Americans and American investors continue to be amazed and surprised at so many things that are taking place. Were we headed in this direction already and has the pandemic merely accelerated it? There is a shortage of labor. (We understand there are 10 million job openings and only 6 million looking for jobs). Was that already going to happen given the changes in population growth? Americans are retiring now more than ever before. The media are referring to this as “The Great Resignation.” American workers are also quitting their jobs (often to go to another job) more now than in recent memory. There is also a shortage of supplies: computer chips, Christmas and other holiday presents (toys, things), cars, parts, materials. There is a shortage of truck drivers. Now we are seeing and hearing there is a shortage in energy. A recent cover of The Economist called it “The Energy Crisis.” We haven’t seen a headline like that since the 1970s. This week we have learned, courtesy of CNBC, that this Fall saw the sharpest decline in college enrollments in the past 50 years…portending a future shortage in skilled workers? One might wonder: Just what is going on? We think there are a myriad of reasons why and we also anticipate there are things that investors might want to consider going forward.
First, as to labor, consider that the population is no longer growing, it is slowing or even declining. The fastest growing segment of the population is now those over 65. Second, consider the positive financial shape many Americans are reported to be in at this time: Checking and savings deposits have swelled to $3.5 trillion dollars — that in part has been helped by the massive Federal Reserve stimulus unleashed in the past 18 months. Real estate values have climbed, along with stock prices and several commodities…leading to increased wealth. If people feel more wealthy or financially secure, might they be retiring earlier?
Third, consider that inflation has increased and many are left wondering if that is permanent or getting worse. We believe that the levels of inflation we are now experiencing will be with us for a while. In response to the labor shortage, wages are up, but so are worker strikes and walkouts.
There are implications for investors. Inflation resistant and inflation resilient investments might be worth further review and adding to current allocations in those investments might be practical as well. Examples of those are energy, commodities, materials, industrials, financials and real estate.
Business leaders have been weighing on inflation: Jack Dorsey, who co- founded Twitter, announced this week that hyperinflation is here. On the other hand, Cathie Wood, CEO of ARK Invest, opines that we will soon be entering a period of sustained deflation. Those are pretty divergent views.
Fourth, the supply chain has been disrupted. This is leading to shortages from chips to energy and everything in between as demand for such goods is increasing. As the world emerges from the pandemic, both developed countries and emerging markets are accelerating their growth. There is a book, written by Darren Hardy called “The Compound Effect.” In it, he notes that as anything that compounds, (in this case economic growth), it can lead to a substantial result or change. In another book “The Tipping Point,” written by Malcolm Gladwell, it is pointed out that massive change comes about as the result of a lot of little things that add up. So, we conclude that economic growth, developing markets and demographic shifts are leading to increased demand for labor, materials and for energy – from all sources. In the meanwhile, concerning energy, there is considerable effort to lower carbon emissions which might be having an impact on exploration and production – eventually resulting in lower supplies. We understand cleaner energy could eventually fill the void but the amount of investment into cleaner energy sources would have to just about triple from where it is now to meet planned targets for carbon emissions and that is not currently happening. Coal has reemerged not only in demand, but in price as well as China and the developed world have increased coal consumption (it also has increased in the U.S., per S&P Global, and the EIA for the first time in seven years).
Looking again at Americans’ financial shape (on the average), balance sheets are at their strongest in decades. We have more money and assets but we owe less. This has also had an impact on those on the lower on the economic spectrum. The New York Times recently reported that the poverty rate in the U.S. has been cut in half in the past 18 months. That is attributable to government assistance as well as stimulus. No one expected this at the outset of the pandemic.
Finally, the most positive thing that has emerged is American productivity. It is at one of the highest rates in history. That is the silver lining. Productivity means that more goods and services are produced per unit of input and this has continued to grow. The question is will price and wage inflation eventually jeopardize that? Maintaining and growing productivity is key to economic growth and ultimately the profitability of companies and that has direct input on stock prices.
So, what might investors want to consider right now? We feel that productivity, maintaining it, and actually growing it will be very critical going forward. How might America’s producers and service providers accomplish that? We think it means acceleration in the use and implementation of automation and artificial intelligence. Investors might do well to look at companies, funds and exchange traded funds that focus on those very things. Cloud computing would be in the same group. The cloud is one of the fastest growing innovations in the world. Almost all of our daily activities interact with the cloud directly and indirectly. With so much being stored and relied upon by way of the cloud, investors can look at companies and funds in those areas as well. What is the cloud? Simply put: the “cloud” is made up of data centers. Note: The growth in energy consumption from these large data centers is quite significant (see “The Atlas of AI” by Kate Crawford). Not just in America, but around the world as well. In other words, it takes massive amounts of electricity to power and run the cloud – which means the demand for energy won’t be easing up anytime soon. Another reason for investors to consider increasing their energy allocations.
Electricity is produced by sources of nuclear, hydro, solar, wind, natural gas (currently 40%) and coal. The increased demands for electricity – whether from data centers (the cloud), mining crypto currency, supply or supply change problems or the upcoming winter weather are driving prices up. Natural gas at this writing has doubled year to date. Raymond James (October 26, 2021 Daily Energy Update by John Freeman, Pavel Molchanov, Justin Jenkins and J.R. Weston) wrote this week that “numerous weather forecast models increased their probability of a materially colder 2021, 2022 winter, sending natural gas prices surging”.**
At The First Wealth Management, we encourage investors to look to make change over time, versus overnight. That ongoing monitoring and vigilance over one’s financial matters is critical to achieving goals. Lastly, having a guaranteed or reliable source of income (pension, annuity, SSI) supplemented with a retirement income strategy are essential elements of living and sustaining a standard of living when no longer in the workforce.
** A full copy of the report is available upon request.
The First Wealth Management is located at First Florida Bank, a division of the First, A National Banking Association, 2000 98 Palms Blvd, Destin, FL 32541 with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport, and Panama City. Phone 850.654.8124.
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