Forget the demand side, it’s the supply side that counts

Outlook: Today we get the US trade deficit, expected to be a small narrowing to $70.5 billion in August but if growth is better than we think, it should be higher. We also get the ISM non-manufacturing index, forecast down a bit to 60 in Sept from 61.7 in August.  And we have two Fed speakers.

Worth noting is the investment climate in the UK, which the CBI employers’ organization says is one of the worst among advanced economies. Not only are rising wage demands promoting inflation fear, productivity is falling and the various “interlocking” crises are contributing to it—labor shortages, high energy prices, supply chain disruptions.  the UK has one of the worst investment climates among advanced economies, hampering productivity growth as wage rises stoke inflation fears. The speaker was addressing the Conservative Party annual conference so consider the context, but he’s not wrong.

Not unrelated is the drop in UK auto sales by a whopping 1.01 million vehicles, or 37% from March and the lowest in more than two decades. The FT reports “registrations fell almost 35 per cent last month, the data released on Tuesday by the Society of Motor Manufacturers and Traders showed. September is typically the second busiest month of the year for the industry due to the second annual number plate change.

“Dealers reported 215,312 new vehicles registrations last month, 34 per cent down on September last year — when sales were also hit hard by the coronavirus lockdown — and an almost 45 per drop on the pre-pandemic 10-year average. The sales figure is the lowest since the “two-plate” system was introduced in 1999. The auto industry, facing with uncertainty around Brexit and hit hard by pandemic shutdowns and uncertainty, has struggled to meet pent-up demand as the economy reopened due to a global shortage of computer chips.”

In the US, we used to have a phrase “As goes General Motors, so goes the country.” It may be working again. Wolf Street notes that in the 2008-09 recession, drivers just kept their old cars and refused to buy new. Remember that two of the three big automakers filed for bankruptcy and had to be rescued by the federal government. “This time, the situation is so screwed up that it is hard to figure out what demand actually is. We only know that it exceeds supply. But supply has been thrown into total chaos by the semiconductor shortage that has triggered plant shutdowns globally.”

Yesterday Ford reported Sept “sales plunged 18% year-over-year to 156,614 units. Of them, 83,554 were pickup trucks and 70,260 were SUVs. It only sold 2,800 cars in September, having handed car production to Asian and European automakers, with the Mustangs and a handful of GTs being the only cars it still builds. It killed the rest of the car models.” And that’s the No. 1 car seller. Other makers had worse numbers, with Toyota sales down 22%, and General Motors, 33%.

The car data leads us to wonder whether the chip shortage of supply chain issues are not what we should be following—and projecting—as we contemplate inflation and therefore central bank policy actions. Forget the demand side, where the focus has been for decades. It’s the supply side that counts. And that is taking longer than we thought. See the CRB index and weep—up 38.95% since the start of the year.

As for what is happening in FX, most prices seem unrelated to economic developments, except maybe the CAD and oil (although as we have written over the years, that correlation is unreliable and this time the CAD gained less than it “should” have, given the oil price rise). We might say risk-off rules, looking at the Swiss franc chart, but then the dollar should not be so weak.

At a guess, we are in one of those twisty-twirly repositioning phases where big traders are re-examining whether they went too far being short the euro, for example, and that had indeed met a record big amount. That’s the only thing we can find to account for sterling, too, which on all the evidence should not be rising. If these moves up against the dollar are a correction, it’s an abnormally big one, especially considering the dollar is oversold and the currencies are overbought, technically. We are counting on the FX market’s tendency to overshoot to keep it going for another day or maybe more—no Tuesday pullback—but it’s an unstable move. Our best advice—reduce positions. Something is brewing. It could even be a reversal—eek!—against the dollar on the prospect of US default, which would be surpassingly stupid but not unthinkable.

Tidbits: Oh, dear—Microsoft has a new version of Windows—this is version 11. We are all in trouble now as Microsoft bullies everyone into buying it (if only by refusing to service Win 10, although anyone looking for help from Microsoft on anything is a fool. Even if you get a response, you don’t understand it.).

The Nobel Prize for physics went to three scientists who can quantify climate change and its source in human activities. One from Princeton, one from Max Planck in Germany and one from Sapienza U in Rome.

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