Storage Wars

Microchips, timber, grains,... The list of products and commodities affected by a global supply shortage progresses as we move further into the post-COVID era. Moreover, the expansionary monetary policy fuels the inflationary trend and accentuates the shortage. Thus, having storage capacities became a fundamental hedging tool for both corporations and governments. But is the market price still relevant when storage wars break out?

In the early months of the new coronavirus pandemic, major central banks enacted aggressive monetary policies to limit any potential market crash that could lead to a 2008 scenario. Avoiding a massive dip in the stock market provides clear benefits in the short term for economies dominated by the financial sector. Nevertheless, it could generate price distortions, disruptions in supply-demand equilibrium and ultimately, market dislocation in the long term.

Markets are thriving, and Wall Street throws the green indicators in investors’ faces whenever they are overwhelmed by uneasy feelings. The global chip shortage, which is currently disrupting the automotive and consumer electronic industries, should trigger an alarm. Western economies printed enough paper, luxury that China, the world-leading supplier of goods, does not have. If China, along with other economies providing commodities and products, decides to corner their respective markets, all printed money, and inflated stock prices become irrelevant. One can have all the money, but there will not be many things to buy.

This scenario assumes that at one point, corporations and governments will start to increase their stocks of various goods considered critical. In a  context where the value of money is zero, the actual dividends are paid by holding stock of physical products. This invisible dividend is also known as convenience yield, denoting the benefit or premium associated with owning an underlying product or physical good rather than the associated derivative security or financial contract.

Companies like Amazon understood this foreseeable paradigm shift and invested in storage infrastructures and supply chain capacities.  Storage wars are real, and in each strategic physical market, there is the incentive to hold a significant position to manipulate its price. The manipulation can go as far as where there is no market, and available supply is null. Such a phenomenon is observed in the automotive industry, whereas all major manufacturers have shut down their operations for an undefined period.

The bottom line is that when storage becomes strategic, whatever stock market prices become irrelevant. Thus, a 1929 stock market crash is not an unrealistic scenario.

Storage is important. Whether it's cushions you only use outside in the summer, or blankets that only come out in the winter, you've always got to think of where to store them. Anthea Turner, former English television presenter

Market overview

The Labor Department’s latest figures are way below expectations. The US economy added only 235,000 jobs in August, almost a third of what was expected by Wall Street. Markets reacted quickly, and the leading stock indices entered into negative territory.  

The volatility index floats above the lower end of its range. However, since the beginning of the year, the volatility swings have diminished, showing that investors have fewer unexpected events. Moreover, institutional traders seem to leverage less volatility in their investment strategies.

Focus:

Zoom

Zoom changed the life and the way of interacting for hundreds of millions of people throughout the pandemic. Zoom was beyond doubt one of the big winners of the new coronavirus outbreak. Until the last earnings came out last week...

Zoom Video Communications Inc. shares had their worst single-day percentage dip in almost one year after the company published its quarterly earnings, indicating that its growth perspectives are modest compared to the initial traction during the beginning of the pandemic.

Investors’ moving away from Zoom may also signal that working remotely is nothing more than a transitory phenomenon. The back to office movement is strong, thereby reducing the dependency on communications tools like Zoom.

Focus:

FAO Food Price Index

It is useless to repeat that inflation affects not only assets but also raw agricultural products. The FAO Food Price Index (FFPI), the world’s leading indicator for food prices, increased by 3.1 percent from the previous month and marked a massive 32.9 percent rise from the same period last year. The FFPI’s growth was driven by significant price inflation in the sugar, vegetable oils, and cereal markets. In addition, reduced harvest expectations in several major exporting countries pushed up world wheat prices by 43.5 percent above their level of one year ago.

Cryptocurrencies:

Bitcoin

Bitcoin had a strong recovery over the last week, climbing above 50,000 USD. When the Fed announced the bond purchase tapering, investors understood that times are changing, and what was thought to last forever may come to an end sooner than expected.

As an alternative store of value, Bitcoin could attract more investors looking to diversify and hedge their core portfolios. Bitcoin’s comeback delivers a strong signal to its detractors that crypto is more than a glorified game.

Market outlook

After the US job report, the Dow Jones Index ended the week directionless, holding above 35,300.  In addition, the new wave of Delta-variant related infections is putting investors in a risky spot.

After a bumpy trajectory and several technical corrections, Bitcoin’s price soared above 50,000, showing resilience and keeping its traction gained in August.

Gold continued to move north, climbing near 1830 USD. If the Fed's announced bond taper is confirmed, the gold ounce could climb as high as 2000 USD.