This week is a big week but more specifically Thursday is a highly anticipated day. This will be when the latest CPI data is released. There is now a large pool of inflation watchers and it has grown bigger with every release. More traders are getting nervous about the Fed’s ability to enact policy that will prevent inflation from getting out of hand while not curbing the enthusiasm for stocks. Still there are many that think, given enough time, inflation will simply fade away. This is extremely dangerous thinking. The primary reason inflation was so subdued for the past 20 years was the globalization of the economy.
Businesses have been moving manufacturing overseas for well over 2 decades (probably closer to 3). They had set up shop in countries with lower wage rates and fewer building/zoning codes. This allowed them to create product while lowering their bottom line. These fat margins put a lot of cash on the companys’ balance sheets. Executives (often paid with company shares) used it to buyback a tremendous amount of stock. Some even used the bond market to borrow money to facilitate buybacks. This elevated their per share earnings and attracted investors. It was a tremendous self-perpetuating cycle of higher stock prices. However, as all parties do, it came to an end.
When governments around the world decided to follow China’s policy of lockdowns, it changed demand at the consumer level. In addition, by closing ports, it also stifled product shipping. This led to shortages, back-orders, and shipment delays which have not abated. The globalization of the supply chain hinged on several factors. The biggest two were low oil prices and easy access to shipping goods. With the lockdowns, this put the oil price into the ground but it limited the access to transportation of goods. Now that the lockdowns are being lifted, oil is at 7 year highs and goods transportation access is extremely difficult and expensive.
We’ve reached peak globalization of the economy. Every manufacturer that could has moved operations overseas. It is at this moment, the folly is realized. Without easy access to cheap transportation, costs are going to rise. This is especially true of shipments of commodities, the building blocks of all goods. With shipping scarce and expensive, commodity prices have risen. In some instances, they’ve risen tremendously.
With lithium up over 475% year-over-year, the idea that more electric cars are going to be hitting the road is a pipe-dream. In addition, their costs should be sky-rocketing. Coal is another that is up big. Ramaco Resources (METC) is still one of my holdings as I don’t believe we’ve seen the top yet. I’m also a holder of VALE and BHP. I believe these resource mining companies will be in high demand from investors for two big reasons. The first is they will show large profits. Secondly, they are paying high dividends. However, there are two commodities that have stalled, gold and silver.
This has been extremely difficult to watch. Many have waited (some since 2008) for inflation to hit and gold to rise. Now that inflation is at the highest since the early 80’s, many gold and silver holders are left wondering, when their time to shine will come. I believe it is coming. Today was a strong day for gold and silver. I think traders are beginning to realize that the Fed isn’t taking the inflation problem seriously. Sure they’ve come out and begun to taper their asset purchases and talking about interest rate hikes but they are still buying assets and no rate hike has taken place yet. There is beginning to be an out-sized risk that the Fed is going to move too slow and inflation is going to continue to run rampant well into next year. I believe this could cause investors to move into precious metals to retain their purchasing power. Thursday will be an important line in the sand. So too will be the March CPI data release. In addition, the March FOMC meeting will be a big day as well. Circle these three dates on your calendar. These will be highly anticipated days. Fireworks are coming.
What do you think about Gibson's paradox? i.e. that higher interest rates will pull up inflation. agree? disagree? Investment in the US is not dissimilar to consumption in my view and thats what is needed to resolve supply etc