From an age of plenty to an age of shortage

Worried about living costs? You aren’t alone. A survey from Aviva suggests that 74% of adults are too. And for good reason. It looks like Covid-19 has somehow shifted us from an age of plenty into an age of shortages, where supply just can’t meet demand and inflation kicks off as a result. Ships can’t get into ports. No one can get their hands on semiconductors (this is why new cars are so expensive). And energy prices are soaring – gas prices have rocketed and oil is well above $80 a barrel.

So what’s going on? Three things, says research group Gavekal. First, overconfidence in the data revolution. The “newfound ability to measure everything” encouraged firms and governments to “optimise” the delivery of services and goods. So supply chains have no slack in a crisis. Second, lousy policy choices. “If governments had not been so vocal about transitioning from carbon to renewables, would [we] be seeing the current surge in energy prices?” Third, a shortage of staff, visible in employment data globally. In the US, the participation rate (the percentage of people prepared to work) keeps falling as well-off older people retire early, fear of Covid-19 keeps people at home, and the gig economy means the young don’t have to commit to long hours in dull jobs. The US “quit rate” is at record levels. In China the working-age population is shrinking, as it has been in Japan and much of Europe for some time. In the UK we have record job vacancies.

The first two can be fixed. Supply chains will be localised and strengthened. And there will be a recognition that pretending we won’t have to rely on fossil fuels for decades to come is silly. The third will take a lot longer to resolve (digitalisation, robots and rising productivity will be the long-term answer). Either way, the immediate effect of our age of shortages (however short it turns out to be) is inflation. US consumer price inflation is now 5.4%. That in turn means rising interest rates – they are already rising from Russia to Brazil, and may soon rise in the West, which should make us all nervous. The UK has the highest public debt-to-GDP ratio since the early 1960s. The higher rates go, the more it costs to service. It would be a shock to a generation of mortgage holders who have no idea what a world of rising rates looks like (not great if you owe hundreds of thousands of pounds and haven’t fixed your mortgage).

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But rising rates will also shock growth investors. Rising rates effectively reduce the value of future cash flows. You can argue that this isn’t a big deal for tech stocks that already throw off piles of cash (Apple and Amazon, say) – they are as much valued on today’s cash as tomorrow’s. But it will be harder to argue that it doesn’t affect those valued almost entirely on future cash flows – Tesla, for example. There has been much debate about the extent to which tech valuations are a function of low rates. We are about to find out who is right.

On the plus side, the age of shortages is alerting the market to some neglected sectors. The new focus on fossil fuels (we need them, so let’s get and use them as efficiently as possible) is great for energy services – a rather more high-tech sector than you may think. It’s also making nuclear power look exciting again. Finally, for those whose personal ESG overlay allows it, there is Russia. There’s no shortage of energy there, which may explain why the market is up 65% so far this year.