Over the last few days, as prices have soared, we’ve discussed the inflation issues.
The biggest knock-on effect is the inability of people to spend, as wages lag the rise in living costs.
You’ve seen headlines about salaries going higher, but the news always leaves out HOW much higher they have gone vs living costs!
This chart answers that question: not high enough!
We are seeing US consumer spending power dropping quickly.
Companies are hesitant to increase salaries because that’s a cost they need to recover.
If their costs are already up because of raw materials, logistics, and diesel, how do they increase wages?
As the chart shows, this isn’t just a US issue but a global one, especially for OECD nations.
When you have the wealthiest countries in the world unable to spend, it has knock-on effects and pushes more pressure down the supply chain.
Demand and underlying retail sales have already slowed considerably, and as more cost gets pushed through the system, we will see demand slow.
The US consumer drives about 68% of the US GDP figure.
GDP = C + I + G + (X – Y)
Said differently: Consumption + Investment + Government Expediture + Exports – Imports.
And the consumer is getting hit HARD.
Business Investment Isn’t Much Better
Businesses are seeing their margins hit and are very uncertain about the future… so what investment?
The Government blasted trillions into the market through fiscal stimulus and central banks (both now reversing) while global trade slows.
So where is the growth going to come from?
We’re seeing ongoing pressure at the manufacturer level with both expected orders and the rate of new orders dropping.
The cost of doing business is going higher.
Companies are concerned about sales and orders… so will they pay workers more money and invest in your business?
No.
You will slow expenses and try to protect cash.
Mainland China: The New Penal Colony
The slow-burning logistical nightmare continues in China and that hasn’t even started to hit us yet.
China keeps locking down more provinces as the backlog of ships at the coast grows exponentially.
This is going to create more pressure (again) on the supply side as shortfalls expand.
Companies have been able to build up inventory as supply chains normalized a bit (off the highs but still far above historical norms) and sales have slowed.
In the face of all these pressure points, investors have been very slow to shift weightings in the market.
BTFD? STFU!
The market has been so conditioned to “buy the dip” with a “fear of missing out” that it takes time for people to adjust their behaviors.
As the data worsens, I expect to see redemptions accelerate.
Stay safe out there!
Regards,
Freedom Financial News
