How long will it take to Normalise, and what will Normal look like?

Blain’s Morning Porridge 4th October 2021 – How long will it take to Normalise, and what will Normal look like?

“Don’t waste October sun…”

This Morning: Christmas is cancelled as supply chains crumble, stagflation mounts and jobs are lost… How long will it last, will there be a buying opportunity, and what will a new normal economy look like?  

Opening with a line from a China analyst report this morning: “Boosting domestic thermal coal production is critical, the sources said.”

Nephews, nieces, god-children and the two not-quite-as-young-as-they-think adults masquerading as our kids have already been warned there is unlikely to be much Christmas this year… If they are lucky they might score an Amazon gift card, but that’s not quite as satisfying as a new cuddly toy or x-box game. Turkey? I hear the queues have already started, next to the ones for petrol.

Pretty dismal reading in the financial press over the weekend – supply chain crunches, and “stagflationary headwinds” of rising labour costs, transport failure and missing deliveries being the latest way to describe the post-pandemic consumer recovery that’s been stopped in its tracks.

Much of the crisis apparently stems from China – where the globe’s manufacturing centre seems to have closed. This is too simplistic. Naturally its more complex; for a good explanation of the multiple points of friction can be found in the Saturday Thunderer: “Tidal wave of chaos engulfs global supply chains.” It examines months of delays in the delivery of Standup Paddleboards to a shop in Devon which  will finally arrive this week – assuming they can find a lorry and driver to pick up the container from the other side of the UK – just as the late autumn storms settle in.

For want of a nail the shoe was lost and all that kind of stuff.

But… the current dislocation is probably temporary. How to price the risks during a period of uncertain transition is the critical thing. Over the coming months the supply chains will repair themselves, shortages will be rebalanced and worked around, equilibrium will be restored – a favourite economist response to any exogenous supply-side shock. The questions include:

• How long will it take?
• What are the consequences of ongoing delay?
• Will there be a buying opportunity if the global economy stumbles into a recessionsary/stagflationary puddle?
• Will there still be a surge in repressed consumer demand to drive growth?

How long… is a piece of string?

When the UK’s petrol crisis started over a week ago everyone assumed it would correct itself in days. Its not happening. Consumer fears remain elevated as drivers continue to keep their tanks full. My Rangey is still sitting on the drive with 30 miles in it… but She-Who-Is-Mrs-Blain is intending to go hunting diesel later today…

Some companies are doing better than others. Despite the shortages which have crushed other automakers (who are mothballing plants around the globe), Tesla managed to increase production and deliveries through Q3 – 241k cars were above the most optimistic expectations. It has struggled with delays, but coped and even found ways to retrofit components as and when they become available.

Further good news for Tesla is a Pew research survey suggesting nearly 40% of Americans will now “seriously” consider an electric vehicle.   Rising fuel costs will also help boost adoption, but more and more competitors are getting into the EV space – where Tesla clearly has first mover and pioneer status.. (Regular readers will be shocked I am saying nice things about Tesla…)

(As an aside from this morning’s theme of supply chains….

Some analysts suggest Tesla is due a spectacular price gain – Piper Sandler are on the wires saying 50% up to $1200! If it’s such a rosy outlook why has Cathie Wood’s ARK dumped Tesla? (Well, sold about 10% of her position.) I don’t know – ask her, but I suspect it’s the realisation the value of Tesla has never been its leadership in innovating and selling EVs (a simple margins game which Tesla is still struggling with), but the perception it was about the deliver autonomous driving – which remains, (like nuclear fusion) a tomorrow and tomorrow project – which will never happen.

Tesla has a bright future as a leader in the EV autospace, and should be priced accordingly as a leading auto manufacturer with a premium price relative to others – inferring about a 80% downward correction in its current stock price.

And, that’s me being nice about Tesla…)

Meanwhile, the supply chain crisis is not a static force on markets.

There is a general rising sense of tension and uncertainty. As the Chinese airforce buzzed Taiwan in force this weekend – and decried a rather elderly British frigate for its “evil intent” in traversing the straights – one can’t but help if the Chinese are looking to distract their people from the unfolding Evergrande delinquency.

The rising tension means every missed delivery has magnified consequences when reacting to other economic forces.  This month we will get interesting employment data from the UK – despite the skills shortages across logistics, transport and hospitality, but how many of the 1 million workers who were still on furlough at the end of September will have jobs to go back to?

The longer supply chains remain in turmoil the higher inflation will go – rising demand and falling supply has only one possible outcome: higher prices. You can imagine an economy where central banks are forced to hike rates even as unemployment rises – not everyone can retrain to drive a truck.. (That said one of my mates who got his HGV licence years ago got a very nice letter from the government last week offering him attractive gainful employment in freight haulage… hmm.. hedge fund manager or trucker? That’s a tough one…)

Is there likely to be a buying opportunity ahead of normalising supply chains? That rather depends on how the market prices in the rising inflationary threat relative to holding low yielding bonds. The complex and non-intuitive maths of bonds means rising interest rates will actually force many bond buyers to buy more bonds to match duration and liabilities! And central banks know an inflationary spike in interest rates could trigger a market meltdown, a crisis in the investment management industry and a hit to voter pension savings, causing  governments to demand they step back in to back markets… Personally – if a crunch comes, I will be a selective buyer!

So… let’s assume the global economy gets through the broken supply chains, and price inflation/stagflation, and in about a year or so’s time we reach a new equilibrium? Will consumers be back in the demand driving seat?

Maybe not. Inflation looks very real. Companies are not minded to pay more for staff as trading conditions deteriorate. The only groups of workers getting pay rises are the strongly unionised ones – by-in-large in the public sector. Their pay – financed by increasing taxes on private workers – is rising. Their guaranteed state final salary pension schemes will be pumped up to cover any losses – again financed by rising taxes on private workers.

All of which means that in a few months time most of us will be living on greatly reduced real incomes with struggling pension pots, and the only workers able to consume will be on those working for public bodies… Dang… I should have stayed in the Civil Service (my first job on leaving University) instead of joining the City…

Ouch..

Five Things to Read This Morning

FT – Electric Vehicles: the revolution is here

FT – European gas crunch pushes up price of carbon credits

WSJ – The Facebook Whistleblower, Frances Haugen, Says She Wants to Fix the Company, Not Harm It

BBerg – Here are the Biggest Revelations From the Pandorra Papers Leak

BBerg – Markets Await Outcome for Opaque Bond Tied to Evergrande

Out of time, and back to the day job…

Bill Blain

Strategist, Shard Capital