Burning Holes in Idlers’ Pockets

It has taken an unusually long time to decide how to structure this edition and where to place the most focus without straying too far into the tangled thickets of politics and ideology. For, sadly, the increasingly inflamed nature of the first and implacable bent of the second have been absorbing much of our attention. given their far-reaching implications not just for markets but for our lives in general.

As we shall discuss below, inflation is very much an issue of the moment. But it is not now just a matter of the over-expansion of money supply or of the excess creation of government debt by means of which this is being brought about. We are also faced with the challenges of making our way in an atmosphere of inflated rhetoric, inflated emotion, and an inflated reliance on the prejudices, ultra vires arrogance -and vested interests – of narrow groups of ‘experts’.

Such an unholy confluence of ‘inflations’ has reached the point where it is beginning to threaten the underpinning of our Western civilisation itself : that cultural and technical edifice which, for all the undeniable horrors incidental to its progression, has delivered ever improving living standards, ever greater freedoms and opportunities, ever brighter hope to more people than have ever before lived. In suffering such widespread revulsion in all its aspects, this, our forefathers’ most priceless legacy to the modern world, is not so much suffering from the effects of COVID as it is from a particularly virulent form of societal auto-immune disease of a kind which T.S. Eliot  would recognise only too well.

Deus vult!

Along with inflation, we are suffering from ever sharper polarisation – though that is perhaps a word which does little justice to the pervasive outbreaks of internecine strife which we are training ourselves to aggravate on our laughably named ‘social’ media and which we are therefore unleashing in an increasingly hair-trigger fashion.

Though we have thankfully not yet reached the point where we are herding the opposition into their places of worship, barricading the doors, and then setting fire to the ‘heretics’ we have trapped inside, it could be argued that, metaphorically at least, we are well on the way to that point.

It is an understatement of quite some magnitude to say that the ‘public square’, as a forum where alternative views can be aired, competing proposals discussed, and the resolution of sincere differences attempted, has not in any way been improved by throwing it open to every cell-phone junkie with a dopamine craving and just enough cognitive ability to string 240 characters more or less coherently together.

Uninhibited by any actual human contact with the objects of our bile – and so denied any possibility of developing any empathy for them – the impulse is a twofold one of demonstrating loyalty to one’s tribal coalition and to demonizing the members of the Outgroup. And all this with a few lightning dabs at the touchpad – an instant upload of reflexive anger and unthinking vituperation which only goes to prove that while the opposable thumb may indeed distinguish us from our simian relatives, that difference does not entirely redound to the credit of us humans.

Not only do we not have to look our antagonist in the eye, we do not even have to pause for reflection while we craft a letter to the editor or compose a fully-developed pamphlet or blog entry. Our rush to judgement is instant, briefly thrilling, and highly self-reinforcing.

With our critical faculties overwhelmed by such a cacophony of alternating condemnation and confirmation, the Lie is far more than its epigrammatic ‘halfway around the world’ before tardy old Truth limps along to offer a correction. Besides, as we all know, anyone daring to advance arguments counter to the ones we instinctively favour must be a paid shill, an extremist, or a bot.

Civility has thus been replaced by cyber war, discourse by derision, objectivity by opprobrium, informed opinion by crude invective, ideals by ideology, and reasoning by rabble rousing.

Is this a world in which we can make rational investment decisions or – more than ever – does the Narrative dominate the numbers: do what we call the ‘Sentimentals’ now far outweigh the fundamentals?

Many of the very founding premises upon which so many businesses – especially of the smaller kind – have been built up, staffed, capitalised, and marketed are crumbling before our eyes and are entailing an incalculable loss of both human and physical capital as they do. Yet asset markets – those organized arenas of increasingly abstract, semiotic speculation – have been pushing ever higher, borne up by the truly unimaginable scale of central bank intervention underway and, now, being bought by those salivating at the prospect of unbounded government spending as the (Green) New Dealers and Five-Year Planners, the Build-Back-Betterers and Great Resetters seem on the verge of seizing full control of the printing press in order to direct not just the Commanding Heights of this new Eco-corporatist landscape, but its foothills, plains and valleys, too.

Case in point: the vast, Biden-Harris ‘stimulus’ plan – being bruited about with the usual, tired Rooseveltian overtones and presumably to be facilitated by old full-employment, higher-inflation Jerome Powell in his role as Marriner Eccles reborn. The cynic would say that, since what passes for the prevailing ‘wisdom’ is that it ‘took World War II to end the Great Depression’; that it transformed the rather spiteful, vainglorious dilettante who occupied the White House into an unassailable historical figure; and since an actual conflict would now be so obviously mutually devastating as to be largely unthinkable, the shadow battles for which we will all be conscripted will be fought against the intangible twin bogeymen of Climate and Pandemic in an Orwellian phony war that conveniently never ends.

Gather ye rosebuds while ye may, people, for everything which both theory and practice tell us is that people who do not OWN resources do not utilise them with care; that people who bear none of the direct costs of their choices do not make decisions wisely; that political calculus is not only far more capricious than the commercial type but can encompass objectives which are purposely detrimental to great numbers of those subject to its operation – so giving it a latitude in which no sensible businessman could ever afford to indulge.

Toward the Carrying on the Warr

But why inflation, now, after so many years of false alarms and official disappointment, you ask? To see why, let us start with a brief review of arguments we have advanced throughout the course of these events.

Last spring, when Western governments were panicked into imposing the first round of Wuhan-wannabe restrictions, the Scribbling Classes reached straight for their dog-eared, Underconsumptionist playbook and started warning that the Draconian suspension of activities would lead to a spiral of falling prices and so, inevitably, to ever lower, even negative interest rates as the Keynesian bogey of ‘deflation’ stalked the land.

Our response to that was to pose the question whether the inevitable (but hopefully temporary) diminution of demand would be offset by a shrinkage of supply which might not only outweigh the former, but which might prove tragically more long lasting as the productivity sapping effects of pervasive sanitary measures precautions cost everyone who survived the initial shock time, effort, and capacity.

Conversely, when the world’s central banks pulled their usual inverse nuclear engineering trick of reverse SCRAM-ming a system threatening to cool to sub-critical levels of activity, we also cautioned that the resulting money flood would only prove to be lastingly inflationary when the recipients ceased adding to their war-chests by borrowing while the borrowing was good and began to pay that money out, rather than paying their obligations down.

As for the everyone else, glumly piling up their furlough payments and stimulus cheques, we invoked the image of Robert Louis Stevenson’s Ben Gunn – a latter-day Tantalus who was marooned on his desert island with an immense pirate hoard for which he patently had no use before the arrival of the Hispaniola and his return from enforced isolation to a civilisation where he finally was able to spend his share of the recovered loot.

While authorities were merely handing out what were effectively ration cards to those whom it had first incarcerated, we therefore had something of an impasse: the state wrote you or your boss a cheque but prevented either or both of you from spending it as you would.

You therefore kept an unusually high proportion of the money idling away on deposit; the banks where those monies piled up held them as excess reserves and the central bank on whose ledger these were registered as liabilities held ever more of the government debt being issued as a result.

And, boy, did they issue!

It may not come as much of a surprise to learn that, for the most recent seven months for which we have the numbers, the Bank of Japan has led a monetization of around $720 billion or some 25% of GDP these past seven months. But it may shock even our jaded cognition to reckon also that ALL of the US Federal government’s hefty ‘contribution’ to GDP has been borrowed in that time and that banking monetization of that same debt has risen to a percentage of GDP not seen since the Korean War may be rather less obvious.

Worryingly, the government’s receipts these past nine months have covered less than half its outlays, while the Federal Reserve, together with the country’s commercial banks, have monetized fully two-thirds of the shortfall (in round numbers, $2 out of the $3  trillion needed).To get some appreciation of the scale of the switch, Washington has handed out cash almost $1 for $1 with those being tallied in the entire nation’s personal consumption account – far exceeding a ~30% proportion which had been typical of the preceding half-century. 

North of the border, meanwhile, government spending in the six months to end-September jumped 30% from the same period in 2019, turning a CAD12 billion budget surplus to a CAD160 billion deficit. Fortunately for the administration, the Bank of Canada helpfully juiced the monetary base by $285 billion or around a quarter of GDP in that same time to ease the pain. Since then, the pace has eased somewhat but that still means the BOC finishes the year with  3.5 times the government securities it held at its start and with a monetary base swollen fivefold.

In Europe, the ECB and its pilot-fish commercial banks have pumped in over €1 trillion since February, effectively paying for 90% of the 10% of GDP surge in government deficit spending. The UK tells a similar story, with the Bank of England chipping in £300 billion and so handily over-financing the state’s vast, £260 billion, 20+% of GDP infusion.

As one final example, Australia’s Reserve Bank has tripled its ‘investments’ since the disease hit, boosting the monetary base by 80%, a percentage not seen in a 45-year statistical record. The A$255 billion in new bank money whose creation this has enabled has thus paid for much of the concurrent A$300 billion explosion of government debt – something which has taken its total from around 40% to 60% of GDP in one fell swoop.

All of this is reminiscent of another set of ‘temporary’ measures, taken in the face of sudden adversity, which eventually brought far greater hardship than ever it avoided. As Costantino Bresciani-Turroni wrote of that earlier episode:-

“The German Government thought, at first, that the war would be short…  If Helfferich affirmed that directly after the outbreak of the war it was necessary to provide, by issues of paper money, for the expenses of mobilization which amounted to two billions of paper marks, and for the first expenses of the war, one must recognize that in this he was right. The Government would not have been able to finance the first phase of the war with taxes, because of the difficulty of obtaining a sufficient sum by contributions in a few days.”

“But we should recognize that the financial policy followed later justified the harsh criticisms to which it was subjected in Germany itself. The German Government neglected to draw from taxation the means for continuing the struggle. The Reichsbank became a pliable instrument in the hands of the Minister of Finance and renounced the functions of a central organ whose business it is to regulate the circulation of the country. The facility of creating the means for covering the expenses made possible a habit of extravagance not only in public finance but also by private persons, whose consumption was not limited by heavy taxes.”

As the quote suggests, on the surface of it, the present policy is in some ways merely a modern twist on the typical war-time process of paying soldiers and factory workers ostensibly handsome salaries; one which cannot however be spent on goods which no-one is producing. Instead they are forced to save through the sale of bonds and by limiting their purchases by edict. In this way the inflationary impulse is temporarily channelled back to the revenue streams of the munitions makers, almost to the exclusion of all others.

Amazon & Co evidently play the role of the armaments industry under this analogy with Jeff Bezos and peers as our latter-day Daddy Warbucks.

Back at the start of September, we suggested that this particular constellation of factors might have reached its culmination point: that, as we said only partly facetiously, “it was time to remember that the modern world can’t survive only on electrons (Tech) but needs protons and neutrons (makers of tangible goods) in addition.”

The timing was fortuitous: commodities have since outperformed FAANG stocks by ~20% and psychology has shifted firmly into the inflationary camp as they have. Turn on the TV or flick to the business pages and you are almost bound to find one or other of its Post-hoc Pundits solemnly rehearsing arguments which they and their ilk would have dismissed out of hand a few short months earlier.

Nor has it all been talk. Check out futures positioning and you will see that in corn, for example, the ‘speculative’ operators (hedge, funds, CTAs, prop desks, and algo traders) were at their shortest ever (-235k contracts, 20% of open interest) in June when the grain was trading hands at a 14-year low of only 320¢ a bushel but have since flipped to record longs (+520k, 35% O/I)as the price has rocketed 75% to 525¢ – a 7 ½-year high whose attainment has been driven by purchases amounting to a full one-quarter of the annual US harvest!

Similarly, in buying contracts equivalent to well over a third of the likely soybean crop, their acquisition of a record net long has also pushed that staple up in price by 66% to a 6 ½-year peak.

Copper is another. So-called ‘Managed Money’ accounts have transformed February’s second-ranking short into December’s all-time high long, scooping up a notional month’s worth of total global mine output and turning the Wuhan crunch’s near-11 year low to a new 8-year best by way of an 80% rally.

Millenary Keynesianism

But while it may be all very well to talk of an inflationary mindset as informing some of the games being played in financial markets, the crux is to what extent this presentiment spills over into the real, hard, world of truly scarce goods and services.

Here, it has been put to us that the current mania for bitcoin shows how such ideas can slowly seep into the mainstream, given that so many of its highly vocal supporters have presented themselves as the block-chain equivalent of gold-bugs, constantly deriding ‘fiat’ this and ‘fiat’ that and disporting themselves in pirate garb as free spirits who live outside the deadening rules and self-destructive policies to which we poor, hidebound no-coiners are subject.

Is the apparent triumph of this breed enough to lend credence to their arguments – based as they are on a kernel of undeniable truth if not necessarily fully rigorous (or even realistic) beyond that? Does the fact that, to become a member of the cult, you have to intone a liturgy of condemnation for the existing money system help persuade other, less zealous types that they, too, should be seeking protection from that system’s coming inflationary doom?

Does that fact that more established, not to say reputable, voices are now being added to the crypto clamour have wider import? Does it imply a change of conditions for anything less esoteric than the ‘coins’ themselves?

Well, perhaps. But a certain weary cynicism, born of long years both listening to and constructing and delivering pitches for exciting new ‘assets’ and cutting-edge ‘investment solutions’ warns us to take much of this with a healthy sprinkling of sodium chloride.

Managers of Other People’s Money know full well that their clients and potential customers are likely to make at least an idle inquiry about the state of this much talked-about market and are therefore aware that they had better appear to be au fait with some of its workings. If they have not already devoted one of those minuscule percentages of the funds under their control which lend an aura of sophistication to their dealings – but which are, in truth too small to move the dial in either direction – they will solemnly intone that they are giving the matter serious consideration or that they are poised to do so.

Whether such earnests of intention survive the first chill blasts of winter, when the heat eventually comes out of the current movement is, however, another matter entirely.

A further consideration is the likely stance of the authorities themselves. If, as some of the most fervent advocates of crypto insist, the current, extraordinary rally is the first sign of a structurally devastating crack in the dam of credibility which is all that holds back the floodwaters of inflation and monetary chaos, are we really to think the authorities will sit idly by while their various Potemkin villages collapse around their ears?

Rather, would we not suspect that there will be a rapid and co-ordinated regulatory backlash, outlawing dealing, tightening AML rules, forcing delistings; that indeed resort would be had to the whole apparatus of state suppression? Indeed, as we were finishing this article, the UK FCA started down this very road, and picked up Mme Lagarde of the ECB, thumbing beside it.

If they can stop people owning agriculture futures in a UCITS fund, or force asset managers to restrict their investments in hydrocarbons, each mostly on a political whim – do you think they will not come after crypto, driving it back to the fringes if not proscribing it altogether?

The strategy would be to force out the institutions so as to allow their withdrawal to collapse the bubble. Then, the Overseers could tut-tut paternally at the clear evidence that this was just another mania and discredit its advocates as well as occasion them monetary losses to go alongside the reputational ones.

Whether or not the ‘central bank digital currencies’ now in gestation would then be ready for launch to take the place of today’s crypto ‘assets’, this engineered collapse might of itself be enough to silence the doubters and suppress the symptoms of monetary over-reach, thus allowing a further interval in which to inflate before the inexorable consequences of that debasement become too obvious to ignore and the final, destructive runaway phase begins.

Once the promised millenarianism which is to be the conduit to this inflation grinds into action, the Juggernaut is intended to sweep away whole industries and to erect in their place towering monuments to Climato-corporatism. Anyone to whom the phrases ‘soft budgets, ‘dominant actor’, or ‘public choice’ strike a chord will probable guess at the denouement to which we see all this leading.

Vast expenditures are to be showered on the eager expeditors of these schemes; the imposition of significant frictions, wearisome delays, and mounting costs on those not so favoured. True, value productivity, in a word, seriously impaired with all the grim consequences that entails for material well-being.

Inevitably, this will involve serious misallocations of resources and  unleash a lowering of real wages which will lead to recurrent bouts of major industrial strife. To the extent that workers receive their pay directly from the state – or indeed at one ‘public-private partnership’ remove from it – their representatives will soon learn that all demands for higher remuneration will be quickly met by pliant governments who enjoy ready access to the central bank’s over-eager offices.

Thus, the more probable outcome of monetary malfeasance is not a rapid descent into Weimar and wheelbarrows but rather corrosive, Stop-Go stagflationism more immediately reminiscent of the grim 1970s and early 1980s. Forget ‘Supercycle’ and think more, ‘Ratchet Effect’ – a condition where each bound upward is spelled by a jarring, swifter-but-lesser pullback – occasioning losses and calling forth a scornful chorus of I Told You So’s, before the climb is once again resumed from a series of successively higher starting points.

Of course, history will rhyme, not repeat, so, this time around, the prospect is of fully harnessing ever present techno-accoutrements, such as our ankle-tag smartphones, to monitor us 24/7 as we walk and pedal around the narrow confines of our 15-minute ‘Smart City’ Stalags. This will be coupled with the broader possibilities for social coercion now being trialled in Communist China and test-run in the wider world under the cover of the pandemic, its unblinking scrutiny soon to be intensified with the all-pervading dual-use, IoT spyware being progressively lodged deep inside all our possessions. This bleak realisation of what we call ‘Sinification’ could mean that Net-Zero Hygiene Socialism long delays any monetary collapse simply by means of actively suppressing any exercise of what little free choice is still left to us poor consumers.

Thus, while the imminent threat of CBDC introduction, with its ominous capability to remove the last flimsy barriers to the imposition significantly negative interest rates – not to mention the possibility of imbuing such monies with explicit, reprogrammable expiry dates – will first serve to add a sizeable impetus to the inflationary drift on which we are now being borne, this need not be a permanent feature of the beast.

By contrast, whenever the scarcity of resources becomes too limiting – when we reach not so much a choice between ‘Guns and Butter’ but between ‘Suns and Flutter’ (solar and wind-power) and everything else – these novel currencies could instantly be turned into disembodied ration books, doling out to us only such proportion of what remains on the shelves as the authorities see fit, a control made more effective by the CBCDs’ interaction with the tagged and chipped goods on which we wish to spend them. No doubt this will also be tailored according to what the Overlords see as our individual merits and demerits, as judged by their panopticon oversight of our movements, actions, and utterances. If you shudder at arbitrary ‘No Fly’ lists, wait until the state starts to impose  ‘No Buy’ lists as well.

Elements lifted from Guenter Reimann’s famous exposition of the ‘Vampire Economy’ he endured in late 1930s Germany  – or from the rich canon of wryly humorous Russian jokes about the multiple failings of Soviet central planning – could thus be given a thoroughly modern reboot.

Reddit, Steady, Go!

All of this disruption, this deracination (‘uprooting’) of our previous norms has come about on top of the re-emergence of many older follies. Crypto is, to its detractors, a classic mania in a line stretching from tulip bulbs to Cabbage Patch Kids and Beanie Babies. Tesla has become the very celestial chariot by which that latter-day Phaethon – Elon Musk – is blazing his trail across the heavens. SPACs – a revamped version of the South Sea Bubble’s infamous venture aimed at “carrying-on an undertaking of great advantage but no-one to know what it is” – raised $83 billion last year and more than doubled the new millennium’s total in the past 24 months. The score for the first two weeks of the current year is running at a cool $1billion a day.

Much like the iconic 1980s arcade game, Pacman, SPACman a true marker of the times, being a device to gobble up whatever businesses can be used as a thin excuse to employ leverage, extort fees, capitalize fairy dust, and further enrich the Plutocracy of ZIRP.

Then we have Robinhhood and its smartphone swarms of Lockdown Livermores, YOLO-ing it for all they’re worth and actually forcing pro option traders to buy stocks as an urgent delta hedge. Beyone that, there’s the genius behind WallStreetBets tweeting witticisms such as: “Biggest difference between boomers and millennials is that some like to bitch about fundamentals while the others just buy stocks because they go up” (he’s clearly never heard of Will Rogers) and: “Hypothetical: if you had an extra $600 just laying around and you had to pick between buying $TSLA calls and bread, what strike price/expiration would you go with?”

On the WallStreetBets Reddit group itself, all kinds of craziness goes on, typically clustered around a few ‘theme’ stocks in circle of mutual encouragement that has not been without its allegations of fostering what are effectively high-leverage pump’n’dump schemes. These were the guys who bought Hertz like it was going out of business (which, of course, it was!) and boasted of exploiting a Robinhood software glitch which allowed them to rack up essentially unlimited options leverage.

But we digress.

For good or for ill, markets are now heavily polluted by a combination of massive official intervention, an online gambling community which is 10s of millions strong (if not more), and sharp-suited professional vultures putting some of that no-questions-asked, burning-a-hole-in-my-pocket, zero-cost liquidity to full use, and are all the while operating in the Cat-and-Mouse La-La Land of sequential COVID Lockdown and Let Loose.

Hysteria meets hysteresis. And, meanwhile, the sleeping dragon of old-style, consumables inflation stirs restlessly on his bed.

So where, today, do we find evidence of price rises even amid the continued repression of personal freedom and much normal business activity?

A Seller’s Market

Well, let’s see. House prices are rising -as ever, under the pernicious influence of artificially low interest rates- and boosted in part by the Metromoaners deciding the WFH merits of swapping the city-centre, pied-a-terre for a wisteria-clad cottage in the countryside.

Those same Lockdown Lotus-eaters are, of course, treating themselves to bigger and better home-IT and electronic entertainment systems and that is pushing up chip and component prices. It is also beginning to cause delays to other IoT producers, notably in the automotive industry as it, too, struggles to recover from Corona Cryonomics. Oh – by the way – new and used car prices in the US are also climbing sharply as a result of the disruptions, as well as the move to the suburbs and away from public transport networks..

People are also not being allowed to spend much, if any, money on services and experiential pleasures and so are buying more goods in general. Coupled with COVID-related limitations at shipping terminals, this has completely upended sea transport, leading to port bottlenecks, container import-export imbalances, high demurrage charges, missed or delayed deliveries, and eye-watering hikes in charter day-rates whose publicly available indices, while impressive enough as they stand, do not include any of the wide range of special surcharges being imposed by liner companies who know only too well that they have the whip hand.

Industry giant, Hapag-Lloyd recently reported, “All terminals [at Los Angeles/Long Beach] continue to be congested due to the spike in import volumes and [this] is expected to last until February… Terminals are working with limited labour and split shifts…the shortage affects all terminals’ turnaround time for truckers, inter-terminal transfers and the number of daily appointments available for gate transactions and delays our vessel operations.”

As a result of “lack of terminal space” to service vessels, “there is a constant switching of terminals that must be kept in mind” given that containers are ending up in the wrong one, the company went on before noting such difficulties were not being confined to California. Canada was seeing “heavy congestion”, ditto at Maher Terminal NY and APM Terminals NJ, “impacting all services with delays of several days being experienced upon arrival.”

Add to this, rising freight rates on land and couple it with a shortage of warehouse space in the burgeoning world of e-tailing -some of which is being addressed by holding onto the containers used for intermodal rail and trucking and hence is exacerbating the mounting sea-borne difficulties.

Pulp, paper and plastics packaging industries are also resounding to a steady drumbeat of price rises, partly as a result.

“There is robust demand,” a US broker of such materials was quoted. “Demand for containerboard is crazy right now. There are many mills that are sold out for four to six months.”

Another agreed. “There’s too much demand for Old Corrugated Cardboard. The Pacific NW paper mills are running in the mid- to high 90 percent [capacity]range.“

And, yes, folks, such costs ARE being passed on as Argus Media, for example, reported:-

“Spot prices [of minor metals products] were quick to react, with notable gains for manganese flake, antimony, tungsten, ferro-silicon and ferro-vanadium. One trader was quoted $15,000/container to ship antimony trioxide grade material from Singapore to Baltimore… equating to an additional $200/t in cost for the metal. Antimony prices ended last week at a 19-month high of $3.30-3.57/lb cif to US warehouses. Meanwhile, the cost of shipping manganese flake from China to Europe has risen five-fold… [meaning] prices have risen to $2,455/t duty unpaid in Rotterdam, against an average of $2,050/t in December…” – a nice little 20% kicker for the material’s users.

Don’t mention it to Greta, but this winter has also been unusually harsh to date, especially in Asia and the frantic need to avert looming brownouts and full-scale failures in China, Korea, and Japan, has seen LNG prices rise fifteenfold, turbocharging the rates charged for shipping the stuff there to their own new record highs. Given the reliance of many local suppliers on the marginal MMBtu traded on the local exchange in a relatively thin global spot market, local headlines are screaming about the possibility of 100-fold increases in consumer bills.

A knock-on has been a rumoured attempt to spike the European market – or else the triggering of a potentially ruinous short squeeze – but, such shenanigans aside, as Frank Harris of Wood Mackenzie told the FT, there could be real, lasting consequences:

“Buyers are going to become aware that you may not always be physically able to source a cargo in the spot market regardless of price,” he said. “The most likely outcome is it shatters some of the complacency that’s crept into the market over the last 12-18 months.”

As for the steel industry, here’s a couple of snippets from a UK trade journal:-

Ductwork fabricators and contractors are being hit by big hikes in the price of steel and warn shortages may be looming. Galvanised steel prices have suddenly skyrocketed in recent months from an average of around £650 per tonne last year …[and] some stockholders are now quoting up to £1,250.. one firm said] he had been told to expect prices as high as £1,350. Tony Warwick, managing director of fabricator Airtrace, said: “I’ve been in the industry for 30 years and I’ve not seen pricing changes as extreme as this before. Steel stockholders are putting prices up almost monthly and availability has really dropped.”

“…the price of structural steel has soared from around £500 a tonne this summer to over £700 a tonne. The speed of the rise is unprecedented and has been blamed on sharp rises in raw material costs, quotas and scrap availability, which has also pushed rebar prices through the roof in the concrete frame sector.” One firm said: “We’ve not seen anything like this since 2004. The fear is this is not the last of it.”

Nor is this limited to Britain. Steel users in Europe and the US have similar tales to tell while, asking for government intervention (!) to check the moves in India, the Engineering Export Promotion Council wailed that “…the path to recovery… has become very tough and arduous. The wholesale price of Hot Rolled Coil has gone up … 55% between January 2020 and 2021, which is hard for the industry to absorb.”

Bottlenecks and price rises are also affecting semiconductors, to the point that some automotive businesses, caught on the hop by a second-half rebound in orders, are actually having to halt production because they cannot source sufficient electronic components. VLSI Research analyst David Hutcheson.

As for psychology, there appears to be the same buyer hoarding behaviour with auto chips as with toilet paper.  That chip shortage has helped accelerate auto chip market sales and prices, to the point that in the fourth quarter auto chip sales reached $6.2 billion globally, up 30% from the prior quarter and 11% from the fourth quarter of 2019.

Nor is this a trivial matter for the rest of us. Estimates made by one well-known consultancy suggest electronics represent as much as a third of a new vehicle’s cost – a figure that is only likely to rise.

Meanwhile, the kit necessary for all those WFH Zoom calls you’re making as well as for the Tik-Tok dance videos our ‘frontline healthcare heroines’ seem to have so much time to shoot; that football-pitch sized Smart TV to which you treated yourself; and your socially-distanced kids gaming PCs are tightening the consumer market in no uncertain terms. 

“Tight supply and strong demand are pushing prices up in the semiconductor sector, ranging from product pricing and manufacturing service quotes. Foundry houses have seen IC designers come knocking on their doors offering higher prices in return for more capacity in third-quarter 2021. Nanya Technology expects DRAM pricing to rally through second-quarter 2021 due to undersupply in the market. And Phison Electronics, which has just raised its NAND flash controller prices by 15-20%, is already mulling hiking them further in March-April.”

“Samsung is one of the leading image sensor makers for smartphones –  the world’s second-largest company when it comes to supplying CMOS Image Sensors. However, because of a serious shortage …  Samsung has reportedly increased pricing by around 40 percent. And Samsung isn’t the only one to do so…”

As Cinda Securities’ Fang Jing, told the Economic Observer newspaper, the prices of mainstream TV panels in the fourth quarter of last year rose by 20%  are expected to maintain the upward trend in the first quarter of the current one.

“The inventory of panel manufacturers is zero and the inventory of terminal manufacturers is only half of the historical level,” he said. He went on: “Moreover, the upstream supply of panel manufacturer inputs is also in short supply and the polarizers, driver ICs, and glass substrates are all out of stock.”

On a last, slightly surreal note, Lockdown has brought unlooked for benefits to a rather unusual corner of the consumer market. As the Korea Times reported, the greatest number of job losses since the national bankruptcy of 1997’s Asian Contagion – and the highest unemployment rate since the GFC – has not stopped bored Millennials treating themselves to a little high-end retail therapy.

As the paper explains:

Only a week after LVMH raised prices of Louis Vuitton products, the French multinational corporation decided to increase the product prices of other affiliated luxury brands such as Dior, Fendi, Givenchy and Bulgari. However, the exact rate of increase has not been revealed. Last year, Dior raised the price of its luxury products twice, once in May and again in July, by 10% each time. On Jan. 7, Louis Vuitton hiked the prices of its popular handbags by up to 25.6%..

According to the Ministry of Trade, Industry and Energy, sales of luxury products at department stores surged 20% from May to December last year. Luxury product sales soared 32.5% in July alone.

Apparently, this is not self-indulgent but prudent for, as an anonymous ‘fashion industry insider’ told reporters: “People in their 20s have become key consumers of luxury goods here as they INVEST a lot of money into what they believe has value.” [Our emphasis].

While extreme positioning in some markets, the deplorable spread of further governmental interference with lives and liberties, and a possible dispelling of vaccin-o-phoria may temporarily reverse some of these moves in the coming weeks, it seems wise to consider whether the underlying trend is becoming increasingly securely anchored in both experience and perception.

If the Men and Women in Suits keep prodding the long-slumbering Beast so determinedly with their sharpened sticks, one day they surely will awaken it to rain fiery ruin upon our heads, once more.

Market Implications

Before running through what we think are the areas most deserving of your scrutiny in light of all this, we must issue the caveat that, as alluded to above, there has already been a great deal of positioning built up, especially in certain commodity markets. Thus, while we are arguing here for a medium- to long-term shift of regime, prices in the immediate future remain vulnerable to any sudden loss of nerve – perhaps related to the tightening of the screw on the captive populations of the various branches of the FluLag Archipelago; perhaps as a result of political instability in the US or because Administrative ideological fervour will be seen as more damaging than its fiscal incontinence is deemed to be helpful.

The first broad point to note is that any drive to higher prices – and especially to higher prices of commodities – cannot be anything other than detrimental to bonds. As the chart here shows, times when the two move together, rather than in opposition are rare indeed.

Stocks have a more nuanced relation with commodities, given that the crux for them is not whether prices are rising (as it is for fixed income instruments), but rather whether costs are rising faster than revenues and, beyond that, whether the firm’s capital accounting is accurate enough to avoid a series of costly errors being caused by the monetary yardstick in which it must be carried out changing ever more rapidly. Equities have tended to move with, not against, commodities in the past couple of decades of Risk On/Risk Off but a shift to more extreme rates of price increase will tend to compress multiples even if it does boost monetary earnings, so some caution is warranted with regard to their valuations and hence to their real returns.

Conversely, rising commodity prices tend to be good for Emerging Market stocks at large:-

One might think that what holds for the various commodity exporters in the EM basket may not necessarily be quite so helpful for the high-tech nations of Northern Asia – countries which not only tend to be quite resource poor (higher input costs) but whose machine tools and robots might be disadvantaged as inflation lowers the real wages of the workers whom its wares are bidding to replace and also shortens investment horizons among those who employ them. One should never sell a market short just because it is making new highs, but one should also be aware that the wax may soon be melting under the wings of one or two of these highest of high flyers.

Another feature which would underpin the scenario outlined here would be for the US dollar at last to succumb conclusively to the force of gravity. If so, past precedent would seem to destine it to trace out a decline of roughly 40%, in similar fashion to the slumps suffered in the wake of the two previous highs set in 1985 and 2002. For us to be confident of that happening, we first need it to take out the lowest point in the past six years – the one touched back in February 2018. With the Greenback barely 1% above that level as we write, that watershed could be reached rather rapidly – and hence a clear indication given of either a continuation (or conversely a rejection) of the trend in fairly short order.

Bonds, of course, are already in a deal of trouble and it may be that, despite the Fed’s captive status, Joe Biden has already broken the market. Again, the slight note of caution is that any loss of confidence in the recovery/reflation narrative will only seem to confirm bonds’ 35-year record of widow-making but, such presumably brief episodes aside, the willingness to hold paper guaranteed to erode one’s purchasing power even if price inflation does not accelerate too notably cannot be boundless. Though given some footing by the regulatory and institutional need to hold some irreducible portion of assets in this form, they are nevertheless merely another momentum trade vehicle here.

A further word to the wise: though one might imagine that gold must thrive in the sort of inflationary environment we are considering here, one should be aware that, historically, this past half-century, it has dramatically underperformed – shall we say? – more functional commodities when their prices have been rising and dragging bond yields up with them. Given, too, that gold is rich to the rest of the basket and that the latter are very cheap to bonds, one might find better outlets for one’s own personal Flucht in die Sachwerte.

Though equites themselves may seem to be overstretched – the Value Line, for example has hit our technical targets well ahead of what the chart suggested (see here), we leave you with one intriguing – if hardly rigorously logical – scenario to consider. This is that stock returns relative to those accruing from fixed income might continue to follow a path which has, for all of the past fifty years, been a passable recapitulation of the one it took seventy years prior to that.

If so, bonds will turn out to be, not wives with deceased husbands, but children without either parent. Orphans, plain and simple.