Alan's Alert 6-23-2021

 

The cat was let out of the bag on Tuesday at the second day of the Qatar Economic Forum.  Glencore’s CEO of commodities trading, Ivan Glasenberg, told the crowd that “commodity prices will stay strong for a long while longer”.  How does he know this? He pointed to two big catalysts for commodity prices, China and the US.  In China, Glasenberg sees a big investment in infrastructure spending.  He sees the same happening in the US.  While the US congress has been battling back and forth over how large the infrastructure bill should be, China has plowed ahead with it’s One Belt, One Road initiative.  Glasenberg was concerned about how long new mining projects would take to come online and meet the new demand.  He also thought the mining industry would struggle to keep pace with the new demand from “green” economy initiatives.  Something that caught my ear was when he admitted that China has been pushing their strategic stockpile into the market to hold down commodity prices.  

Unlike Canada’s strategic reserve pictured above, China has been stockpiling copper, aluminum, and zinc.  China rarely sells off its reserves, they don’t even publish how much they have.  Citigroup estimates that China has 2 million tons of copper, 800k tons of aluminum, and 350k tons of zinc.  They believe it to 16% worth of China’s annual copper consumption, 2% of their annual aluminum usage, and 5.2% of their annual zinc consumption.  The last time China announced that they were doing a sale from their strategic reserves of metals was 2010.  This makes it an infrequent event.  I believe the market has been pricing this in and once China can no longer talk the market down, we’ll start to see new highs in miners like FCX, RIO, BHP and associated futures contracts like /HG.

 

Speaking of strategic reserves…

Biden is moving forward with a Trump-era proposal for a US Uranium Strategic Reserve.  Last week Energy Secretary Jennifer Granholm told the Senate Energy and Natural Resources Committee that she is beginning to lay the ground work to establish a reserve and that the money had been allocated for it during the Trump administration.  Once established, the US will begin purchasing and stockpiling uranium.  Taking a quick peak at the last budget bill that passed, Congress allocated $75 million for the reserve and outlined a 10-year $1.5 billion program.  While the administration said they’ll be purchasing from US miners, this amount of purchasing will put a real floor under the price of uranium, boosting all miners.

 

The last time I talked yellowcake I mention that Buffett and Gates had teamed up to build a new reactor in Wyoming.  Not to be outdone, Jeff Bezos is backing a company in the UK that is set to build a nuclear fusion reactor in Oxfordshire.  The big boys are getting in this space in a big way and its time to pay attention.

 

 

 

Subscriber Questions and Comments

Q. Robert Wenzel’s book talked about his forecast of the 2008 real estate bubble that popped.  Do you foresee a similar “correction” in the current crazy real estate market?

 

A. In time I do believe we’ll see a correction but the madness of the Fed is preventing it with their printing press.  Here’s what Robert saw in 2008:

The maroon line is 2008.  I put on the previous four years so you would have a reference.  Money supply was running hot at 17% and 16% in weeks 16 & 17 but then it fell off a cliff.  It’s typical to see a slowdown in the money supply from weeks 16-30 (like I mentioned yesterday), but this slowdown was dramatic.  The supply had gone from a higher high to a lower low.  This is what triggered Robert’s response in 2008.  If you look back to the S&P in 2008, you’ll see that the market was having a tough time gaining momentum.  It had traded sideways from March to July.  Then it took a 7.5% month-over-month drop.  It held it together for two more months until October which had a 12.6% m/m drop, November had a 13.4% m/m drop and December a 15.2% m/m drop.  Even though the Fed only updates the M2 money supply on a monthly basis, we’ll have a good month or two head start towards the exit if something were to develop.

Alan's Alert 6-9-2021

 

By Alan Baerlocher

 

Jobs, Inflation, & China

 

Regarding yesterday’s JOLTs (Job openings and Labor Turnover) report, I found two things of great interest.  The first is the job openings.  Businesses are getting frantic to find warm bodies to fill vacancies as the economy braces to open back up but warm bodies are not to be found.

In the 20-year history of this report, we have never had job openings at this level.  The slope of the curve is tremendous.  Keep in mind, this report is for April.  JOLTs reports always lag but this is still impressive.  Workers certainly have the upper hand in negotiations with employers.  To me this indicates that wages have to come up to balance the supply/demand curve of labor.  This is basic econ 101.  When demand is high (as it is now), to increase supply, higher wage rates will be required.

On the x-axis is Q, the quantity of labor.  On the y-axis, P, or payments to workers.  The demand for labor has moved from D1 to D2.  To get the market to equilibrium, payments to workers needs to move higher from P1 to P2 so that Q1 will move to Q2.  Until this happens, the labor market will be out of balance.  Worker shortages will continue and this will lead to shortages in goods and services.

 

The Fed has a dual mandate; maintain a stable currency and full employment.  While maintaining a stable currency is subjective, full employment is not.  These worker shortages are giving the Fed the greenlight to continue to run the printing presses hot.

The second point of interest to me in the jobs report was the quits report.

Not only are employers desperate for workers, but the workers smell this desperation and are quitting at the highest rate ever.  What in the world?  I’m thinking some employees might be finding greener grass in other pastures.  Some may have gotten used to the work-from-home scenario and aren’t excited about coming back to the office as re-openings are taking place.  Others might have developed side jobs during the government enforced lockdowns, that they are trying to turn into full time gigs.

Now, according to Austrian economics, to have inflation we need a scenario where the supply of money is high (check that box!), and the demand for money is either flat or down trending.  Reviewing the most recent Personal Savings Rate data from the Fed (last updated 5/28, next update 6/25) we see that savings is still elevated thanks to the unprecedented stimulus pumped into the hands of main street.

I think the scenario we are seeing playout is one where workers have money saved up, aren’t excited about getting back to work, and will live off their savings until they have to get back to work.  This could mute the inflation situation and still cause bottle-necks in the supply chain.  Once this scenario reverses, watch out.  Which brings me to China…

Last night, the PBOC (People’s Bank of China), posted their CPI and PPI numbers.  I always have a hard time believing anything that comes out of China, especially if it would paint their country in a bad light on the world stage.  However, they posted the highest PPI report since September 2008 at 9.0%.

The PBOC also announced their CPI at 1.3%.  So according to the China central bank, high producer inflation has not yet influenced the consumer price index.  This means Chinese factories are absorbing the rising costs instead of passing them on to consumers.  In time, rising costs will force their hand or their profits will plummet and many could go broke. 

 The high PPI print led Chinese officials to announce their intent to introduce price controls. The National Development and Reform Commission, which is a macroeconomic management agency in China, announced that they were making arrangements to “stabilize” the price of “corn, wheat, edible oil, pork, and vegetables”. 

 If Beijing loosens their grip on the producers and factories, allowing them to raise prices, expect prices to raise quickly in the US for anything made in China.  Also, if prices get fixed, expect China to suffer from intense supply-chain bottlenecks, shortages, and black markets in any product the government tries to micromanage.