Quote of the Week
“You don’t need a weatherman to know which way the wind blows.” – Bob Dylan
Last week was a bummer in the markets. The Dow was down -1.14%, the S&P 500 was down -1.30%, the Nasdaq was down -2.34%, and the MSCI-EAFE was down -3.02%. It could have been much worse except for the strong rally on Thursday and Friday.
The probable cause for the market’s drop was the report on inflation shooting up in April. Consumer prices rose 0.8% month over month. The big increase was in autos. I have read that auto dealers are now asking about list prices for new cars. Most car companies are having to shut down production because they can’t get enough semiconductor chips for their cars. What is really amazing is that the prices of used cars rose more than 10% last month, probably due to the shortage of new vehicles. The semiconductor market isn’t flexible enough to make up for the shortages quickly.
The other segments of the inflation increases were all related to travel and events. This group included car and truck rentals, airline fares, sporting event ticket prices, and hotels. Car and truck rentals surged 16.2% last month. The other three were up between 8.8% and 10.2%, respectively. All these areas have struggled during the pandemic and could not ramp up supply fast enough to meet increased demand.
The inflation issue comes down to exceedingly low inventories and increased demand due to the public “getting out of jail” with lots of money in their pockets. The important question isn’t whether inflation will be high temporarily but whether it will last. My opinion is that this spike in inflation will be temporary. Suppliers will catch up on production to meet the demand.
Grocery Prices Apocalypse
Our grocery bill has been creeping up for some time now. As is always, there are some economic influences pulling strings behind the scenes causing this to happen. The Bloomberg Agriculture Spot Index, an index that tracks the cost of essential farming staples, has been on a surge lately and is at its highest point since 2014.
The cost of soybeans is reaching levels not seen since 2012 and corn, which hit an all-time-high of about 8 dollars in 2012, is on a steep route back up above the 2012 level. Wheat is seeing much of the same.
What is causing this?
The cost of corn, wheat, soybeans, and other necessities has been rising due to various macroeconomic factors that have ripple effects on the overall pricing of these essential goods and the products derived from them. Here are just a few reasons why.
*Tightening global supplies: A lack of supply in several major commodities markets like corn, wheat, soybeans continues to be a driving factor in rising prices. The reasons for this are multifaceted and extensive and are probably best explained by your local farmer.
*Higher demand: China is one of the United States’ biggest customers when it comes to agricultural exports. They continue to import extra tons of corn from us as they recover from the pandemic and a swine flu outbreak of their pig farms. They are restocking their farms and keeping demand high. As you learned in basic economics, lower supply because US farmers cut back on corn production and higher demand equals higher prices.
*A weaker US dollar: A weaker US dollar doesn’t just mean that our money buys less; it also means that other countries can buy more relative to their currency conversion rates when importing goods from the US. This negatively affects our purchasing power, driving up prices. A weak dollar also has an inverse relationship with commodity prices.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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