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When pigs fly 2

A few months back we wrote an article titled, When pigs fly. In that article we postulated that the supply/demand imbalance in pork was going to see extremes that haven’t existed in decades. If you haven’t read that first article it’s worth taking a moment to go back and digest it, no pun intended. The quick version if you don’t want to read it is that African Swine Flu in China is decimating the country’s supply of pigs as we predicted. Well a lot has transpired since then and we’ve been educated quite a bit ourselves, one of the perks of being in a business that requires non-stop global analysis.

For example, our team learned that pigs are smart. Yeah I know what you’re thinking — you already knew that. Ok smarty pants, you probably knew that pigs are smart compared to your dog or cat but did you know pigs are smart as in they can play video games better than a 3yr old human? Pretty amazing.

And the connection between pigs and video games does not end there. NetEase, a Chinese online gaming and e-commerce company, unbeknownst to most of its investors, has been in the pig farming business for nearly a decade. With the severe pork shortages hitting China the company is making an investment to increase its pig farming business 400% by 2024. Wow! That’s different!
Since we published our original article on July 2, 2019 pork prices in China have surged almost 57% and we think that’s just the beginning.

It’s fun to joke about video game-playing pigs but there’s something more important to keep an eye on and that’s inflation. In our opinion we have already entered a global slowdown, but we also believe we may have the right ingredients for global stagflation.

Without a degree in economics (no one on our team has one by the way) stagflation can best be explained by seeing a drop in the value of the things you’ve typically invested in such as stocks, bonds, real estate; and an increase in the things you need like gasoline, electricity, food and medical care.

Stagflationary environments are brutal and the U.S. hasn’t seen stagflation since the 70’s. China’s statistics are notoriously unreliable so its a bit harder to pin down the exact last period where China experienced stagflation, but many have argued there’ve been various elements of it since 2011. In the chart below we plot year over year changes in Core CPI in the U.S. (blue line) with Core CPI in China (red line).

As we mentioned we don’t really believe China’s data and regardless of Beijing trying to keep a lid on consumer prices we think that price increases are just getting warmed up. In the U.S. things are really scary. Core CPI came in hot at 2.4% which is a ten-year high! Fed Funds rates are now well below Core CPI. That makes the Fed’s desire to lower interest rates highly constrained. If the Fed has to raise rates to fight inflationary pressures it will come at the worst possible time and we’ll see both equities and bonds fall simultaneously.

Things are going to change quickly and in ways most people wouldn’t anticipate. The lesson of the day is that we should always be learning new skills because if we don’t there’s a smart pig out there learning to fly.