Food and oil.

You won’t have to look far beyond the mortgage/credit crisis to find the next demand-driven economic problem areas. Market analysts and economic strategists have already begun to focus on agricultural and energy shortages as the next hotbed of activity. Indeed, I wrote a treatise about these topics in 1998 entitled “Below the Fertile Fields” in which I posited the potential for price hikes and pricing pressure within these sectors, as well as the ten year run-up in Energy stock’s prices and agricultural shares. Already, early within the trend, these equities are trading at historically high valuations.

In other commentary I have discussed at length my belief, drawn from my quantitative economic studies, that energy (in all its permutations) should be the “dot.com” sector of the next decade in this millennium. Companies whose names we do not know, as well as technologies not yet invented, will dot the landscape of capital gains opportunities for years to come. Only political wisdom and scientific ingenuity might limit the scope of a much needed global demand and solution for replenishable energy.

Only recently has our focus broadened to include agriculture as another high demand/short supply global problem, although its origins have been right in front of us for decades.

You’ll pay more.

Commodities prices have skyrocketed in the past decade meaning higher production costs at the “farm”, as well as higher retail prices at the store. Higher prices affect the average household budget by raising the cost of staples like bread, milk, eggs and poultry.

Government subsidies have contributed to shortages by reducing the incentive and payout for farmers and by encouraging dissolution of planting fields.

And yet, the decline in productive acreage is being replaced by alternative growing methods for different crops, altogether.

The American Farm Bureau reports that reduced planting might raise the price of global harvests by three times the amount paid in 2005. We just have to wait to see.

Steadily rising prices and occasional regional shortages are causing the worst inflation double-take in the last twenty years. While some go hungry, others have been forced to make conscious discretionary decisions to cut back. Record sticker-shock has me predicting that this sector is the next capital gains and investment opportunity.

I believe that agriculture is only superseded by energy as the most caustic socio-economic, macro-oriented, problem for the next decade. Many of these equities are in uptrends and struggling mightily to maintain valuation, even as the rest of the globe’s sectors are in decline. I would be a buyer of earnings-positive equities in that space.

Unintended valuations.

While these two sectors might take years to realize their potential, the rest of the market has been tempting the uninitiated to dabble “at the bottom”. The problem is this is not the bottom. My work indicates that recovery bounces within the prevailing bear-trend are intoxicating, but dangerous. The complexity of the problem is substantial. Global economies are interdependent and fragile. The demise of one region shakes the foundation of others. I have expressed that I wish that there had been better governance over these issues, but the horses have already left the barn. Any unwillingness to remediate the problem at this point only delays the normal, cyclical, course of events. That would be a compound manifestation of incompetence.

We are not at the bottom of this retrenchment, nor have we completed the cycle phase of recovery from the financial crisis that, only two weeks ago, was the topic du jour.