Economic Outlook

Is Inflation “Transitory”? Here’s Your Simple Test

 

The Federal Reserve has been bleating that inflation is “transitory”–but what about the real world that we live in, as opposed to the abstract funhouse of rigged statistics? Here’s a simple test to help you decide if inflation is “transitory” in the real world.

Let’s start with some simple stipulations: price is price, there are no tricks like hedonics or substitution. Nobody cares if the truck stereo is better than it was 40 years ago, the price of the truck is the price we pay today, and that’s all that matters.

(Funny, the funhouse statistical adjustments never consider that appliances that used to last 30 years now break down and are junked after 3 years–if we adjusted for that, the $500 washer would be tagged at $5,000 today because it has lost 90% of its durability over the past 30 years.)

Second, inflation must be weighted to “big ticket” nondiscretionary items. The funhouse statistical trickery counts a $10 drop in the price of a TV (which you buy every few years at best) as equal to a $100 rise in childcare, which you pay monthly. No, no, no: a 10% rise in rent, healthcare insurance and childcare is $400 a month or roughly $5,000 a year. A 10% decline in a TV you buy every three years is $50. Even a 50% drop in the price of a TV ($250) is $83 per year–absolutely trivial, absolutely meaningless compared to $5,000 in higher big-ticket expenses.

You can forego the new TV but not the rent, childcare or healthcare. That’s the difference between “big ticket” nondiscretionary and discretionary (meals out, 3rd TV, etc.).

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Empty Shelves in NZ: International Supply Chain Delays Broaden

Temporary shipping delays caused by the ongoing Covid-19 pandemic – leading to shortages of products across New Zealand industries – are likely to continue until the end of the year, experts say.

Supply chain issues are affecting pet food supplies, the automotive repair and hardware industries, vehicle imports and building supplies.

Shipping delays were definitely affecting the automotive repair industry, Pit Stop Dunedin franchise owner Daniel Cresswell said.

It was particularly difficult to get vehicle parts from Asia through the dealership process, and he faced delays of up to 12 weeks for some items.

“We had a client who failed a warrant of fitness on an LED light for a wing mirror, a non-repairable part, and we were told 12 weeks for a new one to arrive,” Cresswell said.

“And we have been told that for numerous parts, especially out of Japan, when it normally takes only two weeks.”

Electronic automotive parts, such as devices to interface between a car’s wiring and a trailer, were hard to get because of a worldwide shortage of silicon chips, he said.

Cresswell said there were challenges with the supply of automotive oils and fluids in New Zealand as well.

“That’s something that could become a big problem – some industries use a massive amount of oil,” he said… CLICK for the complete article

Worry About the Real Stuff

 

“A ship in harbour is safe, but that is not what ships are for..”

This morning: There are plenty of positive news stories emerging as the global economy reopens, but also an increasing number of real-world tangible threats emerging. The Pandemic has affected economies from top to bottom, and many issues won’t be resolved overnight. For markets the issues to consider aren’t just inflation or market bubbles, but how supply chain issues and instability could continue to impact sentiment.

The ongoing Covid horrors in India, and yet more negative politics noise is dominating the new screens, but the global economy is reopening fast. Ignore the doomsters and focus on the reality… the global economy is open, and that means a host of new supply chain, logistics and market pricing crises to worry about! Yay!

This morning there is plenty of positive news. South Korea’s economy posted brisk Q1 growth after a shocking 2020. The Germans have lifted their expectations for 2021 growth to 3.5% and 3.6% in 2022 on the back of recovery. (Wow, if even Europe is recovering, there must be hope.) The UK’s Confederation of Industry (CBI) is ultra-positive, reporting the sharpest upturn since 2018 in sales as the British economy reopens. There is equally positive news from around the planet.

Of course, there will always be problems – like the rumours of a planned right- wing coup in France (a number of retired generals apparently hankering for a repeat of the Algeria crisis). Or how about yet more allegations of Tory Sleaze…? Yawn! (If you voted for Boris on the basis of his integrity, then more fool you..) The Biden Tax hikes are getting all kinds of attention, and could impact market sentiment – although its largely a case of outraged Libertarians disbelieving the temerity of a President daring to propose they pay their fair-share.

But these political events are all intangibles. There is plenty of real stuff we should focus on in markets.

Housing

US Home Prices (aye, remember them….) surged 12% in February. That’s the biggest jump since 2006… which is one year before things went to hell in a handbasket on the back of a US housing bubble driven by over-easy money.. Hmmmm.. housing boom, easy money? What’s that ding-ding-ding sound in the back of my head?

There are some really interesting trends in the US homes data – like the hottest property areas are up in the Rocky Mountains. The median US home gained $36k over the last year.  Prices rose in all the 20 major US cities covered by the Case-Shiller indiex – Phoenix, San Diego and Seattle were top performers.

The gains in US homes – and here in the UK – is fuelled on the same old reasons – lack of supply, FOMO fears of missing out and being unable to get the ladder, and now on folks moving to find better places to live than dirty old cities if they can work from home The pandemic has allowed home buyers to build up savings, and the home market is an obvious place to put it – especially when interest rates are so low.

Bingo! That’s the danger: more money chasing a limited number of assets! Home prices are being fuelled on a relative interest rate effect. The gains from housing look much more attractive than savings, so folk are borrowing more (at ultra-low rates) to spend on housing. A boom is fuelling a boom. Home prices are suffering from similar distortions as we’ve seen drive financial asset prices (stocks and shares)!

Dare I suggest a bubble is forming in home prices? Someone is bound to tell me not to worry – house prices always rise…. Don’t they?

Global Shipping and Inventory

t’s not just semiconductor chips that are in short-supply. As the blockage in the Suez demonstrated, its shipping and the logistics involved to get goods to consumers that enables spending. Get it wrong, or de-stablise the process, and the whole global economy goes into shock. If the Chinese want to administer a coup-de-grace to the Western Economy, then hacking Amazon into shut-down would be a place to start.

Over the last few months we’ve seen container ship box rates balloon up to 4x higher – but speaking to a ship broker yesterday he believes rates will normalise. That may change on any geopolitical instability, but rates will largely depend on levels of global inventory.

There is genuine scarcity of chips, which is being addressed by new production. There is also scarcity of goods that were in high demand through the pandemic – for instance, exercise bike production cannibalised the production of normal bikes which remain in short supply. It will take time for furloughed and closed business to resume production – which will drive scarcity price hikes.

That scarcity affects everything from fridges to plane engines – which in turn will impact shipping. If the shippers aren’t getting paid for transporting fridges and toasters, they will seek ways to hike their prices for other goods, but shipping costs could normalise in the short-term because of shortages of goods in transit, rather than the global economy regaining equilibrium.

As inventories recover, we could see shipping prices stage a sharp rise again. A sudden spike in shipping, driven by recovery or through instability (like Taiwan) could well spook markets.

Iron and Steel  

China has been in the grip of a strong recovery since last year– earlier this week, steel futures set new record highs. Iron ore prices are also at new tops. Prices for steel products in China (and therefore elsewhere) are set to rise – fuelled partly on the back of expectations prices are set to rise, but also on fears the Chinese government’s plan to reduce steel production to look climate compliant will create shortages. In short, it’s a hot market for steel in China.

Now the rest of the world is playing catch up. Steel prices have tripled from the pandemic lows as manufacturing, home building, large construction projects and infrastructure, new retail and commercial building, and even shipbuilding are all reopening and demanding metal! I was reading about Swiss Steel Group – a speciality steel firm that’s seen Q1 sales increase 12%.

However, a number of critical bottlenecks are emerging– including access to shipping, getting mines reopened and sourcing new supplies when companies find their pre-covid suppliers have gone bust. Iron ore shipping prices spiked this month by over 25%, driven by China demand. Prices are close to the last peak in 2019. Everyone wants Capesize dry-bulk freighters to bring Brazilian and Australian coal to China!

A further bottleneck could emerge from the uncertainty around Liberty Steel – the aerospace industry has already warned the UK government that Airbus and Rolls Royce are vulnerable if there is any shortage in high strength steels. Trying to find alternative supplies in a market that’s in “take-off” would be very difficult – and any slowdown at Rolls Royce would have a massive multiplier effect on its supply chain.

One little know effect on steel prices is a lack of scrap metal. Scrapping old ships is a major source of high-quality scrap for new steel. India is a major source, but is closed due to new Covid strain hammering health services. There is also a shortage of oxygen as Indian supplies are all earmarked for hospitals – and as the news programmes reveal, a burgeoning black market in the gas. Bangladesh and Pakistan seem unaffected and are getting a much higher slice of the scrap market.

These are just three areas of the real economy worth watching; home prices, supply chains and raw materials. Will they create boom or bust, inflation or opportunity? Who knows? Keep an eye on the space.

 

This metal is more valuable than gold

 

Palladium is a precious metal that is more valuable than gold, and its price has skyrocketed over the last couple of years. In 2018, it was worth nearly $1,000 an ounce. Now, a single ounce is worth nearly $3,000. But as its value has risen, devices that use palladium have become magnets for thieves.

The metal is primarily used inside of a catalytic converter, a device that converts harmful emissions such as carbon monoxide and nitrous oxide into less harmful ones before being released into the atmosphere. Since their adoption into the automobile industry in the 1970s, catalytic converters have led to a significant drop in carbon monoxide and nitrous oxide emissions. And the more palladium they use, the more efficient they are at combating these emissions — making them the perfect target for thieves.

Over the years, catalytic converter theft has drastically risen due to the increasing value of palladium. According to a study of reported thefts, on average, 108 catalytic converters were stolen per month in 2018. That number rose to 282 monthly thefts in 2019 and 1,203 thefts per month in 2020.

With more and more manufacturers trying to reduce their impact on the environment and as stricter emissions regulations come into effect in places like Europe and China, the demand for palladium will only continue to escalate.

Verge Science spoke with a chemical engineer and one of the leading recyclers of catalytic converters in the country to find out what makes palladium so valuable — and what it would take to find new alternatives for this precious resource. Watch our latest video to see what we discovered.

View Here

 

 

There was a time in this fair land when a federal budget was an economic document. These days, it is a social policy document aimed to buy votes. It’s actually quite sad.
David Rosenberg, Rosenberg Research

Welcome to the new Canada, where on Monday the Liberal government launched a grand experiment in retrograde economic policy. It deserves a name. When the Soviet Union began to collapse back in the 1980s under the weight of too much central planning, Mikhail Gorbachev brought in Perestroika, economic reforms aimed at reducing the role of central planners, bureaucrats and politicians by increasing economic reliance on markets. Canada is now moving in the other direction. Reverse Perestroika.
Terence Cochrane, Financial Post

Budget 2021 can be read as the opening salvo in a public relations war with the provinces. Freeland has set her government up as the saviour of working mothers and families with small children. She has used the pandemic as a policy window that increases government spending, not just as a response to the crisis but for the long-term.
Lydia Miljan, Fraser Institute

On Monday, Canada’s first female finance minister in her first budget, simply filled in the names of who will be getting the cheques, including everyone from women, to subsidized childcare providers, green energy aficionados (can’t forget them!), Indigenous Canadians, visible minority groups, the unemployed, seniors, students, young families and big and small business. Which would be great news if the government’s finances were in good shape, but they’re a train wreck.
Lorrie Goldstein, Toronto Sun

Yesterday’s Budget shows that marker of fiscal stability not being attained until 2055. In the meantime, the debt burden is depicted as ever so slightly and gradually declining from the current 50-percent mark. This signifies this government’s acceptance of a heavy debt burden and hence considerable risk for more than a generation.
Don Drummond, CD Howe Institute

Trudeau’s reckless budget burdens the kids he claims he’s helping. Eventually, someone has to pay for all of this spending.
Licia Corbella, Calgary Herald

It was inevitable that the budget would be more focused on redistribution than growth. This is a government that is far better at giving away money than generating it, collecting it or delivering services.
John Ivison, Vancouver Sun

Does This Portend The End Of Neoliberal Idiocy

War and Peace

As Tolstoy said of ‘War and Peace’, it’s “not a novel, even less is it a poem, and still less a historical chronicle.” I agree: it’s a schlep. It’s one of those epic novels that you look at and think – can I? And I must confess, with my eyesight, I can’t. Of course, that doesn’t mean one isn’t aware of what the book covers, the Napoleonic war between France and Russia, or its key question – is history driven by powerful underlying forces, or powerful leaders?