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Global Markets

How Higher U.S. Food Prices in 2013 Will Starve the Global Economy

The epic drought – the worst in 56 years – that has wreaked havoc on more than half the United States is setting up 2013 to deliver record-high U.S. food prices that will affect more than just our grocery budgets.

As the drought continues to kill crops throughout the Midwestern U.S., a region known as the "corn belt" because it produces 40% of the world's crop, the problem reaches farther than the dry U.S.

Now the United Nation's Food and Agricultural Organization (FAO) warns that if countries, including the United States, restrict exports on concerns of higher grain prices, the world could face a kind of food crisis like the one seen five years ago.

"There is potential for a situation to develop like we had back in 2007/08," Abdolreza Abbassian, FAO's senior economist and grain analysts told Reuters. "There is an expectation that this time around we will not pursue bad polices and intervene in the market by restrictions, and if that doesn't happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible."

Abbassian added, "The very strong appreciation of the dollar, and the surge in prices, is basically a double blow which is going to be quite stressful for some of the more fragile countries."

Related: Higher food prices are just one part of a fascinating but frightening global trend that will restrain our most vital resources, as well as your finances – unless you're prepared.

Rising Food Prices Stall Economic Recovery

The FAO Food Price Index jumped 6% in July after three months of declines. Grain markets got a boost from speculation that Black Sea grain producers, particularly in Russia, might levy export restrictions after a drought there walloped crops.

A study conducted last year by the National Center for Atmospheric Research, based on some 70 years of weather data, found that from heat waves to cold snaps to droughts, weather could cause up to a 1.7% rise or fall each year in the U.S. economy's gross domestic product. In 2011, not counting extreme weather events like tornadoes or hurricanes, the amount was $507 billion.

Jeff Lazo, one of the study leaders, told USA Today that the findings are significant "especially when GDP is growing a percent or so a year, if that."

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How Global Growth Fears Are Playing Out in the Stock Market Today

After a strong start to the week the stock market today is down on fears of a worldwide economic slowdown. Investors are dealing with weak reports from China and more signs that the drought's effect on U.S. crops is not over.

China, the world's second largest economy, has been a leader of global growth, but is showing more and more signs that its economy is slowing.

China reported its exports grew just 1% from last July, well below forecasts and much lower than the 11.3% increase in June. Import growth stalled as well, up only 4.7% compared to a year earlier, well below the June growth of 6.3%.

At home, the U.S. Dept. of Agriculture released a report today projecting an enormous drop in corn production and an ensuing spike in prices.

In its monthly World Agricultural Supply and Demand report, the USDA projected the corn harvest would fall by 2.2 billion bushels, or 22.6 bushels per acre, resulting in a harvest of 123.4 bushels per acre.

Analysts had anticipated a decline of 20 bushels per acre and a harvest of 126 bushels per acre.
The 2012-2013 crop yield is now expected to be the worst since the 1995-1996 season and prices are soaring.

The USDA said it now expects farm prices for corn to reach a record high this season of $7.50 to $8.90 per bushel, sharply higher than its July forecast of $5.40 to $6.40 per bushel.

The food crisis is affecting consumers across the world as the United Nations released a report on Thursday indicating that world food prices rose 6% in July.

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Winning the Race for Resources

The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time.

I've read he's been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It's inspiring to see the incredible results of his tremendous sacrifice and commitment.

Investing in global markets requires the same sort of stamina, especially at times like this week, when the month's reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.

However, I believe there are encouraging pockets of strength to energize and inspire investors.

For example, we're coming up on the anniversary of the first stimulus move that kicked off the global easing cycle.

On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.

In June and July alone, there were nearly 70 moves-the most since the world began this massive easing.

Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred.

Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.

China Makes Its Move

But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they've recently announced acquisitions of Canadian resources companies.

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What 700 Million People in the Dark Says About Investing in India

For years now I've preferred China over India.

When invariably asked to compare the two as investments, my answer has always been the same.

Somewhat tongue -in-cheek, I'd point out "that India has trouble keeping the lights on from one end of the country to the other."

Little did I know that those comments made in jest would actually become reality.

Earlier this week, a massive power blackout left more than 700 million people without power in India as not one, but three, regional electrical grids failed.

If that isn't a glaring sign that India isn't ready for prime-time I don't know what I can say to make you see the light – pun absolutely intended.

Don't get me wrong. There are clearly a few select Indian companies worth the risk.

But as a whole, the scope of this power failure suggests India has a long way to go before it achieves the global superpower status it seeks and a dominant position in your portfolio.

India Needs to Put its Own House in Order

Not that this will stop India from trying.

It's now the 8th largest military spender in the world, having tripled defense spending in the past 10 years. It's no secret India desperately wants to have a permanent seat on the United Nations Security Council.

And, it's making great strides in international diplomacy that it believes will pay off later in increased foreign recognition and direct investment.

But as this embarrassing power failure demonstrates, India would be better off getting its own house in order first before it steps onto the world stage.

Many investors take issue with these views. They cite the fact that India is the second-largest English-speaking nation in the world, that 58% of its economy is consumption-based, that it has huge numbers of tech-savvy and well-educated people.

I don't dispute any of that.

However, on the other side of the ledger is a laundry list of reasons for investors to be wary.

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Eurozone Debt Crisis Won't Be Fixed by "Bailout Lite"

The market red ink this morning (Monday) around the globe is the result of a usual suspect – Spain.

These days, if someone even sneezes in Madrid, Barcelona, or Córdoba (one of my favorite places, actually), investors go into intensive care all over the world.

This new Spanish influenza has been wiping out paper value from one end of Europe to the other. This morning came word that many of the regions in the country will need help. Attention is now directed from focused support for banks to wider calls for a sovereign bailout.

And that is where the whole matter can turn nasty. Word is that we should now expect some Italian cities to be requesting money in the near future. Seems California and Pennsylvania are not the only locations where cities can go bankrupt.

The accord reached at the end of June by the Council of Europe (the EU member heads of government) to bail out Spanish banks is already derisively referred to as "bailout lite." As the beer commercials attest, this is going to be "less filling."

Unfortunately, it is the heavier version that Europe now needs.

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Soaring Spanish Bond Yields Another Hit to Growing Eurozone Debt Crisis

Investors today (Monday) have been selling on news that Spain might need more bailouts as its 10-year yield reached a record high.

Spanish bond yields reached a record high of 7.56% and the latest unemployment rate sits at a miserable 24.6%.

Global stock markets plummeted Monday after Spain's borrowing costs soared on a third consecutive day amid concerns that an intensifying recession in the region would require Spain's government to request a full-fledged bailout.

The fresh worries come on the heels of a report Friday from the Valencia region, revealing that its economy would contract by 0.5% in 2013 instead of 0.2%, as had been forecast.

Spanish bond yields broke the critical 7%-mark last Thursday, a level many analysts worry could eventually alienate Spain from public markets and force it to seek a bailout similar to its ailing neighbor Greece.

"Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken, the country will need a full bailout," Gary Jenkins, managing director of Swordfish Research told the Associated Press.

The deeper worry rattling markets worldwide is that with so many of its 17-member nations needing bailouts, European finance ministers will have a tough time finding funds to rescue an economy as large as Spain. Spain is the region's fourth-largest economy after Germany, France and Italy.

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Alcoa Earnings Report Uneasy Start to Second Quarter (NYSE: AA)

Investors already have a cautious stance in the market amid growing fears about the world's biggest economies, and Monday's Alcoa (NYSE: AA) earnings report didn't help.

The aluminum producer, which always kicks off the earnings season, delivered more of a punt than a kickoff. The Dow bellwether reported an 81.3% drop in profits, as the global slowdown and production cuts weighed on profits.

Reporting after Monday's market close, Alcoa said income from continuing operations came in at $61 million, or 6 cents a share, on revenue just a hair under $6 billion. While significantly lower than the same period a year ago, the lackluster results still managed to beat Wall Street's tepid expectations (analysts were looking for 5 cents on revenue of $5.8 billion).

Chairman and CEO Klaus Kleinfeld said in a statement following the earnings release, "Alcoa maintained revenue strength amid solid liquidity by driving high profitability in our mid and downstream businesses and by reducing costs and improving performance in our upstream businesses."

Contributing to the profit decline was a global glut resulting from stagnant and slowing growth in many areas around the world, especially China.

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The Next Phase of the Eurozone Debt Crisis

Today (Monday), as we digest what happened in Europe, the obvious question arises: What comes next for the Eurozone debt crisis?

For starters, the heads of state coming out of the Council of Europe meeting last week pledged to have the new structure by July 9, even though the new stabilization mechanism will take longer to phase in.

For the first time, there will be a greater accountability (and control) over continent-wide commercial banking and access to some underwriting of debt coverage. It also means that national banking systems will need to relinquish some oversight to the European Central Bank (ECB).

For months, a number of people (myself included) have insisted that the solution to th e Eurozone debt crisis requires greater financial integration. The shortcoming seemed rather straightforward.

The EU had ushered in a more centralized monetary system (single currency and all that) but had no centralized fiscal system to parallel it. Simply put, that required adherence to currency rules without any ability to coordinate the credit and fiduciary end of the spectrum.

Well what came out of the Council in the early hours of Friday will not solve the debt problem in Spain , Italy , Portugal, or Greece. There is no magic short -term fix. But it might just provide the underpinnings for a credit system that may begin to operate.

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The banks are the problem right now

Eurozone Debt Crisis: EU Reaches Bailout Deal

The recent marathon session in Brussels was the EU Council's 18th meeting on the Eurozone debt crisis. As it is comprised of the heads of government from European Union members, the Council was largely thought of as a grand debating society.

Not this morning.

In what may well be the first glimmer of light at the end of the tunnel, the EU will agree to coordinate bailouts across the continent. The details are still incomplete, and there is always devil in the details.

In addition, EU members must approve the substantive plan, meaning more coming politics in parliaments from London to Warsaw.

So this is not a done deal.

Actually, until there is some flesh on the bones, we are still uncertain what the "deal" really is.

But this much we do know.

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The Eurozone Crisis is Far From Over

The Greek election last weekend has brought us a brief reprieve. The nation and the Eurozone have stepped back from the brink.

But the larger truth is that little has changed.

Yes, the Eurozone has survived its latest test, yet there is little indication where it will go from here. Considerable continental support for the common currency remains, and EU officials will soon introduce initiatives to consolidate banking and financial policy in the European Union.

Still, the problems keep mounting, and there is very little resolve to fix them.

At this point, a lot of actions (or lack of actions) could still upset the entire apple cart.

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