Pomona Wealth Market Comment November 2021 - The Haunting of Inflation, Trick or Treat?
Looking for this year’s Halloween attire, I was disappointed that no inflation costumes were available. Judging by the media inflation is currently the biggest scare, so an inflation attire would have been fashionably scary. Markets obliged with falling valuations, the costume rentals did not. Inflation is a problem when you buy a very specific basket of goods. Inflation is not a problem if you focus on a different basket of goods. The post-pandemic demand growth is slowing, and this will ease any real or perceived price pressure. The handwringing over supply chain dysfunctions repeatedly fails to recognize that supply chains are doing their job. Global manufacturing is producing more goods than ever before, and the volume of global trade is up by well over 10% this year. We are seeing a demand shock rather than a supply chain disruption which highlights pockets of structural inefficiencies. It is also worth looking at practically any country’s trade data today. Japan, for example, came out with their import and export numbers. Both imports and exports were stronger than expected, they were also strong in absolute terms. Japan is telling the world that more and more goods are flowing in and out and that the growth of goods flowing in and out is very rapid. This is not a symptom of supply chains being brought to their knees. This is a story that is repeated country after country around the world. The excess demand crisis is evident again in the data with the Port of Los Angeles reporting an all-time high in the volume of goods processed up 26% on last year. This is worth bearing in mind with all the talk on container shortages and lack of labor that the volume of trade is packaged in containers, and someone must do the unloading. Ships do not unload themselves after all. Had the Port of LA not signed labor contracts that prohibit it from becoming more efficient by digitizing and automating its operations as other ports do, the bottlenecks would not be an issue. Is this 26% increase in the volume of goods shipped enough to satisfy the hedonism of the great US consumer? Soon it could be. The third quarter in the US is seeing a slowdown in the pace of economic activity. The delta variant of the coronavirus did stop people spending money on travel and US citizens wanted to stay closer to home. There is also some evidence that for certain groups the stockpile of savings acquired last year will have been used up. Furthermore, 36 states ended the additional unemployment benefit payment during the third quarter. This had no visible impact on employment but reduced demand relatively to what it would have been. The recent US consumer prices were as expected. The details were worth noting though. The average month on month change during the third quarter was significantly below the second. The core measure was also significantly lower than in the second quarter. Looking on the month-on-month changes in inflation the word transitory seems to be rather an understatement for the brief spike we had during the second quarter. It is also noteworthy that in areas where demand has faded price increases slowed or even reversed. Again, underscoring this is not a problem with the supply side but an issue with extraordinary demand. On the flipside, there is already quite a lot of inventory-building going on across industries. In the aftermath of the pandemic, we are reminded that we are in the middle of the fourth industrial revolution which represents a fundamental change in the way we live, work, and relate to one another. It is a new chapter in human development, enabled by extraordinary technology advances merging the physical, digital, and biological worlds in ways that create both huge promise and potential peril. The speed, breadth and depth of this revolution is forcing us to rethink how countries develop, how organizations create value and even what it means to be human. In this transition populations may well expect their governments to play a larger role in sorting out the ensuing problems. As investors we attempt to seize the promise; as citizens we hope our political leaders are up to the task to manage the structural changes. Maybe an idea for a costume for Halloween 2022?
Switzerland, November 1st, 2021