From glut to shortage

Data published earlier this week show that the US Consumer Price Index has leapt 4.2% in April from a year earlier, representing the fastest 12-month climb since September 2008. Inflation is not anymore subject to speculation but a fully-fledged phenomenon. It is not clear yet whether the price increase results from currency devaluation or from unmatched demand. Is the excess of money leading to a structural supply shortage?

Money has value as long as it gives value to products and services supplied by the real economy. Should you keep one hundred dollars in your bank? Should you buy crypto? Or maybe fill up the tank a few gallons of gas? According to classic economic theories, the answer depends on the point where we are in the economic cycle.

Nevertheless, over the past  12 months, the term economic cycle lost its original meaning. In theory, the global economy should go through  recession, but the signs of an economic collapse are not there yet. There are two main reasons driving this paradigm shift. On the one hand, the unprecedented injection of money through various avenues in the stock market avoided a global crash similar to what we experienced in 2008. On the other hand, the developed economies have suffered a massive mutation since the pandemic outbreak. The GDP shifted from the traditional silos of the economy to those sectors which were resilient to the unforeseen pandemic consequences. Thus, most printed money went into the whole new digital economy.

In the long term, what gains values is not necessarily where money flows in, but what is scarce. Scarcity should automatically be the trigger for attracting liquidity to solve the supply-demand disequilibrium. Quantitative easing has directed funds towards sectors that were not necessarily in high demand.

Issues with the Colonial Pipeline generated last week fuel shortages across the southeast and mid-Atlantic regions of the United States. The global chip market is also undersupplied contributing to significant price inflation in electronic goods. Signs of shortage came across many other markets, including raw material, industrial metals and energy.

The most anticipated shortage is in the human resources market. The pandemic with its stimulus checks and gig economy destroyed people’s propensity to look for a job. Therefore, the reopening will face the massive challenge to attract people to fill the gaps in employment.

Workforce shortage could be even more catastrophic than consumer price inflation and will not be good news for the stock market.

Teach a parrot the terms 'supply and demand' and you've got an economist. Thomas Carlyle, Scottish historian and philosopher

Market overview

Options traders should be happy because volatility is back. Markets plunged across all fronts amid a surge in inflation. The labour figure published on Thursday showed that the number of Americans applying for unemployment benefits fell last week to 473,000, a new pandemic low.

The encouraging number boosted the stock market in the last trading session and readjusted the volatility. Every swing in the market’s mood can generate a volatility jump and macroeconomic instability can be a decisive factor. It could be a good moment to buy volatility.

Focus:

AMC

On May 13 the AMC stock climbed 24% after it raised about 428 million USD in a stock sale. The financial results for the first quarter of 2021 are not good, the revenue contracting by 84.2% to 148.3 million USD.

The Reddit episode from February seemed to have an overall positive effect on the Kansas-based entertainment company. The investing frenzy brought a lot of attention and AMC transformed this market momentum into liquidity. The management succeeded to reinforce the balance sheet and the liquidity, betting on sustainable growth amid the reopening of society.

Commodities:

Gold

After a period of struggle, the Gold ounce seems to foresee better days under the horizon. Since early April, Gold started to move into positive territory into what could be one of the biggest bubbles of the decade. Why are we seeing this move only now?

Previously, inflation was just another topic of debate and now investors start to get really concerned. What better hedge against inflation than Gold?

The real surge in Gold demand could come from central banks and systemic financial institutions. If inflation does not adjust before the end of the year, the central banks will have no other option than to increase interest rates. The resultant turmoil in financial markets will need to be backed by stronger reserves. Gold has always been a prefered instrument for banks to reinforce their own funds.

Cryptocurrencies:

Bitcoin

Bitcoin is not antifragile, This is the main learning from the past week. Another thing we have learnt last Thursday from Elon Musk is that Bitcoin is carbon-intense and is not environmentally friendly. Indeed, mining Bitcoin consumes big quantities of electricity generated in many cases by fossil. Estimations show that Bitcoin’s carbon footprint represents between 22 and 22.9 million metric tons of carbon dioxide emissions per year, equivalent to the emissions from a medium emerging country.

Is Elon Musk entirely right?

No. Bitcoin emerged to disrupt the financial system and not to save the planet. Musk’s tweet has led to a disruption in Bitcoin pricing, its value plunging close to 45,000 USD. The banking sectors generate way more emissions than Bitcoin mining, but nobody tweeted about it and nobody became sensitive to the issue.

Bitcoin needs more composure to consolidate its position of safe-harbour in a hyperinflationary world.

Market outlook

The Dow Jones ended the week near 34,400, after a bumpy ride. We can expect new market corrections over the next week amid an unstable macroeconomic context.  The Musk effect plunged Bitcoin below 46,000 USD, but the leading cryptocurrency managed to stabilise its trajectory around 50,000.

As predicted the Gold ounce moved into positive territory above the 1,840 level and has the potential to gain new long-term momentum.