17th Apr '22 by Edmund Shing

7 comments 1393 reads

Market Musings 16/04/22:
Unpicking the Inflation and Recession Narratives

Weekly Summary:

Inflation remains high, but should start to decline very soon
Consumer demand is already cooling off fast, online in particular
Inventories are back to normal, supply chain shortages are less evident
Food & Energy pressures other consumer spending, but US gasoline prices ease
Commodities remain very well placed given the lack of investment growth
Recession can still be avoided despite gloomy business surveys
US & European employment at pre-pandemic highs, supporting consumption
Company and household finances still in good health, loan growth decent
Housing construction activity still robust, a key economic sector
Idea of the week: COPG Global Copper Miners ETF

Key Market Narratives

What narratives dominate the financial markets today?

1. Inflation is rampant, triggered by scarce supply of goods, strong demand and restricted supply of key commodities in energy, foods and metals.

2. The probability of economic recession is high. Growth is slowing due both to the combination of rising financing costs (making credit more expensive for financing growth investments) and to high inflation reducing consumer spending on non-essentials.

Inflation is rampant, but is it finally peaking?

Back to preferring experiences over stuff: The COVID-boosted demand for goods is finally fading as economies (ex-China) fully re-open. Consumers are being put off by the abnormally high price for all manner of physical products, and in any case, prefer experiences over stuff.

Consumer goods demand peaked in April 2021: If we exclude the effect of price, and just concentrate on the underlying volume of retail sales, we can see that the peak in the buying of stuff occurred back in April last year in the UK, Europe and the US.

UK retail sales volumes peaked a year ago

Source: UK Office for National Statistics

Plenty of stuff on store shelves now: There is plenty of stuff on the shelves now, with retail inventories back above where they were pre-pandemic lockdowns.

US retail inventories back above 2020 pre-pandemic levels

Source: St Louis Fed

The combination of weaker demand for goods, combined with the plentiful supply of goods on shop shelves today, should eventually bring down goods price inflation. However, this will take some time, as the high cost of energy used in the manufacture and transportation of goods is still being passed through to the final consumer.

More spending on essentials means…

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donald pond

17th Apr '22

Very good as usual Ed. There’s certainly a lot of doom and gloom at the moment. I think for the U.K. there’s going to be a moment of truth as people start paying increased energy bills rather than just fearing them. And looking at summer holidays, a lot of the resorts popular with free spending Russians are offering big discounts. While not huge in the scale of things, pockets of the Med will suffer hugely.

And I will throw in a curve ball I’ve not seen anyone else mention. I get a letter every week from a property agent asking if I would sell my house so I called them up and there’s the expectation of a significant number of people moving from HK to U.K. over the next 18 months. Most of them are likely to be wealthy and entrepreneurial. If say 20,000 families were to move to the U.K. with net wealth of £10-20m each, that could be a very interesting event. They could pick up a lot of the slack in consumer demand as they buy the houses, furniture, cars etc for a new life

BnB

COPG is an interesting suggestion but I would just caution those unaccustomed to currency considerations that COPG has risen 30% in 2022 while COPX, the unhedged USD original, has risen by only 24%. For that discrepancy we have Mr Putin and an inevitable flight to the safety of the dollar to blame. I’ve learned over the years that there is no point trying to predict currency movements - but it helps to understand them and their implications. A cooling of the international tensions would depress the value of COPG along with all other USD assets, although that would be a price most investors should be happy to pay for the boost to confidence and possible easing of inflationary sanctions.

It’s also worth noting that the largest constituents of the ETF, being globally diversified miners, are exposed to copper amongst other minerals rather than being exclusively copper-focused. In the current pro- commodity cycle I don’t think that alters the investment rationale but it’s good to understand what’s under the hood.

Westway001

Hi Donald, that’s very interesting about the potential HK influx. As an aside, do you have any idea when the Phoenix Copper permit decision is expected?

Simple answer is no. My understanding is that the company have provided the authorities with the info requested and there is huge local support for the project and a strong belief the permit will come. But timing is down to the authorities and like most state bodies in the US there are still covid backlogs affecting turnaround

aflash

18th Apr '22

If you compare CPER (etf for the metal) with COPX (etf for the miners) (both on U.S. exchanges) the miners are being chased higher by investors. In fact an expert is calling for a correction in copper:

Meantime COPA is lower than last April...

MontanaDawn

22nd Apr '22

Interesting. Aside from families v. individuals and dollars v. pounds, the possibility is there - https://www.statista.com/stati...

Market Musings 16/04/22: Unpicking the Inflation and Recession Narratives

Market Musings 16/04/22:
Unpicking the Inflation and Recession Narratives

Weekly Summary:

Key Market Narratives

Inflation is rampant, but is it finally peaking?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

7 comments

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Unlock the metrics for all these stocks and more...

Market Musings 16/04/22: Unpicking the Inflation and Recession Narratives

Market Musings 16/04/22:Unpicking the Inflation and Recession Narratives

Weekly Summary:

Key Market Narratives

Inflation is rampant, but is it finally peaking?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

7 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 16/04/22:
Unpicking the Inflation and Recession Narratives