Finance blog


The Gates Have Been Strained

October 20, 2021

This past May, I wrote a post entitled "Barbarians at the Gate".

As you are probably aware, when barbarians would break through the gate of a great walled city, things did not go well for the citizenry inside. Murder, pillaging, beatings, robbery, and all the other bad stuff you can imagine tended to ensue. This was why it was so important to hold the defenses.

In that post, I discussed a lot of the leading indicators that I felt were pointing towards imminent inflation. Journalists and the Fed were telling us that these were likely transitory (remember that word?). It appears that they were wrong. In fairness, Janet Yellen did mention certain things that bothered her, but Mr. Jerome Powell came out and said he was not very concerned. It seems that the administration was not very happy with Janet's comments, because she quickly walked them back.

The early inflation was plain to see, in my opinion. As I discussed at the time, lumber was shooting higher, copper was moving higher, oil was on the move and groceries had started to get pricier. Despite the soothing lullaby of "it's transitory" at the time, this trend has unfortunately continued in many of these commodities. Today, the TV talking heads are really starting to sound the alarm. Unfortunately, as the saying goes, I think the horse is already out of the barn.

The causes seem straightforward: massive fiscal stimulus, many people getting free money, all the political issues surrounding energy, super low interest rates, and an economy in which people want to go out and spend. Throw in extensive supply chain disruptions and you have a real witch's brew of inflationary ingredients. Even if only one or two of these pressures were present, we might be having problems, but all of them put together ... "fuhgeddaboudit". To be fair, as you can see in the graph below from the St. Louis Fed, we have enjoyed a long period of low inflation. Since the early 90s it has never reached 5% annually. Please note that the record date in the graph for 2021 is May 26th, so this information is slightly lagging; we are seeing an uptick from the endpoint now.

The title "Barbarians at the Gate" was not "Barbarian at the Gate". That's significant because cities have never been sacked by a single barbarian (Conan being fictional). Likewise, our economy (in my analogy, our "city") is extremely diverse, and one of the great wonders of the modern world. The numbers may sound staggering, but as of the second quarter of this year, the GDP of the United States was approaching 23 TRILLION dollars. A trillion dollars is hard to wrap your head around. Maybe think of this GDP number as twenty-three thousand billions.

My point is this: it will take more than just inflation to kill this economy. Sadly, if you have been watching the news, you are starting to see some of the other "barbarians" milling around our walls. Let me list just a few of them quickly.

Help Wanted

Just yesterday, the labor department reported that 4.27 million workers quit their jobs in August. Concurrently, there are over 10mm available job openings. Several news outlets are nicknaming it the "Era of the Great Quit". Smaller businesses, especially the food and other services industries, are being particularly hard hit. Many restaurants can only open a couple days a week because they simply cannot find workers. This is causing extreme financial hardship for many businesses. This has been exasperated by many workers deciding that the recent unemployment benefits that they could receive while staying at home were better than working 40 hours for roughly the same cash.

Oil and Gas Prices

This is, of course, tied directly to inflation. Having said that, in many ways this is a self-inflicted wound. Bank of America recently predicted that a barrel of oil will soon cost $100. At the start of 2021, oil was happily below $50; today it is at $82. The graph below tells beginning of this woeful story, but the real pain is evident down the chain, at the gas pump. I experienced $5.00 per gallon gas when I was in Wyoming this summer. It wasn't fun. Can you imagine if we reach the $7.00-8.00 per gallon range? This affects the cost of everything. Just drill down to a pizza delivery—all sudden that service gets expensive. Not to even mention trucks, planes, or anything else that transports goods and people. I think oil is a game changer if it keeps skyrocketing—and not in a good way.

The Supply Chain Debacle

In June of this year, I posted an article entitled "Something Not in the Water" in which I described the looming supply chain disaster. I included this graphic in the post, which at the time I found shocking. I followed their original source and got an update.

In June, this level was $6,217. As of September, it is $10,323.

Shipping and shipping container logistics are extremely complicated and massive networks. Most of us probably never even thought about them before, and yet here we are with articles in every paper and all the talking heads on TV being rightly concerned. I don't know if Long Beach harbor has had as much airtime in the last forty years as it has had in the last 14 days. It is a huge problem, bigger than I think most of us can really wrap our heads around.

So, that's just three of the "barbarians". There are more and there are many interconnections. For example, higher oil and gas prices make the container problem even worse, as the cost to take those containers into the interior of the country will go up. The help wanted problem also adds to this problem, as the docks cannot find people to unload the ships, nor are there enough truck drivers to cart them once unloaded.

All these barbarians are interrelated and feed off each other's fury, sometimes in ways that are obvious, and sometimes in ways that we (at least I) don't fully understand. I'm sure some of you will shoot me an e-mail with more great examples of related barbarians you are spotting from your own position on the ramparts.

We had better be vigilant, and we had better prepare for the worst. Once the gates fall, it becomes very hard to reign barbarians in.

Final, final thought: I will back at a live speaking event this week in Dallas, and I can't wait. Looking forward to finally getting out and seeing live people in a room, instead of on a screen. There might even be a great restaurant or two to enjoy…if they can find the staff.

Fill out the form below to subscribe to my weekly blog.

The information, analysis, guidance and opinions expressed herein are for general and educational purposes only and are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Information obtained from third party resources are believed to be reliable but not guaranteed. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.