Pro Perspectives 6/1/20

June 1, 2020

As Mark Twain said, "history doesn't repeat itself, but it often rhymes."

In this case, it seems like we're seeing the major events of the twentieth century rhyme, in hyper-speed.  We have a 1918-like global pandemic, prior to which, the economy was set up for another roaring 20s-like era of economic prosperity.  Then suddenly, we have a 1930s depression-like economic contraction and unemployment (actually worse).  If we're not on the verge of another 1940s World War, we're certainly in another 1980s Cold War.  The 1950s-like family life has been reengaged through two-months of stay-at-home orders.  We have 1960s-like civil unrest.  And we have a 70s-like supply shock, which is brewing inflation.  Next up, the 80s?

On the supply shock front, we've talked about the building theme of higher prices — driven by the mismatch between demand, which is being turned back on like a light switch (from the reopening of the economy), and supply, which has been disrupted and will take time to rebuild.

We've already seen it in food/groceries.  Now, we're beginning to see it in retail. 

If you've been out shopping over the past couple of weeks, since stores have reopened, you may have noticed that inventory is light (if not bare).  In some cases, there are stores that haven't seen a truck with new inventory since they've reopened – and they don't know when they might see one.  This includes all sorts of consumer products (office supplies, computers, furniture, clothing).  

Add to this, you have a consumer sitting on a new record high savings rate.  That's too much money, chasing too few goods – the formula for inflation.

With that, let's take a look at copper prices, an industrial metal that tends to be an early signal on a turning point in the economy, and a good inflation hedge.  It traded today to the highest levels since early March, before the shut down.