La Niña, the black swan

Yet you cannot argue that we’re seeing a bubble. On the back of Queensland’s floods, analysts from National Australia Bank are now expecting an increase in Australian fruit and vegetable prices of 30%, adding 75 basis points to the March CPI. This, alongside the blockage of Queensland grain ports - which comes in turn after estimates that half of Australia’s wheat harvest could be downgraded to fodder or milling grain - spells further chaos.

Amid dangerously accommodative monetary policy in the US and China, where the latter's M2 money supply has surged by some 20% in the past year, inflation matters dearly. As Patrick Chovanec from Beijing’s Tsinghua University's School of Economics points out, the recent fall in China’s CPI from 5.1% in November to 4.3% in December is a misleading indicator, due to the ultimately unsustainable retail food price crackdown and tepid cash rate measures. And as fellow expat academic, now securities strategist, Michael Pettis, writes this week, no lending quota - China’s de rigueur disinflationary measure - has yet to be set, much to everyone’s surprise. 

China is caught between fuelling an economy based on cheap exports and fixed investment with arguable social returns, and the commodity inflation that this development model drives. 

These concerns have been noticed by John Berthelsen and Benjamin Shobert, who respectively write that China faces grave social risks from food price inflation and food insecurity as a result of imbalanced economic policy, poor agricultural practices and the effects of climate change and deforestation. Shobert furthermore notes: “of the 13 major famines China has endured, six have been inexorably inter-related to political upheaval and conflict. China’s current leaders are aware of this part of their history,” he writes, “which is why the government’s stated goal of ‘95% self-sufficiency’ [in food supply] is deemed so critical.”

As much as the mainstream press likes to focus on China’s stranglehold of rare earth materials, the real danger in an era of trade wars and rising commodity prices is China’s dearth of food and fuel supply. China’s policy reaction to these challenges will be the ultimate determinant of whether the New Year ends in growth or ends in recession. 

It is in this context, perhaps, that China has been spending so much money on its new J-20 stealth fighter plane, tested by the People’s Liberation Army as US Defence Secretary Robert Gates was meeting China’s civilian leaders in Beijing, and on its naval ‘string of pearls’ strategy. Both as a potent symbol, and as a latent weapon, China is acquiring the means to ensure commodity supply well into the future. Suddenly America’s foreign policy in the Middle East doesn’t look so unique.

Of course the only thing that China cannot defend itself against is the whims of the planet and it seems ironic indeed that the place from where climate changing coal was mined has now been inundated by epic flood. Following a Malthusian act of nature, highly combustible coal has been tossed onto the blaze of the world's growing commodity inflation. 

And with La Nina still skipping coolly across the Pacific, more may be yet to come.

It would indeed be the ultimate black swan if La Niña pushed Chinese inflation into a cycle-busting inflation spike.