CAPITAL IDEAS: When will supply chain problems ease?

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August 2022. Thanks for coming, everyone. Remember to tip your servers.

Oh, did you come for more than just the punchline? Well, grab a chair and listen to me weave an oxymoronic tale of educated speculation. (“Educated speculation” – patent pending on this expression.)

I went to college in the early 90s. Back then, the study of economics was based on Adam Smith’s ‘invisible hand’, the invisible force that guided our decisions in the short and long. term to maximize our financial results.

In the 1990s I was told I could eat all the candy and bread I wanted and get ripped off like Schwarzenegger, as long as I didn’t eat fat. Fast forward a few decades; athletes are fueled by the Carnivorous Caveman Diet, or whatever it is called, fat intake being a welcome feature.

And today, unlike the 1990s, economists like Richard Thaler are winning Nobel Prizes for studies showing how economic decisions are made based on emotions, societal influences, and non-monetary preferences.

I like to think I did a great job following the likes of Thaler and Cass Sunstein (co-authors of one of my favorite books, “Nudge. “But as I keep up with the beat, I also remember the world changing, sometimes quickly.

Before the pandemic, one of the biggest problems businesses faced was a tight job market. Today, almost two years after the start of the pandemic, the problem is similar: a tight labor market. Or, as some call it, a labor shortage.

The current nomenclature, “labor shortage,” has become preferred because its tone sounds like another of today’s major economic problems: the shortage of supply. The shortage of supply has affected not only businesses but also consumers. Inflation started to rise again in May 2020. It exceeded 2% in March 2021, exceeded 4% in April 2021, reached 5% in May 2021 and last month, 6%. I argue that the high inflation rates are mainly due to the low supply.

In 1963, the Nobel laureate economist Milton Friedman declared that “inflation is always and everywhere a monetary phenomenon in the sense that it is only and can be produced by a more rapid increase in the quantity of money. than production ”. Okay… why then, in 2012, didn’t we see 4, 5 or 6% inflation?

Beginning in 2008, to combat the financial crisis, the Federal Reserve more than tripled the monetary base, a determinant of the money supply. It could be argued that the banks held much of the money in reserves, which were afraid to lend after going through the crisis. There was a lot of money, but he was a captive – unable to be used to buy goods and services. However, between 2012 and 2019, banks worked hard to lend this money and get it into the hands of buyers.

The elements of that 1963 quote hold true – money in the hands of buyers matters when it comes to inflation. As I pointed out in a column from March 2021, just before inflation rose above 4%, there was an “excess” of cash in the hands of the consumer.

But there is more than the money supply. To rephrase Friedman’s quote to reflect the current situation, inflation is the result of too much money for too little good.

For more than a year, supply chains have been severed, causing the “too few goods” part of the inflation equation to drive up prices. If it were simply a matter of figuring out how long it would take to bring Toronto’s lumberyards or semiconductor factories back into service in Taiwan after they shut down during the pandemic, it wouldn’t be hard to predict when the problems would be. of the supply chain would resolve itself. Knowledge is important for businesses that can’t sell something they don’t have, and it’s essential for buyers because if they can find what they want, a shortage means they pay for it. much more expensive.

One problem with predicting the end of supply chain problems is that 4.4 million people left their jobs last month. This is where it gets more nuanced. And by “nuanced” I mean “difficult”. We have learned from Thaler and Sunstein that people make decisions that may seem contrary to the proverbial results. The workers are crazy as hell, and they are not going to take it anymore. It’s hard to say when enough workers will be available to help mend the broken supply chain, as we don’t know when – or if – some of these jobs will become attractive to them.

So, as you can imagine, my prediction of August 2022 being when the bulk of supply chain problems are behind us is educated speculation. Oh, and let’s say the obvious. My prediction isn’t just stupid because I can’t be that precise. This is silly because there will be a different answer for chicken wings than for rubber or aluminum or even just shipping finished products. Consider inflation-adjusted returns and inflation-related investment opportunities (or threats).

Let’s think about it.

The shortage of products is glaring. I won’t make a list because that’s about it. The Delta wave of COVID-19 has significantly damaged the global supply chain and labor markets. The Delta wave has been tough on Southeast Asia, where much of the supply chain begins. And it affected the United States to the point where it prevented 1.3 million people from looking for work in October 2021 due to the pandemic, according to the Bureau of Labor Statistics.

The economy remains tied to the direction and duration of the pandemic. I’ve never claimed to be an expert in predicting what will happen with COVID-19, so I’m relying on Dr. Scott Gottlieb. Gottlieb is a former US Commissioner of the Food and Drug Administration and author of “Uncontrolled spread: Why COVID-19 has crushed us and how we can beat the next pandemic. “I was lucky early on when I made Gottlieb one of the many professionals I listened to and counted on. Maybe you have your favorite scientist. You might be thinking be that COVID-19 is a hoax. Either way, the economy will continue to follow the path of the pandemic. And the supply chain is part of the economy.

Due to vaccines and treatments, Dr Gottlieb suspects that the United States will be pulled out of the pandemic in the first half of 2022. There is a lot of vaccine hesitation in the United States, but there are also lessons learned. regarding treatment and testing protocols. Fortunately, some of the locations we rely on for the origin of the supply chain have fully immunized a larger percentage of their population than the United States, but we appear to be at the forefront of other best medical practices.

Let’s be optimistic and suggest that the pandemic will be mostly behind us by March 2022. Add another quarter to the schedule for the rest of the world to catch up; that brings us to June 2022. Supply chains will need a few more months to unravel. That brings us to August 2022.

In November 2021, the Empire State Manufacturing Survey’s General Business Conditions Index jumped to 30.9 from 19.8 in October 2021. In detail, we saw a tentative sign that the chain problems supply improved as delivery times fell to their lowest level since August 2021. Additionally, the Baltic Dry Index, an average of the prices paid for transporting dry bulk materials, fell from its lowest level since June 9, 2021, well below its October highs. And the number of containers landed at the Port of Long Beach exceeds 2019 levels (the Port of Long Beach is the 2nd busiest port in the United States, after the Port of Los Angeles). I think we are at the peak of a pessimism about supply shortages for many products and commodities, confirming that supply chain issues will ease by August 2022.

Based on the Federal Reserve’s current schedule, its reduction in bond purchases will end around July 2022. Fed officials have said they do not plan to hike interest rates until the cut is made. was not over. That’s quite accommodating, given robust economic growth and high inflation rates. In my opinion, the fed funds rate should be one to two percentage points higher than it is. But it’s not my job to define the policy; it’s my job to predict politics.

I suspect that by July 2022, the Fed will recognize that supply chain issues are resolving themselves. Prices will remain high, but the inflation rate will come down, giving the Fed enough hedge to hike rates once or twice in 2022. That means I’ll stay invested in stocks for now. I may have to give up more bonds next year. Bond investing is not dead yet, but you need to be careful about the types of bonds you hold in your portfolio. Currently, I hold Inflation-Protected Treasury Securities (TIPS), junk bonds and quality short-term corporate bonds. The allocations to my portfolios are 5%, 4% and 2% respectively. I continue to avoid foreign and US government bonds. (High-quality, short-term corporate bonds are held in the more conservative portfolios to protect the face value of the portfolio, but inflation is fighting their purchasing power.)

Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing investments of over $ 500 million. Unless specifically identified as original research or data collection, some or all of the data cited is attributable to third-party sources. Unless otherwise indicated, any mention of specific securities or investments is for illustrative purposes only. The clients of the Advisor may or may not hold the securities that are the subject of their portfolios. The advisor makes no representation that any of the securities mentioned have been or will be profitable. Full disclosures. Direct requests: [email protected]

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