20th Mar '21 by Edmund Shing

25 comments 3201 reads

Kiss Goodbye to TINA

Summary:

This week’s Podcast: riding commodity inflation
Huge upwards revisions to expected US economic growth
Bonds: US Treasury Market tests the Fed
Equities: Kiss goodbye to TINA?
Commodities: Too far, too fast?
Real Estate: Re-opening opportunity

New Podcast: Riding Commodity Inflation

In today’s podcast Edmund and Charlotte discuss inflation in commodities.

Riding Commodity Inflation

Is inflation in general really picking up? If so, in which areas?
What is a commodities supercycle?
Isn't there a contradiction between the rising demand for commodities and sustainability?
If commodity prices are at multi-highs, what factors can drive them up further?

US economy reaches for the sky

In the wake of Joe Biden’s surprisingly large USD1.9 trillion stimulus package being passed by the US Congress, economists have been hard at work upgrading their expectations of US growth this year.

The Federal Reserve themselves now expect the US economy to expand by a stellar 6.5% growth rate this year, while Goldman Sachs have been even more optimistic, forecasting an 8% growth rate in 2021.

Interestingly, Goldman economists forecast a further USD2 trillion to be proposed for infrastructure spending, which could rise to as much as USD4 trillion if Biden’s proposal extends to other areas including child care, health care and education. Goldman is also expecting a US jobs boom: "The main reason that we expect a hiring boom this year is that reopening, fiscal stimulus, and pent-up savings should fuel very strong demand growth."

“Another key reason we expect a quick labor market recovery is that two-thirds of remaining pandemic job losses are in highly virus-sensitive sectors, where employment should rebound as the economy fully reopens. The sharp increase in the virus-depressed leisure and hospitality category in the February employment report provided an early hint of things to come."

US, World financial conditions still very loose, helping growth

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Source: Bloomberg

While focused on the US, this boost to US government spending will also have indirect positive effects on global growth, given spillover effects on consumption and investment which will be supplied in large part by overseas companies.

Consensus world growth of 5.2% in 2021, 4.1% in 2022

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Source:Focus Economics

Consensus GDP growth for the world sites now at 5.2%, both the OECD and IMF are forecasting an even faster 5.6% growth rate for this year.

The key…

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JohnEustace

21st Mar '21

I know many are fed up not so much with working from home as with living in the office. It's fine for those in large properties with space that can be dedicated to office use and less fun working in the kitchen of a two bed flat with a baby. So there are implications for residential property as well as commercial.

Not that anyone wants to go back to commuting on crowded trains five days a week either so I think the hybrid approach will be the one to go for.

William K

Thanks. Jack Ma does seem to be in trouble. My intuition is that the Chinese large caps are fundamentally sound and that they will bounce back whet the CCP feels it has made its point about being in charge. After all, it can’t be in their long term to wreck their own economy. Hope Jack Ma survives.

Indie

Well put. I can see many people going somewhere local that is quiet/makes sure the printer works/provides good broadband etc for 4 days a week, then doing the longer commute to their workplace once a week.

timarr

Another of my London based clients is dealing with this by setting up small regional hub offices and offering staff relocation packages if they want to move out of the South East. It's particularly attractive for younger staff members who haven't started a family and want somewhere larger than a shoebox to live in.

Of course, an anecdote is only a single data point, but there are some interesting changes taking place. As I said a year ago, the longer this goes on the more profound and permanent those changes will be.

timarr

Someone would then come round on their horse and cart at the end of each day to collect the finished goods and pay the workers a groat or two. Clearly the rise of factories and mass-production changed all that,

The original end of home working - literally, a cottage industry - was driven by the rise of steam power - which required centralisation because small steam engines were hopelessly inefficient. That, allied to Adam Smith's idea of the division of labour, led to the creation of factories.

By about 1880 we'd harnessed electricity, but it was still thirty years before electricity started replacing steam in factories. To make electrical factories work you needed to knock down the old factories and build new ones. Steam factories were built around a central driveshaft that needed to be constantly powered. Electrical factories could be organised around the concept of the production line powered at need.

In both cases you needed a technological innovation - steam, electricity - and a change in working practice - centralised factories, production lines. The same is true in the age of the computer, where we still operate on methods developed 100 years ago.

In the case of electricity it took nearly 40 years to replace steam - about the same amount of time it took steamships to replace sailing boats. We're now about 40 years into the age of the computer yet productivity hasn't improved and won't until we change working practices.

Now that it's happening it's inevitable - because the companies that do it well will be more efficient and productive. And so dawns the next golden age of prosperity ... (we hope).

timarr

Edmund Shing

Thanks for the precision john2, absolutely right! For some reason, I can't alter my article to add this, but thanks for pointing it out!

Edmund

Howard Adams

Hi timarr

I always enjoy reading and learning from your thoughtful and articulate posts.

I would like to test your point 'We're now about 40 years into the age of the computer yet productivity hasn't improved and won't until we change working practices.'

I have often pondered this question of productivity (I'm not an economist BTW). Also, the MoneyWeek crowd (which I have read for years) have persistently lamented our (the UK's) lack of productivity growth.

Taking a lay persons view I cannot believe we are not now more productive than we used to be. I can sit at my screen and achieve any number of complex interactions and tasks which lead to successful outcomes and then these also leading onto further productive efforts.

In my working life, without hardly leaving my desk (thus mitigating countless hours of un-productive travel) I could administer large scale business change programmes across multiple sites and multiple countries.

A very specific anecdote/claim that Palantir (PLTR) a US AI business can now release and install its whole application stack in six hours in contrast to implementation processes which traditionally take weeks (or longer).

Are but small instances whereby I can only conclude productivity of individuals must have increased. What I do not understand though is if these speeded up processes are being measured in a meaningful manner?

I get a sense that digitally-based productivity factors (such as speed of interactions, breadth of interactions, depth of interactions, speed of knowledge dissemination and acquisition - at extremely low level of costs) seem not to be being captured into assessments of productivity.

Do you or others have any insights as whether productivity measures are indeed capturing some aspects of our rapidly evolving digital world?

Regards

Howard

I've not listened to the podcast yet but this looks like interesting background.

https://www.bbc.co.uk/news/tec...

https://www.bbc.co.uk/sounds/p...

Hi Howard

Good question.

The productivity paradox is puzzling the hell out of economists. There are lots of possible explanations - for instance, perhaps the move to a services based economy means that we simply can't increase productivity beyond certain limits (because each individual needs to be serviced individually). There are also arguments that we're simply measuring the wrong things.

The UK is the worst economy in the developed world for labour productivity since the mid-2000's. This McKinsey report suggests four reasons - (1) overeliance on a boom/bust financial sector, (2) employment growth, (3) investment decline and (4) uneven digitisation.

https://www.mckinsey.com/featu...

From my own experience of the financial sector, it has been incredibly slow to digitise. Across the developed world the big banks are running systems whose developers are dying of old age. Slapping web front ends on these is putting lipstick on a pig.

Fixing this involves investing billions (literally, Nordea have a six year program costing in excess of a billion to move off their legacy systems) so it's easier to employ a bunch of people to front run customer service, who cost a pittance. Meanwhile challenger banks struggle to get a foothold because of the regulatory burden and cost.

In the same vein, banks increasingly employ masses of people in compliance - checking that they're not breaching the various anti-money laundering, know your customer and proceeds of crime laws. No harm in the regulations but the fix ought to be technology, not more and more people being less and less productive.

I don't really know the answer, but from my limited experience I suspect that very significant areas of our industrial base are hampered by unbelievably poor technology bolstered by cheap labour. Regulations help to protect these entrenched industries but at huge cost to the economy.

However, change is happening. We can monitor the profit / employee of companies - and the flagship companies of the digital economy are generating more profit per employee than we have ever seen. Meanwhile the long tail of legacy businesses are struggling to adapt. Hence the excess valuations of many technology stocks.

So, personally I think the reason we're not seeing productivity gains across the board is because most companies are yet to truly take advantage of the technology. To make that happen you have to dismantle existing working practices, systems, technology and maybe even people - and start again. The exciting digital businesses we all know about are the tip of a very large analogue iceberg.

That's all personal opinion, btw :-)

Revs8

Great article Ed. I agree small cap value is an attractive area but not across the board.

When you’ve made 50% in several months it’s tempting to take profits and in some cases that might be wise. Stock picking and real valuation is going to become important and Stockopedia is an ideal tool to help identify the keepers and sell the over bought stocks.

It looks like European holidays may not happen in Q2 and possibly Q3 so there will be some pain to come in these areas that have risen rapidly recently. However the UK and US may see stellar activity in the leisure sector this summer and construction looks like it’s going to be very strong in the US.

Happy hunting.

Phuntt

I don’t know the answer to this either but do believe it is at least partly due to how it is measured. John’s points below match with most people’s experience - computers allow us to achieve much more much faster than ever before. At the individual company level, we can measure how much more profitable each employee is and see increased profitability of those companies.
However at the macro level we tend to measure productivity by GDP and GDP is a sum of everything produced by a society. Here technology has a very different effect as most of the digital products we are producing have a marginal cost of zero (if I buy a subscription to Netflix, the variable cost for Netflix is zero). I get access to amazing quality programming for much less money (measured as less contribution to GDP), Netflix makes 90%+ margins but I also stop paying for Virgin cable TV which is expensive (9annd has a huge contribution to GDP). The net effect is deflationary on GDP and I think there are many examples like this when we think about the digital world.

It may also be because digital tech doesn’t actually cause us to be more productive. We do our work in half the time but then don’t spend the other half producing more, just checking what Marcus Rashman said on social media. If it is the second option, beware the effect when proper machine AI actually becomes an everyday part of our lives as we really will see massive unemployment levels as huge amounts of jobs are simply replaced by super fast thinking computers that don’t need to take sick days...

We do our work in half the time but then don’t spend the other half producing more, just checking what Marcus Rashman said on social media.

Maybe. Everyone sensible I know is measuring people remotely by output not input.

Hence managers who can't stop micromanaging remotely getting fired - the performance of their teams was noticably worse because they were spending all their time dealing with pointless enquiries from said managers. Productivity will improve because a) the productive individuals will have more time to actually produce things and b) the unproductive managers are no longer around to add a pointless layer of bureaucracy.

Of course, other experiences may be on offer ...

GrahamF

Timarr

You might be surprised at how many factories still use steam. Generally not for electricity these days, as you point out, mainly for process and space heating. But that said, the advances in cogeneration (also called combined heat and power) means that steam is probably here to stay for a little while longer.

On the productivity puzzle and financial services, I think that some areas have seen massive improvements in productivity e.g. high street banks have been able to close vast numbers of branches due to less use of cash, telephone and online banking.

If I think back to some of the huge productivity gains of the past such as clothes washing machines, dishwashers, abundant food products in the supermarket that require little to no preparation, I do struggle to think of the modern equivalents. The TV is hugely sophisticated now compared to 30 years ago but we have not gained any productivity from that. In some areas we’ve actually gone backwards it seems - we would rather get the car hand washed by cheap labour than use the car wash which is much harsher to the paintwork. Where is the duvet cover changing machine and the plumbing/boiler that can run for ten years without a leak or breakdown?

Tony Blair and Gordon Brown thought the answer was education x3. But clearly there’s no link between the improved education of the masses and increased productivity. (Many would argue that this is partly due to many current degrees being of very limited value in terms of the individual’s capability for highly productive work).

Personally, I think that until increasing productivity (preferably created by moving up the value chain) becomes a KPI that affects board level bonuses nothing much is likely to change.

Tony Blair and Gordon Brown thought the answer was education x3. But clearly there’s no link between the improved education of the masses and increased productivity. (Many would argue that this is partly due to many current degrees being of very limited value in terms of the individual’s capability for highly productive work).

Well, bearing in mind I'm a left of centre capitalist ... Blair and Brown were right, but implemented the policy badly. In part that was to massage down the unemployment figures rather than to improve productivity. Putting teenagers into pointless degrees while loading them up with debt didn't do them or us any good. Not that successive governments have made any attempt to rectify this.

We have to be careful about drawing a direct line between STEM subjects and the economy. The UK makes an enormous amount of money out of tourism, hospitality and culture - failing to respect that is incredibly damaging - witness the £5 billion at risk because UK artists can no longer easily access the EU. Good further education in those areas can generate a lot of value.

However, functioning in today's global economy requires a set of basic IT skills which we are failing to prepare our kids for - the Guardian reported this LWI survey today:

" ... the number of young people taking IT subjects at GCSE had fallen by 40% since 2015, and the numbers taking A Levels, further education courses and apprenticeships were also declining"

https://www.theguardian.com/bu...

The UK is a deeply divided society - 6.5% of the population go to public school but their alumini make up 65% of judges, nearly 60% of the senior Civil Service, over 40% of newspaper columnists and 40% of the Cabinet. With such a disproportinate minority exerting control over so much of our country, favouring their own interests (perhaps unconsciously) over that of the wider community, it's not much of a surprise that the UK lags behind every other leading economy in productivity.

Dojosan

The wobbles are due to https://edition.cnn.com/2021/0...

The CCP effectively poured some cold water over the market.

Momoko Miyamoto

measurable productivity gains are easier to achieve in manufacturing which the UK has been doing much less of over the past decades. A huge supply of cheap labour since EU free movement has also disincentivised companies to invest in training and equipment to raise productivity per worker as less capital is required to raise output by hiring. The UK also has quite poor worker protection making it easy to shed workers in a downturn.

Timarr

I’m surprised.

“ With such a disproportinate minority exerting control over so much of our country, favouring their own interests (perhaps unconsciously) over that of the wider community, it's not much of a surprise that the UK lags behind every other leading economy in productivity.”

You’re normally red hot on evidence. I’m not going to argue about who has control and to what extent they may or may not favour their own interests. However, I would have thought that improved productivity would be beneficial to pretty much everyone other than those who might in the short term find that their job was no longer necessary. So, I struggle to see how you get to the conclusion that our poor productivity is caused by the disproportionate minority with public school backgrounds favouring their own interests.

I was disturbed a few years ago by a survey of MPs that showed that a high proportion of them are not particularly good with numbers. Unfortunately, I don’t remember the source.

I agree about being careful about drawing direct lines between certain subjects and the economy. I remember James Dyson bemoaning our lack of graduate engineers. However, I expect that what he really wants is the cream of graduate engineers and simply producing more graduate engineers of itself is not enough.

But I come back to the view that, whoever is in charge of our companies, the public school cohort or not, we need productivity to become a KPI that affects LTIPs etc. to drive a focus on this issue.

22nd Mar '21

So, I struggle to see how you get to the conclusion that our poor productivity is caused by the disproportionate minority with public school backgrounds favouring their own interests.

It's not just that, clearly, but when you have a group of leaders with so little understanding of real life you end up with policies that reflect ideology and not reality. This gets exposed from time to time - the school meals saga was a case in point. You would perhaps expect Marcus Rashford to run rings around the cabinet on a football field, but not on the field of politics.

And of course, this matters - as of 2017 more students from just eight public schools went to Oxford and Cambridge than from nearly 3,000 state schools. The vice chancellor of Oxford at the time suggested that was because the students from public schools were more talented ...

For anyone vaguely interested in this stuff I suggest reading People Like Us by Hashi Mohamed, who arrived in this country as a child refugee from Somalia, and somehow made his way out of poverty and deprivation to become a barrister. He shows it can be done, but he also explains why it's so hard and so unusual.

“ It's not just that, clearly, but when you have a group of leaders with so little understanding of real life you end up with policies that reflect ideology and not reality”

I couldn’t agree more about that part.

Far too many of our MPs from all sides of the house have too limited experience. Combine that with the issue of safe seats, where even someone completely useless can get elected as long as they represent the party that dominates that seat, and it’s a recipe for poor decisions.

Gdawgeedawg

It's a really good point timarr. Working from home as a thing is something that was on trend before the pandemic and I think the pandemic has essentiallty served to accelerate that trend. I was working at Transport for London 3 years ago helping them transition to 'smart working' practices, which at its core was moving to a hybrid working model. A desk for one person in Central London costs about £10k a year all-in - so having less central city office space is a massive cost saver. A friend at Deloitte was also doing regular working from home before the pandemic. I moved into the tech industry after TfL and working from home was standard practice and encouraged - I would do it one day per week. There is a huge amount of 'progressive' literature online advocating working from home or working from 'anywhere' as a lifestyle.

That said, I agree with Edmund that we will see some regression to the mean. I have been working from home for the past year, I don't have kids, but I DO want to go back to the office, but not as much as before. 1 or 2 days per week would hit the sweet spot for me. Now it may transpire that there's a performance element here - does a workforce that spend more time face to face perform better, worse, the same or different than a remote workforce? My experience is that they may actually perform better overall - at least in my industry (software) - but would do even better with a hybrid model - which feels like the efficient frontier to me. The reason I ask the question is that companies may impose different models based on actual performance, rather than employee preferences.

In conclusion, I think we will see more going back to the office, but only slightly. Hybrid or 'smart' working will be the new norm as the economic benefits are too good and the disadvantages too small.

Market Musings 20/03/21: Kiss Goodbye to TINA

Kiss Goodbye to TINA

Summary:

New Podcast: Riding Commodity Inflation

Riding Commodity Inflation

US economy reaches for the sky

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Edmund Shing

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