Juggling Dynamite

One of the most historically informative capital risk readings, the S&P 500 Shiller price to earnings ratio (shown below since 1870), topped 38 this month, far beyond the 1929 market top, and second only to the fleeting 44 clocked at the top of the 2000 dot-bomb hysteria.

Prevailing incentives and policies are an incredible mess to behold, but there is nothing new in financial markets.  Speculative episodes are as old as time, and no asset bubbles have ever been corrected by going sideways.  While we can’t predict when bubbles will burst, thinking people can benefit from the question that matters most:  is this market cycle nearer to an end or a beginning?

Jesse Felder revisited this yesterday with a look at the timeless chart of investor sentiment:

Where are we in the market cycle? pic.twitter.com/sxfWNvTHvc

— Jesse Felder (@jessefelder) October 13, 2021

After reviewing recent sentiment indicators here, he comes to this:

“Perhaps more importantly, it also suggests we now find ourselves in the October 2000 stage of the market cycle and there are some important similarities between then and now to support this thesis. Back then, it was becoming increasingly clear that March of that year represented the blow-off in sentiment. Stocks managed to hold up for another five or six months before officially rolling over into the bear market that saw dozens and dozens of the most popular stocks in the market fall 90% or more”.

An 80%+ loss cycle followed both the 1929 and 2000 stock valuation peaks.  It’s important to consider how a loss cycle of that magnitude or even a run-of-the-mill -25 to -50% decline would impact our life savings and retirement plans. Proactive defence is the rational course.  Financial manias end with a bang, not a whimper.

Consumers increased their spending on durable goods (which last more than three years) by 40% between March 2020 and March 2021, as much as over the previous four years. Producers and suppliers were understandably unprepared, which led to shortages, backlogs, and price spikes for many goods.  In the last few months, however, as orders have been filling and emergency income benefits come to an end, surveyed intentions to buy more consumer goods fell to 40-year lows.

Meanwhile, the supply chain is still ramping up.  The west coast ports of Los Angeles and Long Beach, California, account for 40% of all shipping containers entering the United States.  As of Monday, there were 62 ships berthed at the two ports and 81 waiting to dock and unload, according to the Marine Exchange of Southern California.

To unload goods faster, yesterday, port operators, dockers and the largest shipping companies agreed to work non-stop around the clock, and this will help fill orders and rebuild inventories.  See Aim to Ease Supply Chain Bottlenecks with LA Port going 24/7.

Contrary to the consensus hysteria about insatiable demand and runaway prices, the pandemic-ignited consumption bulge is ending just as supply is rebuilding.  Since May, the downturn in key commodity prices like lumber, copper, and iron ore support other evidence that this global manufacturing cycle peaked last spring.

Although stockpiling and financial speculation can create price pressure for longer, the gravity of receding demand should continue to weigh on the price of most commodities and goods in the coming months; this won’t be inflationary.

A couple of weeks ago, we met friends for dinner indoors at a well-established, mid-range bar-restaurant that had been busy for years before the pandemic.  We made a reservation, presented proof of vaccination as required, and were one of just three tables occupied at 730 pm on a Saturday night.  We felt for the staff and management.

Despite 72% of Canadians being fully vaccinated, the economic costs of the pandemic are ongoing.  Even restaurants that cater to the wealthiest patrons are in trouble; see Canada’s High-End Restaurants Struggle To Survive:

“Fine dining is going to completely change. It’s going to become casual fine dining. … I just had a management meeting, saying we have to be more accessible to people,” Mr. Vij said. “Allow them to come to the restaurant maybe once a month instead of every three months, or we won’t survive.”

It’s not just that the pandemic has reduced traffic and increased costs.  It has catalyzed change in consumer behaviours.  More people have learned that cooking at home can be rewarding and healthier, physically and financially.  Some 20% in recent surveys say they are not planning to return to their previous eating out frequency.

The hard truth is that some of this is a necessary downsizing of a restaurant sector that became widely over-built during the credit bubble of the past decade. The impacts continue for employees and suppliers as well as landlords and commercial real estate.