No Worries. Slap a Band-Aid on it.

I am not sure when the merry-go-round of free cash from the government ends that inflation will really rear its ugly head. It will take time but free-market forces should start to build more production so that the bullwhip effect lessens.

No Worries. Stick a Band-Aid on it.

By Capital Thinking · Issue #842 · View online

The Gravedancer, Sam Zell, bought gold.

For a second I thought he was watching a lot of Fox News. But, he said it was a hedge against inflation.

He’s seeing a lot of inflationary pressure in markets.

-Jeff Carter

Inflation, or Is It Inflation?

Jeffrey Carter | Points and Figures:

I remember the inflation of the 70s. Heck, I took out a 3.5% government college loan and didn’t spend it on college. It was legal at the time.

I put it in the money market at 19% earning a 15.5% spread. I kept re-investing it until finally the 8% I was earning seemed like a pittance. So, I put it in a stock and doubled it. I paid off the loan and had cash to spend.

Gold in the 1970s took off. A friend of mine bought the high tick. It wasn’t until over 30 years later that it ticked up that high again. Gold doesn’t seem like a good long-term inflation hedge.

It’s worth noting that the largest input into production is labor, not raw materials.

Except, raw materials have certainly had a huge bull market over the past year.  It’s not just lumber that’s up. Steel is up.  Corn is up 142%.  Wheat is up. They aren’t up by just a little either.

Anecdotally, I am hearing stories of people that were going to build homes that are putting it off because of the lumber price. When I look at supply chains in all industries, they were extremely brittle.

That meant a large exogenous shock like Covid would really disrupt them. A disrupted supply chain takes time to heal. It’s not a piece of software.

Supply chains are affected by something called the “bullwhip effect”. I think Covid really has coiled that bullwhip and let it fly.It takes a long time for supply chains to build in more capacity. You can’t just create a sawmill overnight.

You’d think with the way lumber prices are, people that owned timberland would be licking their chops. But, they aren’t. There is plenty of timber. The bottleneck is in processing. You can’t get the logs delivered and turned into lumber. The lumber has to age and dry. Then it’s hard to find trucks to haul the lumber.

What has happened over the last 20-30 years is we have gotten super analytical and data-driven. We have gotten a lot more efficient at producing things. That’s caused manufacturing consolidation in a lot of industries. Some industries off-shored their manufacturing and lengthened their supply chain making it more brittle than it normally would have been. That caused a huge decrease in costs, but today that huge decrease in costs might pale in comparison to the opportunity costs of having a brittle supply chain.

Some states are experiencing gas shortages. It’s not because there isn’t raw material. It has to do with the fact there aren’t enough tanker trucks to haul processed fuel and there aren’t enough refineries to make it.

Pork and beef prices went higher not because the herds are smaller, but because Covid caused the slaughter plants’ lines to move slower so they couldn’t process the same amount of animals.

The same goes for microchips. Can’t get the chips, so car manufacturers have to lay off their workforce for two weeks driving up the price of new and used cars. Industry after industry is experiencing similar.

The other unprecedented phenomenon that we have had is the large amount of government transfer payments. Huge trillion-dollar bills that spun up more debt, and gave cash to people.  

The fact that rent has been forgiving is a huge deal. The forced shutdowns of businesses are a huge deal.

The more the government spends, the worse it will get.

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Inflation, or Is It Inflation? | Points and Figures
The Gravedancer, Sam Zell, bought gold. For a second I thought he was watching a lot of Fox News. But, he said it was a hedge against inflation. He’s seeing a lot of inflationary pressure in markets. I remember the …

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