The 20 year plan...

There is an amusing TV advert for Walls sausages doing the rounds at the moment, that as a recent entrant into the world of parenthood and the ensuing sleepless nights, has struck a chord. The advert shows 2 scenes; the birth of a child and, secondly, the departure of said child from home 20-odd years later. The tagline for the sausage company is: "Wall's sausages: we only select the best bits". A bit harsh maybe, but with a 3-month old son, who's lovely, but at the same time a 20 odd year financial liability, I can get the gist. I've been doing some thinking of late about what sort of assets will have value over that sort of timeframe. In trying to select the best bits, there's not a lot that's obvious to me.

As I've blogged before, I'm not much of a buyer into the current rally in stock and bond prices, so they are a bit of a no go area. Endless streams of central bank liquidity, and the transfer of private sector losses onto government balance sheets has so far postponed a reckoning for the flawed global economic approach. Governments are pursuing what should and will ultimately be highly inflationary monetary policies. The US monetary base (coins, paper money and central bank reserves) at the end of August 2008 was about $800 billion. In response to the economic crisis, the US government has printed so much money that the monetary base has swelled to $1.7 trillion. This is the largest expansion in history and a staggering devaluation of the dollar, even if that devaluation is yet to be properly recognised within financial markets.

It means that for every dollar in America one year ago, the US government has created 2.1 more of them. At some point in time, and perhaps not for some time, there must be a serious bout of inflation or increased taxes, or both; these are the only 2 conceivable ways in which governments will extract themselves from their debt burdens. For the time being, in the "postponement period", it's possible to remain comfortably deluded; in countries where substantial stimulus packages have been promised, much of these monies are yet to be put to work - so the delusion period may run for some time.

In the context of the 20 year time horizon I'm thinking of when I plan for our son's future, I'm pretty sure the proverbial will have hit the fan sometime between now and then. With that in mind, I am looking for long-term fundamentals that will almost certainly play-out over an extended time period.

The obvious suggestion, given my views, is to put money into gold - as a hedge against inflation and the effects of a weak dollar. As I've written before, I can't fully get my head around that - since the US broke any direct linkage between the dollar and gold 38 years ago, gold's relevance should theoretically have waned. Granted, the supply of gold is limited and it has been an excellent store of value for centuries, but I can't get a proper grasp of the fundamentals. The only reason it seems to be so popular is for reasons that are no longer relevant - it's a 1000 year fad, that may continue for another 1000 years, but I can only partially rationalize why this fad continues. There is a chance that gold hits a tipping point - unlikely - but possible.

So here is where I am at so far on this quest. Inspiration was provided in the form of a recent David Attenborough nature program in which he said that since he had started making nature documentaries, that the worlds population has doubled. A fairly striking fact.

The world's population has risen from 2.5 billion in 1950 to 6.8 billion. It is growing by 75 million a year and is almost certain to exceed 9 billion by 2050. Thirty years ago half the world's population were not even participating in the world economy, and now they are trying to live like we do; consuming in the same expansive ways. That emerging megaforce will put a substantial squeeze on commodity prices - in particular on basic food stuffs, like wheat. The average daily per capita consumption of oil in the US at 0.677 barrels (an amazing 26 gallons per day)., vs. India's infinitely smaller consumption (0.021bbl.s) and China's (0.049 bbl.). Even if the Chinese and Indians just start consuming as much electricity as Koreans now do, the price of oil will take off. As a fairly fundamental farming input, the knock-on effect for agricultural commodities is likely to be substantial.

It's clear that the world is in the early stages of an unprecedented explosion of the middle class, and the pace will likely pick-up significantly. India and China, where half the world's population live, are a the center of this movement. A recent Goldman Sachs report suggested that India's percentage of people in the "middle class" increased from 1% in 2000 to 5% today, but if growth conditions along the lines of their projections become reality, the vast majority of Indians could be in this group by 2040. One characteristic of "middle class" Indians or Chinese, for that matter, is that they are much more likely to have meat as a regular part of their diet. It takes 9 times as much wheat to put meat on the table (feeding pigs/cows etc.), than to put bread. What seems inevitable is that as the global population continues to grow exponentially, and as the world's middle class grows, the pressure on basic food supplies is only going to increase.

Now this I can rationalize, even if it does scare the hell out of me. Maybe farmland is the answer to financing our son's future, and an early enrollment in agricultural college. Back to his Irish roots!