THE investment world always gives food for thought, but the kitchen appeared to intrude more literally last week, when US Thanksgiving Day was marked by the Financial Times publishing a supplement entitled Investing in Turkey.

On the same day as America celebrated the reaping of first harvest, it was disclosed that the Chinese authorities were concerned about speculation in garlic, hoarding of which had pushed its price up more than ten-fold this year.

This was attributed to a halving in the acreage planted, with the resulting scarcity exacerbated by abundant liquidity in the economy chasing a commodity that was in greater than normal demand because some people in China use garlic as a traditional means of warding off viruses.

The return to favour of emerging markets this year and the sizzling garlic price are symptomatic of a mixture of rational economics and the partly unwanted consequences of the monetary easing put in place to haul the world out of recession.

While the world’s emerging economies have demonstrated an ability to be more self-reliant than in past cycles, justifying their bounce, the leakage of hot money into such non-traditional areas as the humble garlic bulb is a symptom that there is more money around than can find a productive use. This has prompted worries that the central banks are simply creating a series of new bubbles that will misallocate capital and produce losses when they burst.

Part of this is an inevitable consequence of deliberate policy moves aimed at stopping and reversing the collapse of asset values that occurred in 2008.

When assets (whether houses, shares or bonds) collapse in value, they undermine the confidence of their owners, who may also become unable to service loans secured on the assets.

This, in turn, leads to losses for the banks, which rein in lending, creating a scarcity of credit that spreads the recession from asset prices to activity in the economy. At some point, the recovery in assets should reverse that process, resulting in increased confidence and activity. Once that occurs, asset bubbles would be symptoms of economic excess whereas at present they appear a by-product of policy.

The world’s central banks recognise that, at some stage, the extraordinary measures taken to support economies in the past year will have to be withdrawn, otherwise inflation is likely to take off. Although markets have given the authorities the benefit of the doubt so far, with bond yields stable, the rising gold price is a sign that investors prefer the feel of shiny money to crinkly money, given the rising supply of paper currencies. At some point, probably during 2010, talk of “exit strategies” will have to be followed by action. Act too early and the fragile recovery will crumple under the weight of debts that have not yet been paid off.

Move too late and inflation may take hold, resulting either in a sharp policy tightening to counter it (precipitating another recession) or increasingly volatile markets, as the bond market vigilantes punish governments that are seen to condone inflation. Another eventful year beckons.

Andrew Bell,

Head of Research,

Rensburg Sheppards