May 11, 2021 | The Reentry

Fourteen months ago this pathetic blog said pandemics are temporary. They suck hard. Then they pass. None has ever been permanent. Just wait. Stay invested. Wear your mask. Chill.

This one’s now in the process of cresting and retreating. Vaccines 1, bug 0.

But back in March of 2020 nobody seriously thought Toronto would still be locked down in May of 2021, that the RCMP would manning roadblocks in BC or pastors would be handcuffed in Alberta for holding a service. Meanwhile most Canadians look like alpacas because all the damn barbers are closed.

This Covid thing has lasted so long that coming off it has created… issues. Government debt has gone off the cliff. House prices have inflated absurdly. Interest rates have crashed. Stock markets have soared. Millions have forgotten how to save, shower or wear pants. Downtown cores are ghost towns. Airports are empty. Small businesses are croaking. WFH companies, online retailers and the Big Tech guys have romped. Now we face questions about mandatory inoculations, vaccine passports and the return of WFW.

This week give s a case-in-point of the disruption faced as the virus retreats. Wall Street is moaning about a new Tech Wreck with the Nasdaq tanking. The problem? Investors see rapidly rising commodity prices as the global economy starts to reopen and inflation rekindles. That means nobody believes the CBs any more when they say interest rates will be suppressed for the next two years. Higher costs for raw materials and money means lower profits. And stocks respond.

The virus also did weird things to government. In Canada CERB funds flowed like the mighty Fraser River until there were billions stacking up in personal bank accounts. In the US spendy President Biden just sent a new round of $1,400 cheques to everyone. Household savings accounts in both countries are at the highest level in decades. Deficits in both have exploded. Biden has launched a new soak-the-rich plan to help pay for it.

Meanwhile government largesse has hit the labour market. There are currently 8.1 million open and unfilled jobs in the States – a new record. Fully 44% of small businesses report they can’t find enough people to work as the virus exits. The inevitable result will be higher wages offered. Inflation. Now combine that with today’s seriously-messed-up supply chain, insane prices for houses, lumber, puppies and Pelotons and you can see the problem. The guy renovating a duplex across the road form me just found out there’s a global shortage of heavy wire. He ordered two soaker tubs and has to wait 14 weeks. After thirty years of building stuff he is shocked at the price of plywood. Drywall. Tiles.

In other words, central bankers are losing it. An economy can run hot for only so long, until it melts. When a guy in Tofino pays $1 million above asking for a $1.4 million condo townhouse, or the Dow Jones index sets 24 all-time record highs in five months or a pretend-money coin with s Sheba Inu on it inflates 20,000% in twelve months or a collector pays $500,000 for the NFT of kid in front of a burning house in 2006, you know it. This is not a normal reentry.

Where is all this taking us?

Tech stocks seem to know. The post-Covid period (a few years, not months) will likely be characterized by swelling prices, a big spurt in consumer spending and seriously higher commodity prices. Wages will grow amid a labour shortage when restaurants reopen, planes fly again, vacations are a thing once more, you can shop for shoes and Justin gets his locks bobbed. Most of Canada’s GDPfter all, is comprised of the service sector – which was shuttered by Covid.

By the way, a reopening economy amid rising costs also means the 40% jump we’ve seen lately in corporate profits was no accident. As companies make more, P/E ratios decline. Suddenly an inflated stock market doesn’t look like a gorilla.

All this points to inflation – not hyperinflation (will never happen here), but a solid reading which will guarantee interest rates increase long before the late-2023 timetable you were given. Of course, higher money costs are the last thing needed when you’re $1.3 trillion in debt and spending $400 billion a year more than you earn – which is why 2022 will also be ushering in higher taxes in Canada.

More reasons to (a) lock in your mortgage, (b) take profits and (c) stuff your tax shelters.

Oh, and gas the car. More on that tomorrow.

Garth Turner May 11th, 2021

Posted In: The Greater Fool

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