Moody's Talks - Inside Economics - Shortages and Supply Chains

Episode Date: September 17, 2021

Tim Uy, Todd Metcalfe, and Jesse Rogers, all economists at Moody's Analytics, join Mark and Ryan to discuss global supply chains and commodity shortages. The focus is on issuances around semiconductors, lumber, and copper.Full transcript can be viewed here.  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy. Thanks for joining this week. We've got a real group here today. We're missing Chris. Chris DeReed. He's the deputy chief of comics. He's on sabbatical, isn't he? Ryan, what's up with him? Where is he? Is he going to make it back for next week? No, he'll be back next week. But have you noticed that our ratings have gone up substantial since Christmas been on vacation? Oh, really? How do you know that? Oh, you're only kidding. Oh, I thought you had me going there for a second. Yeah, I should have kept it going because he's probably going to listen to this on the plane. Coming back from Italy. Yeah. Yeah. Well, we've missed him, but it'll be good to have him back next week. But we are in good shape. We've got a few of our colleagues joining us.

In fact, this podcast is a little bit of an experiment because we've got a pretty full house here. In addition to Ryan, who's the director of real-time economics, who you all know quite well, we've got Jesse Rogers. Jesse is, well, Jeff. Jesse is like a Renaissance man. He does like almost every. You like, you speak like 10 languages, don't you? Yeah, three or four. Spanish, Portuguese, and a little bit of Arabic.

Is that why he said three or four? Yeah. Yeah. Depending like if you count the three words I know in Arabic. The family heirloom, we've lost it over the generation. My mom's a native speaker, but, you know, just didn't get passed down. Oh, is that right? I didn't know that.

What is her nationality? Where is she from? She's American. Oh, but my grandparents, yeah, we're from Syria. Oh, from Syria. Oh, okay, very cool. And you are critical to all the work we do in Latin America. In fact, we were thinking about buying a Brazilian company.

Was it Brazilian? I think it was Brazilian. Yeah. And you actually, I remember, I asked you to go down and run that business. And you said with some intrepidation after some real deep thought, yep, you were ready to go. And then, of course, the deal didn't happen.

So you were so bummed out because you were all set to go. Where was it exactly? I can't remember. San Paulo. So, we do have an office there. Yeah. It's going to be a bit of a different thing, though. Yeah.

So, Jesse, tell us a little bit of a little bit. bit about your background. How did you find your way to Moody's analytics? Sure. My background's in public policy and journalism. I cut my teeth actually living in Mexico City and working at a small research institute in think tank there. I was there for three years. Came back for my master's. And I don't know, almost by accident. A recruiter kind of called me up towards the end. and asked me one thing. He said, you know, would you be prepared to move to Westchester? I'm thinking it was Westchester, New York.

I said yes. No, no. Seriously? Yeah, yeah. That was the first thing he asked me. So, yeah. Westchester PA is a lot nicer than Westchester. Well, I shouldn't say that, you know.

I'm comfortable. I'm in Philadelphia now, but I miss going to the office. Yeah. But how long have you been with us at Moody Town? Now? It's going to be seven years. Wow. Yeah, cool.

Well, and I should have said right up top that after we get through some of the numbers like we typically do, and we're going to play our game and everyone's going to play, we're going to talk about global supply chains. And so, Jesse, I think you're on board to chat about copper and other commodity prices. And, of course, a lot of that's produced in Latin America. and so it all kind of fits. So you're ready to talk about copper? Yeah, Dr. Copper. Looking forward to it. The answer is yes.

Yeah, you are ready. Mark's favorite is. Peter. Oh, I'm, yeah. It's my favorite indicator. We'll come back to that. Although, I forgot to look at the price before I came on, but I'm sure Jesse knows the price.

4.3. Okay, and we also have, what is it? 4.3. $4.3 and $0.30.30 a pound. Yeah. Yeah. Okay. So very high.

Okay. We also have Todd Metcalfe. Todd, Howlingland, have you been with us? Not seven years. It's been more like a three and a half. I was going to say three, four. How about that? Yeah, very good.

And you are critical to all our housing analysis. In fact, we've been going back and forth recently on house price modeling at the metro area level. And we seem to be getting that together. A lot of good work there. And you're, you're. here to chat about, because we are talking about global supply chains, obviously there's been a lot of disruptions to supply chains for building materials. Lumber has been the kind of the poster child for

supply chain issues. And so I know you've been watching that very carefully, so it's good to have you aboard. And did you come to us right from your PhD? Because you got your PhD in Syracuse, you were just telling me. Right. Did you come to us directly? No, I worked as an economist at Towson University. they have a little think tank that they do regional economics there. And so I worked there first. And then Evan Andrews was in the same PhD program as I was. And he's the one who got me into Moody's. Yeah, you can't be too familiar on this podcast.

Like you're talking to me, but you're also talking to the world. So, you know, like they're going, who the hell is Evan Andrews? Yeah. So just, you know, great guy, by the way. He's a great guy. But, uh, and so you went from Syracuse, got your Ph.D. Actually, Syracuse has a really good public policy. Uh, uh, uh, is, is that where you were?

You're in the public policy area? So I was actually in a multidisciplinary program. Um, so basically it was, uh, I was an applied economist, um, but all of my professors or all of my committee members were actually public administration professors. Yeah. generally economist in the public administration program. Yeah, really, really good group of folks there. Well, it's good to have you here.

And then finally, Tim Way, Tim, he's our chip guy. He's been following the chip industry, you know, carefully for some time. And obviously, that's also a kind of a poster child for global supply chain issues, has really messed up the vehicle industry, which has really been a real problem. here. So good to have you here, Tim. Yeah, thanks, Mark. Good to be here. Yeah. And, you know, I like to tease Tim because he got his Ph.D in Minnesota. And when I was back at school, they were all about real business cycles. Did anything ever come out of that whole thought process around real business cycles?

Do you think it's had an impact on people's thinking? I think to some degree, yeah. I think it's influenced sort of a lot of the modern DSGEE modeling that we see coming out of central banks and academic institutions nowadays. But to me, it's just, you know, it's yet another kind of sort of way to think about the world, right? And it's, I think, coming to some kind of acceptance, right? I'm sure Todd will agree that Syracuse also teaches real business cycle theory at some point during its macro-curriculum. You guys are both from schools that got it wrong. So what can I say?

Well, Penn also teaches RVC stuff, Mark. So. They do? When did that happen? They do. Oh, yeah. They do. Absolutely. I mean, like, they've hired a lot of Minnesota guys. So, so, you know, I mean, I think if you go back there, I think you'll see that RBC constitutes a huge chunk of their macro curriculum. I'm only joking. As you know, Tim, I tease you all the time. I give you a lot of brief. Yeah, but you, I know, from Minnesota to where, you, you, you didn't come to us directly from Minnesota, did you?

No, that's right. No, no. So I've been through the ringer in some ways, you know, because I'm originally from Canada, but as you said, I went to school in Minnesota for my PhD. I went to Cambridge after that. I was a fellow at the University of Cambridge in the UK for three years. And I worked in consulting after Cambridge. So that's actually how I got to Moody's was through consulting.

Well, great to have you. And so you can see, there's a little bit of a little bit of a little bit of a, Brady Bunch thing going on here. We've got five of us. So this is a little bit different than what we've had previously on the podcast, so a little bit of an experiment. But it's good to do this experiment with you guys. So welcome aboard.

And as the listener knows, first, before we dive into the topic, which is going to be, again, global supply chains, we talk about the statistics and play a little bit of a game here. So of a game here. So I'm going to just so that you get a sense of it. We're going to start with Ryan. And of course, Ryan is a maven at this. He's really, really good at this.

So Ryan, what's your statistic for the week? All right. It is minus 1.5%. Minus 1.5%. This is something on everyone's mind. And it has been one of the big contributors. fluctuations recently. Fluctuations what?

Recently. What did you say? Over the last few months. Fluctuations in what? It's just, I'm not going to give it away. Oh, that gives it away?

Yeah, that gives it away. It's like a damn. I thought I got him. Oh, yeah. You guys have any idea what minus one point? And this is a recent,

this is a statistic that came out this past week. Tuesday. There's another hint. Oh, geez. 8.30 a.m. 830. Everything comes out.

Well, not everything comes out at 8.30 a. Well, CPI came out Tuesday morning. And minus 1.5%. Guys, do you see how I do this? This is called deductive reasoning. Isn't it called deductive reasoning? Yeah, it's called deductive reasoning.

Jesse would know. And it's probably the decline in used vehicle prices in the month. I'm impressed. Very good. baby ding ding ding ding hey we need to get a bell on i can ring it yeah i need to get the bell i need to get the bell anyone talks you can just ring the bell i i will have to say though i'm not sure i would have gotten unless you told me tuesday uh i would have yeah because a lot of stuff came out this week but yeah a lot of stuff

came out yeah use car prices have been driving the cpi up hot like over the last few months it's been adding a lot, and now it's subtracted in August. Yeah. Well, tell us about the CPI report in general. I mean, I thought that was a pretty important report, but I'll let you kind of lead the way on that. So why should fill us in on that one? Yeah, so August was like the first glimpse of inflationary pressures beginning to moderate. The CPI rose less than what the consensus anticipated. And if you strip out the volatile food and energy components, the CPI only rose of one-tenth of a percent in August. And that's a lot weaker than what we've seen over the last several months. And a good chunk of that is because used car prices fell. A lot of the reopening components of the CPI,

so use rental car prices, lodging away from home, they also moderate airfares. They plunge. That could be Delta as well in August. So we're getting a little relief on the the inflation front. Yeah, it feels it feels like inflation is peaked. You know, it's rolled over. I think overall CPI consumer price index inflation peaked in June, I think, on a year-over-year basis, 5.5 percent still elevated obviously because of the base effects, but it feels like we're, and given that 0.1 percent increase, very modest increase in core CPI, excluding food and energy, which is what economists generally look at to gauge where the inflation rate is headed in the near term suggests that we've peaked on inflation.

So the idea or the view that this spurt in inflation, the spike in inflation is temporary or transitory as the Federal Reserve might say, that looks right. That looks like what's happening here. Would you concur with that? Yeah, you agree. Yeah, next month, so for the September data, it could be a lot of noise in there because of some hurricane effects that drove off. up energy prices. But, you know, looking past the hurricane effects, I think inflation is definitely

beginning to moderate. Yeah. Okay. So should I give you my statistic or should we go on to the guys? Guys, do you have, like Jesse, do you have an indicator? The statistic? Yeah, yes, they do, Mark. You do? Oh, okay. You have a good one. It's a good one. Yeah, I believe so. Did Ryan give this to you, or did you come on this on your own? This is mine. I may have workshopped it a little bit with Ryan, so maybe we should count them out for this round. All right, right.

Jesse stressed about this, Mark. I know he is. I can feel it. Look, his hands are folded across. I know. He's really nervous about this. He's sweating a little bit. Yeah.

Don't disappoint, Jesse. Actually, I can see he can cleaned up his room. We're all on Zoom too. So I see you cleaned up your room there a little bit, you know. I can tell he's ready. Okay, fire away, Jesse. What's the number?

All right. It's 15%. And one clue is it's year to date. 15% on the nose. 15%, you said. Yeah. Roughly. Cumulative year to date.

And this is a statistic that came out this week or relatively recently? It's a weekly average. So it's a weekly average of... Weekly average. Oh, were that... This is not the one you ran by me. Yeah, this is a bit of different. I was thinking of the other one I ran by Ryan.

Yeah. Ryan, do you have any... Can you... Is it related to global supply chains in some way? Yes, yes, it is. It is. Is it a price? Yes, it is a price.

Oh, it's a price. Okay. Yeah. Again, you see how I do this, guys? Deductive reasoning. Detective reasoning. It's a price, 15%, it's up 15% so far this year. It's the start of this year, yeah.

And it's a weekly average. And I'm guessing, given, you know, where you're coming from, it's a price for a commodity. Would that be fair? Yes. Yeah, that is. Okay. Is it copper? Copper.

Copper. Can it? Yeah. It is copper? Here we go. Copper prices. We got them pinned. I thought that would be too easy.

That's why I said it can't be copper. That's like, yeah, okay, copper prices. Chris only talks about housing. Jesse's only going to talk about copper. Oh, okay. Yeah, you guys have typecast me already. You know, I'm not on for 10 minutes and I'm typecasted. Good point.

Well, we do that on Inside Economics. We can figure you out pretty quickly, you know, right away. But that was a good one. That was very good. Yeah, okay. Well, we'll come back. to copper prices in just a few minutes. Okay, let's go to Tim. Tim, do you have a statistic, Tim? Yeah, I do. It's 75%. 75%. Okay. And don't tell me it's chip prices year-to-day.

Oh, it's not chip prices. That would be quite a topic. That would have been too easy. Okay, so, all right. So it has to do global supply chains? Yes, it does. It also has to do with chips. But it's not a price. It's not a price. Is it capacity utilization? Getting there, getting there. Close, yeah, close. Not quite, yeah.

Hold it. 75% sounds low for capacity utilization. Oh, I was going to build on your train of deductive reasoning and start shipping away at industry-specific. Okay. It's related to capacity utilization, yes. It's related to capacity. But it's more geographic in nature. Okay. Industrial production?

Production, yes, but production where of what? Oh. Oh, now we're getting... Can I take you go out? Now he's really... Yeah, we're very close. We're very close. Sure, go ahead.

Okay, I'd say probably Asia. Yeah, yeah, yeah. So what is on Asia? Do I have to tell you what the province? it's in, you know. No, you're spot on. So it's 75% of global chip production is done in East Asia in particular. Oh, okay.

Well, that's a, that's a good statistic. Yeah. Say that again, 75% of global chip production. And that's all chips, you know, basic chips, high tech, you know, sophisticated chips, the whole shoot and match. That's absolutely right. Yeah. So all basically 75% of total chip manual.

manufacturing around the world. Okay, I got one for you. This is for Tim. What percent of global chip manufacturing is in Taiwan? Ah, so for high-end chips? No, I said total, total chips. Total, total. So I would say in terms of FAB production, it's 54% is done by TSM alone.

So that accounts for the vast majority. Taiwan has-TM. Now who's that for the listener? Yeah, so it's Taiwan's semiconductor manufacturing company. Right. It's the world's largest chipmaker. But to dig a little bit deeper into that in terms of high end, right? Mark, you mentioned high end chips.

And these are the chips that go into phones, computers. 92% is done by TSMC. So done by Taiwan. And that's incredible. That's impressive. Well, the number is impressive, but the way you kind of answered that, my challenge was impressive. I had no idea what the answer was, but you did.

So very good. That's great. I'm biased to knowing things about Taiwan. I'm glad that you think I'm doing a good job. No, I thought that what Ryan, wasn't that impressive? That was impressive. Yeah. Todd's not impressed, but he never is impressed. No, yeah, yeah.

I just don't really want to follow that, but it doesn't look like I have a choice. Okay. Hey, Tim, that was damn good. Very good. Todd, you're up. What's your statistic? 1,076.6. 1,076.6.

All right. Is this a price? It's price related. So it is dollars. Building materials? It is building materials related. The peak in lumber prices? Yeah, is lumber back up to 1,000?

No, because that's below that now. It's closer to 500 right now. It involves the peak in lumber prices. Oh, the peak. Oh, so this is in a recent price. This is a historical price. It's both. It's a difference.

Oh, we're going to differences. It's the decline. I know what it is. I know what it is. It is the decline in lumber prices from its peak to the current price. You see how Mark does this? You see how Mark does this? I get them 95% of the way there.

And then he jumps in. That's not true. Is it really true? I mean, maybe it could be. Okay. That may be true. Not intentional, though. You see, I didn't know that I was doing that, but it's possible.

It's possible I could be doing that. Well, if we had that bell, we could settle it, you know, ring it in. No. I'm sorry I even mention that because now Ryan's going to go get the bell and he's going to ring it when he wants to ring it. Right. I'm going to get the bell. I'm getting the bell. You can get the bell.

Ryan, you get a bullhorn. That's right. Hey, well, that was good. That was good, Todd. That was a good one. Should I give you my statistic? Yep. Okay. And of course, I'm not, it's kind of related to global supply chains, kind of sort of. I don't want to lead you too far down that road. But it's a statistic that has come out this week. Actually, I'll say it came out very recently. And it goes to a reason for, optimism about future economic growth. Ready? One point two five. One point two five. And Ryan, I mean, this is a reason for optimism? Yeah, reason for optimism about economic growth going forward. Yeah. Indeed. But it, you know, it highlights, you know, what's going on with global supply chains and why, you know, it has been a drag on economic growth. But, you know, this, are you going

inventory to sales ratio? You got it. Way to go, Ryan. That is right. That is the inventory to sales ratio. So you take all the inventories. That's the numerator. You take all the sales and that's the denominator and the ratio. It gives you a sense of, you know, how lean inventories are. 1.25 is about as low as that has ever been. This is for the month of July. It was actually lower one month back in the very kind of the wake of the financial crisis when we had that big drawdown in inventory. We got to 1.24 for one month. But that quickly came back. So we're at 1.25. And interestingly enough, the census department, which is the, the source of the data, breaks that down lots of different ways, but manufacturing, retail,

and for retailers, you know, inventories and manufacturers, inventory to sales at retailers, inventory to sales at wholesalers. And really the thing that is just incredible is the inventory of sales ratio at retailers. It's, you know, it has plunged since the pandemic. It was, you know, kind of headed down over time, just in time inventory management. that kind of thing has been bringing that inventory of sale ratio down for retailers. And also, you know, online use and increase in Amazon and warehousing, much more inventories have been going to warehousing. But that is really collapsed and, you know, suggest, you know, the reason for optimism here is because it's so low, you know, as things start to kind of normalize and we kind of iron out the global supply chain issues, and we will.

We'll talk about that. businesses are going to have to ramp up a production to rebuild inventory. Inventories are so low that we're going to get a real boost to economic growth, at least for two or three or maybe even four quarters, you know, maybe all of 2022 because we're going to have to see those inventories rebuilt. Anything else to add on the inventory sales? I know you look at all these statistics, Ryan. So any other insight on the IS ratios or anything on inventories?

Yeah, so if you take all the data that came out this week, you know, retail sales, the inflation numbers, the inventory data, our GDP model, our daily high-frequency GDP model ticked up from 3.9% at an annualized rate to 4.1. But to your point, inventories are- Ryan, just to explain that, and I know you talk about it regularly on the podcast, but that's our tracking estimate for the third quarter, the current quarter GDP growth rate. So we take all these statistics that come out on a daily basis. We have a model, you have a model that you run to translate that into what does it mean for GDP growth? Real GDP, the value of all the things that we produce in the current quarter.

And you're saying, given the data we got this week, it went from expected growth rate tracking estimate of 3.9 percent, which is where we were last week to 4.1 this week. Correct. Yeah. But if you strip out inventories. Oh, yeah. Barely growing. No, really? 1%.

Inventory is going to be a big boost to the third point of GDP. And it's not like we're adding inventory, are we? Or is it just that we're not cutting inventory as much? Exactly. We're not cutting as much. Wow. Are we going to actually add to inventory in the quarter, though, according to our modeling? Not yet.

The model doesn't have a positive. It just has less of a decline. Less negative. Yeah. Corrective. Yeah. Hey, how would you characterize, I've got my own view, but I'm curious in your perspective, how would you characterize the message from this week's raft of data?

You know, in the context of Delta and the clear negative impact that Delta virus and the wave of infections have had on economic growth. I mean, the economy feels like it's been dinged meaningfully, you know, probably since late June, certainly in July coming into August. But, you know, are you, how do you feel about the data this past week and what it says about how the economy is navigating the, fallout from Delta. I don't feel good about it. Oh, really? I mean, if you look at retail sales, they were strong in August, in August, but there was massive down to revisions to July. So the decline in July retail sales is now a lot larger than we previously thought. So the spending data, you know, we net it all out August and July, it's not great. You look at all the alternative high frequency data that we have, and you and Dante, our colleague and Matt,

in that CNN back to normal index, that's rolled over. So I'm just not feeling good. Yeah, that's interesting. I mean, because my take was, I mean, I've been nervous about Delta, and it has lowered our forecast for growth in the current quarter Q3 and for the year. I mean, you know, if you look at our forecast real GDP for calendar year 2021, We had been, if you go back two or three months ago, almost to seven percent for the year, we're now back down to about six. Not all of that is, is Delta, but I'd say at least half a point of the downward revision in our growth expectations for this year is because of the effect of Delta.

But it feels like it felt like this week, the data, just everything kind of felt a little bit better to me. I mean, retail sales were surprisingly strong. Yeah, they downwind revisions for July. but, you know, it was still, you know, if it rose and so it was good. Yeah. And, you know, just small things like, you know, the Philly Fed Index, right, which maybe many people don't follow. This is an index constructed by the Philadelphia Federal Reserve of Manufacturing Activity in Philly. And this index's been around since the beginning of time because, you know, Philly's been, Fed's been doing this, constructing this for a long time.

it actually rose. And that's a, you know, in the month of August from July. What else? You know, consumer sentiment seems to have stabilized a little bit. Yeah, but it's still really depressed. Yeah. It's down where we were during the teeth of the pandemic. What's interesting is if you look at the measures of business confidence, so the NFIB survey, the regional Fed manufacturing surveys, their general business conditions index is actually like a question about confidence. Yeah. And our weekly business. confident survey. They're all holding up fine. It's the consumer measures that have just gotten rushed by the Delta variant. Okay. So you came out of this week, no more, feeling no better

about the impact of Delta than you did last week. No, I think, yeah, I'm feeling a little bit more, I'm a little bit more concerned. Because the number of schools that are closing or going back to virtual learning increase relative to last week. And it's now a thousand schools across 35 states. and that's going to be problematic for labor supply over the next couple months. Say that again? How many schools? A thousand over 35 states. So it's spread out.

It's not regionally concentrated. That have gone back to online learning? Correct. Because of the infections. Delta Valley. Wow. Okay. All right.

So we're going to like to see that effect in the September employment numbers. Right. Okay. Yeah, I was actually feeling a little bit better now. I'm not so sure. You're right about our back to normal index. That index takes all of these statistics and brings it together into back to normal, what percent of normal, what percent of what we were prior to the pandemic in terms of economic

activity. And that's now back down below 90 percent. So it says we're, you know, had gotten this high is almost 94, 95 before Delta. We were 94 percent of normal, 94 percent of pre-pandemic, but now we're back to. down to 90s, so, okay. And I guess one last thing I'd say on Delta is, I guess my pessimism is being driven more by the alternative high-frequency data, the daily, you know, open table, or seated dinners through open table, number of people passing through TSA checkpoints.

That's capturing what's going on right now. The data that came out this week was showing what happened in August. So I think the September data, when it starts to roll in, will be on the softer side. Okay. All right. So I think we're looking at two different snapshots. I'm talking today. You're looking at the weekly day or the monthly data for August.

Yeah, a good point. And I guess the other reason I was a little more upbeat. And I guess, well, curious what you think here too is it does feel like the virus is that the wave, the delta wave is kind of rolling over, that there's fewer infections. People are masking up more and there's more vaccinations. And of course, more people are getting sick and developing immunity. So it feels like that. wave is starting to abate, which we had been anticipating now. But that would be some reason for optimism. No. No, I agree with you. Yeah, the seven-day moving average in daily confirmed

cases is dropping. But it's still above 100,000 per day. So this two will end, you know, just like past waves, but I just think the economic costs of the delta wave are going to be a little bit more than what we had previously anticipated. Yeah. Okay. All right. Well, we're anticipating it, right? Because we do have stronger growth in the fourth quarter of this year in, in significant

part to the expectation that this wave will abate over the next few weeks, certainly over the next couple of months. Yeah, I'm confident that I think your baseline forecast is spot on. You get a big pickup and grow final three months of this year. I'm just worried about it. Yeah. you know in the next few weeks okay all right well we'll certainly be talking about this next week on the podcast as well so okay let's um let's turn to global supply chains there's certainly an issue

uh that's come to the fore again as the delta virus has reintensified and in caused um by the way is this is not just a u.s phenomenon this is a global phenomenon we've seen delta create havoc everywhere and it scrambled already scrambled a global supply chains to a significant degree And the supply chain issues is a really important one from a macroeconomic perspective and a just parochial personal perspective. It feels like you can't get anything these days without having to wait for it. My son ordered a couch for his new apartment probably two months ago. It arrived yesterday.

So, you know, not easy to get stuff. And, you know, part of that is just the surge in demand. You know, demand has been very strong, you know, certainly throughout the pandemic for goods, you know, for things that travel through the global supply chains. But, you know, the chains have been severely disrupted by the pandemic. You know, people getting sick and Malaysian chip plants of chip plants closed to messing with ports. You know, we saw the Chinese have to shut down various terminals and various major ports because of the discovery of COVID, to, you know, to obviously a corollary to the global supply chain issues or the labor supply issues, you know, because people are sick or taking care of sick people are fearful of getting sick.

You know, they haven't been going to work and that exacerbates the global supply chain issues. And all this has, you know, come together and is now creating, you know, very significant disruptors. So far, most of the economic damage has been around a prime. You know, inflation has spiked. So we've seen prices jump for almost everything, you know, all kinds of products have jumped because of the supply chain issues. But it also seems to be, and here's where it gets a little more worrisome, demand destruction, right? You can see this feels like it's happening to some degree in the vehicle industry, right? Because the chip plants closed, vehicle manufacturers who need all those chips can't produce as many vehicles. so they can't sell as many vehicles, and they probably will lose those sales, you know, to some degree. There's going to be some pen-up demand. We'll get some of those back.

We might get, might not get all those back. So I don't think that's happening in a lot of industries yet, but certainly, you know, something to watch. There was certainly another concern. That's how I would frame the discussion around this. And so the conversation I'd like to have is, you know, we're going to dig deep into different parts of the supply chain issues, try to understand, you know, what exactly is causing these problems, you know, what will it take to solve them and when do we think they will be solved?

Or, you know, that's a tough one to answer. No one knows for sure because a lot depends on the pandemic and how it's going to play out. But, you know, in our baseline outlook and our forecast for the economy, where we think it's headed, what are we assuming about this? Does that sound like a reasonable conversation, guys? Sounds good. Sounds good. I'm bored. You're on boarded.

Okay. Well, who wants to go first? No, I'm not even going to ask. I'm going to pick. I'm going to pick Tim because unless you're on Zoom or unless you're on YouTube watching this, we're zooming this thing. Tim looks like Superman. He's got a bright blue. What would you call that?

It almost looks like it's not even a shirt. It looks like he's going to go scuba diving or something. I don't know. It's a sweatshirt. It's a sweatshirt. I don't know. It's a regular sweatshirt. No, it's not a regular sweatshirt.

No, it's not a regular. That's not a regular sweatshirt. You guys agree with me? There's something going on with that sweatshirt. Don't sweatshirts have to have hoods? No, not in Canada. Not in Canada. They've got the park.

Him has a secret life that he's hiding from us. As soon as we wrap. There's definitely an S somewhere over there. Yeah, I'm riding at Superman when I'm not working Moody's. Yeah. All right. Well, let's begin with you, Tim, and what's going on in the chip industry. Give us a little bit of history.

How did we get into this mess that we're in in the chip industry? Yeah, so actually, Mark, what you and Ryan were just talking about. I think in terms of Delta is particularly pertinent to the chip industry. Because I think before the Delta variant, sort of really, came to the fore. I think, you know, we were sort of of this mindset where, you know, the chip industry, kind of they were hampered by, hampered in the sense that there was a shortage because of the pandemic, because demand just surged, while supply is relatively constrained, right? So I think a bit of background kind of taking a step back. I mean, chips, there are many different types of chips.

So there's sort of, you alluded to kind of high-end chips earlier, Mark, so these are sort of seven nanometer or less type chips. These are the chips that are used in phones. So those, types of chips basically, you only need a handful of them, right, to make some of the major electronic gadgets that you see, phones, you know, gaming consoles, laptop computers, versus some of the more mature chips, right? So these are the chips that are using cars, you know, sort of much older technology, 15 years or older. You need a lot more of these chips, thousands of them, to make a single car. Right. So early on in the pandemic, I think, you know, what we saw was, you know, we saw kind of severe sort of shortage for the car industry, but maybe not so much

for sort of some of the more high-end chips. And that's in part because, you know, there's a lot more incentive for chip makers to make these high-end chips. Margins for those chips are a lot higher. So to give you another statistic, so nearly 50%, 49% of TSMC's revenues come from phones alone, right? So making chips for phones alone. So that's nearly half versus only 4% from automakers. So clearly there's a huge, and then another 30% comes from advanced computing. So that's cloud computing, artificial intelligence, all these sort of high-end chips, right? So the high-end ships basically make up about 80% of their revenue book, which makes sense, right, given that these are kind of really advanced technologies, very few manufacturers are able to produce them. And so,

they have pretty strong monopoly power over these chips. So now kind of fast forward to the Delta variant and kind of what it's doing to Asia, which is where I kind of started off my spiel. So 75% of global chip production is done in Asia, and Asia unfortunately is bearing the brunt of, or at least sort of really experiencing some of its record highs in terms of COVID-19 cases because of the Delta variant, particularly affecting Japan, Korea, Malaysia, Thailand, as well as Vietnam.

So these are five big countries that are to some degree involved in chip production, whether it's in assembly or integration or testing. So these are all essential in getting chips out the door. To the point where even Toyota, so Toyota is kind of like the poster child, basically, for car makers in terms of supply chain management. They've always done a very good job of that because they have a long history of creating, you know, speaking of inventories, you mentioned that earlier as well, they have sufficient buffer inventory and they have a very well-known tracking system

where they basically have an online real-time tracking system that sort of looks at over 6,800 parts, you know, what the lead times are and how much inventory they have. so that they can manage all those changes. And even Toyota has had to curtail production significantly. They've just raised it to 400,000 less vehicles this month because of these disruptions that are going on in specific plant closures in Asia that we hadn't really seen before the Delta variant. So I think, you know what?

Go ahead, sorry. No, no, go ahead, Tim. I was just going to end by saying, I think, in terms of high level, right? I think what Delta has really done is it's sort of exacerbated a lot of the existing shortages that are already out there, right, by creating yet another sort of, it's almost like a natural disaster of sorts, right? So the ship industry, they're always affected by natural disasters. They're affected by earthquakes. They're affected by droughts. These are very significant.

If there's a drought in Taiwan, the whole world suffers because Taiwan basically produces a vast amount, right, more than half of basically all chips that are manufactured. you know, but Delta basically is something that, you know, even TSM can't plan for, right? So TSM has business continuity plans that account for drought, that account for earthquakes. What does it do, right? But it can't account. Droughts, can I say just so because people don't know, I mean, producing chips is pretty water intensive, right? I mean, very, very much so. So you have a drought, you don't have water, you can't produce, basically.

You can't produce at all. Yeah, you can't produce at all. So, so, but they, they kind of, I think with droughts and earthquakes to some degree, you can kind of plan around that, right? So Toyota's planned around earthquakes. That's actually the genesis of their sort of world-class tracking system was because they had this 2011 Fukushima earthquake that devastated them. And so since then, they've basically tried to keep a very tight hold on how much inventory they have for each, every single individual part that goes into their car models. But even they can't plan around factory closures in Thailand and Vietnam, right? That's just sort of like a natural disaster almost.

So just to summarize, we saw a surge in demand because everyone's at home and they're not traveling, going to restaurants, so they're buying stuff and all that stuff. And, of course, remote work, you know, that means you're buying computer. and telecommunications equipment and gameboys and just all kinds of things. And they all, every single thing these days has a chip in it of one form or another, of course, vehicles as well. And so that drove up demand. And then you have, it sounds like what you're saying is the chip industry on the supply said already was pretty fragile, kind of vulnerable to anything that could go wrong.

Fukushima nuclear meltdown in Japan to Taiwanese droughts to whatever. And now you throw in Delta, particularly Delta, because this is the first time that Southeast Asia got crushed. And there's a lot of chip production. I keep going back to Malaysia because there you have plants that actually have closed because everyone's sick. They literally are sick and can't work. And so the confluence of all that is this very,

very severe shortage of chips and the spiking prices. Is that, that's it? That's what's going on. Yeah, that's absolutely right. I think the only thing I will add to that, Mark, is that I think, you know, the listener may appreciate how difficult it is for new production to come online. I think, you know, typical lead times for existing capacity, right? So this is machines that are already in place, you know, production lines that are already in

place. Typical lead times right now are in excess of 26. weeks. That's half a year. Right. And that's basically that's that's that's that's that's that's that's not, is that 26 weeks is not to build a new fab chip. No no no. So this is for existing fabs. Right. So for existing fabs existing production lines right just to get one chip from the manufacturer out to the door out the door to the end user. It's over six months. It's over six months. Right. That is remarkable. And so if you want to build if you want to build new plants or fabs as they call it. Um, so TSM has been working on this for a while. in Arizona, and that fab isn't going to come online until 2024, right?

Samsung has the same plans to create new fabs in the southern U.S. They've filed papers with Texas and with a couple other states, and that their plan's not going to come online until 2023. So it's just near impossible, right, to create instantaneous supply, right? The only thing you can do is try to basically, you know, talking about Ryan's point earlier, about capacity utilization, right, to basically wrap that up to 100 and over. if you can, right? And basically work overtime to make up for what you currently have and what's currently missing. The other issue with that is that you can't really repurpose these chips, right? So I kind of

alluded to it a little bit earlier in terms of there's a big distinction between high end and low end chips. And that's not a superficial distinction. I mean, that's really, you know, you have very specific machines, right? So I wrote a paper earlier this year, you know, that kind of doveed a little bit deeper into the global foundries, one of the actual US manufacturers of chips. I mean, kind of what they do in their plants, right? So they have basically specific lithographic machines that can sort of essentially laser into silicon wafers, you know, these specific chip designs, right? So you can't just anyhow, you know, switch from one chip design to the other, you know,

just because the auto industry needs it more and and maybe, you know, you're getting less demand from the gaming console makers. You can't just switch it over to auto. It doesn't quite work that way. So the supply constraints are real, right? These are actual tangible supply constraints, and they're only going to be made worse if the factories close down. Okay.

One thing you did not mention is a cause is the U.S.-Chinese tensions and the fallout from that. Huawei, has that played, you know, any kind of role here in terms of what's going on? Oh, absolutely. It's played a very big role. So Huala is kind of more historical in nature, I would say. But I think some of the things that happened after that, you know, a lot of companies have basically adopted the same strategy. So taking a step back, right?

So what happened sort of earlier on in the Trump administration, as they were basically imposing this boycott, you know, not allowing essentially Chinese companies to buy from the U.S., and of course there was a lot of bickering back and forth and sort of reciprocity in that manner, What a lot of the Chinese telecom and electronic companies did was they actually stockpiled a lot of chips, right? So they knew that this was coming, right? There was clearly a lot of discussion around it.

It took months, as is always the case with government, for it to pass. And so they actually stockpiled a lot of chips. And what a lot of companies are doing now, and this is something that Toyota's always done in the past, is that they've always just had huge buffer inventory. But what a lot of companies are doing now is they're basically stockpiling chips as much as they can, right? It's not just automakers. It's a lot of, you mentioned gaming consoles earlier. I don't know about Game Boys anymore, Mark, but PlayStation 5.

Sorry about that. That's my son. My son was a Game Boy. Yeah. Is there such a thing left? Is there any more Game Boy's? Yeah. So the counterpart nowadays is PlayStation 5s, right?

So these are kind of, I'm not that young. But yeah, but, I mean, those are really in high demand. Oh, that's why he's got the blue sweatshirt. That's his gaming shirt. He's like, he's going to come on. He's going to go. on a PlayStation 5 and you know, he's like he's a gamer.

That's what's going. He looks like a gamer. You know, Mark, I need to make some YouTube income, you know, because I'm clearly not getting paid enough at Moody's. I got to be myself presentable. I'm just kidding. I'm just kidding. I'm just kidding. No, but I think, you know,

but I think, you know, with PlayStation 5, right? So it's the same thing. So they basically had so much demand, far more, in fact, than they had forecasted, which kind of brings to light the importance of the work that we do. And so they've had several months, basically, where they had demand where we're not, you know, it was just not getting met because they just had no chips. So what they've done is they've more than doubled their normal order, right? So this is basically what people are doing in anticipation, right, of what these geopolitical tensions can do.

So I think the U.S.-China tensions, they still matter, you know, particularly for Taiwan, right? I mean, because that's such a huge, you know, it's such a huge kind of manufacturing hub. But yeah, I would say that it's more maybe sort of what happened after and the lessons that we learned from that. You know, there's a classic human behavior around hoarding, right? As soon as there's a whiff that you're going to have trouble getting something, people hoard and then you have a problem. I can remember at a Moody's conference, you know, everyone's getting breakfast and someone says, oh, I think we're running out of coffee. And, of course, everyone starts pouring all the coffee. And we run out of coffee, you know, very rapidly.

It was like a run-on coffee. So I'm sure this sounds like what's happened in the- The toilet paper shortage during the pandemic. Toilet paper. And by the way, I am fully stocked. My wife is like all over that. You know, there's never going to be. If you've got anybody wants, of course, I might charge you a price for it.

But, you know, I've got toilet paper. Hey, so two quick things, Tim. First, what was the first thing? Oh, first thing is, so how is this going to get resolved? Is it, are we seeing any progress here in resolving these supply chain issues? I mean, what are, what's, generally things happen on the demand side. You see higher prices, so people kind of adjust and try to, you know, switch to something else, although you just articulated that's not so easy in the chip industry.

You see, then you see more investment, you know, people, existing plans figure out new ways to go from 26 weeks, let's say, to 20, 21 weeks to kind of speed things up. Are you observing any of that happening? Is that happening? Both, both. Yeah, you're right on. So I think in terms of prices, right? So TSM is going to raise prices by as much as 20% for some of its, you know, some of its chips, actually more on the lower end of things, because those have traditionally been cheaper. And you're also seeing, like, China, in fact, like basically find three of its chip makers almost half a million dollars for what it's called abnormal price practices, basically trying to keep these prices low, artificially low.

And also I think we're going to see a lot of pass-through, right? I think we're going to see, you know, laptop prices go up. We've already seen vehicle prices go up significantly. Average vehicle prices in August were up $8,200, which is crazy from a couple years ago. So I think the price mechanism is certainly at work. I think in terms of inventories and in terms of adjustments, a lot of companies have been doing that. Tesla, in fact, is famous for trying to cut out the middleman.

So what they've tried to do is they've tried to have sort of a more direct relationship with the actual chip makers. This is very difficult, obviously, because, you know, a lot of production processes are kind of, you're kind of, you kind of inherit them, right? So you, you know, you kind of already know, oh, this car part I'm going to get from this guy, you know, this, you know, electronic unit I'm going to get from this other guy. And they're trying to do, you know, sort of, they're trying to cut that out so that they have

more direct access. But that's not something that, you know, all, all consumers and suppliers can do, right? So, so there's some, there's some movement to try to, to try to, you know, make it more efficient. But I think in the short run, it's going to be very difficult to kind of really get around it. I think the hope really is that the Delta gets more controlled. And we're seeing that in some of these places, right? So in Japan, I think numbers are coming down. You know, in fact, even Malaysia has now come down from all-time highs. So we are seeing some progress there. And obviously, if that, you know, works out, then, you know, we'll be closer back to normal. Okay. Well, we could have had a podcast just on the chip industry.

I feel like I haven't really been able to ask all my questions. I do want to save your forecast, though, because I know, you know, as I said, I'd like to know what, in terms of timing, when you think some of these things will start to iron themselves out to a point where it's not disruptive to the economy, to the vehicle industry or any other industry. But we'll come back to that, you know, at the end. Okay. So let's, let's pivot. And we have a choice. We can either go with Jesse and talk about copper, completely. commodity prices or we can go with Todd and lumber and building material prices.

Anybody want to go first or do I need to, should I pick? Your podcast. My podcast. Actually, Ryan, what do you think? Let's go, let's go with Todd. Todd, okay. Todd, everyone's always talking about lumber prices. I know.

And actually, that could be a good case study here for the future of, you know, how this is all going to play out. So I don't know, Todd. I mean, it seems to me, we do a lot of work with folks in the housing, multifamily commercial real estate industries. And, you know, whomever I talk to, you know, they're talking about shortages of something else that matters to them. Like, for example, I was at a function in Southern California. And I was talking to this multifamily developer, a very successful developer, mostly in the West in California. And he was telling me, and he builds a lot of affordable rental, you know, multifamily,

which is obviously incredibly short supply rents are screamingly higher, you know, across the country, particularly for affordable rental, for rental out of necessity. And he was telling, and he does a lot of so-called LI-tech, you know, rental. This is a, lie-tech is a low-income housing tax credit, you know, that is a subsidy to get builders to build more housing for lower income households at lower rent points. And he was telling me he's not, he's got projects, but he can't actually, and he won't actually begin them because he doesn't know when he's going to get the delivery of appliances. So, you know, toaster ovens, I guess.

I don't know. That's, that's Tim's issue again, because a lot of them are chips. Oh, chips. Chips, right. It all goes back to Tim. Damn, Tim. Because, you know, my oven now is smart. Yeah, there you go.

So, yeah. And that's part of the issue. But then not only are there the chip issues with that part, there's also the fact that, you know, all the ships are stuck in port waiting to get unloaded because of the backup and kind of the global supply chains overall. So that's part of it. it's kind of been a rolling a rolling calamity of what is going to be in shortage for the house building industry and that's actually where it's a little hard to say in some regards what was the impact of lumber because i would actually argue that i'm going to spoil the punchline already from a lumber standpoint things have kind of i don't want to say they've come

completely to normal because we're still, I think, up 61.6%. I have that statistic handling nearby from two years ago price-wise from 916, 2019. So lumber prices are still elevated to where they were two years ago, but they're actually down from where they were last year. And as I mentioned with that $1,076 at the beginning, with my stat, we're actually down almost 65% from the peak in May. So lumber prices have definitely come down pretty drastically. The appliances have always been an issue and still are an issue.

That's kind of similar to the couch and furnishing. Of course, that's not really the home builder's issue. That's the home buyer's issues. But yeah, that's still very much there. And from the end, yeah. I was going to say, so going back, I guess, well, let's pick on lumber a little bit because that seemed to be the first kind of major product that, at least in my mind, it came to the forward with regard to global supply chain issues.

It was well over a year ago when we started to see labor, excuse me, lumber shortages. And as you say, things seem. to be kind of normalized. They're not normal. We're not back to normal. We've got a ways to go there, but they have been normalizing. So if you go back to the beginning when the supply issues began to manifest, that, that too was in part increase in demand, right? The housing market navigated the pandemic incredibly well for lots of different reasons we've talked about on previous podcast, obviously low, record low mortgage rates being first among the reasons why. But we saw this.

Demographic and shift in, yeah, and shift in preferences. Surgeon, yeah, shift in preferences because people, you know, weren't traveling. So they, you know, said, I want, and they wanted to get out of the big cities where they were renting and out into the suburbs. So we saw a lot of home improvement because people were sitting on their backdecks like me and, you know, investing in their back deck in their homes. and then on the supply side of the market, explain what happened there. Why wasn't the industry able to kind of ramp things up to meet that increase in demand?

So, of course, the industry at first really expected that just that demand was going to just fall out. And so the industry actually shut down. And they weren't really producing the lumber that was needed. And only say they were looking at our forecast. Our forecast was saying this industry is going to have a lot of housing is going to have a lot of problems. So they shut down and say, oh, Moody's is saying, hey, you know, this is going to be a problem. Actually, isn't that your forecast, Todd? For the record, that was right when I got transferred.

And so I'm going to, I'm just going to say that's more forecast. It's still your forecast. Jeez, Louise. So you're saying your bum forecast causing you. entire housing industry, lumber industry kind of shut down, turn off all the lights, and all of a sudden they go, oh my gosh, there's like, people are knocking on our door saying, where's the lumber? Is that what you're saying? It's all my fault. Oh, I knew. So, so yes, the lumber industry basically, I mean, they had the shutdowns. Like everyone,

when the economy shut down, everyone thought that the, you know, the sky was falling. And everything went down. And so no one really knew what to expect. I don't think you would have said in February of 2020 that that would have been the case. And so basically they shut down production. And actually overall, in the end, production was actually up in 2020 for lumber for the entire year To be specific, when you say lumber, you mean sawmills, right? We're talking about sawmills here. So timber is you grow a tree and that goes to the sawmill. Timber's been flat.

Sawmills are the bottleneck. And so sawmills are where all of the money is being made. And so the sawmills had a great year last year. But the home builders, not so much. Well, the home builders had a good year, too. Well, let's fast forward. Fast forward. Okay, so now we have these severe shortages.

What happened? So how is it that things are getting resolved? So what's the dynamics in the market that caused things to start normalizing? So one, after kind of realizing their error and prices started increasing, lumber mills did basically start going as full out capacity-wise as they could. There were some things that kind of slowed them down. Generally, they're rural. Some of them had problems finding labor, kind of the common issue.

But they were basically running at as full capacity as they could, as quickly as they could, and have been more or less running at full capacity since. In Canada, just in the last month, some of the sawmills have actually started running below full capacity. Oh, is that right? Oh, really. Yeah, in at least British Columbia, their break-even point is higher than the American break-even point. So some sawmills in British Columbia have actually, I don't want to say idle production, but they've lowered production. Got it.

I guess the U.S. tariffs on Canadian lumber might be one reason for that. I think that's breaking even price points higher. I think that's part of it. It's also just with Canada, the different provinces have different like fee structures for cutting. Right. Because basically the whole tariff thing is that in Canada, most of the land where the trees are cut is, is owned by the government. Whereas in the United States, most of it's owned by private companies. or is privately owned.

And so the argument is that the Canadian suppliers are overly subsidized by the government. And I think it just depends on what province you're in as to kind of what those prices look like. Okay. Okay. So the sawmills kind of turned back the lights on a little bit of delay because of labor supply and other issues, but they kind of iron that out. So now where they're producing flat out, I guess demand is moderated a little bit. too in response to the higher prices.

So you've seen people kind of bulk at, you know, the building their back deck out another five yards because it's incredibly expensive to do. Home builders have actually kind of pulled it in a little bit too because of the high lumber and other building material costs. So there's been a demand side response to supply rights fronts. And correct me if I'm wrong, but the other aspect of this, which is interesting and has played out in other markets as well, there's some speculation going on here too, right? I mean, lumber is in a sense a financial market. And because there was all these shortages, you saw people kind of speculate in lumber

and that drove up the price. And of course, once it became clear that the supply demand dynamics were shifting in the other direction, all that speculative demand has gotten wrung out and that's caused prices to come in. Is that a fair characterization of what's going on or did I get that wrong?

I have seen the speculation. It's hard to, it's hard to tease that out versus like there was hoarding because a lot of home builders are, you know, if you can buy it, you just say, yes, I want it. Partly because there were delays and even getting it, you know, getting lumber. And so there was some hoarding, I think going on in the industry also. And I think it's kind of hard to tease out exactly what that is. I'm making a different point. There might be some hoarding that's. You're saying physical hoarding, right? Physical hoarding of... Right. I'm asking about the financial, you know, kind of financial spec. Ryan, you're shaking your head up and down. Yeah, I'm with you on this one.

I think there was definitely some speculation. I mean, we could do some work around it, but to tease out the exact effect, but I think there was some clear evidence of speculation. And that is, that's one of the reasons why prices rose so sharply, we kind of went parabolic there for a while, and that's why they've come crashing back down. That's just, to be frank. There are absolutely anecdotes about that. There are absolutely anecdotes about that, but I haven't seen,

I haven't seen kind of any smoking guns is exactly how much. Well, there never is. Well, yeah. With investors, they're not going to leave a smoking gun, my friend. You know, you got to piece it all together. Yeah. Okay. And so, so tell me, pre-pandemic, what was the kind of the benchmark lumber price?

probably it would be roughly I guess the the three to high three hundreds roughly 400 300 what and what is that for I believe it is board feet

1,000 board feet and then 1,000 board feet and then what was the peak the peak was 1,670.5 for close that Roughly speaking, when was that? That was May 7th of the show. May 7th. And what are we are today on on price? We closed yesterday at 5009, basically 594. Okay. So we're within spitting distance of

pre-pandemic. We're not quite there that, but we're spitting distance. Yeah. I mean, I'd say, well, we're still up. I mean, about 60% from two years ago because it was like 367 two years ago. Okay. Yeah. It feels like we're in spitting distance, but you're saying it's, you know, still pretty high. Yeah. And that 590 is a little bit misleading because we had contract expiration yesterday. So we shifted from the September contract to November. So you look at late September when we're still in that September contract.

We're close to, we're below 500. We're below 500. Okay. Yeah. Okay. So we'll get back down there. We'll get back down there. So is that arc of pricing in the dynamic that generates that arc playing out across all building materials?

appliances or or not? So, no. Basically, the new kind of issues is, so I think steel is up year to date 80% building paper and. So just for the listener, Todd's looking over at his screen because he knows that I want precision down to the third significant digit, but don't worry about that, Todd. Probably speaking, yeah. So I mean, basically NHB has really laid out. out just that year. National Circus of Homebuilders, yeah. Yes, sorry. That basically everything is up for their expenses.

Asphal, public water, plastic pipe for water, fertilizer for the lawns, veneer. So the other wood products are up. And actually, they've been a little more sticky. So the plywood, they're all related to that. upper lumber price, but some of the hardwoods and other things, they still have some of their own dynamics. They kind of move together, but they will kind of be a little, yeah. Now, the other thing is, is, okay, go ahead, sorry. Well, I was just going to say is that even with the lumber price is going down so much, the contractors aren't paying that futures price. They're still paying a higher

price than what we're saying, because on the way down, the prices are sticky. because the wholesalers don't want to sell at a loss. And so they hold it back a little bit more. And so there's still some elevated prices even for most home builders. Plus, when you buy it versus when you have it today. So the dynamics that are in play in the lumber industry are playing out in other building materials, but in varying degrees depends on the material. Yeah, well, and I mean, the other thing is I would say that I don't, you're not getting the same spikes.

You're, I mean, steel is one where obviously that just industry wide, the home building or well, home building or, you know, multifamily, probably more for steel. They're, they're small part because industry wide or, you know, worldwide, we use a lot of steel for for other part, for other things like cars and whatnot. Yeah. No. All right. Well, I'm going to come back to your forecast on, we're going to use lumber as the benchmark, you know, when we're going to normalize. So before we go on, I have a policy question for you. Why don't you think that for you?

For me, Mark? Yes, Mark Zandy. Any other marks here? No, I thought maybe Todd. Go ahead. Far away. I'm good at policy. But I was curious.

Why didn't the Biden administration end the tariff on Canadian software lumber? Well, there was a lot of pressure on them to do that, right? I just think that that has all other kinds of storylines and complications and political fallout. I don't know. It's a pretty complicated mess. So you might have created more havoc than it was worth, you know. And at the end of the day, the market seems to be. who adjusted pretty quickly even without the tariffs.

I mean, I'm no fan of the tariffs. You know, I would have gone there immediately, but, you know, given all the political issues involved, I'm sure, and many things that I don't understand and none of us may understand, you know, because there's a lot of other dynamics here. They didn't do it, but that's a good, that's a good question, good question. So let me have a crack at out if you don't mind. Yeah, sure. Fire away.

So my alternate stat for today was going to be 18.32%. And that's actually the recommended tariff from the Department of Commerce for what the lumber price should go to on Canadian lumber. It's currently at 8.99%, which was lowered by the Trump administration at the beginning of the year, from 20.2%, which had been what they did in 20. what the Trump administration put on in 2017. So the lumber trade issue has been going on since Reagan. There's been five, I believe, yeah, five major lumber deals. The last one I think ended, I wanna say 2015.

And then there was like a grace period of like a year where it kind of stuck. There's kind of broader trade negotiation issues, I think probably also at stake here where it's probably preferable to have a broader trade agreement on this than to just kind of keep fighting it up or down. Yeah, that sounds right to me. There's a lot of moving parts here. Okay, so I think we need to move on. The podcast is getting a little long in the tooth here.

And Jesse, you probably should have volunteered to go after Tim. So you're going to get a little short shrifted here. All right. Sorry about that. I apologize. I'll be brief. It's actually well past lunchtime, so here in the East Coast. So, you know, we're going to have to move a little long here.

And I still have to get forecast from you guys on, you know, how this is all going to play out. So copper. What's going on in the copper market? As Ryan noted early on, that's been one of my favorite statistics for gauging the strength of the global economy and, you know, the potential for inflationary pressure is developing. What's going on in the copper market? Why? Provide a little context. You know, where is, where's copper prices typically?

Where is it now? What does it mean? And why are we here? All right. Well, I kind of elbowed my way on here because we don't really have a shortage. in global copper markets right now. But I do have... Are you kidding me?

Yeah, I just kind of pushed my way. I didn't get on this podcast. Oh, my gosh. Through the back door, you know, did a little extra easy analysis for Ryan this week, you know, a little favoritism. So anyway, to be brief, the message I have to bring,

I think is a really important one. And it's that this balance is really fragile and it's something that we need to pay attention to. So the statistic I chose, which was 15%, you know, copper prices up year to date, that compares to just 10% for the broader index of, you know, commodities, whether you look at Bloomberg's index or the CRB, you know, metals, ag, oil, the whole basket. Copper's kind of in this different class because supplies been very tight over the past year related to various difficulties in bringing on new production in South America.

Okay. So bringing on new. So it's not that the industry has been disrupted by the pandemic or other events. I mean, clearly demand is up, right? Because copper goes into lots of stuff, too, just like, you know, chips and lumber. So demand is picked up. And, of course, the home building industry drives a lot of demand for copper. And the supply side has just not been able to keep up with that.

But it's not because of any pandemic-related supply distortions. Is that right? Yeah, I mean, in part, it's the classic commodity cycle that we were talking before, you know, periods of underinvestment, followed by periods of high prices and the supply side catching up. And, you know, in comparison to lumber or semiconductor fabs, like bringing new mines on is a multi-year process. So we have a market that, you know, the way this plays out is, you know, there's been new investment this year. We're going to have new investment in our big producers, which are Chile, Peru, and to some extent, producers in Africa. But it's a delicate balance.

Copper prices spiked. I think you guys talked about it when Chilean miners went on strike early in August. And we're on an edge really where anything that happens in South America, whether it's labor-related, a lot of, you know, just political turmoil right now, sort of any false step throws us, you know, throws a wrench in global supply genes, a huge copper wrench that we're going to have a hard time taking out. Yeah. I mean, now I remember why I wanted you on, because embedded in the mess that's been created by the pandemic to global supply change, which is idiosyncratic, obviously, to the current period.

This is, you know, very unusual, obviously. But embedded in that is this kind of classic kind of cycle that exists in particularly commodity markets, agriculture. and metals and even the energy markets, where what happens is demand picks up coming out of the recession. The supply side of these markets can't respond quickly enough because the mines have been turned down or turned off. The oil platforms have been fallowed. To get them back up and running takes a bit of time.

And in many cases, there's been underage. investment, you know, through the recession, the preceding recession. And the result is you get these. And then, of course, you have the financial accelerator that I talked about in the context of lumber, where you have people kind of speculators jumping in and speculating on price. And so all that comes together and creates this kind of classic commodity cycle. But that augurs well going forward, right, at least if you're not a producer of commodities, but a consumer of commodities, because, you know, demand starts to moderate because of the higher prices. And because of the higher prices, the supply side of these markets kick into high gear because they can make a boatload of money. And then

you see these prices come back in. And so we would expect copper prices to kind of roll over steel prices, ag prices, energy prices, and kind of moderate as we move forward here. Is that kind of sort of roughly right? Yeah. On the nose, the risk is, and this is the original stat that I had run by Ryan. The number is 40%. That's the share of global copper production in South America, mostly Chile and Peru, a little bit in Brazil. And, you know, just the pandemic has really amped up underlying political turmoil in Latin America. You know, countries that are rewriting their constitution, introducing new tax regimes for the mining industry. And our baseline is, you know, not a major shift, but we just don't know. There's a populist undercurrent across the region.

And, you know, this is the reason why, you know, I'm really concerned about copper markets moving forward. I mean, it's in our baseline, we're going to have demand and supply balance out. And like you said, moderation and prices, but there's certainly plenty of risk involved. Oh, okay. So you're saying, given the political instability throughout all of Latin America, and that's pretty obviously from Bolsonaro in Brazil and, you know, pick your country. There's, you know, issues, that that could be disruptive to investment that's necessary for the price moderation that we expect. It may not happen. If it doesn't happen, it might be because of this political uncertainty. Exactly. Got it. Okay. All right. Okay. So very informative, very useful. So let's end the conversation with a bit of a forecast. And I'll begin with you, Jesse, because we're on on on you. We have, right, four buck 30 for, uh, for a pound of, is a pound? Yeah, it's a pound. Yeah, a dollar per pound. Yeah. Pound of copper. I just got my units confused. And typically it's three bucks. That's what it is on average through the cycle. Uh, two bucks is pretty low. That's kind of recessionary where we, yeah, that was our pandemic low.

The shutdowns on the pandemic. Yeah. Okay, so we're four buck 30. When do we get back to three bucks? Oof. Uh, in our forecast, not for some time. Um, we actually have prices trending higher over the next 10 years and implicit in that assumption. So not trending higher. We kind of return to, wait, wait, wait, wait, wait, wait, wait, wait, wait, we're at four bucks 30. Are we're not going back to $3? No, we don't quite get there. We hit 3-4, 3-2 in 2023, and then we start to tip back up again. Okay. All right. Roughly speaking, we get back to 3 and when? Yeah, 3. Yeah, and the next year into 2023. Okay, so that's the horizon I'm focused on here. Yeah. Because, you know, obviously longer run than, you know, there's the general rate of inflation, all kinds of stuff. But we get back to roughly $3 or close to typical.

by mid-20203, did you say? Yeah, even early in 2020. Early 20- so 18 months from now, you're saying? Yeah, yeah. Okay, okay, fair enough. Okay, that feels right to me. Okay, good. Better be right, because that's our forecast, so sounds good.

All right, very good. We're working backwards here. Todd, lumber prices, that's been our poster child for all this. we were at $350,400 a thousand board feet, got to a peak of 1,600. I think you said we're back now down to about 500, let's say, give or take, depending on the contract. When do we get back to $35,400? I don't think we're going to get back down there, at least not any time soon. But that's not to say that we're going to have a huge spike up, but just demographics and home building.

No, no, no, no. You're doing the same thing, Jesse is. I don't know. No, no. I want to know. I'm not explaining it enough. Yeah, over the next 12, 18, 24 months, are we going to be less than 500 bucks and where is it going to be, you know, over the next 12, 18, 24 months? I will say, so one, it's a little closer to 600. I would say probably closer to 700 over the next 12 months just because of home building demand. because we're so critically short on new homes. As much as I know inventory has creeped up on new homes, I think it's like six or seven months now, 6.8, I think. We still need more housing. So I don't think that we're going to see enough of a debt.

Even with the supply increases that are coming, because we know sawmill investment is picked up dramatically. We're going to see a lot of you, sawmills, you're saying that demand is going to keep up with that. And so prices are not going down from where they are today. Yes, because I think sawmills will idle a little bit even before. What about other building material prices? I mean, steel, aluminum appliances.

Do you feel the same way? Yeah, I mean, well, think about what else is competing with them. I mean, everything, like chips are going to go into the appliances. So appliances aren't going to go down. So steel, I mean, we need, demand is up for everything. So I would say unless you think we're going to see all of a sudden people stop using less steel or start using less steel. Well, no, steel, I mean, the level of stuff we're buying is very, still very elevated. You know, much higher than where you would have expected to be based on pre-pandemic trend.

So the answer is yes. Not at home building. Home building, that's all different ballgame, but retailing in general. general. I mean, stuff, goods, you know, what we retail sales, though they're going to, they're going to, I don't know how they moderate. I don't think they, you know, fall off a cliff, but, you know, they are going to moderate. But interesting. That's interesting. Ryan, do you buy that, what he's saying? No, I think they're going to moderate. Yeah, they're going to moderate. Particularly for other commodity prices, construction costs, you know, if you look at the industrial production,

So the output for these industries that have these high prices right now, it's increasing very, very quickly. Capacity utilization is climbing. So I think the supply response may overshoot, and that should put some down my pressure on prices. It feels like we had a bet here. You know, we're going to take a, all right, record this for history. We're going to have a bet. Ryan, what is the current lumber price, the benchmark price? Todd just said 600.

Is it 500 or $590? Yes, $590. And that's the current contract. Yes, November. Okay. Well, I'll go with that, $600. So 18 months from now, we're going to have Todd back. And what do you think the price is going to be, Todd?

Quickly. $6.50. $6.50 higher. Okay, very good. Ryan? I'll go $500. I'll go $400. Write that down.

Write that down, baby. Jesse, you recorded that. in your 10 languages? Yeah. Yeah. All right. All right. Tim, you're up, man.

No wishy-washy stuff. You know, and you know the horizon, 18, 12, 18, 24 months. And we don't really have a benchmark chip price, but I don't know, however you want to characterize it. What is the world going to look like in the chip industry? Yeah. I'll say most optimistic scenario, second half of 2022 is the earliest that we see sort of you know, easing of the shortage for certain types of chips.

And what that means is basically lead times coming down from, you know, 26 weeks and over to something more like 10 weeks, which it has been in the past. But again, you know, I think, you know, we've spoken at length about sort of general trends, right, in terms of more and more appliances, as Todd mentioned, using chips, more and more electronic gadgets, you know, everything's becoming digitized, right? And as you said, Mark, at the top of the hour, right? I mean, it's digitization, right? I mean, this is kind of the way the world works now, right?

I mean, so I don't really think demand is going to fall at all. It's going to be a question of, you know, whether supply can meet that demand and whether, you know, sort of demand can make adjustments, right, along the lines of what we mentioned earlier in terms of inventory management, in terms of making supply chain, supply chain is leaner, right, more efficient. But those things take time. So it's just, you know, and that forecast is my, most optimistic forecast. That's assuming no further delta spikes, you know, no geopolitical

tensions that would, you know, Tim, Tim, we're running along in the tooth here. I know, I know. I know. Give me your quickly, your baseline. What do you think? Not your most optimistic. Yeah, I would, I would say baseline. If I was playing it safe, I would say 2023. 2023. Okay. Okay. Very good. You know, this is a fantastic conversation. I wish I could go on with each of you, you know, we should probably do a separate podcast. This is a long podcast, this one here, because obviously we had a lot to say and we had a lot of people on, but hopefully the listener got a lot of it. I certainly did.

You know, I enjoyed it very much. And I'm going to put a quick end to it, but please, if you have other topics you'd like us to address, go to economy.com inside economics and give us your your, your, your, your suggestion, we take that to heart. And we always appreciate any ratings that you provide to us. So thank you for all this. I guess the takeaway for me is that this normalization in global supply chains, pricing and availability and inventory and all the things that are impacted by the supply chain issues is a process. And it's going to take some time. It's not going to be tomorrow. it's not going to be next month.

It's not going to be next quarter. Obviously, it depends on the product we're talking about. Each one is running on their own dynamic and has their own story. But this could be something that's going to play out, at least over the next year, probably over the next two years. Something like that. In the case of some things, there's no going back here, you know, prices are going up. Is that everyone shaking their heads reasonably up and down?

Yeah, I agree. Todd doesn't agree. No, you do agree. Okay. All right. Sort of. Not really. Okay.

Well, that's great. Because we're going to have you back in 18 months from now. We're going to see who wins that bet, right, Ryan? Ryan never forgets a bet. No, I don't. He does not. I'm going to mark it down. All right.

Thank you so much. Take care now. See you next week.