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.
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@theMarket: Inflation Is Running 'Hot'
May's Consumer Price Index (CPI) jumped the most since 2009. That follows a similar gain over the past three months that has brought the total increase to 6.9 percent on an annualized pace.
That is the largest gain in 13 years.
Excluding the notoriously volatile food and energy components, however, the "core" CPI rose by 0.7 percent, which was still larger than the forecast of 0.5 percent. Readers might scratch their head when looking at those numbers, since excluding food and energy makes little sense to us, who are faced with weekly rises in both commodities.
The difference is that the price of chicken or a $3 gallon of gas might reverse at a moment's notice while core component prices are stickier and longer lasting. The underlying cause of these price gains are easy to explain. The economy is re-opening, sparking a rush of consumer demand. At the same time, there are shortages of materials caused by shipping bottlenecks that are leading to higher input costs, including rising wages.
Government stimulus checks and pent-up demand by consumers has led to growing back orders and below-normal inventories of goods. The used car and truck market, for example, is red hot and accounted for fully one-third of the overall increase in the CPI. Consumer product companies, from fast food restaurants to women's clothing stores (and a slew of other enterprises) are ratcheting up prices as demand continues to rise.
As if to underscore this trend, initial jobless claims fell for the sixth straight week to a new, pandemic-era low. More job gains in the weeks and months ahead may fuel this rising tide of consumer demand, and spending. But will it fuel even higher inflation?
Market pundits had predicted if inflation ran hot, investors would get even more anxious that the Fed might tighten, in which case, the markets would tumble, but they did just the opposite. A look under the hood of the core CPI number reveals inflation was not as "hot" as it first appeared. If you subtract the price increase in used cars, which the market considers transitory, the core rate was actually lower than analysts expected.
That gave the Fed's "inflation will be transitory" argument more credence among nervous bond investors. The so-called bond vigilantes responded by driving interest rates lower.
The benchmark U.S. Ten-Year Treasury Bond fell to under 1.50 percent.
The S&P 500 Index had been attempting to break to new highs every other day this week, only to fall back in defeat by the end of each session. The CPI announcement was the catalyst it needed to finally break out of its range to a new, all-time high. The other averages followed suit but failed to make new highs.
Lower interest rates should continue to act as support for the equity markets overall. We are entering the summer doldrums at this point, which should mean a slower tempo to the markets. I expect equities to continue their "two steps forward, one step backward" sort of advance.
The S&P 500 should climb higher (maybe another 40 points or so) through the beginning of next week. The Fed's FOMC meeting is scheduled for mid-week, so investors will be keen to listen for any clues of future monetary policy from Central Bank Chairman Jerome Powell.
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The Retired Investor: Want equality? Start With Better Jobs
Jobs. They are the primary focus of the Federal Reserve Bank, the Biden administration, the Republican opposition, and most U.S. corporations. Supposedly, with all this high-powered attention, we still can't find enough workers to fill all the positions available. Has anyone questioned why?
One important reason might be that 60 percent of jobs in the U.S. are considered "mediocre" or "of poor quality," according to a recent Gallup survey. If you combine those findings with the fact that many workers in the service economy are poorly compensated, the problem begins to come into clearer focus.
If you listen to the free market critics, generous Federal unemployment checks are the root cause of the problem. These simpletons argue that these higher benefits have discouraged workers from returning to their former jobs. They ignore the obvious, which is that if the "government dole" is preferable to the offered wage, then that wage must be far too low. It is myths like these, as well as the historical focus on the number of jobs gained or lost without paying attention to the quality of employment, which obscures the truth.
American companies, especially in the service sector, have spent the last thirty-plus years cutting wages and benefits in the name of reducing costs and improving profit margins. Global competition and lower wages abroad (especially in China) have been blamed for this development. That trend has reversed in a big way, but here in the U.S. we act like it is still a fact.
Our treatment of the American worker, especially the lower-income, service worker, needs to change. A recent Gallup poll, for example, found that only one-third of low-income workers received fringe benefits like health insurance and retirement benefits. An even smaller number received paid sick leave. Is it any wonder that only 28 percent of the lowest quintile workers claimed to have a "good" job?
Remember all the fuss when the Biden Administration tried to raise the minimum wage earlier this year? No dice. Here's another myth: the federal minimum wage is meant to be a living wage. At the going rate ($7.25 per hour), a family of four is living well below the poverty line. The reality is that about half of America's working population earns less than a living wage.
Is it any wonder we have exploding rates of crime among our youth?
Parents, who just want to feed themselves and their children, are forced to work, sometimes two jobs, away from home until the early hours. That leaves their kids alone and unsupervised for much of the day and night. We all know this but choose to look the other way or worse, use the race card as an explanation. Shame on us!
But simply paying workers more is not the answer, although it certainly helps. Creating an entirely new culture around the job is the challenge we face. Not only must we, as a nation, provide higher pay and better benefits, but also a workplace culture that improves the overall lives of our employees. To me, a quality job is one that makes a person feel valued and respected with a voice in their workplace. I see it as an opportunity to shape my work life, while contributing to the goals of an organization.
If this sounds schmaltzy to you, or a job description above your pay grade, consider this: Jobs that do not meet employees' needs have a higher-than-average turnover rate, poorer employee productivity, and a lower-quality consumer experience. Amid the competition to hire workers in today's post-pandemic environment, I believe workers at all levels are seeking more than just a sign-on bonus, or a bump up over a minimum wage level.
Otherwise, chances are your new hire will consider their position as "just a job," as opposed to "a career." As such, these disengaged employees cost businesses an average of $350 billion every year in productivity, or $2,246 per disengaged employee. In a tight labor market, with traditional hiring habits of "only money counts," a high turnover of employees is a given.
The cost of replacing an employee can range from one-half to two times the employee's annual salary.
The pandemic has changed quite a few things, some temporary and others permanent.
The American worker took it on the chin during the last year and a half. Millions were unemployed, while many that did show up to work were faced with constant danger to their health and safety. Essential workers in health care, early childhood education, food production and delivery, as well as countless minimum wage workers not only showed up, but delivered in our time of need.
Many others managed to work from home, delivering to their employer extra hours, higher productivity, and lower expenses for the same, or lesser wages. Going forward, there is no need for America's workers to justify their worth. That's been proven, in my opinion.
No, the ball is squarely in the employers' court. American workers have experienced deteriorating wages and working conditions over the last few decades. As a result, fundamental pillars of our democracy have been eroded. Economic stability and opportunity have decreased dramatically, while inequality has risen to historical levels. The present polarization of this country is no accident. Our workers need and deserve better jobs with higher wages and a radical change in the quality of the workplace.
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@theMarket: A Churn at the Top
It was a sleepy week in the markets for the major averages. Stocks flirted with the old highs, only to fall back by the end of the week. Energy and a few meme stocks occupied most of the attention.
Crude oil spiked higher, nearing almost $70 a barrel (bbl.), pulling energy stocks along with it. Energy traders were heartened by the latest OPEC meeting. The cartel expects demand to outstrip supply by more than a million barrels a day for the foreseeable future. As a result, the members intend to gradually increase production as the global economy gathers steam. Most analysts expect oil to breach $70/bbl. before taking a break.
Certain stocks such as AMC and GameStop, which have been dubbed "meme" stocks by the Reddit crowd of retail traders, had an unbelievable week of gains. AMC, the nation's largest theater chain, for example, saw its stock gain by more than 100 percent in one day. The price rise finally slowed and then reversed after the company announced two consecutive stock offerings over three days.
There is no fundamental reason to justify this kind of price movements. I witnessed the same thing during the Dot.Com boom (and bust) back in the beginning of this century. For those who can ride the bull, I applaud you. I just hope you are lucky enough to exit before you get trampled. Buyers beware.
Investors are also watching the infrastructure negotiations between the two political parties. The horse trading is getting intense. Reports that President Biden might be willing to revise his proposal to increase the corporate tax rate to 28 percent from 21 percent cheered markets. That tax hike has been a major roadblock in winning Republican support for his infrastructure plan.
The Washington Post reported that Biden might consider a minimum corporate tax rate of 15 percent instead. On the surface, that might seem to be a tax cut from the present 21 percent rate. However, few corporations pay the going rate (although politicians like to pretend they do). The actual tax, after all the credits and loopholes in the tax law, usually results in a payment that is a substantial discount to the stated tax rate. Some large corporations pay no tax at all.
Another indication that the U.S. Central Bank sees further signs of economic recovery is that the Fed announced it was preparing to sell its $13 billion corporate bond and ETF portfolio (called the Secondary Market Corporate Credit facility, which it established during the pandemic). Officials made it clear that this was a separate move and should not be considered as a move toward tightening monetary policy.
May's Non-Farm Payroll employment report for May 2021, which was announced on June 4, was the second monthly disappointment in a row. New hires came in at 559,000 jobs. That was far lower than the 675,000 expected, but bad news proved to be good news for the financial markets. Stocks rallied since markets are keenly focused on the "tapering" conversation.
Some Federal Reserve Bank members continue to talk openly about the need to start tapering purchases of fixed income assets. Yet, other "doves" on the FOMC board remain convinced that we need several more months of data before beginning that process. The weak employment numbers give credence to those Fed officials who want to go slow.
Continued, easy monetary policy means interest rates should remain low, which is good for equity assets. And so the stock market rallied on the Non-Farm Payroll "bad" news. At this point, traders are expecting to hear more about tapering from Fed officials after their mid-June FOMC meeting with a possible announcement on when tapering will begin around the Fed's annual Jackson Hole conference in August.
Equity markets, I believe, will continue to be a battle between bulls and bears. While summers are usually a slow period in the markets, I suspect this year we could see further turbulence and possibly further gains. That could keep the pros close to the terminals, since we are quite close to historical highs on the S&P 500 Index. A break above them (at 4,238) would give the bulls clear sailing to 4,300. The question is what new piece of news could trigger that breakout?
The crypto currency market, on the other hand, remains subdued. Bitcoin continues to trade in a range between $33,500-$38,000. Technicians seem to be biding their time before making a move. Many believe Bitcoin must either break decisively below $33,000 to sell it, or above $40,000 for new purchases.
In the commodities corner, copper, gold, and silver took it on the chin this week after the U.S. dollar bounced off three-week lows, while oil continued to rally. Volatility like this is the name of the game when investing in crypto currencies, commodities, and commodity stocks. There is a saying "If you can't stand the heat, get out of the kitchen," so invest accordingly.
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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?
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