The Big Shortage

This week was a little bit turbulent for all markets, not only within the crypto-space, but also equity markets got a little bit shaky, although they managed to hold their high level more or less. Both topics I want to discuss a little in this weekly review.

However, I want to start with one of the most discussed topics of the past months, namely the global shortages in commodities and other consumption goods. Because of the global reopening the demand for some goods and services is accelerating while global supply chains have still not fully recovered. 

Bloomberg summed up the situation as follows: Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation. 

Despite commodity prices pushing back a little bit this week, many of them are still at or above +30 % compared to the beginning of the year, e.g. oil, gas, copper or corn. Sugar notes +10 %, soy beans +18 %, steel +20 % and Aluminum +22 % Year-to-date. Lumber is down about 25 % from it's all-time-high of this year, but still extraordinarily high at about 1,327 US-dollars. 

There are voices who claim that those shortages may be transitory (everything is transitory these days) and a result of the economy getting back on track. Those people trust that everything is going to be alright rather sooner than later. 

Nevertheless, the widely discussed semiconductor shortage is expected to last for longer. Either as cheap versions in automotive, or as expensive version in smartphones, semicons are needed in a big variety of products. Pat Gelsinger, CEO of Intel, already expects that those shortages will persist for a couple of years (the US and the EU already think about bringing some of the production back on its soil, which I fear will turn out into a huge waste of money and resources).

Transport costs also continue to accelerate, for example the Baltic Dry Index which has reached an eleven year high. HSBC trade economist Shanella Rajanayagam estimates that the surge in container rates over the past year could raise producer prices in the euro zone by as much as 2 percent [BBG].

Rail and truck prices are elevated as well and one has to wait, how fast global supply chains will recover and a normalization will set in. 

Delivery bottlenecks and simultaneously rising demand from consumers has caused inventories to drop significantly. Because of longer-than-usual delivery times goods simply do not follow up quickly enough. Companies may be forced to raise prices as far as they can (after all, they depend on customers buying at offered prices).

Europe still lags behind the US, where inventories are going down rapidly. Take a look at the US Total Business Inventories to Sales Ratio, which is already at record low levels. While the economy restarts, supply chain bottlenecks could be the sand in the gears.

Although the FOMC-Minutes revealed that some members of the Federal Open Market Commitee already talked about the possibility of tapering later this year, I do not think that the Fed is even considering to taper sooner than projected in the Feds forward guidance. 

The biggest problem there is that the jobs-market is still far away from being fully recovered and the effects of the reopening on the CPI are expected to fade out smoothly. Excessive savings, which were a result of a lack of spending possibilities will also fade soon (although it affected high-income groups only anyway) and Morgan Stanley expects savings to fall below its' ex-Covid Trend later this year.

However, apart from supply chain disruptions and higher input costs (e.g. commodities, semicons) I do not think that inflation will be just a transitory thing. Analysts and economists are divided about it, or - as Andreas Steno Larsen and Martin Enlund (Nordea) call it - Overheat'istas vs. the transatory crowd. 

Andreas and Martin are opposed to the claim, that inflation will be transitory. Their argument is the US labor market, although a cooling in commodity prices may calm down the situation a little bit (very possible and usual after big price increases). 

But let us get back to the question what a role wages may play: It’s too early to conclude that the recent pick-up in wage growth is enough, as it is likely driven by a negative (but temporary) shock to the labour supply owing to the same #Oprahnomics. (We [Andreas Steno Larsen & Martin Enlund] do expect wage growth to be able to carry this inflationary baton down the road.)

The Nordea guys expect that the effect of #Oprahnomics (What a great name!) will diminish in Q3 if the stimulus checks are not prolonged. That is a big IF, because another round of stimulus seems totally plausible to me, given the current administration. Because voters love presents there is also a chance that some Republicans may not be opposed to that and vote for it as a result. 

A point that is not touched by the Nordea-guys is US housing prices. Goldman Sachs expects that a shortage in housing (resulting in higher prices) may push US inflation above 3.8 % (YoY).

Nordeas' European outlook is interesting as well: If the ECB manages to launch such a regime with integrity, then we should expect a complete melt-up in 5y5y EUR inflation expectations by late Q3. Probably for good at first, but then comes the head-ache. 

Honestly, the claim that inflation is only rising because of base-effects is a very weak argument in my opinion, because it was not only year-over-year prices that where off the charts, but monthly price gains as well. 

Finally, to sum up this part I would like to write a short paragraph about the US-Repo market because something it is sending some warning signals. Reverese-Repo usage has risen to level we saw back in March 2020. ZeroHedge writes: What the Fed published at 1:15pm ET when it revealed that in the latest overnight repo, 43 counterparties parked reserves worth $294 billion with the Fed, a number which not only surpassed the March 2020 covid crisis highs, but was the highest since 2017! 

Financial markets also got a little bit under pressure as well after the FOMC-Minutes were released past Wednesday, although equity prices are still elevated. The Dow Jones is still near its all time highs (before the open on Wednesday at 33,896 pts) of this March. The german DAX managed to defend the 50 DMA line and is also in reach to new all time highs. The reopening in Europe, which is lagging behind, may be a hint that more all time highs will be just a matter of time. 

The Nasdaq is still struggling under a rising interest rate environment and is clearly below its all time high. Futher, the chart is suggesting a possible double-top (which still has to be confirmed).

Finally, let us not forget about THE topic on fintwit this week: Wednesdays Cryptogeddon...

After Bitcoin struggled (supposedly) because of some tweets of Elon Musk where he stated some concerns because of Bitcoins high energy usage, the news, that the PBoC spoke very negative about Bitcoin and claimed that neither Bitcoin nor any other digital token could be used as a form of payment, lead to Cryptogeddon. 

Within one hour the Bitcoin price collapes from 40,000 US-dollar to 30,000 US-dollar and currently has recovered to 41,000 US-dollars. 

However, if you look at Bitcoins daily (log) chart, you see that the price drop has bounced exactly from the upward-trend line, which means that the bullish trend that has been going since March 2020 remained intact. Therefore, six-digit prices year end are still possible in my opinion.   

The time for critics have come: Everyone of them declared the drop the beginning of the end of Bitcoin and cryptocurrencies. Well, i would be cautious because Bitcoin has been declared dead too many times.

What we see is that endless money printing causes disturbances in the overall economy, e.g. current inflation like rising input costs. If the trend continues, demand for finite assets - let it be equities, gold, silver, commodities or cryptocurrencies like Bitcoin (the only decentralised cryptocurrency) - will face huge demand.

But keep in mind: In the End, everything is going to be alright!

Have a great weekend everyone!

Fabian Wintersberger

Disclaimer: This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the blog owner and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity.