This year is flying by. Our youngest is now a Freshman at the University of Miami ( the U) in the nursing school and we are empty nesters. Well almost. Seems the kids keep coming home and we really are not that empty. I don’t bring this up to really talk about me but to say that sometimes what you expect in life is not how things happen. The economy and its
proxy, the stock market, are great examples of this. I’ll try and make this make sense.
We started 2021 after a Phenomenal stock market advance in 2020. I call it ‘Phenomenal’ not because of its percentage gain but the fact it did it despite the government mandated lockdown and their associated business restrictions. 2020 is a testament to the resilience of our economy. But there is a dark side to this. And that is the reality that the longer we stayed locked down and the more the government got involved in what businesses could or could not operate in a normal capacity, the more long term or perhaps permanent damage it was doing to our economy. Sure many companies reported great earnings but Washington and local bureaucrats have harkened in a period of inflation and uneasiness. Lock downs and the associated policies have, by some estimates, destroyed or closed over 40% of the small businesses in the US. We know of the 33% drop in GDP last year and over 23 million jobs lost from these lost businesses but the long term damage is rolling through the markets and the economy today. “The economic crisis is unprecedented in its scale,” Brookings Institution scholars wrote in a September paper, “the pandemic has created a demand shock, a supply shock, and a financial shock all at once.” While bureaucrats gave Walmart, Costco, Lowe’s, and other big-box stores “essential” status, allowing them to stay open during the COVID pandemic, 38.9% of small businesses (which are the providers of most of the country’s jobs), were forced to close based on fear, hackneyed social-distancing rules, early ignorance about transmission, and an insatiable desire by governors to micromanage the affairs of men. Some of the jobs have returned in spite of continued state mandated policies but some are lost and some are forever changed. In short, according to the National Bureau of Economic Research the governors in the most restrictive states did not achieve their desired results as there is no statistical data that shows their states had a lower transmission rate than the most open states. But there is data that shows the most restrictive states increased their unemployment rates by over 2x over their least restrictive neighbors. Not what they expected.
The unintended consequences of government lockdowns and other mandates, which have included surging global poverty, mass job loss and business closures, spikes in depression and suicide, excess deaths, and other adverse social consequences are just the start. Today we continue to deal with the economic fall out from these policies. Lock downs in the US are no longer in place but the governments’ mandated social distancing rules continue to slow business. A simple but effective visual of this are the pictures from the port of LA where, as of writing this, there are over 70 container cargo ships waiting to off load their goods. This is up from 60 in mid-September and almost none in this same time period 2 years ago. The ships arrive from foreign locations and just wait over 10 days to off load, severely slowing the supply chain and causing significant increases in the costs of those goods. The chaos in those ports is close to the chaos companies must feel when trying to forecast their earnings when they have no idea when their products might arrive, when they might be off loaded and what the price will be. A container today might cost 500% more than it did prior to the pandemic. Supply chain and delivery problems mean that The Dollar Store is no longer selling items for a buck.
Aside from the horrible abuse that bureaucrats have wrecked on small business owners and their employees Washington has printed trillions of new dollars. They have gone to the printing press and today refuse to stop printing. What do they expect from this? Well it’s simple. Most politicians have no business background so they do not even think about the question of what all this increase in spending will do in the long term. Special interest groups and their lobbyists want more, so some continue the push to keep spending …borrow more…print more…someone else will pay for it. Someone else’s money. Under Trump the national debt increased approx. $7.8 trillion, of which approx.. $5 trillion was for COVID relief. In the first six months of the Biden administration this has increased another $5 trillion with a current ask for another $3.5 trillion. The word from Washington is that it will be paid for by those greedy billionaires and trillionaires (Joe Biden Sept.24, 2021). ( Of note there are approximately 630 billionaires and exactly ZERO trillionaires in the country) This of course is ridiculous, and it will be the middle and working class that ends up paying for these policies. The most vulnerable will be told they are getting something for nothing but end up paying for it in higher prices at the pump, the grocery store and in rent. Not what they are told and not what they expect.
In all this you might be asking how did Jim just write all these words with not one mention the word inflation? Isn’t that what he’s talking about? And the answer is yes it is. Partially. Yes, there is inflation. Since Mr. Biden took office we have seen a 100% increase in the price of oil. More in the price of natural gas.
Food is through the roof. Talking about roofs, if you can get shingles their prices are up over 400% and pool chemicals, for all those pools built during the lockdowns, are now almost impossible to come by. This isn’t just the US. European bureaucrats also believed lockdowns made sense and shut down their industries. As the saying goes...Winter is Coming…and today they are facing the prospect of a cold winter with little to no reserves of natural gas…which will most likely end up pushing our prices even higher. Shut down businesses, stop extracting oil and gas from the earth, stop building pipelines and limit shipping. What will happen? Higher prices. Inflation. For a while. And this is where it gets interesting. And strange.
SO this year the US government has printed another $5 trillion in debt. And interest rates have jumped a whopping ½ percent? What’s the disconnect? Didn’t Jim just say there was inflation? Don’t interest rates go up during times of inflation? All that money printed and no serious increase in rates? Not what you would expect. See a trend yet?
We all learned in school that there are three basic components of inflation. Wages, energy and material costs. Should any of the three go up the price of goods increase and over time you have inflation. Today we have increases in all three categories. Now I will concede that under Mr. Biden I never expected energy companies to be good investments. But the energy index is up significantly so far this year. Actually the energy sector is the best performing in the S&P index for 2021. Prior to the election the mantra was ‘lets go green’. Petrochemicals are evil. Killing the earth. Child star Greta Thornberg graced the cover of Time magazine and was talked about in hushed tones by the costal elites. She was the poster child for the next generation that cared about the planet. Well except that same generation cares about their cell phones and their pelotons. Somehow those marvelous go nowhere bikes have to get to their parents’ homes and those phones to the Apple store. And somehow all those young adults have to find a way to get to Lala Palooza. And Amazon and FedEx need to deliver my new Nikes ‘like by tomorrow’. Ah, electric vehicles…except those batteries to store the energy have components that have to be mined and transported…and all that takes oil. And who knew? Plastic is made from oil? And planes and trains and ships run on oil. So in order to go green we need to use a lot of oil and gas. Wacky right? Not what most expected.
And then there is the issue of making the electricity to go into those batteries and to manufacture those chips for the cell phones and cars. Wind and Solar to the rescue…oh but all those wind turbine blades and panels are made in China and in order to make them they use ‘dirty coal’ and they have to be shipped here…on oil powered diesel engine ships whose containers cost significantly more today and are delayed by weeks or longer. Policies to get the world away from oil and gas ( less drilling and no more distribution system growth i.e. pipelines) have just pushed prices higher. For now.
The same goes for material cost. Those batteries take lithium, mined in China, Russia and South America. Lumber cut in Canada is needed for all the new decks and pool areas as well as the newly constructed homes in the suburbs for all those fleeing the cities where the police are told to not chase thieves and States Attorneys do not prosecute crimes. Collar communities are growing as young families escape to raise their new families and dogs. Steel, aluminum, wood and copper. All go into these new homes and all are in short supply or significantly delayed. They all cost more today than a year or two ago. For now.
The last component, humans, are also more expensive. Labor is expensive. If you can get it. Policies enacted out of the goodness of the bureaucrats heart have allowed those who normally would need to work to eat to stay home playing X-Box. Restaurants, lawn services, retailers and more all have help wanted signs up. There are pay increase and signing bonuses for the first time in history for dishwashers and many restaurants still cannot attract enough workers to stay open 6 days a week. MacDonald's is offering hourly wages of up to $15 an hour in Hart Michigan just to attract some workers. For now.
SO if all three components are in short supply or significantly more expensive why have interest rates not increased? Interest rates have not increased, I believe, for several reasons. First, I believe that the supply chain issues, created by poor policies, will over time, right themselves as the policies change. And second, there is so much money floating around the planet as all governments have had the printing presses running 24/7 that it needs to find something to do. When bond yields rise there is a natural tendency to buy the higher yielding bonds which in turn keeps the proverbial ‘lid’ on rates. Additionally, there is a self-serving interest that all countries have to keep their interest expenses low...especially as they continue to print more and more debt. It is possible that I am wrong about policy reversals and if I am then there is another silver bullet against inflation. Technology.
Technology is in general a wonderful, fascinating enabler of mankind. We today carry around in our hands or on our wrists a computer that allows us to interact with the world in a new way. We see more, hear more, have access to more and are more connected to each other than other before. Technology allows us to sit in a speeding sedan, that is the safest vehicle in history, while watching Netflix and talking to someone in another country. It has helped us eliminate certain diseases and allows me to write this without showing you how bad a speller I really am. Technology has helped us be more energy efficient, healthier, safer, and better fed. We may not truly appreciate it but technology enables us to do things and see things that our ancestors believed to either be magic or done by a deity. Flying? Rockets? Robots? Cancer therapeutics? What a strange and wonderful time. Technology is also disinflationary. And here is the second part of why I believe interest rates will stay down-although there is absolutely temporary policy driven inflation today. Technology works to replace high cost inefficient, slow systems with lower cost, fast and repeatable, efficient systems. Technology replaces workers, lowers energy usage through efficiencies and makes materials better, stronger and more readably available.
Where does this leave us? Ill try and wrap it all up. What we expected is not what is happening. Just as I mentioned, empty nesting isn’t a do over from when you were first married and didn’t have kids. The kids are always there. In a similar manner the economy, and its proxy the stock market are subject to the realities of policies and the mood of the country. Today policies have and are driving inflation. This is in turn hurting the most vulnerable people in our country. They are also potentially leaving a legacy of debt that our great grandchildren will be saddled with. How this is all dealt with over the coming weeks and months is subject to much late night and Sunday morning talk show debate. We really do not know what will happen in the short term but we do know a few things about the long run. And that is the fallout of our policies will be with us just like our kids...they will impact us for generations.
Interestingly the supplemental federal benefit ended over Labor Day. The increase in labor costs should be lessened over the coming months as individuals begin to reenter the work force. This is the beginning of what I believe will turn into the real problem. Disinflation. More on this in the future.
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