The Retired Investor: Chlorine, Cars and the Supply Chain Challenge
Supply chain shortages are showing up across the nation. Some items, such as chlorine for America's pools and used cars, just illustrate a lesson we need to learn.
The chlorine shortages illustrate why supply chains are so important and how fragile they can be when faced with something as devastating as the pandemic. Last year, when lockdowns kept most Americans hunkered in their homes, an enormous home improvement wave swept through the country. Demand for home offices on the inside, and new recreational improvements on the outside, skyrocketed.
Gazebos, firepits, and swimming pools were just some of the items that consumers decided would make life bearable under a lockdown. New pool construction and upgrades were a savior to the pool industry, which saw their sales jump 20 percent or more. Roughly 66 percent of the 5.2 million in ground, residential pools in the U.S. use traditional chlorine systems. The last thing new and old pool owners were expecting was a chlorine supply shortage.
All it took was a fire at one chemical plant in Louisiana to drive prices of chlorine pool tablets into the stratosphere. Unfortunately, this facility accounted for a large share of domestic chlorine pool tab production, and there are few remaining sources of supply within the U.S. And as with so many other products in the global supply chain, China is the only significant foreign supplier.
Importing products from China is beset by a variety of problems ranging from bottlenecks in ports, China's own virus outbreaks, and the various economic sanctions and tariffs imposed by the U.S. We are paying a price, and a steep one at that, for our past and present policies of bashing China (and other nations) rather than investing in our own abilities to compete.
The scarcity of new and used automobiles in the U.S. is far a far more serious issue than chlorine, but its cause is just another example of how supply chain disruptions can ultimately impact consumers in unexpected ways. Semiconductors, for example, are used in so many products that they are considered indispensable to the world's economic health. As most readers are aware, there is at present a global semiconductor shortage. For today's gadget-filled automobile that has posed a real problem.
The pandemic is once-again the culprit behind the shortages. Demand by shut-in consumers seeking electronic equipment for home offices, and for chip-heavy gadgets for home entertainment exploded. The companies that build and sell these devices reacted by sending a wave of semiconductor orders through the supply chain all at once. At the same time, many of these global chip makers were being forced to shut down due to their own coronavirus threat. As a result, those U.S. orders quickly overwhelmed the few chip foundries that manufacture most of the world's computer chips.
Automobile manufacturers were caught flat-footed by the semiconductor shortage. The electronic goods manufacturers had quickly gobbled up most of the relatively lean, worldwide inventory of chips. By the time they got around to realizing there was a shortage, it was too late. The production of many new models had to be halted, since many models just couldn't be completed without vital semiconductor components. New car production became a trade-off and dealerships found that their supply of new cars was being rationed.
At the same time, consumer demand began picking up. One reason is that the U.S. passenger auto stock is aging. The average age of America's vehicles is now approaching 13 years old. Consumers shopping for new cars realize there are few to be had and the waiting list is in months, not weeks, long. The result has been a growing shortage of new cars. That has led to a record increase in used car prices. The subsequent rise in used and new auto prices was so strong that it accounted for one-third of April's overall rise in consumer prices.
Cars and chlorine are just two examples of the present supply change imbalances. There are lessons to be learned from this predicament. For one, the world's economies are a lot more vulnerable to catastrophes than anyone imagined. Second, global supply chains are just that — global. Whether we like it or not, we need and depend on the products other nations sell us, and they need ours.
The next calamity may be weather-related, or another virus (like the bird flu resurgence in China today); who knows? Whatever it is, we are dependent on each other if we hope to survive it. The sooner we wake up to that fact, the better off we will be.
The Retired Investor: The Movies Return
The Memorial Day weekend launched the unofficial beginning of the summer season. Movie theater owners are holding their breath in hopes that consumers, once vaccinated, may start to return to the cinema. Is it a false hope?
Much has been written about the demise of the movie theater, even before the world was ravaged by the novel coronavirus pandemic. Sky-high prices for tickets and the exorbitant costs of concessionary items like $8 bottles of water, and $15 baskets of popcorn had made the movie-going experience almost as costly as a rock concert.
At the same time, consumers were being offered the choice of sitting at home, while watching a steady and increasing stream of big-name stars and high-quality films for a $15 monthly fee. This growing competition from streaming companies like Netflix, HBO, and Amazon Prime, and the climbing cost of the movie experience, left the future of movie theaters questionable at best.
And then along came the pandemic. Box office revenues plunged 80 percent or more last year as all 5,477 of U.S. cinemas were closed in order to slow the spread of COVID-19. That left the Hollywood studios with little distribution and only one major product outlet -- streaming.
In an additional blow to a struggling business, the largest theater chain, AMC theaters, agreed to collapse its theatrical "window" of exclusive access to new movies from three months to 17 days. Streamers such as Disney Plus and HBO Max also began offering simultaneous openings on both their streaming channels and in movie theaters for additional fees or as part of their promotional services. Major film producers like Sony, that lacked big, affiliated streaming companies, sold their movies to organizations such as Apple TV+ and Amazon.
Fast forward to today, in what movie theater companies hope may be the beginning of a post-pandemic return to the cinema. Memorial Day box office returns, usually a preview of the summer season, were somewhat encouraging. "A Quiet Place Part II" made $57 million over the three-day weekend. "Cruella," which opened simultaneously on Disney Plus and in the theaters, generated $26.5 million, which was solid and above expectations.
While more theaters are open than not, we are still in the early days. Thus far, total box office gross this year amounts to about $650 million with around 71 million tickets sold at an average price of $9.16 per ticket, according to The Numbers, a data-gathering organization on movie theaters.
The question is whether the pandemic has accelerated the disruption caused by home streaming, or will the pent-up demand and excitement to go out, give the theaters a reprieve and reinvigorate attendance?
Roughly half of adults surveyed by Morning Consult, a research intelligence group, said they felt comfortable at the movies, and nearly 4 in 10 adults said they would feel comfortable returning to the movies in the next month. Generation Z respondents (as well as Millennials) felt the most comfortable in a movie theater, while Baby Boomers lagged with under 50 percent expressing comfort in the idea.
It has become accepted wisdom that going to the movies is passé. For many, it's a place your parents went to make out when they were teenagers. Many argue why go out when you can stream at home, or on the go? When you can get a month's worth of good flicks for the price of one movie ticket? They have a point.
Maybe the streaming companies are right and moviegoers will dwindle down to a couple of chuckleheads like me willing to pay for that buttered popcorn, or that over-priced box of Raisinets. But I suspect there is still an audience out there, and maybe more of one than anyone imagines. I still feel that thrill in my chest when the lights go down, the curtains rise, and for an hour or two I am whisked away to a different world. How about you?
The Retired Investor: Carbon Market Comes of Age
At the beginning of this year, the global price of carbon was $24.05 per ton of CO2. In order to achieve the emissions reduction goals of members of the Paris Agreement, prices need to reach a range of $50-$100 per ton of CO2. That makes buying carbon an attractive investment.
The ongoing concerns about climate change have spawned several emission trading schemes over the last decade. The reasoning is simple: if left unchecked, carbon emissions (among other factors) will have a material impact on our environment and will do severe damage to the global economy.
The ratification of the Kyoto Protocol of 2007, by world governments, effectively addressed the challenge, establishing rules of carbon emissions. And in the process created an entirely new asset class.
Today, whatever system a government chooses has at its core, a cap-and-trade system. Emitters of carbon must by law either limit carbon emissions to the level allocated by their government, purchase additional carbon emissions permits in the marketplace, or pay a fine for exceeding their emission limits. This has created a new commodity: carbon emission permits.
The European Union Emission Trading Scheme (EU ETS) is by far the largest such scheme in the world. It has also become the model for most of the world's governments. Carbon emissions, according to the Financial Times, was the top performing commodity in recent years, growing fivefold in the last four years. By the end of 2020, the three largest global carbon futures exchanges had a market size of $260 billion.
In April 2021, on Earth Day, President Joe Biden hosted a "Leaders' Summit on Climate," and promised to reduce emissions by 50-52 percent below 2005 levels by 2030. The U.S. was just one country, among many. The EU, the U.K., and China promised similar, if not larger, reductions. Carbon emission pricing was the central theme of the summit and is the key, fundamental component for achieving the summit's reduction goals.
Prices have risen by 70 percent this year in response to the aggressive goals set by the EU, which is targeting a 55 percent reduction in greenhouse gases by 2030 and net-zero by 2050. The hope is that as the price of carbon credits continue to rise, polluting companies will at some point decide to invest in reducing emissions rather than purchasing increasingly expensive credits.
The re-opening of the world's economies is also a bullish development for carbon pricing as industrial companies and utilities increase output and carbon emissions, which is sparking even more demand for carbon credits. And adding to that trend, new carbon markets seem to be popping up every month. Cap-and-trade carbon pricing exists in 24 national and sub-national markets currently. Another 19 more markets are in the development or consolidation phase.
Some American institutional investors and pension funds are gaining access to this market either directly, or through Exchange Traded Funds (ETFs). The retail crowd is still relatively absent from this asset class.
In addition, as far as I can tell, the carbon market is uncorrelated with other risk assets. The underlying asset, the EU ETS, is a liquid instrument with a well-understood prospective risk premium. Its risk-adjusted returns have outperformed traditional asset classes such as equities, bonds, and other commodities. In my opinion, it appears to be a case of making some real money over the long-term, and, at the same time, contributing to the greater good by helping to address climate change and a much-improved global environment.
The Retired Investor: Gold Regains Its Mojo
In inflationary environments, investors historically have hedged their bets by buying gold. However, this time around, the precious metal has languished as investors bought alternative investments. But times are changing.
The primary alternative to buying gold has been cryptocurrencies. Bitcoin and Ethereum, two of my 2021 buy recommendations (for those with a strong stomach) have enjoyed spectacular gains in 2021. Bitcoin, at one point in May, had gained almost 100 percent, while Ethereum saw gains of more than 400 percent.
In addition, other commodities held more interest than gold for most investors. In January 2021, I recommended investors focus on some specific commodities, especially oil, copper, and soft commodities, like food and lumber. I listed gold as my last pick among those commodities.
That proved to be the correct approach because I recognized that the world had moved on, at least temporarily from something as arcane as gold. In today's internet world among the Robin Hood traders and GameStop crowd, gold was simply not be as attractive as digital currencies. There are plenty of arguments for why that could be the case. Bullion, for example, is expensive to hold, and rising interest rates increases the cost of holding it. Gold is cumbersome, while digital transactions are easy and far more efficient. And while gold is still used in several products, copper, lumber, and oil are far more leveraged to a re-opening global economy.
It is not as if gold has gone nowhere. Gold made what I consider a cycle low back in November 2020 at $1,767.20 an ounce. Today, that same ounce of gold will fetch $1,882.70. That's roughly a 6.5 percent gain. That's much better than the risk-free rate in the bond market but compared to the stock market's 12 percent gains it has been disappointing at best.
However, recently gold has begun to perk up and I believe we may be on the cusp of a new move higher in this precious metal (and silver along with it). Why the change in attitude? The increased worry over how high and how fast inflation will rise and the dollar's sharp decline has investors nervous. At the same time, other commodities are at record peak prices, while gold has done little.
In addition, recent arguments that crypto currencies are the Twenty-First Century's "new gold" is beginning to unravel as speculation within that asset class runs amuck.
As an example, the crypto world is in the midst of a massive decline (evenas I write this). Bitcoin has fallen from a high of $64,000 to Wednesday's low of $33,700, which is almost a 50 percent decline. Ethereum and Dogecoin have also incurred similar losses. The argument that it is a hedge against inflation or rising interest rates seems to be suspect given recent events.
I have noticed over the last few months an increasing number of Wall Street firms including Goldman Sachs and Credit Suisse have warmed to the prospects of gold. Some respected analyst forecasts are expecting gold to move much higher. Twelve out of 32 analysts are predicting that gold will average $2,000 an ounce this year. The median forecast with half above and half below, averages $1,965 an ounce.
I expect that all these forecasts could be low. I am putting gold at the top of my commodity list for the second half of 2021. Silver could be a close second. For investors interested in this area, keep in mind that gold and silver mining stocks usually outperform the metals by a ratio of 2-3 to one. Remember, however, that commodities overall, and precious metals in particular, are highly aggressive investments.
The Retired Investor: A Labor Shortage Solution
The hiring boom that was expected in April 2021 fizzled. Last Friday's nonfarm payrolls report came in at 266,000 jobs gained compared to over a million expected. It was the biggest miss in decades.
Politicians and many corporations were quick to provide a ready scapegoat for that failure. They blamed it on the weekly payments of $300 in federal unemployment aid through September 2021, on top of the regular unemployment benefits paid out by the states. In short, the fault apparently lies with the Biden administration's stimulus package. If the president and the Democrats had not provided these overly generous benefits, more workers would be thrust back into the work force in order to eat and pay their bills. Hogwash!
Many of these complaints are coming from service providers in the restaurant and retail trade where the median wage is around $11 a hour versus more than $20 a hour in other occupations. Non-partisan economists can find no evidence to support these wild claims, but there are two factors that could explain the lack of available workers.
Fear of contracting the coronavirus is one reason. Many millions of Americans avoided hunting for jobs in April because they were afraid they might be infected with the coronavirus. In the restaurant and retail business sectors (where the accusations are loudest), there is a much higher risk that can occur. Disruptions in schooling and child care also contributed to the anemic job hires, since 2 million or more women specifically were prevented from looking for work because of caring for children at home.
A third explanation involves economic theory. The economy has suffered, and continues to suffer, from a severe shock. As in all such shocks, growth and hiring are not likely to evolve smoothly, like clockwork. The economic data will be choppy, reflecting the fits and starts of an enormous economy coming back to some semblance of normalcy.
Surging consumer confidence has fueled demand as Americans want to buy, eat, travel, and shop. Many companies have been caught flat-footed by this sudden explosion in new business. They somehow expected that workers would magically appear just because they decide to reopen their business after months of lockdowns and hesitation and fear. But business owners have been spoiled by decades of cheap available labor, especially in the U.S. services sector, which now represents about 70 percent of the American workforce.
In times like these it is easy to fall back on all the old myths about the American workforce and their failings. I am hearing comments like "Why work when you can get more staying home?" or "stimulus and unemployment benefits are killing the workforce," and of course the old tried and true racially motivated "people just do not want to work."
Let me put an end to this crap. The U.S. is the most overworked, developed nation in the world. Today, 70 percent of American children live in households where all adults are employed and 75 percent of those women are working full time. In the U.S. 85.8 percent of males and 66.5 percent of females work more than 40 hours a week. And women make 87 cents for every dollar a man makes. Productivity per American worker has increased 400 percent since 1950. All the net gains in April's job growth went to men. Women, as a group, lost jobs.
My solution to the nation's dilemma of finding more workers is not to reduce unemployment benefits. That would simply lock our antiquated attitude toward labor. It is obvious to me that American companies, especially in the service sectors, need to pay higher wages to attract the workers they need. If they cannot do that and still make a profit, they should not be in business at all.