The Retired Investor: The Fed's Key Inflation Gauge
Inflation is worrying investors. Every new data point seems to be heightening their anxiety. Oil and other commodities are raging higher. The rate of wage increases is also climbing, but the most important variable the Fed is watching is about to move higher.
Housing and/or home ownership is one of the most important components of the U.S. economy. However, housing prices per se are not included in the Consumer Price Index (CPI). Instead, the CPI measures the cost of shelter, which is broken down between actual rents paid and the Owners' Equivalent Rent or OER.
OER is the amount of rent that would need to be paid in order to substitute a currently owned house as a rental property. It measures (in an indirect way) the value of the present price increases in the real estate market including your home.
One could call it the "shelter" component of the Consumer Price Index, which is published by the Bureau of Labor Statistics. The OER represents about one third of the CPI basket and it is a number the Fed watches carefully.
You may wonder why rent is included in the CPI, but not food and energy. The Fed considers price fluctuations in food and energy as transitory. If, for example, OPEC decides to raise oil production next month, the price of oil would probably decline. That, in turn, would likely impact how much consumers will pay at the gas pump. Rents, on the other hand, are stickier and tend to last longer.
It is obvious to most readers that housing costs have skyrocketed during the last two years. Since the start of the pandemic, inflation-adjusted home prices have increased 11.8 percent annualized. To put that in perspective, real house prices have been rising 100 times faster than they did from 1955 to 1998.
But there has been no commensurate increase in the OER, until recently. That is because there is usually a lag time between increased housing prices and rent increases (by roughly five quarters). That lag time is now up, and right on schedule we are beginning to see OER impact the inflation rate in both the CPI and the PPI (Producer Price Index). In September 2021, the shelter index rose by 0.4 percent, accounting for nearly one third of the increase in prices across all goods and services in the CPI.
That is the largest increase in 20 years. OER rose by 0.4 percent, while rents of primary residences rose by 0.5 percent. Those were the biggest one month increases since the early 2000s. Economists blame the results on rapid housing price gains, more aggressive landlord pricing, low inventory and faster wage growth.
For the Fed, this is bad news. As the headline number of the Fed's inflation gauges, the CPI and the Producer Price Index (PPI), continue to climb higher, the pressure to raise interest rates sooner rather than later is building. The idea that broad-based inflation pressures will continue to rise thanks to supply chain issues and aided and abetted by wage growth has the financial markets nervous. They also know that some of the long-lasting economic forces that have kept inflation low for decades have been turned on their heads. China, for example, is exporting inflation right now, after functioning as a massive deflationary force for the last thirty years.
Consumer expectations for inflation are continuing to surge, rising to 5.3 percent over the next year, and 4.2 percent over the next three years. Both are the highest in the history of data going back eight years, according to the New York Fed.
As it stands, about half of the Fed's policy makers are expecting to start raising interest rates next year and think borrowing costs should increase to at least 1 percent by the end of 2023. That timetable may have to be pulled forward if the present trends continue. Watching the OER may give us an early warning of what the Fed will do next.
The Retired Investor: Barbie Gets Better With Age
Despite this new age of video games, electronic toys, and diminishing attention spans, children are returning to a toy that is almost as old as me. Mattel's Barbie doll is back and at the top of many holiday shopping lists.
Some of the credit for Barbie's new-found popularity can be attributed to the pandemic. The lockdowns and the subsequent search for things to keep children occupied had mothers remembering their own fascination with all-things Barbie. Buying a Barbie, however (at least until recently), had parents wrestling with several negative stereotypes. Leading the list was the doll's image of a whites-only toy that ignored the realities of the melting pot we call America. Then there was the all-too-perfect body, which critics said promoted an unrealistic body image.
Consumers took the criticism to heart. In years past, sales declined, competitors gobbled up Barbie's long-reigning market share, and there was even talk of discontinuing the 62-year-old model from the company's lineup.
Instead, Mattel's management, after much soul-searching, decided to revamp their products to better reflect the world we live in. Taking their cues from the success of Disney's Marvel and it's cast of superheroes of every race, age, gender, and walk of life, Barbie entered the 21st century.
Mattel revamped their entire product line and produced news dolls with various skin tones as well as body types. The doll now comes in 94 hair colors, 13 eye colors, and five body types. But they haven't stopped there. Some models have prosthetic legs or wheelchairs. Ken dolls have also been updated with their own skin colors, body types, and hairstyles.
Mattel has also delved into areas such as wellness and has introduced a line of role-model Barbies. The company, for example, recently announced a series of dolls honoring the heroes of the novel coronavirus pandemic. COVID-19 vaccine developer Sarah Gilbert, a 59-year-old Oxford University professor and co-developer of the Oxford/AstraZeneca vaccine, is one of six women who have new Barbies modeled after them. Others include an emergency room nurse, a frontline doctor in Las Vegas, as well a Brazilian scientist and a Canadian psychiatry resident at the University of Toronto who battled systemic racism in health care.
Mattel has also established a film department and enlisted some social media influencers to help propel their toys into the forefront of popular culture. It appears to be exceeding. Last year, Barbie had its best sales growth in 20 years. The company's stock price has risen by almost 50 percent, and analysts are expecting good results for 2021 as well.
And given its long history, certain dolls have become collectors' items. Barbie debuted at the American International Toy Fair in New York on March 9, 1959. Over the years, thanks to limited edition models, or exclusive collaborations that resulted in a unique doll design, there are about 60 Barbie dolls worth as much as $667,757.
The "I Love Lucy" Barbie fetches as much as $1,050, while other expensive collectables such as the Coach Barbie ($1,500) or the Christmas Show Barbie ($2,000) are in demand. There are also Chicago Cubs versions, as well as a NASCAR Official Barbie. Both models are commanding $2,000 or more. Not bad, for a new doll that usually retails for under $40. It should come as no surprise that the Mattel is now considering turning its collector brands into non-fungible tokens (NFTs) as the next market to explore.
In the coming months, a Barbie movie, starring Margot Robbie, should keep the kids and their parents' pocketbooks quite busy into the holiday season. In anticipation of the film's release, management has increased prices for the iconic doll, due to higher commodity prices and transportation costs. The company said it expects full-year net sales to increase by 12 percent to 14 percent driven by Barbie's new-found popularity, as well as demand for toy cars (Hot Wheels) and other action figures.
The Retried Investor: Golf Continues to Grow
In 2020, during the midst of the pandemic, golf made a comeback. More than 24.8 million people discovered outdoor refuge on the links, last year and the popularity of the sport continues to grow.
Golf, as many have discovered, is an outdoor activity that has proven to be an almost perfect answer to the limitations of the pandemic. Players can get outside, exercise, and at the same time, socially distance themselves from one another. Last year the U.S. saw the largest increase in golfers (2 percent) in 17 years. This year, the number of rounds played was up 16.1 percent, compared to the same period in 2020, according to the National Golf Foundation. And with this increase has come an upsurge in both golf equipment and apparel.
Golf equipment sales in the U.S. have grown by double digits (37 percent) so far this year, as have food service shipments to country clubs (plus-32 percent) and golf courses (plus-51 percent) compared to last year. Typically, for those who do not play golf, the reward for playing a good round of golf is usually the food and beverage consumed afterwards. The top items this summer included bottled water and energy/sports drinks, juice, chicken wings, hot dogs and French fries.
There are roughly 15,000 golf courses in the U.S. that account for the almost 25 million outdoor golfers. However, there are another 21 million people who are enjoying the sport through different entertainment venues like Drive Shack, Big Shots Golf, and Top Golf.
TopGolf, which started in China and now has 70 locations in six countries, offers an alternative to driving ranges. It is a high-tech golf game that appeals to players whatever their skill level. It is only one of a growing list of interactive golf experiences and virtual simulators that go beyond the traditional 18-hole golf course. Throw in a more social and gamified atmosphere, plus food and drinks, and the appeal to neophyte golfers is understandable.
The sport is also attracting more women as well as younger players, and even families. The number of female golfers jumped by 8 percent in 2020, which was the largest gain in more than five years and 44 percent of those who played at least one round of golf last year was under the age of 40. That is not to say that the older, passionate golfer is on the down swing. They are still in the game and their average number of rounds played continues to increase. An all-time high of rounds played (20.2) was hit last year, according to NGF, and that number will probably be surpassed this year.
It appears that the same wave of golfing popularity is surging worldwide as well. In the U.K, golf staycations are skyrocketing, while China's growth rate in new players is above 7 percent. Both Japan and Canada, which are top golfing countries, are also seeing robust growth.
Golf equipment companies such as Callaway, Titleist, and Dick's Sporting Goods are all forecasting increased strength in the future. The only caveat is the difficulty in obtaining product due to supply chain disruptions. Some managers are already seeing a slowdown in deliveries for certain golf equipment.
The good news is that Americans are exercising more and perhaps realizing that playing golf is not as difficult as they thought. If this develops into an entirely new generation of golf enthusiasts, so much the better.
The Retired Investor: Out of Gas
Winter approaches and with it a potential natural gas crisis. Areas of Europe are already scrambling to find the energy required to heat homes and continue their economic rebound. Could the U.S. be next?
Over the last year, prices for European natural gas have jumped by almost 500 percent. Natural gas prices on this side of the pond have also spiked by more than 100 percent this year. But it isn't just countries in the Northern Hemisphere that are feeling the scarcity. Parts of Asia, which are importing liquified natural gas (LNG) at record prices, are being forced to switch to coal and heating oil as LNG shipments decline. Japan and Korea are somewhat protected so far, thanks to their use of long-term LNG contracts, but not so with China.
China, the world's largest importer of natural gas, is having a power crisis as a result of the shortages. Many provinces are rationing electricity to industries. This is resulting in production cutbacks in cement, steel, glass, plastics, and a host of other products.
Brazil, and other areas in South America, depend on hydropower for much of their energy. However, serious drought has reduced the flows in various rivers such as the Parana Rover basin. The output of energy has declined to the point that utilities have been forced to make up the loss through natural gas imports.
The present shortages have multiple sources. Industrial production in this post-pandemic world has surged, which has expanded demand for natural gas and LNG. Climate change from a cold and flooding European spring to a grueling hot summer in Asia also boosted energy demand. Russia, the main gas supplier to most of Europe, has been piping less gas into European stockpiles. Whether by accident, or on purpose, is anyone's guess.
Alternative energy sources have also contributed to the present shortage. Politicians, ESP advocates, and the wind and solar sectors have argued that "going green" makes increased investment in natural gas production and exploration unnecessary. Only now, in this crisis environment, is the world realizing that transitioning to cleaner fuels will require a decades-long period. In the meantime, we will still need natural gas as an integral ingredient to the world's power supply, which fuels so much of our industrial and residential sectors.
This winter, with huge demand from the world, importers are looking to Qatar, Trinidad, Tobago and especially the U.S. to increase supply. Unfortunately, the U.S. is experiencing its own shortfall in supply. Blame climate change once again for some of that. Summer heatwaves and back-to-back hurricanes have disrupted production and distribution, while increasing overall energy demand and consumption. Our own economic recovery has also diverted more consumption of natural gas away from residential use to industrial sources.
Then there is the reduction of U.S. gas production. "Fracking" has become a dirty word in many areas of the country. As a result, shale drillers are far more focused on achieving acceptable climate goals and increasing dividends and buybacks of their stock than in raising production. Energy analysts predict that there is little new gas coming online anytime soon — an increase of just 1.1 percent over the next six months. That is a big change from the recent past when our domestic surplus of gas was climbing steadily, and exports of U.S. LNG was the wave of the future. In the short-term, there is no real alternative to looming shortages.
Readers should brace for the highest energy prices they have seen in many years this winter. But if that is the only impact, we should consider ourselves lucky. The risk is that we follow Europe's and Asia's lead and experience widespread cutbacks in production. That would damage economic growth, while adding to the already rising rate of inflation. An environment that could cause stagflation. About the best we can hope for is a mild winter, but in this era of disastrous climate change, what are the chances of that?
The Retired Investor: Weather Worsens Global Trade
Changes in climate are impacting a global economy that is fighting to recover from a pandemic. Supply chain bottlenecks continue to worsen as continuous weather-related catastrophes close ports, and snarl land, sea, and air transportation routes. Can it get any worse?
Yes, and it probably will, according to climate experts. Nearly all actively publishing climate scientists agree that humans are causing global warming and climate change. The less than 2 percent of experts that disagree have published contrarian studies that either cannot be replicated or contain errors. I'll go with the consensus on this issue.
Here in the U.S., we receive ample proof of that change almost on a daily basis. I have lost count of the number of hurricanes hitting our shores so far this season. Rivers are drying up, some permanently, while heat domes and uncontrolled forest fires afflict the American West and Pacific Northwest. Similar occurrences are happening throughout the world from flooding in Germany typhoons in Asia and drought just about everywhere.
These weather-related events significantly increase the price of production, no matter the product, while reducing the speed with which supplies can be delivered. The quality of goods and services also suffers. Increasingly, the timing of deliveries is being thrown into disarray. Delays in components and parts that may make up a finished product further disrupts supply chains. If you add in shutdowns and labor shortages caused by the ongoing pandemic, you may now understand why some consumers are doing their holiday shopping in September rather than December.
Swiss Re, a world-class insurance company, recently predicted in a research report that the effects of climate change could shave anywhere from 11 percent to 14 percent off global economic output by 2050. That comes to $23 trillion. Every year, however, billions of dollars in lost trade go unreported and uncounted.
Using the U.S. as a ready example, over the past four decades, we have suffered through 300 weather and climate-related disasters that cost the country more than $1 billion each in losses. In 2020, there were 22 such billion-dollar disasters. But none of those losses include the disruption in economic output and lost trade that accompanied the death and destruction.
Until recently, supply chain managements considered weather as a short-term risk where disruptions would be temporary at best. Only now are companies realizing that they need a long-term understanding of weather and climate trends that encompass several years or more. How to mitigate this physical climate risk on supply chains is becoming, quite literally, a hot topic.
Most of the world's populations, for example, lives near seacoasts, where there is increasing risk that sea levels will rise, causing more storms, flooding, and hurricanes. Buying, or building a property (or contracting with a supplier) in a coastal area that lacks infrastructure protection in the event of coastal flooding may no longer be advantageous. Factors like this are now becoming more of a consideration among corporate planners.
Climate-driven weather extremes are most evident and visible in the area of food production. Prices are skyrocketing and scarcities are becoming more frequent.
Problems in pork production in China, tomatoes in California, sugar and coffee in Brazil, and grains of all kinds in various locales are devastating certain producers while benefiting others. Human-driven climate change is hammering agricultural areas throughout the world.
I could also address the risk to the world of a diminishing water supply, but by now you are getting the idea that climate change is not only here to stay but its impact is increasing. It is going to make goods and services less plentiful and far more expensive in the years ahead. Corporations that plan today for the risks ahead should come out on top.