by Louis Navellier
October 19, 2021
I am sure that you have heard that the port bottlenecks and supply shortages have caused a shortage of everything from Halloween decorations to Christmas presents for kids, since toys are becoming scarce.
And, as if the toy shortage is not bad enough, California Governor Gavin Newsom just signed a law requiring large retailers to provide “gender-neutral” toy sections! Toys with “blue” and “pink” colors designed for boys and girls, respectively, are not to be sold in the gender-neutral toy section. This war on “Barbie” carries a $250 fine for the first violation and $500 fines for any subsequent violations!
Getting back to the real world, for proof that the supply chain disruption is not damaging the economy much, look no further than Friday’s report that retail sales rose 0.7% in September – a huge positive surprise, since economists were expecting a 0.2% decline. Fully 11 of the 13 sectors surveyed posted an increase in September. Sporting goods (including gun sales) rose an impressive 3.7% in September to lead all sectors. Excluding vehicles, gasoline, building materials, and food services, retail sales rose 0.8% in September and were revised up to an impressive 2.6% increase in August. In the past 12 months, retail sales have risen 13.9% (without inflation adjustments) and 5.4% after inflation adjustments. Apparently, economists were anticipating that retail sales would decline in September due to supply shortages, but since personal income is rising, consumers will continue to spend money, regardless of any shortages.
As a result of port bottlenecks and supply shortages, however, the International Monetary Fund (IMF) cut its global 2021 GDP forecast to 5.9% last Tuesday, down from 6% in its previous estimate. For 2022, the IMF is forecasting 4.9% global GDP growth. The IMF also noted that surging commodity prices have helped boost some emerging economies, while also acknowledging that many developing economies are being left behind as low Covid vaccination rates and higher energy prices impede their economic growth.
Order backlogs for major economies – like China, Germany, and the U.S. – remain very high, complicated by the Taiwan semiconductor chip shortage. On CNBC Squawk Box last Tuesday, Kyle Bass, who is the founder of Hayman Capital Management, said that it is “inevitable that Taiwan’s days are numbered.”
I disagree. I get a lot of questions about what is going to happen “when China takes over Taiwan” after tormenting the island nation an untold number of times with the Chinese air force invading Taiwanese airspace. My answer is that “China will not harm Taiwan’s infrastructure, since they need semiconductor chips, too!” This was reconfirmed by Chinese President Xi Jinping when he recently called for “peaceful reunification” with Taiwan. Not surprisingly, Taiwanese President Tsai Ing-wen said that Taiwan would not bow to Chinese pressure. If China did invade Taiwan, they would face a possible military reprisal as well as higher tariffs and sanctions from many other countries, so I respectively disagree with Kyle Bass.
China has its own economic problems. Based on the official Purchasing Managers Indexes (PMI), both its service and manufacturing sectors are now in a recession. Furthermore, the Trump Administration’s sanctions on 5G pioneer Huawei have severely hurt that firm, so its 5G market share is shrinking. Since the Biden administration did not lift or modify the Trump tariffs on China, if China invaded Taiwan, they not only risk a military reprisal, but also potentially higher tariffs; so my Taiwanese semiconductor companies, especially UMC, remain great near-term buys, since I do not expect China to invade Taiwan.
You may have noticed that my shipping companies consolidated after the crude oil pipeline break in California was blamed on a containership anchor dragging the pipe some 4,000 feet! The ship guilty of this alleged anchor incident has not been identified, but I expect the entire shipping group will rebound strongly after resolution of these ongoing supply chain glitches. Like Britain, the U.S. also has an acute shortage of truck drivers, which just exacerbates the supply chain bottleneck.
Navellier & Associates does own Taiwan Semiconductor Manufacturing Co. Ltd (TSM), and United Microelectronics Corp. (ADS) (UMC) in managed accounts. Louis Navellier and his family own Taiwan Semiconductor Manufacturing Co. Ltd (TSM), and United Microelectronics Corp. (ADS) (UMC) personally via a Navellier managed account.
Inflation May Be Transitory, But It is Still Rising Sharply
The news on the inflation front looks bad, but I found many positive tidbits in the details of the reports. First, the Labor Department reported on Wednesday that the Consumer Price Index (CPI) rose 0.4% in September, which is a dramatic drop from the 0.9% surge in June. Food prices rose 0.9%, while energy prices rose 1.3%, so excluding food and energy, the core CPI rose only 0.2% in September. In the past 12 months, the CPI is up 5.4%, the highest 12-month run rate since 1991, while the core CPI is up 4.0%.
I found it interesting that the Labor Department report showed a chart of the CPI increase for the past 13 months to illustrate that the CPI is cooling off since its June surge. Essentially, this Labor Department chart was designed to make the argument that inflation is largely “transitory,” but due to a tight labor market and higher service costs, I expect wage price inflation to continue to remain elevated.
The next day, the Labor Department announced that the Producer Price Index (PPI) rose 0.5% in September. Wholesale food prices rose 2%, while energy prices rose 2.8%, the largest one-month increase since March. Excluding food, energy, and trade margins, the core PPI rose 0.2%, the smallest monthly increase this year. In the past 12 months, the PPI is up 8.6%, while the core PPI are running at an annual pace of 6.8%, so although the PPI rate is discouraging, there are some positive details in the core PPI rate.
Speaking of inflation, China’s National Bureau of Statistics announced that its producer price index (PPI) soared 10.7% in September compared with a year ago, as prices for coal, steel, and other commodities surged. In August, this rate was running at a 9.5% annual pace, so wholesale inflation is accelerating! This is the highest pace in 26 years! As economic growth in China decelerates, inflation should cool, but so far there is no evidence of moderating inflation, especially since energy prices remain abnormally high.
Thanks to high inflation, Social Security benefits are expected to rise 5.9% in 2022, the highest annual increase in nearly 40 years. This boost in Social Security benefits should help consumer spending rise next year. It will be interesting if those benefits can offset the anger consumers feel over higher prices.
Also on Thursday, the Labor Department announced that weekly unemployment claims fell to 293,000 in the latest week, down from a revised 329,000 in the previous week. This is the first time weekly jobless claims fell below 300,000 since the pandemic began. Continuing unemployment claims declined to 2.593 million, down from a revised 2.727 million the previous week. Economists were expecting the figures to come in at 320,000 and 2.67 million, respectively, so both claims came in much better than expected.
Looking at the jobs data, I think it is safe to conclude that the Fed has met its unemployment mandate, so it can now turn its attention more fully to its other mandate, namely containing inflation.