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Land Ho

Updated: Jul 19, 2023

Back in June, the esteemed financial journalist Jack Hough wrote an article in Barron’s called “The Everything Shortage Is Here” and cited shortages in everything from lumber to Chick Fil-A sauces. That same month, I wrote here in our Insights column that most inflationary functions at the time were likely transitory but specifically that wage pressures were here to stay. We even pointed out that prices for used cars would begin to fall, followed by hotel room prices, and that has already happened.


Barron’s is a great publication, and while they were late to the party (this time), they made a solid entrance this week with their cover story, “Coping With the Cargo Crunch—Why the Outlook for Holiday Sales Is Looking Brighter.”

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With all the south swell in the water recently, I drove up to Newport Beach this weekend to surf with some old friends. I lived in Newport for a long, long time, but I have never seen so many container ships lined up on anchor to get into Long Beach as I did this weekend. There were eight of them right there, just a few miles off of 52nd Street and framed by Catalina Island, so it’s probably not much of a surprise that Hough wrote about supply chain concerns-- they’re pretty in-your-face this week. Rather, what surprised me was his conclusion that retailers, manufacturers, shippers, and Wall Street forecasters are learning to cope with bottlenecks and that supply chain stresses will largely ease next year.


I loved it, just didn’t expect it. Loved it because his conclusion jives with many of the technical indicators we follow. For example, the breakeven inflation rate, which is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity, is the same as it was in April, and it’s well off of its June spike. Moreover, it has pretty stiff resistance near these levels, indicating that Hough is probably right and that the view between 52nd and Catalina should clear up soon.

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The causes of today’s shortages are numerous (seemingly coming from all parts of the globe) and varied (like a grounded ship blocking the Suez Canal for a week). However, virtually all of the most meaningful recent inflationary catalysts have been attributable to Covid-19. Vaccines should have reversed that trend, but the uptake was slow in places, and variant cases raged. As a result, spending on consumer goods has only fallen by about a point a month since March and remains 15 points above pre-pandemic levels.


Virus trends have taken a promising turn in recent weeks, though. Merck announced Friday that their antiviral pill, known as molnupiravir, reduced the chance that a newly diagnosed Covid-19 patient would be hospitalized or die by 50%. If cleared by the FDA, the drug would be the first pill authorized to treat Covid-19, providing doctors with an easily administered drug to keep newly diagnosed patients from developing severe disease.


The good news is that we expect booster shots and easily administered therapeutics to speed economic recovery. The not-so-good news is that we think the Fed and that “dangerous man” Jerome Powell are just about done providing tailwinds to the stock market. Critical overseas manufacturing centers are reopening, and consumers are slowly returning to spending on experiences after a huge shift in preference toward household goods. That reversal will continue and even pick up speed as new Covid cases fall, which just so happens to be why the Fed will have to taper its bond purchases, and we expect that to lead interest rates on the ten year Treasury to double over the next eighteen months.


So, while we don’t expect inflation to completely run away from consumers over the coming months, we appreciate that the Fed will have to ease up on the stimulus. In dealing with that sort of double-edged sword, we emphasize:


· avoiding technology stocks dependent on high growth rates

· leaning into value-oriented cyclical stocks, especially financials and large retailers

· maintaining elevated cash positions for buying dips




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