As US consumers venture out, lumber prices are heading back to earth. Prices for the wood have pulled back sharply from astronomical heights in recent weeks as homeowners have redirected their spending from building decks and replacing flooring to going out to eat, drink and shop.
Lumber prices have fallen almost 50% per cent to $875 per thousand board feet from a peak of $1,686 in early May, reflecting a sharper than expected pullback in renovation projects. “As the economy has opened back up, people are doing less around their homes,” said Chris McIver, senior vice-president of marketing and corporate development at West Fraser, the world’s largest lumber producer.
Kevin Mason, managing director of ERA Forest Products Research, said media reports of soaring prices had caused Americans to hold off buying lumber and pause their DIY projects. “It’s more demand deferral than destruction,” he said.
The fall in prices has given some economists greater confidence that a burst of inflation will soon pass. Yet prices remain well in excess of the previous 2018 record of $651 per thousand board feet and about three times the historical price average. “People want to look at lumber as this inflationary metric — we’ve pulled back but we’re still some monstrous number above our average price level,” said Greg Kuta, president of broker Westline Capital Strategies. “From an inflationary standpoint, it still screams pressure . . . The inflation genie is out and you’re not going to rein it back in.”
In spite of the cooling off in cost, lumber brokers expect lofty prices for years. That is mainly down to strong demand for new homes after decades of under building and lower mortgage rates during the pandemic unlocked a generation of millennial property buyers.
On top of equipment and contractor supply constraints, forestry regions face issues from labour shortages in the south of the US to after effects from a mountain pine beetle epidemic in British Columbia.
Lumber prices in the futures market are down more than 45 percent from their peak, slipping below $1,000 for the first time in months. That’s still high between 2009 and 2019, prices averaged less than $400 per thousand board feet. The sell-off has been gaining momentum over the last few weeks. The price has fallen in 11 of the last 12 trading sessions, including a 0.5 percent drop to settle at $900.80 on Friday, according to FactSet data.
Cathie Wood of Ark Invest said during the past six weeks, lumber prices have dropped more than 46% from $1,686 to $897.90 per thousand board feet while copper prices have dropped roughly 12.78% from $4.77 per pound to $4.16.2
We believe oil prices will not be far behind, despite the significant cutbacks in energy-related capital spending, particularly if drivers in the ride-sharing space take advantage of the lower total cost of EV ownership.
FT Timber Prices Fall As US Consumers Swap DIY for Going Out
Harry Dempsey 21 June 2021
Cathie Wood Ark Invest
Last week, the electric vehicle company Landstown, warned it may not have enough cash to survive the next 12 months if it doesn’t raise more funding. CEO Steve Burns and CFO Julio Rodriguez then resigned after an investigation found the company had overstated actual customer demand.
Then a few days after all these events happened, the company’s president Richard Schmidt said the company had enough binding orders to take production through the end of next year. Except they weren’t binding orders, the company later had to clarify in a Securities and Exchange Commission filing.
And as it turns out, several executives at the business that went public via merger with a special purpose acquisition company sold their stock shortly before a financial report, with Chuan “John” Vo, who runs the company’s propulsion division, selling 99.3% of his vested equity in February, per the Wall Street Journal.
Certainly Lordstown’s snafus and failures are a sign that many companies that should have stayed private longer and scaled more slowly. They are coming to market before they were ready via a merger with SPACs or SPIVs. Which also means its story is one that will become additional ammo for the SEC to take a harder look at instilling more controls around how such companies report projections.
But what remains more bizarre in all this is perhaps how investors are reacting to revelations that Lordstown misstated demand: Shares of Lordstown are down, yes, but still maintain a market cap of $1.9 billion. The company was valued at $1.6 billion pro forma when its agreement to merge with a SPAC was first announced last year.
This from Term Sheet by Lucinda Shen The bizarre story of Landsdown Motors
1 Theory …
A supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained …
2 Modern Monetary Theory …
MMT suggests sovereign nations with their own fiat currency can print as much money as they need to because they cannot go broke or be insolvent … hence, for example, the US can sustain much larger deficits, than previous thought, without cause for concern.
3 Quantitative Easing …
Quantitative Easing (QE) is the monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity.
The central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets, lowering yield, increasing money supply and liquidity within the economy generally.
4 Modern Monetary Policy …
Quantitative Easing (QE) is the monetary policy whereby a central bank buys government bonds. The central bank implements quantitative easing by buying financial assets directly from the Government debt management office or issuing agent. The central bank acts as the “Buyer of Last Resort”. In the US the Fed is both the buyer and seller.
5 Dire Straits Economics : Money For Nothing Gilts for Free
In the UK, HM Treasury funds the government deficit by issuing gilts via the Debt Management Office. The Bank of England buys the gilts from the DMO. Any risk is underwritten by the Treasury. Any dividend or yield on the Gilts purchased by the Bank of England is remitted to the Treasury.
Of the £300 billion of gilts issues by the DMO in the current financial year, including roll overs, the Bank has purchased the majority (almost all) of the new issuance.
As the Governor of the Bank of England admitted this year, without central bank intervention, the Government would have had difficulty in getting the volume of gilts away. The government was confronted with a possible gilt strike.
6 One Man’s Asset is another man’s liability …
The liability owned by the Treasury, is an asset owned by the Bank of England. Both the Treasury and The Bank of England are owned by the British Government. At some stage in the future, a process of “intergroup consolidation” will ensure the long term debt, just like old soldiers, will just fade away.
7 A Critique
MMT is based on a rather quaint terminology about the “printing of money”. An increase in money supply should lead to an increase in inflation at some stage in the future if our economics 101 is correct. The velocity of circulation where MV = PT rules OK.
However, the inflation impact is mitigated. MMP funds government spending at a time of economic weakness. The output gap or rather the demand gap is generated as household spending and investment falls. Government spending is an endeavour to bridge that gap. The boost to output does not create an inflationary excess.
In any case, MMP has a slightly different impact. The impact of an increase in liquidity is exported into asset prices (and a deteriorating balance of payments deficit). As Andy Haldane Chief Economist at the Bank of England has stated, the process of QE has created “the greatest bond bubble in history.”
Asset prices rise, yields fall, the curve is distorted. The search for alpha pushes equities, property and alternative assets higher.
Logically the increase in liquidity should lead to currency weakness. However the Dollar, Sterling and the Euro are equally vulnerable to the process. Step up the renminbi as a “safe haven in a volatile world”. At some stage the money will move East. China is down-weighting Dollar exposure in its own international reserve portfolio.
[China eases rules, offering the renminbi as a safe haven against global volatility. South China Morning Post November 1st 2020.]
8 It’s all About Credibility …
In July 2020 Fitch Ratings revised its outlook on the US credit score to negative from stable, citing a “deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan.” “High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the epidemic” it said.
In October, Moody’s lowered the UK’s sovereign debt rating by one notch to Aa3 from Aa2.
Domestic and International institutions will take note of the down grade but will understand any increase in risk is underwritten by the central banks in North America, UK and Europe. The prospect of debt cancellation in the future will provide further support in part to the underlying values.
If MMT was so easy anyone could do it. It is not clear the Governments of Argentina or the Weimar republic would be offered such largesse.
9 So what’s the end game?
Trapped on Planet ZIRP, interest rates on the floor, yields flat, asset prices pushed higher, the search for yield continues. The process of MMP, Modern Monetary Policy, continues. Inflation will not be the end game. This is not MMT or QE, it is important to understand the subtle difference.
Dollar weakness, the Euro not really a plausible substitute, Sterling swinging in the Atlantic vortex. Money will move East. The renminbi will find favour as Washington disapproves.
Dr John Ashcroft The Saturday Economist 2nd November 2020
Message from Corey Sparling 31st October 2020
I'd like your opinion on something. I read a report this morning from one of our investment counselors here in Canada that went into some detail on Modern Monetary Theory. What I understand is that it supports the printing of dollars to keep the economy going, no matter the amount of deficit spending.
Central Banks then become the buyer of the ensuing debt to prevent austerity measures from being put into place, and it continues until inflation becomes "an issue" which who knows what that number will be until the time comes.
Sounds like the closest thing to a free lunch since I became a wealth advisor 25 years ago. But I feel like there has to be an end game, doesn't there? What are your thoughts?
The easing of many COVID-19 restrictions in line with the UK government roadmap, rapid roll-out of vaccines and the unleashing of pent-up demand means that the UK economy is poised for considerable economic growth over the summer. But this won’t be felt as strongly by those sectors still working under restrictions. More broadly, stagnant productivity and business investment remain a drag on the longer-term sustainability of economic growth.
UK GDP is set to bounce back to its pre-COVID level towards the end of 2021, a year earlier than the previous CBI forecast (in December 2020) expected.
The CBI is forecasting GDP growth of 8.2% this year, and 6.1% in 2022 (revised up from 6.0% and 5.2% in our previous forecast), following a historically large (-9.9%) fall in output over 2020.
Household spending is the linchpin of this recovery, driving just over a quarter of GDP growth in 2021, and 70% of growth in 2022. Consumer spending is bolstered by an improvement in real incomes, and households running down some of the excess savings built up over the last year.
The CBI now also expects a much lower peak in the unemployment rate (5.5% in Q3) than in December (7.3% in Q2 2021). This is in part due to the extension of the Job Retention Scheme into the autumn, the resilience of the labour market so far, and expectations of a much stronger economic recovery.
A temporary boost to government spending on tackling the virus is another significant contributor to growth this year, driving around half of the rise in GDP over 2021.
Business investment is also set to claw back some of its losses, spurred on by strong economic growth and rising confidence, reinforced by the super-deduction announced in March’s Budget. Business investment nonetheless remains 5% below its pre-Covid level at the end of 2022, reflecting both the scale of the decline seen over the crisis, and lingering uncertainty over the longer-term impact of COVID-19 on business models.
CBI Director-General, Tony Danker, said:
“There are really positive signs about the economic recovery ahead this year and next. The data clearly indicates that there is pent up demand and ambition across many sectors.
“The imperative now must be to seize the moment to channel this investment into the big drivers of long-term UK prosperity. That’s why it’s the right time for Government to come forward with far more detailed plans on everything from decarbonisation, to innovation to levelling up.
“Clearly this does not apply to the hardest hit sectors from the pandemic who even now face continued delays and genuine challenges to stay viable. Extending the commercial rent moratorium will help keep some firms’ heads above water, but the Government must also do the same on business rates relief.
“It would be devastating for hospitality, events or aviation businesses to fail on what we hope is the last leg of restrictions.”
Key forecast data
Jobs and household spending
The prices of commodities were falling sharply on Thursday, cutting into months of gains and weighing on equity markets, as China takes steps to cool off rising prices and the U.S. dollar strengthens.
The decline in commodities was widespread, with futures prices for palladium and platinum falling more than 11% and 7%, respectively, along with declines of nearly 6% for corn futures and 4.8% for contracts tied to copper. Oil prices were also down more than 1%.
Thursday’s move continued a slide that began earlier in the week, thanks in part to actions by Chinese regulators.A Chinese government agency announced a plan on Wednesday to release reserves of key metals, including copper and aluminum, according to Reuters. Officials in the country have also warned about speculation in financial markets in recent weeks.
“Base metals prices are melting as China’s State Council escalates its crackdown against commodity speculators and hoarders by investigating [state-owned enterprises]′ overseas positions and auditing futures firms to combat squeezed profit margins,” Daniel Ghali, TD Securities commodities strategist, said in a note. “While overseas positions are harder to police with warnings, this crackdown still has some bite.”
That rapid increase in prices may have made some of the commodities markets ripe for a quick pullback. Evercore ISI technical analyst Rick Ross said in a note on Thursday that copper appeared to be at its most “overbought” level since 2006.
The weakness for commodities rippled into the equity market on Thursday, taking a bite out of energy and mining stocks. “Rumors since Mar that CN’s State Reserve Bureau (SRB) will release reserves of non-ferrous metals to market came true on June 16. Coupled with Fed’s rate decision on Jun 17 (post strong May PPI) sent most new energy material stocks plummeting, down 5-10% overnight ...
Research published by the FCA estimates that 2.3 million adults now hold cryptoassets (up from 1.9 million last year). 78% of adults have now heard of cryptoassets, up from 73% in a year.
The consumer research shows that as holding cryptoassets has become more common attitudes to them have changed. 38% of crypto users regard them as a gamble (down from 47% last year), while increasing numbers see them as either a complement or alternative to mainstream investments.
By contrast, the level of overall understanding of cryptocurrencies is declining, suggesting that some people who have heard of crypto may not fully understand, with only 71% correctly identified the definition of cryptocurrency from a list of statements.
Enthusiasm for cryptoassets is growing with over half of crypto users saying they have had a positive experience so far and are likely to buy more (rising from 41% to 53%). Fewer people also regret having bought cryptocurrencies, down from 15% to 11%.
1 in 10 who had heard of cryptocurrency said they are aware of consumer warnings on the FCA website. Of these, 43% said they were discouraged from buying crypto. Most consumers recognise that crypto investments are not protected, although 12% of crypto users believe otherwise.
Sheldon Mills, FCA’s Executive Director, Consumers and Competition said: 'The research highlights increased interest in cryptoassets among UK customers. The market has continued to grow, and some investors have benefitted as prices have risen. However it is important for customers to understand that because these products are largely unregulated that if something goes wrong they are unlikely to have access to the FSCS or the Financial Ombudsman Service. If consumers invest in these types of products, they should be prepared to lose all their money.'
The research is the FCA’s fourth consumer research publication on cryptoassets ownership. It is part of the FCA’s strategy to develop its thinking on the potential harms and benefits to consumers from cryptoassets and help better understand consumers’ attitudes and patterns of use.
During that period the FCA issued further consumer warnings, stating that investing in cryptoassets is high risk and that investors should be prepared to lose all their money.
The FCA will continue working closely with HM Treasury and other regulators, including through the UK Cryptoasset Taskforce.
In 2013, the Fed said it would slow down the pace of Treasury bond purchases. Investors reacted to the move with a "taper tantrum". There was a sell off in fixed income bonds, yields increased, there was a correction in stocks and a move to inflation hedge with a hike in gold and commodity prices. In 2021, traders would add Bitcoin and other crypto to broaden the hedge. Gold miner ETFs would also find favour.
Certain stocks were beneficiaries in the move in 2013 including Micron, Amazon, General Motors and Nike. The threat of rising rates would normally be a signal growth is returning to the economy. Bank stocks would be beneficiaries of rising rates. The Gods of Wall Street have already made strong gains. Goldman Sachs, JP Morgan, Morgan Stanley are pushing new highs. More can be expected from Barclays, HSBC, Lloyds, Natwest and Virgin after some profit taking.
Our Empires of the Cloud will always find favor, despite the threat of regulatory intervention. Apple, Microsoft, Amazon, Google, and FB remain the dominant stocks in Cloud and AI. Our "Chips with everything" fund features Micron, Nvidia, AMD, AMSL, Intel, NXP, Samsung, Qualcomm, TSMC and Texas Instruments. You will have to wait for bargain day, it's time to average out. Consumer stocks and luxury goods would benefit but most investors have already made the move,.
This week, Federal Reserve officials signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March. The economy is recovering from the effects of the pandemic. Inflation is heating up. CPI inflation hit the 5% mark in May.
The Fed increased their forecasts for growth to 7% in 2021 and 3.3% in 2022. The reversion to trend at 1.8% is expected from 2024 onward. PCE inflation is expected to hit 3.5% this year slowing to 2.1% next. For the Fed, inflation is always and everywhere a transitory phenomenon. Unemployment is expected to slow to 4.5% this year and 3.8% next.
As for interest rates, the median projection is for rates to rise to 0.6% by the end of 2023 rising to 2.5% over the longer run.
Fed officials also discussed an eventual reduction, or tapering, of the central bank’s bond-buying program, Chairman Jerome Powell said in a press conference Wednesday. The timing of such a move remains uncertain. Central bank largesse may have to continue in the US and the UK, until the burden of borrowing falls within the capacity of the private sector.
Stocks and bonds fell after a statement from the Fed and Mr. Powell’s press conference. The Fed’s change in tone and new forecasts were “a wake-up call to the market” about the central bank’s likely response to higher inflation, said Phil Orlando, chief equity-market strategist at investment manager Federated Hermes Inc.
By the end of the week, the markets had pressed the snooze button. Inflation is always and everywhere a transitory phenomenon.
Contributions and References
WSJ Fed Pencils in earlier interest rate increase, most officials expect to raise rates by the end of 2023
|The Saturday Economist|
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.