EDITOR NOTE: The prices for lumber, copper and other industrial materials have begun to deflate as excess demand over tight supply has receded. This is exactly the Fed’s picture of the current inflationary surge: transitory and demand-driven. Housing prices are still rising, which betrays a picture of lingering high demand, and potentially some speculation to go with it. But can it be that simple a problem? Isn’t inflation first a monetary issue--that of too much money chasing too few goods? Perhaps much of that money will remain in savings accounts, slowing down money’s velocity. And what happens when prices continue to rise, prompting people to stop saving and start buying in order to get their goods before the costs rise? What happens when employers are forced to raise wages leading to higher product and service costs? We’ve seen this before, especially in other countries, where, in the worst cases, hyperinflation emerges. And the Fed is overestimating its capacity to prevent it (like other central banks before them). Out-of-control inflation or even hyperinflation may not be imminent, but both are in the realm of possibility. We’re just saying that it’s wise to prepare for an outcome that may be worse than expected. That’s what diversification and safe-haven investing are all about, isn't it?
A classic short squeeze looks to be well and truly over.
On 4 May this year, EWI’s ProServices Insight column published a chart on lumber, under the headline “A Growing Shortage of Common Sense”. In it, we noted:
“As some major economies emerge from the economic lockdowns that have been part of World War C, there are increasing reports of shortages. Computer chips, food commodities, even chlorine are just a few of those making the headlines. …the shortage of wood has led to an historic squeeze in lumber prices. Much of that demand for lumber is coming from U.S. households, flush with cash that has been dropped from helicopters (ok, sent in the mail but it’s the same thing).”
The point being made was that the incredible rise in prices of some goods and commodities was seemingly being fueled by an obvious excess of demand over supply, but that there was also a speculative elelment to it too. The article concluded:
“The evidence of speculative froth is all around, from Bitcoin to building materials. It might have legs but end it will. Probably dramatically.”
We didn’t have to wait long. The July lumber futures contract topped out four trading days later on 10 May and since then has crashed by 45% into this week’s low. EWI’s commodity expert, Jeffrey Kennedy, is anticipating that the decline will continue.
So, was it just a massive short squeeze brought on by Americans in particular engaging in home building and improvements? That’s certainly a major element to lumber’s boom and bust this year, and it could be one that other goods and commodities might follow. Cathie Wood, the prominent fund manager, takes the view that the rise in prices of many goods and commodities has been a function of the World War C shortages when people wanted to buy physical stuff when being locked at home. As the economy gets back to normal, which it is now doing, people will go back to buying services again, dropping the demand for stuff. As the demand for stuff wanes, and gets rebalanced with supply, prices should drop. This appears to be happening as lumber prices crash but, for example, air fares rise. Prices in the economy are acting a bit like a boxer would do after taking a right hand from Mike Tyson. Staggering from one side of the ring to the other before finally recovering and standing upright again. Or, do they simply go to the mat? After the supply-side and demand-side shock that World War C created, prices will find their natural equilibrium as they always do.
That will mean some prices continue to rise but others, especially where there is speculative excess involved (residential property?), experiencing a deflation like lumber.
Original post from Deflation.com