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The world has been transfixed this year by a strange spectacle: a scarcity of nearly everything. It has been a cinematic experience, complete with congested shipping lanes, limited energy capacity, and rationed microchips. To be sure, this kind of drama is an entirely unfamiliar genre. The decade after 2008’s global financial crisis was marked by chronic oversupply with deficient demand. Yet the gluts of the 2010s are now giving way to a far different world.
Welcome to the new shortage economy. Readers will now be well-acquainted with the struggle. Routine purchases have become multi-month odysseys. Precise delivery times are a thing of the past. The kitchen appliance you are looking to replace? Check back in January. New furniture? Try next summer. Want workers for a home improvement project? LOL! Need a children’s bike for Christmas? It would be easier to get Timmy a lump of coal (though that is in short supply too).
What to make of all this? The first question that should be asked is why – why have these shortages run so deeply and across so many industries? Andrew Bailey, Governor of the Bank of England, recently concluded that the shortage economy is not the result of a few large bottlenecks. Rather, it is a confluence of factors. “There is no common cause,” he said flatly. Then, making a brave attempt to unravel the conundrum, Bailey tossed in this nugget: “What we have to do is focus on the potential second-round effects from those shortages…and central banks must preserve their optionality.” An English translation, which is yet to appear, would interpret this as something like: “We don’t really know what is happening but admit that inflationary pressures are lasting longer than we thought.”
Of course, much of the shortages is pandemic-driven. The mismatch of supply and demand dynamics are not difficult to see: The world has just witnessed the largest demand surge since World War II, caused by post-Covid reopening, and the largest supply collapse the world has ever seen, caused by Covid lockdowns. Add in other obvious factors: billions in cheques to cabin-fevered consumers (that have radically shifted their spending patterns), asynchronous openings across countries and, for good measure, some $11 trillion in government stimulus. It is no surprise, then, that a purring and seamless international assembly line has been replaced with a snarled and shambolic supply chain.
But more complex reasons lie behind the current mess. This is no longer the economy of the past two decades. It is clearly something else – a departure from the Ricardian fantasy of frictionless and unfettered trade across national borders, where companies optimized their deliveries with “just in time” inventory management. That system failed the pandemic stress test. Unsurprisingly, supply chains without redundancies are fundamentally fragile. And now we have a new subversion: weaponized supply chains, where geopolitical interventions from several countries attempt to gain competitive advantages (whether with constraints on semiconductors or natural gas pipelines).
Clearly, global supply chains are in unprecedented flux. But many are taking away the wrong lessons. In fact, given that shortages are such a visible and politicized topic, we have entered high season for narrative-building based on misinformation and backward-looking perspectives.
Meanwhile, a wider-angle view offers far more insight. Actually, the most overlooked observation is also the simplest one: shortages are being resolved, albeit at different speeds. Witness the roller coaster ride in lumber prices, which have now collapsed. Used car prices are moderating. Semiconductors, ostensibly the new “oil” of the global economy, and their associated crunch has prompted a wave of investment – China is now throwing a stunning sum of capital and people at the problem. Rather than scarcity, overcapacity likely lies ahead in the coming years.
What’s more, the cost of moving things around the world, while elevated, is no longer soaring. Shipping stocks are all turning down. Backlogs are beginning to clear and container traffic is starting to normalize. Real-time data indicate that the worst is behind us (Chart 1).
But if there is a big blind spot, it is this: the inability to perceive the outlines of a looming productivity boom. Once seen, it is hard to look away. That the world is undergoing a massive shift in the way commerce is conducted is obvious. What is less obvious is that the pandemic has offered a rare opportunity to kickstart sluggish economies. Companies across the world are not only working on supply chain issues but spending on new plants and machinery in ways they haven’t done for decades. Globally, corporate capital expenditure, will jump by 13% this year (Chart 2), with growth in all regions and broad sectors (figures from S&P Global Ratings). A recovery in business investment is critical for lifting capacity and productivity.
Consider the experience of IKEA. Even before the pandemic, the Swedish company had begun its biggest transformation in its 78-year history – planning an end to customers collecting and building their own furniture (thank goodness), replacing the shopping experience with virtual reality-assisted e-commerce. Yet Jesper Brodin, chief executive of the biggest IKEA franchisee Ingka, recently told the Financial Times that the pandemic has “given us a boost like never before to speed up our transformation.” The company has accelerated its restructuring, and e-commerce sales are soaring.
Of course, IKEA is just one example. But it is representative of a wider shift. For global growth, the missing ingredient of both the recoveries in the early 2000s and after 2008, has been meaningful capital spending, with most companies preferring the capital-light investment of software and smartphones. This is certain to change in the coming period across all industries.
Consider the current energy crisis. After years of underinvestment by fossil fuel producers, no one should be surprised that traditional energy prices are now soaring. In fact, the transition to a lower-carbon economy was always destined to be clunky. Shortages in China and the EU highlight the continuing need for fossil fuels despite global efforts to decarbonize. Renewable energy will take decades to build up.
But the current crisis is only speeding up this transformation. And, the race to build a new energy system will be enormously capital intensive, comparable to the post-war reconstruction boom, as infrastructure, transportation networks, and technologies require vast amounts of fixed capital investment. China-U.S. geopolitical tensions actually reinforce this trend. The experience of the United Kingdom and Germany in the late 19th century and early 20th, along with the U.S.-Soviet Cold War, suggest that big rivalries act as spurs for massive investment in technology, science, and other innovations. Today, a key focus is alternative energy.
What about the current labour crunch? Staffing has become a key problem for nearly all sectors (including wealth management). Admittedly, the causes of shortages are numerous – aging demographics in developed economies, preference for “gig economy” jobs, etc. – and are unlikely to go away soon. But there is also fertile ground for productivity-enhancing breakthroughs. In fact, clues existed before the pandemic. A 2013 study on modern employee management by Stanford University found that hybrid home-office work led to a 13% increase in performance, with improved work satisfaction and less staff turnover.
It also has the potential to encourage a more diverse range of people into the workforce, including people outside of major cities and even different countries. Other innovations in areas like automation will have enormous impacts on productivity too. And, labour shortages are finally driving wages higher (which was another missing ingredient of the post-2008 world, where weak investment and austerity dragged on employment and incomes for years). Ultimately, all of this will contribute to a virtuous cycle of increased wages, rising capital spending, and higher global growth.
If the above sounds too rosy, consider the primary risk here: inflation. This needs to be closely monitored. While easing of bottlenecks will bring some prices down, higher price pressures will be with us for some time. Demand is still booming and unlikely to moderate any time soon. That is the story of recent U.S. inflation figures, with the CPI rising to 5.4% year-on-year in September to a post-August 2008 high, up from 5.3% in the prior month. And it is the story across the globe. And importantly, China, backed by a chronically strong currency and rising domestic market, is no longer a deflationary force upon the world economy, as it was in the last two decades. (See “Global Inflation: Has the Force Awakened” for further insight). These dynamics should be monitored closely.
It took a global crisis of choke points to kickstart a capital spending boom. That means the world is moving away from the post-2008 era of stagnation to a “high pressure” economy where wages, employment, and growth are higher. Have investors adjusted to this new reality? Looking at investor sentiment and positioning, almost certainly not. Markets are still pricing in clogged supply chains and sluggish growth. Yet, by next year, the drama will have moved away from shortage issues and investors will be scrambling to price in higher global growth.
The key is to anticipate which investment classes will thrive in this new regime. For our investment team, that means broadly staying with a reflationary bias and cyclical-orientation in client portfolios. Companies and sectors that will profit from shifting labour dynamics should be bought. These can be found in countries with lower-cost labour, like Poland and other select emerging market producers. In particular, Latin American assets, long left for dead by global asset allocators, are primed for a multi-year boom. Investors need to look through the current headlines and re-position portfolios now.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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