I thought I knew that large budget deficits, excessive government spending, increasing the money supply (M2), low unemployment, and low interest rates would eventually cause runaway inflation.
But what do I know?
The Trump economy proved that all those assumptions—plus tax cuts and a good economy—did not cause runaway inflation. Along with reduced government regulations, the economy grew well until the pandemic began here about 11 months ago. Trillions of dollars in government spending last year, and the upcoming trillions more this year, kept the economy stable or very good for most of us. The economy is strong even though high unemployment rates continue, especially for many in the leisure businesses and those with lower education levels.
The Fed and many economists are saying the greatest risk for the economy is doing too little, not too much. Housing prices and almost all commodity prices have been rising for the past eight months. Americans are saving more than ever and disposable income is very strong. The December Consumer Price Index was up 1.4pc, and some members of the Fed worry it is too low.
We will be hearing a lot about inflation this year. Some of the comments will reference how inflation has gone up a lot, but that is compared to the very unusual Q2 2020. As we come out of the pandemic, there will also be lots of pent-up demand in spending. Spending from the government assistance distributions and a possible infrastructure plan also will fuel the inflation talk.
However, there is another opinion out there regarding inflation. Phil Gramm, former Texas congressman and chairman of the Senate Banking Committee, said in an opinion piece in The Wall Street Journal, “Policy-makers are acting as if running up the national debt and printing money doesn’t matter. Yet all the factors are present to generate rising prices and eventually higher interest rates: excess fiscal stimulus, excessive money-supply growth, impaired domestic production capacity, and impaired international production and transportation capacity.” I am not smart enough to figure which experts will be right, but the “no inflation” reasoning does look weird to me.
Nondefense capital goods new orders excluding aircraft—the best proxy for business spending—was up again in December by 0.6pc, continuing eight months of increases. The manufacturing PMI for January was down slightly but still near its 2018 high, and 16 of the 18 indices were up again. Most industries are reporting longer delivery times. Commodity prices are very strong and the price paid index was up 82pc in January, a 10-year high. New orders and production continue to be strong, while the order backlog hit a multi-year high.
ITR, an economic forecaster I use, reports that all of their leading indicators are positive for 2021. The Shapiro Nonferrous Scrap Metal Activity Index for January was the same as December: With all the stimulus money coming, this looks like an economically great year. That is IF we can get through the pandemic.
Jeff Currie is the head of commodities research at Goldman Sachs, and his reputation is generally regarded as out-of-consensus with most other commodity forecasters. He believes we’re heading into a new commodities bull-market supercycle, reminiscent of the 1970s. He argues that President Biden’s policy priorities will contribute to a boom in oil and other industrial commodity prices. This may be true for the years after 2021, however, Edward Meir believes that 2021 commodity prices will be a “sideways slog.”
Overall, there is still a lot of demand for vehicles. General Motors announced it will end production of combustion-engine vehicles by 2035 and transition to solely manufacturing electric vehicles. Many other automakers are moving in that direction as well. The move will drastically change the playing field for cast aluminum auto parts suppliers and the secondary aluminum industry in the future.
The castings for EVs will be high-end prime alloys used in the battery cases.
There are always opportunities out there for those who can think ahead. In the short term, auto production has been slowed by the shortage of computer chips, but I expect the shortages will be made up in the near term. Computer chip production potentially could become a greater issue down the road considering EVs are more chip-intensive than combustion-engine vehicles.
Scrap aluminum is tight and the prices continue to rise even though prime has dropped slightly. The spreads between prime and scrap have dropped to the tightest levels since 2017. As the economy has improved, there are still supply chain issues for scrap. China has been importing prime for some time, as their economy remains good and the Caixin is over 50, but not booming. I expect the supply of scrap to improve as more cars are shredded and that aluminum hits the market. Also, Covid has reduced the peddler trade in scrap, but as we recover and the weather gets better, those flows will improve. Copper prices are flat this month, nickel is up slightly, and 304 stainless steel took another jump in February to 73¢/lb, its highest level since 2014. Steel prices were supposed to be down this month; they were down on secondary grades but held steady on mill grades. The mills continue to be busy and are keeping the prices strong.
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” -Aristotle
Life is good. Family and health are precious.
This report was prepared by Bruce Shapiro and reflects his current opinion of the economy. It is based on sources and data he believes to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice.