United Nations’ Food and Agriculture Organization’s food price index is at its highest since August 2008, driven by gains in cereals. This has a big impact on emerging-market inflation: in emerging Asia, food accounts for 40% of the average CPI basket.

The Elusive Small House Utopia

Even in the midst of a recession, (those) Americans (who are still buying) are proving resistant to the idea of smaller homes, says writer Andrew Rice in the New York Times Magazine. He notes that this year’s Builder magazine concept house was about 1,700 square feet, “the size of the average American home built in 1980.”

Since then, new houses have on average grown by more than 40 percent, as dens have expanded into great rooms, and tubs and sinks have multiplied. “Houses got too big, because people were chasing investment gains and there was cheap money, and the industry responded by building houses that were too large,” [editorial director Boyce] Thompson says. “So we really wanted to focus people’s attention on doing smaller, better homes.” He points to Census statistics that show a slight decline in the size of homes built over the past two years and to a much larger drop in the square footage of those that have just started construction, and suggests that the market may be headed toward a more austere norm.

Yet, while there is one strain in America that romanticizes the idea of the small home (think Thoreau’s Walden Pond, says Rice), there is a larger, more powerful strain that measures success and wealth in square footage.

“Everybody hates the Calvinist sacrifice; they just don’t want to hear of it,” says the architect Andrés Duany, a founding father of the New Urbanist movement and a mentor of Marianne Cusato’s. Duany argues that the sprawling homes of the last decade actually met a need, albeit imperfectly, by reproducing internally what suburban communities lacked: an exercise room substitutes for a park, a home theater for the Main Street cinema. Buyers will only accept smaller homes, he says, if their surroundings compensate them. “The idea that you can promote things — that a developer is actually going to come out and say, ‘Marianne’s house is more virtuous,’ is ridiculous,” Duany says.

Ian Bremmer on Water Security

Ian Bremmer of Eurasia Group tells The Wealth Report (Knight Frank) that water security ranks above food security as a worry in the coming years.

Wealth Report: Agricultural real estate has become a big global investment play in recent years, partly on the back of concerns about future food security. In your recent report looking at the top 10 risks facing the world in 2010, you don’t mention food security. As world populations increase and more farmland is degraded or used for development do you foresee that food security will become a more significant political risk as the decade progresses?

Ian Bremmer: Food security shouldn’t be considered an immediate risk for 2010. Longer term, I would bet on technological improvements and the ability of some of the most vulnerable states to import needed infrastructure. I’m more concerned about water security, an essential part of the food production process, but also an underappreciated element in energy production and power generation. Some forecasts call for a 40% increase in global demand for water over the next 15 years. Conditions are especially severe in northern and eastern Africa, the Middle East, and South Asia. There are plenty of fights brewing over this issue in India and China, in particular, where it’s easier to import food than water. In general, the world is going to need solid long-term planning on how best to use energy in the water production process and water in the energy production process. These are issues we really have to get right.