September 2021
I reached one of those parenting milestones this past summer: My oldest turned 16. When I was a younger parent, I would think ahead to this day and say, “We probably won’t get a third car right away because our kid needs to learn the value of a dollar.” Fast forward a decade – and a hundred or so drop-offs at 5:50am swim practices – and I found myself in the market for a car for my newly-turned 16-year-old. There was just one problem: There were no cars on the lots.
Little Wheelin’ or Dealin’
Almost all car dealers were in the same general predicament. One dealer told me that while they typically carried 250 cars in inventory, they had only 9 new cars for sale (half of which were base-model minivans). Another said that its 12 salespeople each had a monthly sales quota of 12 cars, yet, they had 17 cars on the lot and were only expecting 30 cars to be delivered that month (most of which were already pre-sold).
What about a used car? My original plan had been to purchase a pre-owned car, but, in response to the new car shortage, the price of used cars was soaring. The Mannheim Used Vehicle Index is up a whopping 45% since 2020 pre-pandemic.1 In some cases, used car prices EXCEEDED the price of new cars. I could not rationalize paying those prices, so I was stuck.
Maybe I could buy a bike? My 13-year-old son has become obsessed with mountain biking since the pandemic began, so when he asked for a “better” one for his upcoming birthday (“gotta have dual-suspension for the jumps!”), I thought it was a reasonable request. It probably did not hurt his case that he is getting close to my size, so Dad may be able to use the bike too. Having mentally committed to buying a new bike, I trotted into several bike shops only to hear: “We have no dual-suspension bikes to sell.” If I placed an order today, one could arrive by Spring 2022.
Delayed, but Not Canceled
Similar to the Nelson family predicament, many of you have likely had home repairs, furniture purchases, or deliveries delayed as well. All of these examples bring to life an extraordinary feature of this recovery – the U.S. economic hose is badly kinked.
Think about the repercussions of just the car and bike I cannot buy. Retailers cannot take my money, while everyone from parts suppliers to shipping and logistics companies around the globe cannot get their share of the profits. Those who provide ongoing maintenance and insurance for these vehicles have fewer products to service. I am leaving out others in the labor and supply chain, but you get the picture. The U.S. economy is far from firing on all cylinders.
Now, it is generally a problem when employment, personal incomes and corporate profits could all be higher. While most would prefer a smoother functioning economy, the situation that we have found ourselves in has some advantages for investors over the long-term as well.
First, the recovery likely lasts longer as both supply and demand forces play out over future quarters, versus a rapid rebound compressed into several months. Those of us who wanted to buy a car, bike, house or take an overseas vacation this year, but did not, will likely want to buy those things next year. Therefore, our consumption has been delayed, not canceled.
Second, the Federal Reserve has stayed patient with monetary policy. Regular readers of this newsletter know how helpful we believe easy monetary policy is to financial markets and it has remained extraordinarily easy this year. (You may have noticed the S&P 500 is up nearly 20% thus far in 2021 as of this publication.)
Last, we believe the challenges presented by the pandemic will ultimately force businesses to operate more efficiently and build more resilient supply chains in the future. Companies are already responding to a microchip shortage by establishing greater geographic diversity in their supply chains. More companies will likely create robust technologies to deal with business interruptions. In short, more planning and increased innovation could result in more durable business models.
For readers who have no affinity for business jargon, imagine the following scenario: You are ten years old. It is Thanksgiving morning. Your parents are down with a cold and the oven has blown a fuse. (You have a labor and supply chain disruption for the Thanksgiving meal.) Word spreads down the street and a kind group of neighbors decide to share some of their dishes with you. (That is kind of like stimulus.) Typically, your family would sit down for a big meal in the afternoon. You would gorge yourself at one sitting while your parents hounded you to not eat too much (a bit like the Federal Reserve). This year, the trickle of food begins at noon, more arrives during the afternoon, and the late eaters bring even more in the evening. You eat at a slower pace over a longer period of time. There are no bellyaches even though you consume more than on a typical Thanksgiving. Since your consumption is delayed, you make better choices throughout the day (pecan pie > green bean casserole). What originally began as a problem resulted in a wonderful day.
A Garden Hose Beats a Fire Hose When Thirsty
I do not mean to make light of the negative side-effects of the kinked hose economy. Prices are rising sharply in many sectors. There are employees throughout the supply chain who are not making optimum wages because their products are not widely available for purchase. Consumers cannot enjoy all the things that they would like to. These things are not good.
Despite these drawbacks, I maintain that kinked hoses are not all bad; this one is likely giving us a smoother growth trajectory for several years out. Said another way, it is keeping us, in many instances, from choosing consumption today – and that “forced saving” can actually be a positive economic factor for the future.
We find it hard to believe that labor shortages, supply bottlenecks, and Covid-19 all disappear next year – meaning that some demand from 2022 will likely bleed into 2023. Financial markets like elongated periods of growth and the Federal Reserve maintains a more patient hand during smooth recoveries. A sudden acceleration in growth (in other words, a quick unkinking of the hose) would force the Fed into sudden actions of their own, such as removing stimulus or raising interest rates. These moves, if enacted swiftly, would present a challenge to the markets. Fortunately, we think the kinks are here to stay for a while, so we believe this scenario is unlikely.
Markets are perpetually full of challenges, and now is no different. Only a year ago, investors were worried about the election and how quickly a vaccine to fight the Covid-19 pandemic might be developed. At that time, we urged calm, level-headed thinking and cast our vote for Candidate TINA (There is No Alternative). Today, as you read about new taxes, China, and inflation, we again support a steady approach. This kinked hose is keeping the economy in a Goldilocks place – not too hot and not too cold. We’d argue that there are worse situations to find yourself in as an investor.
1) Source: Bloomberg