Food prices 'will double by 2030' - BBC

"Food prices 'will double by 2030'"

I caught the thread on the BBC's Today program this morning. You can find a the article on the BC website here. Basically food prices will double in the next 20 years. I think that this is the basic medium term story for commodities. Things are exacerbated by a growing middle class who want to eat "Quality Food". Quality food is a euphemism for meat and a brief conversation with almost any vegetarian (many of my friends and family are vegetarians) will tell you that meat is a far less efficient way of producing food. It takes, from my ropy memory, 10 times as much land to feed a non-vegetarian.

Tesco & Branding

As a reader of the Motley Fool (an excellent, and free publication) I came across their article about Philip Clarke (Tesco CEO) vision. You can find the article here. Owning a slice of Tesco is the only thing that I know of that Warren Buffett and I have in common though I suspect I may well have the ability to make an expensive suit look cheap.

Looking through the article I noticed that Tesco want to focus, amongst other things, on developing brands. Philip Clarke put it as: "To be a creator of highly valued brands". This is interesting. To my mind there is a natural conflict between supermarkets and brands. The manufacturers of brands have a higher margin than the manufactures of generic goods. People want to drink Coke even though blind testing shows that few can tell the difference and often people prefer competing products. Strong brands give pricing power. They are the classic moat and a moat like Coke is a hard one to breach.

The emerging markets and growing middle class is a natural area of expansion for both the food manufactures (Nestle, Denone, Kraft, Pepsico and friends) as it is great expansion ground for the big supermarkets - Tesco is expanding very aggressively. It will be intersting to see how the brand war shapes up there as it does here.

David Herro - Value Investor

"The world ,as we know it, is ending" - David Darst (Morgan Stanley chief investment strategist).

This is the first time I have republished a video that was posted on somebody else's blog. This video appeared on Dah Hui Lau's blog yesterday. I am cheap enough to grab his video and post it myself as it was interesting. I am in good, cheap, company as WealthTrack, who publish the video, are themselves cheap enough to preamble it with some good wholesome advertising, followed by sponsorship - after all while you are waiting for the video to start you could be coming to some (subliminal) decision about products to buy. And why not?

David Herro is a Value Investor who achieves 9-10% average returns. The interview covers his investing philosophy gives some insight into his style. Here are a few points I picked up from the video:

• News is getting much more rapidly priced into stock. David finds that he holds onto stock far shorter (half the time) than he used to. He did not say if the discrepancies between cost and value are smaller. If they are not smaller then he should become more efficient as a value investor as Mr Market is less sluggish in figuring out that there is value.
• He sees a much greater market volatility and believes that it is here to stay. The volatility he sees washes across different sectors (asset classes) of the market. Presumably volatility is what you seek as a value investor as volatility implies that there will be times when stocks will be attractively priced.
• He sees an acceleration of economic expansion in developing world and decellaration in the developed world.
• He seeks to buy quality stocks.
• He is investing in Japan and now sees Japan as a home of improving corporate governance, and that there is good value. He currently holds Diawa Securities. Personally from what I have understood of corporate governance in Japan, (gleaned from Aswath Damodaran's lectures) is that the cross-holding structure corrects when there is an individual management failure in a single company but it is resistant to any kind of management cultural change. Additionally there is the curious practice that stock buy backs enable the company to vote for the shares that it bought back.
• He invests in Europe and points out (living in the UK this is no news to me) that Europe far from homogeneous boasts a wealth of economic policies, labour laws etc. But, of course, there is value to be had across Europe - Titan Cement in Greece (is an example). And he likes the corporate governance of Sweden as often a Swedish company will have part of its employees pension invested in the company and have a trade union presence on the board. To me this is a fantastic way of reigning in any recklessness in the board room and getting the employes to think of themselves as owners as well as the management.
• He is currently wary of Emerging Markets - and cites high prices and a great deal of lousy corporate governance. You should price this corporate governance in (it's risk after all) to your valuation. He sees the macro effect of demand (growing 10%-12%) from the emerging markets as a source of demand and a driver for global economic growth. The developed world OTH has lots of debt, low savings rates and therefor can not pace-up demand.
• When evaluating a company he looks at the macro influences on where the company makes its money. This is different from, my understanding, of the Buffett Munger approach where you look for outstanding companies and pay little regard to the macro picture.
• He invests in Small Caps and cites them as outperforming the market by 1-2%. This is consistent with Guy Spier, and Cale Smith (a value investors I particularly like) who hunt out small caps. Guy, as I remember, says that smaller more volatile stocks can represent better value. Francois Bonnin put it as "The greater the liquidity of an asset the greater the amount of information that is embedded in the price".

And what would an interview be without a tip? David recommends Diageo. As people age they transition from beer to spirits. Profit dynamics great - good return structure and good at allocating capital 10x cashflow. And my opinion what-do-you-know the middle class (and out there as the world develops boy is it growing) likes to drink, amongst many other things.

Enjoy the interview.

"People abandon common sense when macro trends disrupt them."

Obama - BBC Interview with Andrew Marr

A really excellent interview with Andrew Marr from the BBC. Andrew Mar probes Mr Obama, I think, quite carefully as well as with quite a lot of respect on forgien policy, Osama, Pakistan the Middle East. I watched it on BBC iPlayer - here is the same interview on youtube. It is well worth checking out.

Inflation - uniformed thoughts

I have been thinking a fair amount about inflation over the past months and this is a short summary of my understanding of inflation and general thoughts. It is a mixture of uninformed opinion and conjecture.

Inflation can be thought of an invisible tax. Whatever it is you have saved will buy you less in the future than it will do now. If you look at is as a tax it is a particularly clever one as even collects its self (no bureaucracy requited) whatever money you have is taxed.

The way that inflation affects you is dependent on what you buy. One of the most memorable accounts of inflation I came across was from Ron Hosen (a value investor) who discounted reports of inflation on the grounds that he had seen little inflation in the goods that he bought - most notably rotisserie chickens. In rotisserie chicken terms Ron had seen no price change at all so he was entirely correct in identifying that there was no inflation. I live in a different part of the world and consume a different set of goods than Ron and I have been experiencing a much higher level of inflation. Things just cost more, that is the things that I buy cost more. Most notably food costs more, gas and electricity costs more and for many years council tax has increased. If, in a homage, to Ron (who I have a lot of respect for) I look at poultry as a measure of inflation then when Virginia, now my wife, moved in eight or so years ago Tesco's economy turkey legs (there really is a meal for two in a leg and a damn good one if she cooks it) which were 89p each and now are I think £1.25 - is that 40% in eight years.

The serious part about inflation is what it affects and how it affects you. The government RPI and CPI are based on a set of goods and services. If your consumption is different from either of these two sets (and it will be) then inflation will affect you differently. If you, over the last few years, have bought consumer electronics then inflation has been kind to you. For many other goods (what I would consider the basic staples) it has not.

The counterpart of goods inflation is wages inflation. Over the last couple of years my wages have risen buy about 1% a year so I am a net looser. I mention this as an example rather than some kind of back-handed complaint, I am not complaining. However lets look at it - as my wages do not keep up with inflation the invisible tax gnaws away at my future earnings, and so attacks my future ability to save as well as what I have managed to save. Happy as I am with my job (great job BTW) financially I am bitch-slapped. We are currently in difficult economic times so generally people are relived to have a job - which makes wage inflation less likely. Even if they are not pleased with this, when the economy is slow the opportunities for moving to a new job are not good. As I understand it this sort of state of affairs is called Stagflation.

So does anyone benefit from inflation? Well if you get inflation your savings are attacked. If inflation is greater than interest you actually end up with less as time passes. Just look at your savings as "Tesco's economy turkey legs" and you have less. But what if you have debt? Well this is interesting - as long as your wages rise corresponding to inflation then your debt gets cheaper. At the moment at the NationWide building society I can borrow money at 7% or so for a personal loan - if inflation is 5%, and my wages were to keep up what do I care - as hey presto my loan is just 2% in "Tesco's economy turkey legs". If you are a government that can not balance it's books and has debt you can nibble away at it with inflation. What is owed shrinks. And who pays? well those who lent it money.

Looking at the medium term I personally expect inflation, to continue at levels greater than the Bank of England target (2%) and I would imagine greater than wages. Why? Well we are at the start of a new era where the balance of the world allocation of wealth and resources is changing. Currently 20% of the population have 80% of the wealth and this is changing. Also there are simply more people in the world - the population of the world is compounding. What this means for us (one of the 20%) is that it would seem that there is going to be just less to go around. A part of this is that we have limited natural resources and these will have to be spread differently, but also we have limited capabilities for growing food and that the world GDP won't necessarily increase fast enough to stop the people with more having less.

Naïvely, from my point of view, one of the things that seems to have kept inflation low in the UK is the influx of Chinese [imported] goods over the past years. My guess is that our currency has hung in there stronger than it should as our economy has reenforced its self on mushrooming consumer debt. So things change - debt is not indefinitely sustainable. Politically any boom is good, and the reverse looses you elections. So with when Brown was talking prudence and was fighting with No 10 and managing our economy the consumer led boom bubbled up with consumer debt. I suspect that the economy was really weaker than it seemed to be (debt made it appear stronger) and as we come to terms with this we experience the weakness we should have had - but with "interest" as there is never a free lunch.

Goods from China will become more expensive. China has growing aspirations, a growing middle class, growing wages. Recently the yuan has been allowed to appreciate against the dollar and my guess is that this appreciation will continue. I am sure that production in China will become ever more efficient - but I also can't fail to see that prices won't increase. How else do you pay for a growing middle class. I mention China as it is large, and in the forefront of people's minds, but it is not the only accelerating emerging economy.

Assuming inflation bites down on, and our wages fail to keep pace what will the effect be? We will have less and more of what we have will be spent on essentials. On the back of this is it not reasonable to assume that house prices will fall and rent will fall. Why? well rent and house prices soak up a huge amount of the slack in your personal finance. Discretionary spending will suffer.

The key issue here is the rate of change, the rate at which we become poorer. Go to Cuba and the average Cuban says "we have nothing". Compared to much of the 3rd world the average things are not bad in Cuba (though I will say for the avoidance of doubt not as we have it in the west by a large margin). As a whistle stop summary life expectancy of 76, education is good, more-or-less complete adult literacy. They have food, housing, low unemployment, strong family. Their perception has, to an extent, been colored by a sudden horrific drop in their standard of living. Compared to how they were before the fall of the soviet union and ratcheting up of the US trade embargo they have little. If this change had seeped in slowly over a generation or two it might have been easier.

So what do I hope for? Well I hope for a reasonable rate of change - that way we can adapt and adjust. Change upsets people, it is confusing, too much of it all at once always causes problems.

Mohamed El-Erian - Bloomberg Interview

Mohamed El-Erian, CEO of Pimco is one of the people that I specifically look for on YouTube. His videos are clear, interesting and instructional. I really like his take on things. In this video he talks about debt in the major economies, how is it going to be handled, what that means for investors - you just have to look at countries that have a better balance sheet or that do business with countries that have a better balance sheet. As bad-boy Clinton might say- it's the multi nationals stupid.

Mr El-Erian also talks about the IMF and Dominique Strauss-Kahn and the implications of Mr Strass-Kahn's situation, as well as touching a bit on his succession. I can not imagine the IMF being in much better hands than Mr El-Erian but there is this "problem" that he is neither American or European.

Guy Spier - Value Investor

An interesting interview with Guy Spier in the Manual of Ideas can be found here.

Guy is famous for having paid $650,100 for a lunch with Warren Buffett as the result of a charity auction that he won with Mohnish Pabrai. Far more important than how he spends his lunch times is what a man does - Guy is a committed value investor. Looking through the posts I have made I note that so far I have not posted anything about Guy - in spite of the fact that there is an excellent interview on Opalesque TV. I don't doubt I will dig it up and post it at some point soon. It is an excellent interview.

Jeff Immelt of GE - Interview

This is another Stanford Interview - this time with Jeff Immelt of GE. Geoff is an engaging and entertaining speaker. He talks about GE, managing GE dealing with problems and the challenges that he faces and will face. Here is a summary of some of the things that I got out of his lecture - but there is a lot in it.

• CEO needs a point of view of the world - and needs to invest using the world as you see it. If you are investing in a company it would seem to be a good idea to have some kind of faith in the management vision.
• We are in a reordering of global economy - this is something that is well mentioned by other leaders 20% have 80% of GDP this is changing. Also in his opinion europe will be slower growth region 5-10 years.
• Notion of productivity & cost - there will more products at more price points. Sell products at low price points and still make money as you attack new emerging markets.
• Resource scarcity - resource rich parts of world will be interesting. For example Angola. Kazakhstan Ubikistan Russia. Also conservation technology (to conserve scarce resources) is/will be interesting.
• Networked world. Not only IT but also collaborations - joint ventures etc.
• State economy - Governance through the world are very influential in business.
• World is and will become more volatile.
• You have to plan for the long term.
• You need to understand how things fail.

"A CEO drives change and develops other people."

Ed Catmul - Pixar (Great Interview)

Generally I post videos of investors or managers - that give me insight to specific points that are sort of investment related. I post them amongst other things because I use my blog as a record of things that I am interested in and can refer back to. A couple of weeks ago I was looking for that great video with Ed Catmul and could not find it.

So this video by Ed Catmul is just a really good video. It tracks the change of Pixar from being a company that produced software to a company that produces (primarily) animated films - the growing pains, the issues and how they were solved. It is a really excellent video and shows some really good management. Good management has undefinable qualities - I seem to remember somebody one saying "I don't know how to define obesity - but I know when I see it" - there is a lot of good management (I can see it) and good learning in this video. Enjoy!