Worry About the Real Stuff

There are plenty of positive news stories emerging as the global economy reopens, but also an increasing number of real-world tangible threats emerging. The Pandemic has affected economies from top to bottom, and many issues won’t be resolved overnight. For markets the issues to consider aren’t just inflation or market bubbles, but how supply chain issues and instability could continue to impact sentiment.

Blain’s Morning Porridge – 28 April 2021: Worry about the real stuff…

“A ship in harbour is safe, but that is not what ships are for..”

This morning: There are plenty of positive news stories emerging as the global economy reopens, but also an increasing number of real-world tangible threats emerging. The Pandemic has affected economies from top to bottom, and many issues won’t be resolved overnight. For markets the issues to consider aren’t just inflation or market bubbles, but how supply chain issues and instability could continue to impact sentiment.

The ongoing Covid horrors in India, and yet more negative politics noise is dominating the new screens, but the global economy is reopening fast. Ignore the doomsters and focus on the reality… the global economy is open, and that means a host of new supply chain, logistics and market pricing crises to worry about! Yay!

This morning there is plenty of positive news. South Korea’s economy posted brisk Q1 growth after a shocking 2020. The Germans have lifted their expectations for 2021 growth to 3.5% and 3.6% in 2022 on the back of recovery. (Wow, if even Europe is recovering, there must be hope.) The UK’s Confederation of Industry (CBI) is ultra-positive, reporting the sharpest upturn since 2018 in sales as the British economy reopens. There is equally positive news from around the planet.

Of course, there will always be problems – like the rumours of a planned right- wing coup in France (a number of retired generals apparently hankering for a repeat of the Algeria crisis). Or how about yet more allegations of Tory Sleaze…? Yawn! (If you voted for Boris on the basis of his integrity, then more fool you..) The Biden Tax hikes are getting all kinds of attention, and could impact market sentiment – although its largely a case of outraged Libertarians disbelieving the temerity of a President daring to propose they pay their fair-share.

But these political events are all intangibles. There is plenty of real stuff we should focus on in markets.


US Home Prices (aye, remember them….) surged 12% in February. That’s the biggest jump since 2006… which is one year before things went to hell in a handbasket on the back of a US housing bubble driven by over-easy money.. Hmmmm.. housing boom, easy money? What’s that ding-ding-ding sound in the back of my head?

There are some really interesting trends in the US homes data – like the hottest property areas are up in the Rocky Mountains. The median US home gained $36k over the last year.  Prices rose in all the 20 major US cities covered by the Case-Shiller indiex – Phoenix, San Diego and Seattle were top performers.

The gains in US homes – and here in the UK – is fuelled on the same old reasons – lack of supply, FOMO fears of missing out and being unable to get the ladder, and now on folks moving to find better places to live than dirty old cities if they can work from home The pandemic has allowed home buyers to build up savings, and the home market is an obvious place to put it – especially when interest rates are so low.

Bingo! That’s the danger: more money chasing a limited number of assets! Home prices are being fuelled on a relative interest rate effect. The gains from housing look much more attractive than savings, so folk are borrowing more (at ultra-low rates) to spend on housing. A boom is fuelling a boom. Home prices are suffering from similar distortions as we’ve seen drive financial asset prices (stocks and shares)!

Dare I suggest a bubble is forming in home prices? Someone is bound to tell me not to worry – house prices always rise…. Don’t they?

Global Shipping and Inventory

It’s not just semiconductor chips that are in short-supply. As the blockage in the Suez demonstrated, its shipping and the logistics involved to get goods to consumers that enables spending. Get it wrong, or de-stablise the process, and the whole global economy goes into shock. If the Chinese want to administer a coup-de-grace to the Western Economy, then hacking Amazon into shut-down would be a place to start.

Over the last few months we’ve seen container ship box rates balloon up to 4x higher – but speaking to a ship broker yesterday he believes rates will normalise. That may change on any geopolitical instability, but rates will largely depend on levels of global inventory.

There is genuine scarcity of chips, which is being addressed by new production. There is also scarcity of goods that were in high demand through the pandemic – for instance, exercise bike production cannibalised the production of normal bikes which remain in short supply. It will take time for furloughed and closed business to resume production – which will drive scarcity price hikes.

That scarcity affects everything from fridges to plane engines – which in turn will impact shipping. If the shippers aren’t getting paid for transporting fridges and toasters, they will seek ways to hike their prices for other goods, but shipping costs could normalise in the short-term because of shortages of goods in transit, rather than the global economy regaining equilibrium.

As inventories recover, we could see shipping prices stage a sharp rise again. A sudden spike in shipping, driven by recovery or through instability (like Taiwan) could well spook markets.

Iron and Steel  

China has been in the grip of a strong recovery since last year– earlier this week, steel futures set new record highs. Iron ore prices are also at new tops. Prices for steel products in China (and therefore elsewhere) are set to rise – fuelled partly on the back of expectations prices are set to rise, but also on fears the Chinese government’s plan to reduce steel production to look climate compliant will create shortages. In short, it’s a hot market for steel in China.

Now the rest of the world is playing catch up. Steel prices have tripled from the pandemic lows as manufacturing, home building, large construction projects and infrastructure, new retail and commercial building, and even shipbuilding are all reopening and demanding metal! I was reading about Swiss Steel Group – a speciality steel firm that’s seen Q1 sales increase 12%.

However, a number of critical bottlenecks are emerging– including access to shipping, getting mines reopened and sourcing new supplies when companies find their pre-covid suppliers have gone bust. Iron ore shipping prices spiked this month by over 25%, driven by China demand. Prices are close to the last peak in 2019. Everyone wants Capesize dry-bulk freighters to bring Brazilian and Australian coal to China!

A further bottleneck could emerge from the uncertainty around Liberty Steel – the aerospace industry has already warned the UK government that Airbus and Rolls Royce are vulnerable if there is any shortage in high strength steels. Trying to find alternative supplies in a market that’s in “take-off” would be very difficult – and any slowdown at Rolls Royce would have a massive multiplier effect on its supply chain.

One little know effect on steel prices is a lack of scrap metal. Scrapping old ships is a major source of high-quality scrap for new steel. India is a major source, but is closed due to new Covid strain hammering health services. There is also a shortage of oxygen as Indian supplies are all earmarked for hospitals – and as the news programmes reveal, a burgeoning black market in the gas. Bangladesh and Pakistan seem unaffected and are getting a much higher slice of the scrap market.

These are just three areas of the real economy worth watching; home prices, supply chains and raw materials. Will they create boom or bust, inflation or opportunity? Who knows? Keep an eye on the space.

Five Things To Read This Morning

FT – Biden’s Global tax plan “breakthrough moment” Canada’s Freeland says

WSJ – Google Earnings Smash Sales Records as Digital Ad Market Booms

FT – US post-pandemic boom overcomes market fears

BBerg – Musk Says Tesla Sold Bitcoin to Prove Liquidity as Cash Alternative

BBerg – There’s a Good Side to the Chip Shortage

Out of time, and back to the day job….

Bill Blain

Shard Capital