The Inflation Monster
What Is Inflation?
Inflation is the decline of purchasing power of a given currency over time. A
quantitative estimate of the rate at which the decline in purchasing power occurs
can be reflected in the increase of an average price level of goods and services in an
economy over some period.
The Challenges Ahead:
Currently, the U.S. is facing a 1.3 million housing shortage nationwide, which is causing a
supply and demand issue around the country. Just in this past year the Wall Street
Journal reported that lumber futures have increased to over $1,000 per 1,000 board feet,
from only $370 per 1,000 board feet exactly a year ago. Timber pricing service Random
Lengths said that orders for engineered wood products, such as flooring and I-beams, are
backed up for months. With more people stuck at home than ever, remodeling and
expansion projects continue to be in high demand. This, combined with lumber mills
unable to hit their production targets, have caused these surging prices. As more
Americans get vaccinated, it is expected that the demand for timber will only increase.
This will eventually drive prices even higher, and according to Bloomberg, U.S. imports
will need to increase by 14% –15% to hit demand this year.
The surge for new built homes reached 36% this past year. NAR chief economists
Lawrence Yun predicts new-home sales will jump 21% and existing-home sales will
climb 9% in 2021. He also indicated that home prices will rise 3% in the current year.
“The consequent rise in home prices have boosted wealth accumulation for
homeowners,” Yun said. “But the opposite side of this will mean the continued decline of
housing affordability and will limit future homeownership opportunities for young adults
if housing supply is not greatly increased.”
Main Suppliers of Forest Products:
China and Japan still make up 87% of all forest product exports to the U.S. Canada makes
up 7%, which 83% of their forest product is soft wood. As mentioned above, Canada has
struggled with meeting lumber targets with several sawmills and suppliers shut down
due to COVID-19.
Impact on Transportation:
Transportation has caused a crippling effect on the commercial and residential sector.
The global forest products trucking market is expected to decline from $175.77 billion in
2019 to $173.78 billion in 2020 at a compound annual growth rate (CAGR) of -1.1%. The
decline is mainly due to the COVID-19 outbreak that has led to restrictive containment
measures involving social distancing, remote working, and the closure of industries and
other commercial activities resulting in operational challenges. The entire supply chain
has been disrupted, impacting the market negatively. The market is expected to recover
and reach $214.23 billion in 2023 at a CAGR of 7.2%.
A shortage of truck drivers is a major challenge in the forest products trucking market.
According to the American Trucking Association's (ATA) USA estimates, there is a
shortage of 50,000 truck drivers and this is expected to increase to 174,000 by 2026.
Moreover, according to an article in the Canadian Press, due to the shortage of truck
drivers, Weyerhaeuser, an American timberland company, lost $10 million to $15 million
in the fourth quarter. By 2024, the average age of truck drivers is expected to be 50, the
shortage is expected to be between 38,000 or 48,000, and more than 10,000 trucker
drivers retire every year. Therefore, the shortage of truck drivers is expected to limit the
growth of the forest products trucking market.
The Main Culprit:
All things considered. I strongly believe that the U.S. Federal Reserve had a large play in
this. Since 2009 up until the pandemic, there was a gradual increase in money supply
year-over-year. When the pandemic arrived, we saw the U.S. money supply increased by
354.7%. Short term yields and Fed rates were crunched down to zero. Bonds have been
showing higher yields, which indicates that the bond market is anticipating higher
inflation. Although today we did see a slight decline in bond yields which make equity
market happy. We must not neglect the bigger picture. Inflation erodes purchasing power
and we are feeling those repercussions right now.
The Fed has shown no indication to raise interest rates till 2023 and intend to keep easy money policies in place, per Fed Reserve Chairman Jerome Powell address last month.
The Fed seems more inclined to keep printing money until labor statistics reach certain
levels among other monetary agendas are met. But this comes with a risk.
As I see it, the Fed has two options:
First, keep printing money to avoid a market crash and the start of a new debt cycle.
Essentially, just keep “kicking the can down the road” and hope it will generate a faster
economic recovery before inflation numbers reach dangerous levels. This is a gambling
tactic with option one, if all does not go to plan, it could lead to major consequences in
devaluating the US Dollar. They would want to avoid this repercussion at all costs
because a weak domestic currency makes exports cheaper, but imports become more
expensive and may decline productivity.
The second option, let the market crash and start a new debt cycle, which would raise
interest rates high enough to squash inflation levels. This is a very delicate situation to be
in and will be a waiting game as we progress forward towards a recovery
By:
Michael Suttora
Senior Investment Strategist
JSJ Sustainable Investments LLC.