Once the government started writing checks it was clear to me it was game on for inflationary pressure. We felt so strongly about that theme that we hosted a series of webinars entitled ‘The Inflationary Freight Train.’ Each of these Zoom webinars was registered to capacity and I feel like we did a good job getting out the message. This was well in advance of the recent series of CPI prints that now has ‘inflation’ front and center on radars all across boardrooms and national media. The scare has been real, as we’ve seen supply chains broken in a multitude of industries, the most notable being auto manufacturing due to a global shortage of semiconductors. Every single person has also heard about lumber, but it doesn’t stop with these two areas. Supply shortages have been recognized in almost every product line out there as millions of cash rich, post-lockdown, vaccinated Americans flock to the stores to spend, spend, spend. Just the other day I took my youngest to Target to spend some birthday money on toys. The shelves were so bare you’d have thought the apocalypse was upon us and the only savior was a nerf gun and an action figure.
As we’ve discussed countless times, when you have limited supply due to supply chain issues or otherwise combined with increased demand due to global re-openings and free money, the result is higher prices, plain and simple. Despite the Fed’s best efforts to quell the inflationary fears, the pressure has been so great that many stocks have been selling off for several weeks with the fear of an eventual rate hike and a hiatus in our economic resurgence.
Enter the Delta Variant.
By now you’ve become aware of the Delta Variant. Despite our desire to rush back to normal it seems as if our reopening will at least be slowed a bit by this uptick in cases and genuine concern over health and well-being once again. If you’re like me, you’re nauseous over the thought of going through what we have been going through over the last year once again, especially as we seek to return to school reopening and Fall flu season. You may have already begun implementing some of the same consumer concerns as you did during the height of Covid-19 and it is this precise reason we’ve seen the acceleration of a nasty sell-off in the market these last few days. Fear of a return to 2020 is out there and people are selling first and asking questions later.
It is my very strong view this is a terrible decision and the absolute wrong course of action. Allow me to explain.
First off, it’s important to understand that each state in the US did not follow the same playbook during Covid-19 and it has resulted in dramatic and life-long fiscal differences. Florida was the leader in the unconventional approach to remain open and it not only helped the state remain economically healthy throughout, it has become the destination of transition for anyone wanting to remain ‘open’ regardless of what seems to be happening. Right or wrong, this strategy has become the envy of many states not so fiscally fortunate, and it is my belief that we will not even come close to the same strict guidelines in other states as we saw in the past. Mask mandates are one thing but closing business again would, in my opinion, spark all-out riots.
While I believe the response by governments will look quite a bit different, I also believe that the Delta Variant may actually have the direct opposite effect on the markets that most people believe and be precisely the recipe needed in order to repair the supply chain issues we have seen and ultimately take the Fed and interest rates completely off the table.
For a long time, I used UK basketball tickets as a metaphor for the supply / demand issues we’ve been seeing. I discussed what would happen if, all of the sudden, the UK Wildcats went from being terrible to beating the #1 seeded team on the road. What would happen to the price of tickets for the next game? You got it, they would soar. This is exactly what has happened with our CPI and a majority of commodity prices. Now however take this same scenario and right before the game we receive word of a terrible snowstorm aka (Delta Variant) approaching Lexington. Do you think this would stunt demand a bit? You bet it would. Sure, folks with snow tires, 4-wheel drive and an insatiable demand to see the Cats would still venture out but many others would opt to stay home, safe and sound and watch on the TV. Enter this new variable and what happens to ticket prices? Yup, you guessed it, they’re still elevated but not at ridiculous levels as before.
Hopefully you see where I’m going with this and make the connections. While it makes me sick to think of people falling ill or our front-line workers once again being called to go above and beyond, the reaction to turn around and sell stock is, in my opinion, the exact opposite of what the appropriate strategy should be here.
Just as with Covid-19, the Delta Variant will come and go. Demand will soften, allowing supply chains to catch up, prices to stabilize and economic activity to return to an appropriate balance. There is absolutely no way, in my opinion, the Fed will raise rates, thus claiming victory on their transitory call, all while unemployment continues to drop, general rates remain historically low, input prices come down and we prepare to launch a multi-trillion dollar stimulus.
This is precisely the pullback bulls have needed and rather than be fearful, I believe it is time to be on the lookout for bargains and opportunities.