Macro analyst/investment advisor Lyn Alden just released her August Investment Newsletter. Here is my pick of her article’s money quotes:
Supply Chain Problems
If the current inflation was purely based on supply chain issues, which are causing issues globally, then we should see similar rates of inflation across the developed world. But we don’t see that. The United States has noticeably higher inflation than our various developed peers.
…Large fiscal stimulus in the United States, monetized by the Federal Reserve, helped boost demand for goods and services in the US but can’t fix supply shortages, and so … the US is a net exporter of services, but a huge importer of goods. When you combine services and goods together we have a net trade deficit, but it’s in the goods area that we are really weak. This is important, because starting from the initial March 2020 lockdowns and fiscal stimulus, the US and many other places had an explosive difference in goods consumption vs services consumption…. Since the US has de-industrialized and exported our physical goods supply chains to the rest of the world more-so than most other advanced nations, that makes us particularly vulnerable to this type of supply chain disruption in goods.
…With the United States and China entering a period of global competition, even a Cold War type of environment, the United States in particular as well as other countries have to think about their global supply chain exposure more than they used to. …In other words, after multiple decades of extreme globalization, we seem to be on a longer run towards re-shoring portions of our supply chains, which takes a very long time. This can improve resiliency, but can also increase prices, because the reshuffling of those interconnected supply chains isn’t cheap.
In this sense, the 2010s and 2020s are shaping up to be directionally similar to the 1930s and 1940s in terms of de-globalization, which mirrors the fact that the fiscal and monetary policies are similar to that period as well.
Tech (deflationary) vs. Oil (inflationary)
Oil is the biggest commodity by far in terms of annual commodity revenue. … Decades with low inflation tend to be characterized by periods of commodity abundance, and decades of high inflation tend to be characterized by periods of commodity scarcity. For nearly a decade, commodities have been pretty cheap, and this has dis-incentivized companies from spending money to bring new supplies online.
… Over the long run, we should indeed see tech companies outperform oil, because they are able to compound value. But it goes in massive cycles, with some long periods of oil outperformance as well. … Investors tend to overpay for tech stocks during times of commodity oversupply/cheapness.
… My base case is that as we head deeper into the 2020s, with various supply chain problems, de-globalization, and less new oil supply coming online, that another longer-run commodity bull market is setting itself up. It won’t be a straight line, of course, and … this comes at a time when tech/growth stocks are very highly-valued by historical standards. Plus, the rate of margin growth may have peaked for the cycle…
Conclusion and Strategy
…This continues to be an environment where inflation is running higher than the prevailing interest rate that you can get on bank accounts or Treasuries. …This means that people’s cash money is gradually losing purchasing power. Inflation-adjusted interest rates haven’t been this negative since the 1970s. A consequence of this is that it pushes people further out on the risk spectrum…. People are historically quite overweight equity exposure at this time, for example.
Basically, devaluing money encourages the formation of asset bubbles, but policymakers find themselves with little other choice due to the high debt levels that…have built up in the system.
I continue to prefer good stocks and hard assets in this environment with a long-term view, but investors should be prepared for volatility along the way.