Stagflation is not a phenomenon anyone wants to see.
The term is a portmanteau of ‘stagnation’ and ‘inflation’, which indicates a time when inflation is running rampant even though economic growth is slow and unemployment is high.
Unfortunately, the macroeconomic equivalent of quicksand is starting to be mentioned in investing circles once again.
According to Ophir Asset Management co-founders Steven Ng and Andrew Mitchell, 2 forces are currently threatening to ignite stagflation.
“Inflation pressures have remained stubbornly high because some sectors are struggling to find workers, some supply chains remain backed up, and energy costs are sharply rising,” they said in a memo to clients.
“The momentum of economic growth has slowed globally after the initial rebound from COVID-19-induced lockdowns.”
Freight delays and costs are going through the roof
To demonstrate the labour shortages, Ng and Mitchell took freight as an example.
They showed how cargo costs on the world’s most important routes, such as Shanghai to New York City and Shanghai to Los Angeles, have multiplied 5 to 6 times since the pandemic hit.
“Some of the companies we analyse and hold globally have been recently talking about difficulties getting delivery of goods out of port in Los Angeles and Long Beach to their customers. These ports handle around 40% of cargo entering the US.”
As economies reopen as vaccination rates plateau, consumers are rapidly spending their lockdown savings.
“A surge in demand has seen retailers restocking from low inventory levels to try and get ahead of any supply issues before holiday season.”
This combination of high demand and congested ports might result in “a messy September quarter reporting season for some US companies”.
“The issues have not been so much the physical capacity at port but finding the workers to unload and truck drivers for transport as well as the restricted operating hours,” the Ophir co-founders said.
“Incredibly, President Biden himself has gotten involved to help solve this problem with expanded operating times just announced.”
Global growth is slowing, but will it be stagnant?
Economic growth is definitely slowing, but Ng and Mitchell are unsure it could trigger stagflation.
“We see global growth slowing but it is a far sight from stagnant,” their letter read.
“The IMF just released its global growth forecasts for 2021 and 2022 at 5.9% and 4.9% respectively, well above long-term trend levels, with US growth rates even higher at 6.0% and 5.2%.”
Higher inflation could last well into next year, but the Ophir founders don’t think it’s long-lasting.
“Lumber prices have rolled over and based on the latest available data there’s perhaps some early evidence that used car and freight prices may be peaking.”
So ultimately, the talk of stagflation will die down over the next few months, according to Ng and Mitchell.
But the current concerns will put enough of a brake on stock market exuberance to provide for a “more normalised growth environment” as we start the post-COVID era next year.
The Ophir team said this would be “positive” for its investment process.
“When growth is scarcer, or at least not outright bullish, investors are willing to pay up for growth,” said Mitchell and Ng.
“And that is our job: to be first to identify the companies whose better days and years are still ahead of them, but are as yet undiscovered by the market.”