01/11/2022
KDM Capital 2022 Q1 Commentary
Seemingly, every day banks are forecasting more rate hikes for 2022. Higher rates are clearly having a negative effect on growth companies, so it’s worth discussing.
In fact just yesterday, Goldman predicted four hikes this year! They could be right, but I’ll take the under on that. A few reasons why;
Powell has been able to talk rates higher by promising rate hikes. But, listening to his congressional testimony, supply chain issues are playing a big part in their decisions.
If supply improves while demand slows, that could take pressure off of rising prices.
For instance, ISM Manufacturing PMI data for December came in at 58.7 vs. the expectation of 60. It was down from 61.1 in November. Any number above 50 indicates a growing economy.
PMI is a reflection of factory activity and this number reflected a slowdown in new orders. Prices paid also eased, to 68.2 vs. 82.4. But, perhaps demand is slowing as inventories have been built up. That inventory buildup could have also led to higher inflation in the short term. If that slows, so could inflationary pressures.
Another interesting data point is the velocity of money has slowed. Velocity is indicative of consumption. Slower velocity means less consumption. In fact, it was measured at 1.147 in Q3 2020. The measurement fell to 1.115 by Q3 2021. This is also a sign of slowing demand. Money supply also slowed significantly, from about 27% in 2020 to roughly 13% in 2021. Again, this should help moderate inflation growth.
Another often discussed driver of recent inflation spikes are used car prices. Since there are not enough chips for new cars, consumers have driven used car prices to historic highs. But according to the Mannheim Index, the leading reference for used car data indicated a 1.7% decline in December. It also showed a 4% decline yoy in December, according to Cox Automotive estimates. Average daily sales conversions, also declined for the month, which indicates more balance between buyers and sellers.
More balance equates to price depreciation. Used retail supply hit 114 days in April of 2020. Normal retail supply is about 44 days. It ended December at 54 days. Wholesale supply peaked at 149 days in April of 2020. It ended December at 33 days.
Lastly, if you look at the dollar index, the dollar has been very strong over the last six to seven months. Commodities are priced in dollars. A strong dollar could have cooling affect on commodity demand which is another potential reason inflation may slow.
Inventories are building and delivery times are shortening. If that continues and prices moderate, that could take pressure off the Fed for multiple hikes. In fact, I think improving inventories, slowing demand and shorter time delays allow the Fed fewer hikes than what the market is currently pricing in. And if there is any hint of the Fed not moving as aggressively on rate increases, then there could be massive rotations back into growth names.
Nonetheless, the business’s we own are not dependent on rates, but a quickly digitizing world with verticals such as the Metaverse, AI, blockchain and other technologies playing a foundational role in how the world is changing.
This is not meant to cover all data inputs into increasing rates, but a few important perspectives to consider as the market obsesses over rates.
Thanks,
Andre