Lead: Capital Spending Historic Regardless of How It Is Sliced, It Is Strong
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The Black Owl Report : An Executive Intelligence Brief Briefing: Friday 28, May 2021 Lead: Capital Spending Historic Regardless of how it is sliced, it is strong Additional Items we are watching. We were going through this month’s modeling forecasts in the ASIS and we saw some significant changes in a few of the models. Some of them • Malaysia Goes on Lockdown. Malaysia’s were picking up the surge in commodity prices (interpreting those Prime Minister has ordered at least a 2- increases as a surge in demand). week complete lockdown in the country as cases of COVID have spiked. This is nearly As we dove deeper, we discovered that there was some data supporting a total and complete lockdown, and that notion. anyone waiting on materials or services to get exported out of the country will see When you look at corporate investments in capital spending (equipment, further delays in the supply chain. machinery, improving facilities, etc.), it surged again in April (latest available). This is just one example of what is The chart below shows capital goods new orders through April and we can happening across Southeast Asia as the see that they are both higher on a nominal basis (blue line) showing the region gets its unexpected wave of COVID highest level of dollar spending in history and they are also up year-over- cases. Although total case counts look year at their highest level on record (going back to the 1990’s). nothing like they have in other countries like the US, Europe, Mexico, India, Brazil, etc., it is significant enough for the region that they are reacting in dramatic ways. • Japan Extends State of Emergency . Japan has decided to extend COVID restrictions through at least June 19 th to help try and control an outbreak of the virus that has overwhelmed many hospitals. The BBC was reporting that daily case rates have to fall below 100 in order for Even if we try to remove the impact of the pandemic on spending, we still the country to host the games in just five see that spending was 14% higher vs. April of 2019. weeks. They were 700 yesterday. Some will argue that corporations have been taking their pent-up cash Now, Japan’s lockdown does not look like (since they weren’t spending it briskly between march of 2020 and at least what the US did early last year. Bars and through Q3 of last year) and they are now unleashing those war chests of restaurants are still open but their hours resources. of operation and sale of alcohol are going to be limited. We can see in some of the forecast models that machinery purchases are at the top of the list of spending. Robotics and spending on automation is But the Olympics are planned to go off as high right now because of a shortage of workers in many industries. expected – but there will be no fans in Knowing that recovery is in the offing, some industries are starting to spend venues and the movement of staff and on automation to be able to handle growth without using headcount to do it athletes will be highly restrictive. (or minimizing the need to dramatically add headcount). And, as wages start to show some inflationary pressure (even if it is Much could still happen between now and temporary), larger capital investments in technology make even more the opening of the games. sense when they can be done without sacrificing customer satisfaction. - KP Confidential – Armada Executive Intelligence Brief – Confidential - 1 - The Black Owl Report : An Executive Intelligence Brief US Domestic Economic Items • Inflation Gauge Rises Faster than Expected. There is no way to slice it, inflationary pressures showed their heads in April after today’s core CPE report. Sequential inflation increased 0.7%, the fastest monthly gain in inflation since October of 2001. Against easier comparisons from last year, the core CPE was growing at an annualized rate of 3.1%. The Federal Reserve continues to say that this is a transitory inflationary condition, and indeed the “deflation” narrative is already being murmured in the halls of financial institutions. We’ll explain this later. For now, and especially this weekend, consumers will get a taste of what it’s like to pay $5 for a gallon of gas in some markets and over $3 a gallon nationwide. Grocery bills are significantly higher than they were a year ago according to a few independent studies (granted, against easier comps due to the national lockdown). Deflation rumors are spreading because many believe that adequate supplies of materials will return in short order, but demand destruction is ongoing. So, a company may be ordering significant numbers of items because they see significant demand for it at this time and supply chains are not delivering those products, but due to inflationary pressures demand for those items drops and significant supplies eventually get delivered (late). That could lead to significant discounting of those items later to try and move what might become inventory overstocks. Although most of us don’t see a deflationary signal in the current outlook, most forecasts for PCE see the annual rate of inflation dropping back below 2.5% (the Fed’s target rate) by late Q3. That, most of us can agree on. - KP Confidential – Armada Executive Intelligence Brief – Confidential - 2 - The Black Owl Report : An Executive Intelligence Brief • Just How Low Can They Go? Auto inventories were already trending down, but the inventory to sales ratio for autos has just hit a significant all-time low. The ratio is now at 1.025, average is a bit closer to 2.5 months of inventory on hand. This should be of no surprise to anyone, but seeing this inventory to sales ratio so low, it should keep us all anticipating a return to normal once the global microchip shortage eases. There are tens of thousands of vehicles that have been built but are awaiting that critical piece before they can be delivered. On a personal note, my daughter is purchasing a vehicle and she was told that it would be delivered about a week ago (three weeks after placing a deposit on the vehicle). The dealer said that they have inbound vehicles that are about to be shipped to the dealership, but a majority of them are already purchased and won’t ever hit the dealer lot. In fact, we don’t live far from one of the major production facilities for this particular automaker, and they joked that we could take a ride out by the airport and in an old, abandoned warehouse parking lot, could probably see her new truck waiting on a tiny part. US auto sales are still trending near 18 million units a year, which would be among some of the strongest annualized rates of growth in history. And, used car sales are almost as brisk and ridiculous as the housing market. Used car prices according to the Producer Price index are 62% higher than they were a year ago and 25% higher than they were against April of 2019 prior to the pandemic. Some automakers have begun to restart their supply chains as they get larger quantities of microchip supplies. That will get more of the tens of thousands of key suppliers back to work (for those that were idled during this time) and start to get it back in order. Geopolitical Items • Another Catch-22 on Suing China for COVID . I took a lot of heat mid-year last year (prior to all of the election upheaval) for quoting a ZeroHedge article that detailed China’s patient zero and the fact that she was a lab tech at the Wuhan laboratory. It was “mere speculation” on my behalf (that’s what I was accused of) that three lab techs were in Wuhan hospitals in November of 2019 with symptoms that now sound much like COVID. This would have been months before the supposed consumption of a bat in a meat market that launched the virus. Confidential – Armada Executive Intelligence Brief – Confidential - 3 - The Black Owl Report : An Executive Intelligence Brief In any event, bipartisan commissions in Congress have now opened up investigations that could lead directly to citizens being able to sue the Chinese Government over COVID-19. Regardless of how a person may have gotten COVID, if they got it and died from it, family members may be eligible to sue the Chinese Government if these bills end up being written correctly. It would open a legal floodgate unlike any we have seen since the aftermath of World War II. I was wrong about one thing, I said at the time that the liability (for what is now as many as 7 million deaths worldwide) would be so significant that this situation would never be allowed to be pinned on the Chinese Government - because of the financial liability. It appears that the US Congress is trying to allow just that. In a different development, there was interesting timing on the release of a Department of Energy briefing on the risks to the global community of a disruption in rare earth material supplies. The DOE estimated that the damage to the global economy and the cost to the United States would be felt “for years” if something happened to delay, stop, or redirect current rare earth material supplies. China controls more than 85% of the world’s rare earth materials market, much of which is critical in high- capacity, quick charging batteries. It is central to the world’s push to zero emissions.