Here is our take on the articles summarized below: 

In times of volatility and uncertainty, William of Ockham would teach that the best bellwethers are often the simplest. For this reason, we focus on two of the main forces driving the markets: inflation and commodities. Our first article highlights the inflationary risks of a lack of transparency in monetary policy vehicles, potentially leading to a flood of cheap money. Our second article deals with lithium, the primary component in many of the high-capacity batteries needed for the technology of tomorrow. Our third article explores how bulk shipping has been revived by shifting raw material needs. Finally, we look at five forces pushing the economy towards an inflationary paradigm. When the terrain becomes difficult, a good map can be a life saver; in investing, rational, long-term decision-making is the key to safely traversing uncertain times.

Post-Pandemic Economic Risks

William A. Barnett, Center for Financial Stability

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William A. Barnett, writing for the Center of Financial Stability (CFS), is concerned that we have not learned the lessons from the 1940s which brought us to the 1951 Accord negotiated by the US Federal Reserve (Fed) and the US Treasury. The massive increases in money circulated in the 1940s supported higher inflation and complicated an agreement made between the Fed and the Treasury to keep a price ceiling for treasury bills and bonds, which had been established during World War II. The 1951 Accord released the Fed from sustaining the ceilings on Treasury securities, giving it more flexibility to manipulate interest rates in response to inflation. Today, the Fed is creating a similar environment by purchasing tens of billions of dollars in Treasury securities every month, essentially placing a floor under weakening Treasury bond prices. However, at the same time, the money supply is rapidly increasing. The combination of these two trends is presenting inflationary risk. Many might assume the Fed would raise interest rates to combat rising inflation, but the Treasury would be opposed to this because interest on new Treasury debt would grow. Complicating matters is the Fed’s new policy of paying interest on banks’ reserve deposits. Since the beginning of the pandemic, banks have accumulated massive reserve balances which means, as Barnett puts it, “If interest rates on primary market loans increase, without a corresponding increase in interest paid on reserves, there will be an explosion of bank lending from banks’ abnormally high levels of reserves.” Such a surge in lending could cause a dangerous surge in inflation. This is not the only way inflation could materialize. Any surge in liquid monetary assets held in the economy could spur inflationary pressures. Because of this, the author urges that there is an increasing need for “state-of-the-art data on monetary aggregates”. Unfortunately, there has been a recent decline in the quality and quantity of such data available from the Fed. Latest CFS data reveals that the monetary growth rate is increasing at an alarming speed, which should prompt concern of the inflationary consequences ahead. “How the Fed would control such risk, while at the same time holding down interest costs on Treasury debt, is a conundrum that needs to be addressed.”

The Lithium Gold Rush: Inside the Race to Power Electric Vehicles

Ivan Penn & Eric Lipton, The New York Times

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The race is on to produce enough lithium, a critical raw material used in batteries and renewable energy technologies, to power the electric vehicle movement that is spanning the globe. In order to be competitive with China, Europe, and other major powers, the US needs to take advantage of its domestic supply of lithium instead of having to rely on foreign suppliers. The effort to construct the first new large-scale lithium mine, called Lithium Americas, is underway in Nevada. However, the project, which promises resources that would allow the country to move towards its green energy goals, is not so green. A neighboring Native American tribe, ranchers, and environmental groups are protesting the project because it is expected to use billions of gallons of groundwater and could potentially contaminate the area’s water supply for hundreds of years to come. As the authors highlight in the article, “The fight over the Nevada mine is emblematic of a fundamental tension surfacing around the world: Electric cars and renewable energy may not be as green as they appear.” While traditional mining can be harmful to the environment, several companies are investing money and research into cleaner ways to extract lithium, such as lithium brine extraction. While the Biden administration has not moved to endorse the more environmentally friendly options, investors and the auto companies who will be purchasing the lithium will have the power to influence the ways lithium, and other raw materials needed for renewable technologies are produced. Ford’s purchasing director for supply chain sustainability, Sue Slaughter, said “We really want to force the industries that we’re buying materials from to make sure that they’re doing it in a responsible way…And we intend to do that.”

Commodities Boom Sends Bulk Shipping Costs to Decade Highs

Harry Dempsey and Neil Hume, Financial Times

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The disruption of global supply chains was one of the most significant effects of the pandemic on the world economy. Now, as manufacturing begins to accelerate, global shipping has seen a major boom, with dry bulk shipping rates skyrocketing.  The combination of roaring Chinese demand with an under-investment in new ships has catalyzed a 700% increase in rates, dramatically increasing the cost of raw materials at a time when demand is rising. Since 2008, the dry bulk sector has seen little in the way of investment due to an initial oversupply of vessels. Now that much of the demand pent up by the pandemic has been released in one tremendous wave, shipping companies are scrambling to keep up with demand.  Industry analysts are divided as to the duration of this swell – some see it as a one-off increase due to the Covid phenomenon, others as the beginning of a supercycle. With many shipyards occupied by orders for container vessels, the supply of bulkers will likely remain suppressed, driving further price increases. Still, there seems to be little impetus for a long-term upswing, as this growth has been driven primarily by the black swan of coronavirus rather than a fundamental shift in the underlying market. This, coupled with decreasing demand for coal (nearly 20% of seaborne dry bulk volume) may prove to be roadblocks to the development of a supercycle. Regardless, dry bulk shipping has seen a historic swing of fortune in the past few months.

Everything Screams Inflation

James Mackintosh, Wall Street Journal

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Inflation has become the word of the day on Wall Street as investors look at this monumental force as the primary driver influencing the trajectory of the market. Several factors have influenced this outlook, not least of which is the Fed’s policy of constraining inflation to an average rather than a ceiling. This shift from proactive to reactive policy management has empowered broad government spending in the short term but may leave a painful hangover when the time comes to curb rising rates.  The Biden administration has been hesitant to slow the pace of stimulus, likely drawing on Obama-era lessons following the recovery from the 2008 crash. With these programs come a push for more resilient domestic supply chains, as great power rivalry with China seems all but inevitable. Compounding this is an increasingly empowered labor force, which has put pressure on wages. While most of these factors are in the wheelhouse of the federal government, there is a steep price to pay for failure and an equally costly price for success. When Fed Chairman Paul Volcker waged his famous war on inflation, the return to normalcy came at the cost of a deep recession. On the other hand, should inflation not be contained, millions will see the value they had stored in Treasury bonds eroded by a loss of purchasing power through negative real (i.e. inflation-adjusted) yields. As the Fed continues to step through the minefield of inflation management, prudent investors would do well to consider the full impact of inflation on their portfolios.