Shortages: From Toilet Paper to Printer Ink Cartridges

Over the last year, we have highlighted the sometimes funny but always relevant sides of shortages — from toilet paper to printer ink cartridges and from guitars to airplane seats. Since the end of 2020, we have framed our views about inflation around long-term trends such as demographics and technology, as well as short-term trends stemming from supply chain disruptions. Along with higher commodity prices, challenges securing workers, and an uneven reopening of the economy, prices for goods and services have gone up this year.

Last week, April’s Consumer Price Index reading of 4.2% reignited these inflation fears and sparked a debate about the transitory nature of the data. Of course, transient does not mean one month. According to Bloomberg, close to 60% of the month-over-month increase came from five components — used cars, rental cars, lodging, airfares, and food away from home — that have little staying power.

As these supply shortages run up against the base effect of 2020 for comparison, the CPI will continue to run hot into the summer. The May CPI data comes out June 10.

One lesser talked about driver of this inflation story is the impact of government stimulus checks into consumers’ pockets. The chart below shows the magnitude of the U.S. Treasury cash held on the Federal Reserve’s balance sheet. Peaking almost a year ago at $1.83 trillion, this balance now stands around $940 billion.

That is a lot of money making its way to consumers to spend on restaurants, vacations, cars and even stocks. Some of these fiscal pressures should be alleviated as September comes around, when expanded unemployment benefits are set to expire and more school districts reopen, allowing for higher labor-force participation, especially for women. 

British economist John Maynard Keynes is the most well-known proponent of deficit spending as a form of economic stimulus. As government deficits increase, so should corporate profits. Michal Kalecki, a Polish economist who was a contemporary of Keynes identified this relationship between government budget deficits and corporate profits as the profit equation. While this mathematical equation does not mean government should run deficits at all points of the business cycle, it does highlight the potential impact of changes in the deficit on stock prices.

Ultimately, we may not know the answer to how much inflation we will get until it is in the rearview mirror. While we do not forecast a return to the ‘70s type of inflation (given the long-term deflationary pressures of demographics and technology), we are thinking a lot about protecting client portfolios in different ways. Our inflation framework has guided our portfolio allocation decisions regarding diversifying our core fixed income. Other asset classes such as real estate and commodities may merit being added to portfolios to complement this diversification.

If you have any questions or want to have a conversation about the market or your portfolio, please contact Liz, Ed, Fred, Scott, Tyler, or myself. Your Sendero team is ready to help. 

Best Regards,
Amary de Barros Conti
Partner | Vice President Investments