October 20, 2021

Call the Calvary

Much about the supply chain problems story shouldn’t came as a surprise to at least to half of us thanks to the media. But neither the media nor the investing pundits ever needed all data and usually ignore the absence of cause, in favor of correlation, when analyzing an outcome. This has caused a curious glitch in my thinking focused on the clear rising in interest rates, responding to well-deserved inflation concerns, and an equity market that doesn’t seem to care. But I do.

The entire inflation scenario seems deadlocked to the 70 plus container ships idle off the cost of California. Logistics information shows that there are customarily anywhere between 20 and 40 on hold, usually for customs impositions. Today, that number could have easily risen by recent changes introduced by the trans-Pacific services to bring in smaller ships to help with the overdemand, hence, more ships that fit in the space, but don’t necessarily translate into more cargo. However, much of the blame is on the shortage of workers to handle the surging demand coming out of the pandemic. There’s also the blame that focuses on lingering stimulus benefits and that seems thin, in my opinion, since most states have pulled out of those services. This is where the concerns of inflation are being fueled, consumer demand, product shortage and history tells us inflation is the outcome. But neither does my investment strategy embrace that, nor do I see inflation as the problem it’s made out to be.

The problem I have with the long term inflation versus short term bet on inflation, is its source. Demand is there, absolutely, but we’ve come out of an historical change in behavior due to a pandemic and people don’t just want to shop online. They want to eat out, see events, and engage in all outside cultural consumer activities, including just appearing in public, which is why I like owning Lululemon (LULU) and Este Lauder (EL).  Is all this the stuff of long term fiery consumer demand or as history suggests have more often than not seen our infamous, and often gluttonous, consumers, take a break? And is the storage dilemma caused by that demand or is the sheer size of the blockage due to pandemic emptied business inventories. Simply put, the storage problem must be solved, and the consumers true demand can be measured. Then inflation might stagnate, although most small businesses kind of like it. But what if the storage problem isn’t solved, especially before the holiday season? An unfulfilled holiday season would see residual unsold products, this would also cause inflation to stagnate. Overall, the worker shortage might have more to do with worker leverage, as suggested in the NYTs, and hiring signage is widespread perhaps leaving an undeceive sector of the workforce in limbo. From another perspective, Inflation is historically versed as a tax on middle income earners. If that’s true, then the potential for such leverage to result in bigger incomes, health benefits and pension guarantees is much an offset to inflation as it is to further fuel consumption behavior. Long term average of inflation is around 3 to 4 percent. Between 2000 and 2020 inflation averaged 2.13, room to grow within the average.

On a last point, oil has surged to a level not seen since 2014. This is curious to me because for decades I always used oil and soybeans as a measure of potential inflation. But as soybeans, the single most used product in the world, began suffering under the weight of, academic science backed, attacks on its longer term heath dangers. And now, few in the investing community and much of the western democracies haven’t begun the move away from fossil fuels in favor of sustainable resources to fuel electric vehicles for example. And nearly all of the world’s biggest oil companies have pledged to a carbon free future. This may seem shallow to some, but it’s not, as my point is neither oil nor soybeans does the job anymore, and oil over $80 no longer triggers the contrarians and the Algochums. I like to look at the consumer through the Consumer Price Index, currently 5.4% at 12 months through September 2021, and the Employment Cost Index, currently 3.2% at 12 months through June 2021. And for every other angle I let Capacity Utilization, recently at 76.6% (80+% is an indication of inflation) tell me about production inflation. All are both historically in line and manageable and that’s what the market’s interpretation appears to be.  I don’t disagree, but I’ll still remain alert.

No comments: