Barron's Streetwise - The Everything Shortage

Episode Date: May 28, 2021

From pickles to pool chlorine, Jack looks into why so many goods are in short supply. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Would you remember me? I need a sub-zero range. I can't help you. What do you mean you can't do it in yellow by Thursday? Yeah, exactly. You're going to have to have patience. Expect delays. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Mitch Hires. He's CEO of Construction Resources in Decatur,

Georgia. Mitch has been supplying area builders with flooring and fixtures for 25 years, and he was telling me about the worst shortage he's ever seen in appliances, especially luxury ones. There are supply shortages everywhere now, not just in home building. From Pelotons to pickle jars, everyone has a story about difficulty finding something. to pickle jars, everyone has a story about difficulty finding something. More than a year into the pandemic, what's behind this everything shortage in the land of plenty? We'll talk about that with Mitch and with a California longshoreman, and we'll hear from a couple of top Wall Street strategists about what it means for investors. I wasn't born into a fancy fridge family and I never asked to join the fancy

fridge life. I just needed a house with more room for my kids and I bought one and it came with fancy appliances. The range in the dishwasher, those are fairly new, but the fridge, it's been there since the house was built 19 years ago. And the manufacturer says it's designed to last about 20 years on average. If it cocks out, I'll be stuck using the little fridge in the garage. That has barely enough room for 12 Heinekens, plus maybe six more Heinekens. Anyhow, my wife wants to replace the fridge, so that's that. I asked for a quote, and when I heard it, I waited for a just kidding. But a just kidding never came. Fancy cars at least come with loads of features that make up for part of their added

cost. But a fancy fridge, it does exactly the same thing as the fridge I grew up with. It keeps the milk cold. The reason you replace one with the same brand, as near as I can tell, is that you worry about what other FFers, that's fancy fridgers, will think if you try to leave the FF life. Maybe my home value will collapse. Maybe my kids will start smoking. Anyhow, I made my peace with the purchase and I called in the order. And I was told that the manufacturer was sold out of every model for six months at least.

And I'm secretly delighted because I put off writing a big check until October. And between now and then, mentally at least, I'll be living the free fridge life. Loving it. There are shortages everywhere. We've already talked in this podcast about how the price of lumber has multiplied since before the pandemic. Steel and corn are up big, too. There's a shortage of chlorine for swimming pools and dog food and semiconductors, which means there's a shortage of things that use semiconductors like cars and iPads. You've heard about the chicken sandwich war? Everyone is

suddenly trying to out-sandwich Chick-fil-A, but now chicken breast prices have doubled this year. Chick-fil-A has been running low on chicken sandwich sauce. Burger King has pickle problems, because although cucumbers and brine ingredients are plentiful, the glass jars that hold them are not. Remember when toilet paper ran out last year? That was because too many rolls were packaged for offices and restaurants and not enough were packaged for grocery stores and manufacturers needed time to adjust. Plus, people hoarded. The good news is all of that stuff is, shall we say, behind us. No, nothing for that. Thank you, Jackson. The bad news is, don't panic when I say this, there's a bit of a shortage of

shipping vessels that carry wood pulp to toilet paper factories. I think it's going to be fine, and please don't rent the biggest vehicle you can find and try to corner the local market on Charmin. Anyhow, rental vehicles, those are tough to find right now. All these shortages are leaving shoppers and investors wondering who to blame and when it will pass and what to do. So to learn more, I spoke with a supplier to home builders who says he's having supply problems himself with the house he's building.

I'm in the middle of building a second home in the panhandle of Florida. I'm on month 16 and I'm in the business. And, you know, it's a lot of things that are going on in construction right now I've never seen before. That's Mitch Hires. He took over his father's marble business in 1996 when it had 20 workers. And today, he employs 726 workers at Construction Resources outside of Atlanta. It supplies countertops, tile, garage doors, appliances, shower doors, and a lot more. Mitch says back in February, he ordered furniture for the house he's

building in Florida. He was told to expect delivery in June, but now the estimate has slipped to August or September. But he knows what it's like to be on the other side of those conversations. Garage door prices have shot up with the cost of steel and freight, but at least there are available units. Appliances, that's a bigger problem. So you've got entry-level appliances, you've got apartment-grade appliances, you've got mid-level appliances. All of those back order, very difficult for us to complete orders.

It's not really the range you pick, but we have one, you need to take this. So we're having to do that across a lot of our builder communities. Then you go to more of the premium luxury brands, you know, your Wolf, your SubZero, some of those guys, they're domestically made, which is great, but the parts come from all over the world. And you've got a big spike in demand there as well. We're seeing people come in and order their appliances when they break ground on the house. You know, our appliance company that we own, 60 years old, it's never happened before. Mitch blames a seizing up of the supply chain ahead of surprisingly strong demand. He himself

went from early in the pandemic thinking about cash preservation and survival to now struggling to keep up with orders. Suppliers have been caught off guard too. For one thing, they're desperate for shipping and costs have ballooned. Here's Mitch. One of the big impacts on our business is freight. Some of our containers that we used to pay $3,000 a container to ship from overseas are now, last quote, $11,000. You know, we may do 20 of those a week.

And you think about the dollars and how we have to pass that on to our customers. And at the end of the day, it ends up with the end user. Are we going to see $3,000 container shipping again? Not for a long time. I mean, I don't know if we ever will. Mitch says that many of his products remain in ample supply, but that experienced installers available for hire are not. We are absolutely hiring and it is very difficult to find people. Yes, we've increased our ranges on entry level. Yes, we've increased in multiple places.

Because we do turnkey products, it's very difficult to find installers. That's a difficult part of our business right now is attracting enough talent. Mitch is scrambling, but he says his business is in a good place, all things considered. He's happy for the demand. He says he's never seen supply chains so disrupted, but that the key is to work through the issues with transparency and honesty, and that if he does that, he's going to be fine. Spend time looking into shortages and some themes emerge, along with some one-off events.

Remember the polar vortex that sent North America into an unusually deep freeze in February? It shut down Texas petrochemical plants and production of key plastics, like a resin for mixing with wood strands to make siding for houses. Remember Hurricane Laura last August? It set off a Louisiana factory fire and chlorine production hasn't quite recovered. There are quarantine effects like a surge in home remodelings and pet adoptions and exercise equipment purchases. Spending power has gotten a lift from a wealth effect created by a rising stock market and from stimulus spending, which on one hand has given much-needed relief to struggling individuals, but on the other hand, some economists say,

has greatly exceeded, in aggregate, the hit to demand from the pandemic. One of the biggest themes behind shortages is transportation bottlenecks, which can affect just about everything. Mitch mentioned the high prices he's paying due to scarcity of shipping containers, those rectangular metal boxes that come off ships and get placed on truck chassis or rail cars. But here's someone who's seeing too many shipping containers. The cargo's there. Your goods are on the dot. Who's going to pick them up? We have the two largest terminals in the United States of America to the brim, ready to go. We just got to get someone to pick them up.

If you don't believe me, I'll take you to LA Long Beach and you can see them stacked eight high. That's Daniel Miranda, president of the Longshore and Warehouse Local 94 Union. So why are containers stacked so high in his docks? Jonathan Chappell, a transportation analyst at investment bank Evercore ISI, he says the shortages seen in containers, ships, and port capacity have extended to warehouse space, warehouse workers, trucks, truck chassis, and drivers. You place an order for a Class A tractor, you can get it delivered in four months, four and a half months is the average. Now the build to backlog time is 12 months because there's steel shortages at the OEMs.

There's semiconductor shortages at the OEMs. People are trying to respond to the spike in demand and this inventory restocking capacity, and they can't even do that. There's a huge truck driver shortage in the trucking industry as well. I mean, people say, oh, well, that'll be solved with pay. And it will, but it takes time. You have to train these people. The schools were closed because of social distancing. There's a risk of getting out on the road, obviously unemployment benefits as well. So you have this demand surge and you can't respond with capacity as you have in prior cycles. So when will shortages ease? Jonathan says if I had asked

him that question back in March, he would have guessed this summer, but that it increasingly looks like supply chains will remain stretched until the Christmas shopping season. And that means conditions might not return to normal until early next year. I asked another Jonathan, Jonathan Gallup, the top U.S. stock strategist at Credit Suisse, the same question. When will shortages ease? He said, no sooner than two or three months and no longer than two or three years. We'll hear more from him in a moment because shortages, it turns out, could have a lot to do with where stocks go from here. Shortages matter, and not just because I like my chicken sandwiches saucy.

Apple says a chip shortage will reduce iPad and Mac sales by $3 billion to $4 billion this quarter. Ford says its chip shortage will cost $2.5 billion this year. That's lost earnings, not just revenue. And General Motors puts the figure only a little lower, $1.5 billion to $2 billion. Shareholders would be concerned if not for the fact that those costs are for now overshadowed by an earnings explosion. Estimates for this year's earnings have been rising faster than stock prices, and stock prices have been rising pretty darn quickly. As things stand now, S&P 500 earnings are expected to rise 16% above the record earnings from 2019, before the pandemic. But there's another concern for stock prices. All those higher supply chain costs are resulting in scattered price spikes, which are falling to consumers, and which are pushing the broad inflation rate higher. which are falling to consumers and which are pushing the broad inflation rate higher.

If investors believe that's a temporary effect and that shortages will soon ease, no big whoop. But if they believe inflation will heat up and stay hot, stocks could tumble because ultra-low interest rates are part of what has pushed stock prices higher. And to keep rates low, the Federal Reserve will need to see that inflation is under control. So far, there's a lot of talk of inflation fears, but the bond market, which takes inflation signs seriously, is shrugging it off. Not everyone is worried that higher inflation will sink stocks. Take Jonathan Golub, the chief U.S. stock strategist at Credit Suisse. In a recent analysis of futures and stock returns, he found that on days when inflation expectations, even bond yields, have risen, stocks have lately done just fine.

Here's Jonathan. I was just talking to the Credit Suisse analyst who covers beverages. And just think about what a can of soda is. It's corn syrup. It's water, which costs basically nothing. And it's metal for the can. And it's the cost of transporting a whole bunch of the stuff, which tends to be heavy, from one place to another. And so he said that he's never seen anything like it.

Some of these companies were able to just go to the supermarket and say, you know, I'm sorry, but our expenses went up. We have to charge you more. And the stores have said, OK. So you would think that typically in a period of inflation, they have to eat those expenses. And it's really hard for people who make things like beverages and floor cleaner. hard for people who make things like beverages and floor cleaner. They're not like a hotel room that's going to change their pricing every day or an airline that's going to change the price. I mean, those are staple prices and they're passing them on. So there's a huge amount of pricing power. Jonathan is quite bullish on U.S. stocks. The S&P 500 was recently up 12% this year. He thinks it'll end up 22%. He expects banks,

which have performed well since highly effective vaccines were announced last November, will continue to shine. People are quite liquid, and so they're paying their credit card bills, and businesses are paying for their loans or their leases on equipment. So that's really important. And that's actually, not only is it extraordinarily good now, it's going to get even better over the next year or two. So that's really favorable for banks. The second thing is that as businesses need to restock their shelves, they need to replace their inventory.

They're going to need to borrow money in the near term to do that. So loan demand is going to be really borrow money in the near term to do that. So loan demand is going to be really strong. Jonathan also likes cyclicals. Those sometimes have high overhead costs and low margins, which sound like bad things, but they result in high operating intensity, which is a good thing to have when economic activity is surging. So you want to buy factories and copper mines and those kinds of things. And then you also want to buy the area that's going to win the most from the reopening, which is actually retailers. People are going back to the mall because the mall is a social place to go. And while some of these businesses may not be healthy with a five and

10 year horizon because they're getting beaten up by online. The surge in their volumes is going to be breathtaking. Ann Mileti, head of active investing at Wells Fargo Asset Management, is bullish too. Although she says we've gotten spoiled on stock returns and that we shouldn't get used to it. That investors should expect single digit returns from here, not double digit ones. She's watching for any lasting effects that shortages have on inflation, especially labor inflation. As that pent up demand gets filled, as a bottleneck starts to clear, will we see a real slowdown of the economy that kind of takes care of some of the things that are happening now? What's happening with wage growth and what's happening with rent?

And those two things are probably more important in longer term inflation. Some wage inflation is welcome. I mean, only the folks paying call it wage inflation. The workers, they call it a raise. And raises can be good for everyone because workers are also customers. At lower income levels especially, wage inflation has been a long time coming. But the pace matters. Here's Anne. You may see companies need to raise wages to get people back to work.

A certain amount of that is OK, maybe up to 3% wage growth over time. But once you get substantially above that, I think there will be some concern, probably even by the Fed, if that goes too high. Because wage growth isn't something that you can take away that will dissipate quickly like commodity prices. One last thing about shortages. The causes I've mentioned so far have been recent, starting with the pandemic or maybe to some extent with trade tensions between the U.S. and China that predated the pandemic. But there's a cause that has arguably been decades in the making. Call it just-in-time manufacturing, popularized by Toyota in the 1970s and adopted worldwide. There's a book from the early 1980s that explains the Toyota method.

It's called Zero Inventories, and I have to admit, I've read it zero times. But we've all heard companies talk about reducing inventories and streamlining manufacturing to free up capital and boost profit margins and share prices. Daniel, the longshoreman, he talked about how shoppers used to ask store clerks, do you have any more of this in the back? But today, the back only has bays for unloading trucks.

Merchandise is stored right in the sales floor. Shipping containers have, in effect, become the warehouses. And modern supply chain software and tracking technology, they've made it all work smoothly. Except, it seems, during global pandemics. Now there's talk of supply chain managers shifting from just-in-time methods to just-in-case ones. In a survey last year, a large minority of them, more than 40%, said supply chains have gotten too lean. There are fixes for that that don't involve squander, like moving factories closer to customers. Intel is spending $20 billion to build two new chip factories in the U.S., and General Motors has a deal with Korea's LG Chemical to build a second plant for electric vehicle batteries in Tennessee. Spending like that is called capital investment, and there might have been too little of it for too long, judging by the average age of fixed assets like plants and equipment, which have reached levels not seen since the 1960s,

according to those party animals at the Bureau of Economic Analysis. They're hardworking civil servants. some of them probably listen to this podcast i bet it sincerely we're still living in a digital virtual asset light shared and maybe even just in time economy but actual stuff, tools, things that would hurt if you dropped them on your toes. All of it is suddenly hot. Here's wishing all the hardhats out there plenty of work and good pay in the years ahead. And all of my fellow chicken sandwich fans, a return to plentiful pickle condition soon. Thank you for listening. Jackson Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple,

write us a review. And if you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.