Is The Global Food Supply At Risk? With Shawn Hackett

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1:24And now to the top analysis of today's markets. Is the global food supply at risk? Hi, everyone. Welcome to this extended Real Vision daily briefing. In just a bit, Sean Hackett is going to give us his outlook for global agricultural commodities and how weather is likely to impact crop production. But first, my colleague Ash Bennington is here to fill us in on a couple of really fascinating conversations he's been having. Hi, Ash. Hi, Maggie. It's great to be here with you. Great to see you. So we saw U.S. stocks sell off for the third day in a row today. NASDAQ down 1%. Very interesting in congressional testimony today.

2:01Fed Chair Jay Powell said he expects more rate hikes and more in the inflation fight has a long way to go, kind of resetting those expectations or trying to. This struck me as very interesting in light of a deep dive conversation you had yesterday with an expert in commercial real estate. A lot of people have been asking us about that topic. Let's have a listen to a clip from that, and then we'll talk on the other side. I've done these calculations. You can have a perfectly healthy Class B office building in New York City be worth$100 million in 2019. Now you let this asset experience this triple, I call it the triple headwind, the triple headwind of higher rates, cash flow trouble from remote work, and climate regulation.

2:48And this asset is worth$38 million. It lost 62 % in value. And again, I don't think this is hypothetical. This is the revaluation of that asset. This$100 million plus B office building is now worth$38 million, which means somebody needs to take a massive loss. The equity is wiped out. That takes a big loss. So Ash, I loved that example because it was so clear about what's going on sort of underneath the surface for commercial real estate. That's a big valuation reset he's talking about, especially if the Fed's not done. Yeah, absolutely. Particularly if we're in the middle of this long sort of twilight struggle against inflation as rates rise.

3:32You know, Stan von Nuremberg, the professor who we just spoke to yesterday, is a professor of real estate at Columbia Business School. And he's something of a rising star in this space because he's been doing some of the actual underlying modeling and calculation about what's happening here. And I expect we're gonna be hearing a lot more from him shortly. In fact, yesterday, right before we went on the air, he said, one of my students just messaged me. Apparently I'm quoted in the Wall Street Journal today. I think there's gonna be a lot more of it. Let me break down what he said because he makes some really important points.

3:59First, he mentions a class B building as an example. That's important because there seems to be this flight to quality happening right now in commercial real estate, particularly in office real estate that he's talking about. So he talks about three factors here, three structural headwinds, rising interest rates, working from home, being unmasked, obviously, and accelerated by COVID and climate regulation costs. Now, we're not talking about anything political here. I'm not saying anything about the underlying nature of climate change, just that the mitigation impact, the mitigation effects here that are being done are going to have costs.

4:31This makes sense. If you're essentially going to have to retrofit buildings to be compliant with different standards, it's going to have a cost. He talks about a 62 % drawdown in valuations based on cash flow. That would be simply catastrophic. Additionally, we should point out, he makes this citation about how equity holders get wiped out. This is an important point, understanding the capital structure of commercial real estate more generally. A lot of this stuff is done by debt financing. This is probably intuitive to most people. If, for example, you buy a house, you typically would go and borrow from the bank, take out a mortgage against it.

5:04Now, what's happening here, you know, in commercial real estate, they talk about cap rates. That's a measure of the rate of return on a particular property. In its most generic form, it's a measure of the cash flow against price, a little more technically net operating income against property asset valuation. What winds up happening is the equity holders get wiped out in this scenario of a 62 % drawdown. These are some very, very sobering numbers. Yeah, eye opening. Professor, to put it mildly. I think it's fair to say like you did not geek out on this at all, did you, Ash? Like I could tell just a little bit, but it's great because I know you've been thinking about this.

5:39We've been getting a lot of questions and having viewers ask us to do a deep dive on this. And it's fantastic. And you guys cover everything. You really set the table. And then he goes into really specific parts. We hear everything being tossed around, but he really breaks it down. Where are the vulnerabilities? Where does he see the risk? Some really fascinating stuff about SASB loans, I think, or SASB, the way things are structured now and the changes from before. So really, really want to encourage anybody who wants to understand about this, about this topic to have a full listen of that. So we're like rocking and rolling right now, because you also spoke to, hardest working man in showbiz, spoke to Caitlin Long from Custodia yesterday.

6:19Caitlin's been at our events. Amazing, amazing knowledge. But for those who may be listening who aren't as familiar with her, just give us a little background on why we were so psyched to have her on. Yeah, so Caitlin is a very well-known person in the crypto digital assets space, as you said. She's the CEO and co-founder of Custodia Bank. I call Caitlin a triple threat. She's one of the few people in the crypto space who understands all of the three major components of the space. Number one, she understands the finance and economic models here that are used to understand how this stuff works.

6:52Number two, she understands the technology. And number three, she understands the legal, regulatory, and compliance aspect of the space, which is becoming incredibly important, particularly with regulatory actions like SEC. Caitlin actually has a degree in public policy, a master's from Harvard, and also a law degree from Harvard Law School. So she is incredibly well read in on these details on the mechanics of all this stuff. Right. And the thing I love about having her on is that so she is sort of a pioneer, certainly in that space. But she is super knowledgeable about banking. I mean, she comes from from TradFi.

7:24She really understands this sector. So she's got this great sort of foot in both worlds, which is really important now. We know from a macro point of view, we just talked about we're talking about vulnerabilities. We're worried about the banking system. But she's also really in the weeds on the regulatory system. And it just so happened that the both of you talked about a developing story in that space, in this sort of regulatory bank supervision space, that I think it's very important. A lot of people missed it over the holiday weekend. Let's have a listen to that. Well, there are a number of names of questionable or likely ineligibility who are incumbents.

8:09Right. So, you know, last year there was a big brouhaha over a trust company called Reserve Trust that enlisted a former Fed governor, allegedly, to help it get its application over the finish line, which was successful. And that actually broke into a big story of revolving door favoritism at the Fed, denied by the nominee. But it actually ended up taking down her nomination for Fed chair. This new database, in my mind, releases a whole new thread on that reserve trust story. I don't think reserve trust was eligible for a master account. It got one, and then the Fed ended up revoking it for eligibility reasons.

8:53But what no one knew at the time was that there were large incumbents who had the same structure with the same issues who had Fed master accounts all along. And that was kept very quiet. And again, it's no wonder why the Fed dropped this database on a Friday afternoon before a three-day holiday weekend. So, Ash, master accounts at the Fed, no small thing. This is an important subject. It's not one that is sort of in the headlines all the time, but this is important. Yeah, it sure is. And it's coming off a data dump where the list of banks that had these accounts came out. The important thing here for people to understand is that this is the ability of a bank to bank directly with the Fed.

9:35It's incredibly important in the crypto space because as we've seen with the spate of bank failures we had earlier this year, If you have exposure to one of those banks in your crypto shop, you could potentially be in serious, serious trouble with counterparty risk. The reason this is so important to Caitlin is because getting one of these Fed master accounts would allow a shop like Custodia to bank directly with the Fed and therefore eliminate the counterparty risk. But even more generally, more broadly, and Caitlin makes this point in a very eloquent way during that conversation, it's important because it's about incumbency bias.

10:07If you're a big bank, if you already have those relationships with the Fed, it's significantly easier for you to continue doing business than for new innovation to come online, which is what many of us in this space are so passionate about. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

10:31Yeah, but I think more broadly, when there are vulnerabilities and fragility in the banking system, people don't want to be exposed to counterparty risk for any commercial bank. And I think at some point she made the observation that there's a state on there. No other states are on there. And this is just released. They were forced to disclose this. So the other state treasurers are like, hang on a second. Nobody wants to be exposed to commercial or counterparty risk if they don't need to be. So a little bit wonky, but it speaks to the sort of functioning of the banking system. And we all know that we have to pay close attention to that.

11:04So I love I love both of these store both of these interviews because they're sort of digging in below the headlines on things that the professionals know about. But often the ordinary investors, you and I don't hear about and don't and no one talks about it. So we're always trying to sort of push on that to make sure we keep people informed. Ash, I understand at some point there was a topic that both of them are watching, which is probably something we should be watching. What was that? Yeah, that's exactly right. And it sort of orbits the same constellation of issues that we're talking about here, which is the challenge of what happens with capital flight in banks.

11:40We've been talking about this on Real Vision before. In the 1980s, a very quick bank run may have taken weeks. Today, it takes hours. If you are a depositor in a bank and above the FDIC limit. If you hear rumors that there's the risk of insolvency, you grab your phone, you jump on it, and you start moving funds to any big money center bank you possibly can. That's the risk right now, which is capital flight, the risk of future insolvencies. Both Caitlin and Stan raised these very core fundamental questions about the basic nature of fractional reserve banking in the United States today. Caitlin goes a little bit farther on this than Stan does, but you can see if you watch both of those interviews side by side, back to back, There are both significant concerns about whether or not the regulations that we have in place and indeed the very basic business models themselves are as current as they should be.

12:31And if these challenges bring risk into the system, it's a very big question and one that we explored with both Stan and Caitlin yesterday. Fantastic. Amazing stuff. Ash, thank you so much. Love it. If any of you have not watched them yet, you should go and do so. They're on the platform. And if you're not already a member, scan that QR code and come join our community. We're trying to stay on top of all the stuff that you need to know. Maggie, if I could just say one final thing. Yeah. This is what Real Vision was built for. These conversations, these types of topics, the kind of deep dives that we're having right now, and the kind of deep dive you're about to do with Sean.

13:05Thank you so much for letting you join. Yeah, great stuff. That's it. You could have said it better, Ash. Thanks so much. I know that you probably got 12 more to do now, so we're going to let you go. But thanks for being with us. All right. So as you said, we're going to switch gears and talk about another issue that a lot of you have been asking us about, and that's the outlook for global crops. Back by popular demand, Sean Hackett, president of Hackett Advisors. Sean, it's great to see you. Hey, Maggie. It's great to be here. I know we had a great conversation last time, and a lot of what we talked about back then is actually happening.

13:38Our forecast has almost been perfectly correct up to this point as we're dealing with a major drought now in the United States. Yeah. And all kinds of weather activities that we have literally been, you know, we keep saying choking on, but it's so true. I mean, it's just been so prevalent, the volatility this year. So I want to sort of walk through what you're thinking about now, what we need to understand, because every time this has come up, we have had people say, can we get Sean back on? Can you get Sean back on so we can talk about this? And of course, importantly, how it's related to some of those agricultural commodities that a lot of people have been playing or maybe looking to play.

14:14Just a reminder before we dive in, though, this is extended daily briefing. We're going to go past the half hour, but in order to stay with us for the whole conversation, you need to be a member. So same thing. Get on that QR code, get on a trial so that you can participate. And we're going to take as many questions as we can. So be ready for those. So, Sean, first of all, you, of course, we always turn to you. We want to understand the intersection of these changing weather patterns and the economy. I want to start with just what is going on with those Canadian wildfires. We all feel a little bit of relief right now, but it's kind of been moving around the East Coast, disrupting all sorts of stuff.

14:53Is there a weather pattern that you're watching that can explain why it's so bad this year? Well, first of all, I'd like everyone to understand the fundamental belief that we have when it comes to climate, Maggie, is that if you understand the statistics, correlations, and cycles of the past, you can generally have a pretty good idea of what future climate's going to look like. We talked about on Real Vision for many years now, this idea of the grand solar cycle minimum. That's an extended period of up to 30 years where the sunspots activity or the sun's activity of sunspots is at least reduced by 50%.

15:39That action tends to amplify the upper air flow factor called the jet stream. And so instead of the zonal flow that we have been with our entire lives, we go to what's called this meridional snake-like amplified flow. And what's going on in Canada is a reflection of this extreme upper airflow pattern. And what it means is that you have very, very high amplitude winds going back and forth. And where the upper airflow pattern sets up the high pressure system, it's exceedingly dry, it's exceedingly hot, and it creates these extreme weather events like fires that we've seen. And last year out west, we saw all those forest fires.

16:27And now it's up in Canada. And this is going to be a more consistent feature that we're going to see more and more as we go along. One of the contributing factors, Maggie. Hold on one second, Sean. As you're talking, I think, Brian, I think we're looking at, I think there's a, it was probably last in the list I gave you, but there are two globes. I think this is what two worlds on that graphic. I'm looking at it right now behind the scenes if you want to. No, you had it before. It's right at the beginning. Yeah, the one. Yeah, I put it last, so I reordered them, Sean. Yeah, that one. We can see one screen that you guys can't see, if you're wondering.

17:00We're not magicians, but that, just so we can see, because I think that's the one you're talking about, right, Sean? It is correct. And I think it really illustrates what you're saying. So finish your thought about what this means for us. Well, normally, when the sun is normal and we have normal sunspot, the left zonal flow is from west to east. It doesn't create a lot of weather volatility. Storms come in, come out. We have what we've had up until about five years ago. Then the world on the right, which is that snake-like jet stream, starts to develop as the sun goes quiet. And so where you see the upward undulation of the jet stream, that's a high-pressure system.

17:42That's where you get hot, dry weather. And because you have this undulation of north to south, you get extreme winds that also come from it. And so there's three things you need for a forest fire to really be an issue. You have to have a lot of dry weather, has to be hot, and you have to have very high winds that spread that fire like wildfire so that you start, it spreads. And then obviously the smoke that came into New York City and has been coming into the Midwest becomes amplified. But it's one of the manifestations of this 30-year period of low solar activity and high amplified upper airflow pattern.

18:21The same thing, by the way, occurs in the southern hemisphere. There's a jet stream down there as well. It's just on the opposite side. But it is a dramatic change in weather volatility of an order of magnitude more than normal. And it's not going away until the sun goes back to normal. And based upon the history of this 220-year cycle of lower sunspots, we have another 30 years of this pattern to go before we can get ourselves back to normalcy. And that's the challenge for growing food. That's the challenge for how do we manage this weather volatility? And how do we handle these rolling food shortages that have become more prevalent as we go forward?

19:01Yeah, that's alarming to hear that. And we know in the case of the wildfires, so it's interrupting crop, but it's also economic activity. They had flight disruptions. We had people sent home from work. I mean, it was extreme. But if you're talking about dealing with that with more frequency, we're talking all kinds of economic disruptions that we have to be aware of. Wanted to pull up another chart. I don't know if it's related to this or if it's going to speak to the potential drought conditions, but you had one on the heat content of the Greenland Ocean waters. So we were talking about the sun, but what is the impact of the ocean water going to have on climate patterns?

19:42The sun's motion and activity and the moon's motion are the gravitational forces that impact ocean currents daily and the long-term current called the thermohaline system. It's like the Gulf Stream, for example, off the coast of the East Coast. There's a 40-year sea surface temperature cycle. So we go through 40 years of warming, and we go through 40 years of cooling, and then we go through 40 years of warming. This cycle has been going on for hundreds of years based upon this activity of the sun and the moon acting on the Earth's oceans. The chart shows that at the end of these cycles, at the end of these 40-year cycles, you get extreme weather volatility and extreme weather events.

20:28So, for example, in the 1930s when we had the Dust Bowl in the United States, that was the last 40-year sea surface temperature warming cycle that signified by one of the worst hot, dry weather patterns the U.S. has experienced since that time. But notice that when we had the cooling that troughed in the late 1970s, early 1980s, we had the global cooling scare. Extreme cold weather, extreme winters, short duration growing cycles. Once again, an amplification of weather volatility. And of course, now we're nearing the peak of the 40-year sea surface temperature cycle, which means that we are now, This actual cycle completes around 2025, Maggie.

21:14So we're in the zone where this hot, dry fires, we're in this last three years where the most extreme portion of this cycle is about to be seen, which makes the next three years exceptionally more volatile than normalcy before the cycle starts to turn around again. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:45Oof. Okay. So if we talk about some impact of this, let's get a little bit more. We're talking broadly, globally. Now we're going to see all this volatility. If we look at the U.S., it's been a weird, I mean, I think most people feel like that. But forest fires aside, it's been a little bit of an, it feels like an odd weather pattern that a lot of people have been in. What is the situation for the farmland? I mean, U.S., huge food producer for the world. What are we looking at in terms of how the crop productions look in the U.S.? Remember in our last conversation in February, I think it was, we talked about the Gleisberg cycle.

22:27Yes. which is an 89-year cycle that typically there's a three-year period where the U.S. is at high risk of a one in 50 to one in 100-year drought. 2023, 24, 25 is your three-year window, like 34, 35, 36 was in the Dust Bowl. We discussed that you cannot have one of these if you have an El Nino. You can have it if you have a La Nina or you have a neutral condition. One of the biggest misconceptions that has occurred this year is everyone assumed because we were transitioning from La Nina to El Nino, and even though El Nino has technically been triggered by 0.5 plus degrees above normal in the central sea surface temperature of the Pacific, it does not mean that the atmosphere will immediately act like in El Nino.

23:21It does not work that way. So one of our big forecast was that the United States, because of the Gleisberg cycle and because of this delayed reaction to a transition from La Nina to El Nino, had the potential for an elevated risk for a high order drought. Majority of all weather men that cover this stuff for grain markets, majority of grain analysts were calling for El Nino weather, cool, wet, fantastic record yields, and they crushed the grain markets into the spring. We warned that we were expecting to see that on our last show. But now the tide has turned and we have an extreme drought cycle in the central eastern grain belt.

24:04In fact, if you look at moisture precipitation from May 15th to the current, it's the second - So I think we have a chart. I'm gonna just interrupt you and jump into it because your charts are so awesome. We're gonna drop them in the chat, everyone, so you can really zoom in and look at them. But I think we have one talking about the US's already experiencing high order drought. So if you try to get that up, Brian, while you talk, yeah. It's a different chart, but that's fine. That's a forecast. Even if he tried to put them in order, he'll find it. So I think the important point here is that they were expecting fantastic conditions, but that's not what has transpired.

24:45No. Like I said, we have the second driest start to the growing season from May 15th to the present in 50 years. Only 1988 was drier up to this point. Now, I'm going to say something that's very different. Every major drought that the United States has had that's created a major crop problem has been hot and dry. This year has been cool and dry, meaning that we've not had a hot summer in the Midwest. We've had extreme, you know, one in 50 year low precipitation, but it's been on the cooler side. But the key to the corn crop specifically is pollination, which occurs in July. The big thing that we are focusing on is can heat come in for the corn pollination phase where the crop can really get hit hard?

25:36Or are we going to keep this cooler, drier pattern? Right now, our best guess is that we're going to not see extreme heat this current crop cycle. We could see some warmer temperatures. It's going to be a severe crop problem. But when you're talking about something like the Dust Bowl or 2012, the last time we had a major drought, you're talking about crop yields like corn down 20 % below trend. In order to get that, we need heat to come in during pollination. We don't think that's going to happen. We're thinking more along the lines of something about maybe closer to 10 % below trend. By the way, it's a terrible crop.