[ad_1] Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. Check the supply chain: We’re out of chips The pandemic has challenged businesses in many ways—and global supply chain problems are among the biggest threats to global economic growth, as well as a contributor to inflation. As we discussed in this space waaaaaay back at the beginning of the pandemic, if there is one part missing for the assembly of a product, that entire product might be put on hold. Think of a steering wheel for a car: No steering wheel, no car. But in modern times, we’ve discovered that cars run on chips. (Semiconductor shortages have also been called out as a culprit.) The move to more electric vehicles adds to the challenge for chip supply. From that CNBC post… “The shortage is thought to have been exacerbated by the move to electric vehicles. For example, a Ford Focus typically uses roughly 300 chips, whereas one of Ford’s new electric vehicles can have up to 3,000 chips.” And the problem goes beyond chips. “You find shortages or constraints all over the place,” says Ford Europe chairman of the management board Gunnar Herrmann in that same post. Supply constraints could drop global vehicle production by some 5% in 2021 vs. 2020 levels. In the U.K., vehicle production plummeted to its lowest levels since 1956. And the U.K. is churning out more EV and hybrid vehicles. That eats up more chips. From that post… “Approximately 26% of the cars built by U.K. manufacturers in July were either battery electric, plug in hybrid, or hybrid electric, SMMT [the Society of Motor Manufacturers and Traders] said, adding that this is a new record. It said U.K. car factories have turned out 126,757 of these products since the start of the year.” We’ll keep an eye on this chart and the search for chips. Auto sales figures courtesy of Liz Ann Sonders at Charles Schwab: Auto sales continuing to decline sharply (-29% from most recent peak in April) … current annualized 13.1M level consistent with recessionary periods pic.twitter.com/6f0MRyUAU8 — Liz Ann Sonders (@LizAnnSonders) September 7, 2021 And while the pandemic has created its own supply chain issues, the chip shortage and semiconductor challenge is not a new event. The modern (technological) world runs on chips. We need these chips in everything from our smartphones to our dishwashers to our vehicles. Chips are a necessary commodity, perhaps not much different in practice than a nation needing oil and natural gas and other materials. From that Time link… “In 1990, 37% of chips were made in American factories, but by 2020 that number had declined to just 12%. All the new pieces of the growing pie had gone to Asia: Taiwan, South Korea and China. Chip fabs aren’t just factories, but linchpins of American self-reliance.” The geopolitical risks are massive. Relying on foreign chips is the same as relying on foreign oil. Stop the flow of chips, and you stop the flow of information and economic development. We certainly know that nations have gone to war over oil. The U.S. and other nations are waking up to the need to be more self-sustainable on the chip front. A new bill in the U.S. addresses the concern and dire need. From that Time post… “If the U.S. Innovation and Competition Act survives its journey through the House and becomes a law, billions of federal dollars will flow into the semiconductor industry—already one of the most profitable. But it will take years to turn that investment into new chip factories, new chip designs and a new pipeline of engineering talent.… “Until then, chip manufacturing—and all of the geopolitical and economic reverberations it causes—will continue to depend on a global web, stretched delicately across the oceans.” Such demand and scarcity might create an obvious investment opportunity. In a future post I will look into the ETFs and stocks that will help you gain additional exposure. It might be a good option for the “explore” component of your portfolio. On that, here’s a taste CHPS from Horizons. Bad news is now good news This is a theme I have suggested over the last couple weeks. The great fear for the markets is that the economy might get too hot, creating inflation, and the need to remove stimulus and hike rates. (We covered the fear of a taper tantrum here.) If we have a weakening or tempering of economic growth and growth prospects that may remove the need to hike rates. It might give the excuse to keep much of the stimulus flowing. The concept is gaining steam from the real experts. We could enter a goldilocks period of tepid growth. In this Globe and Mail (paywall) market update, Ipek Ozkardeskaya, senior analyst with Swissquote, offered… “But bad news was mostly interpreted as good by the global equity markets, as the soft data revived the expectations of a delay in Federal Reserve (Fed) QE tapering.” Last week we looked at the slowing Canadian economy. This week the Bank of Canada kept rates steady at 0.25%, and in the accompanying statement painted a mixed picture of a mixed recovery for the Canadian economy. They see enough pockets of growth and still see higher inflation as transitory. They point to those supply chain issues we discussed above as temporary. That said, BOC is still ahead of most other major central banks in reducing emergency stimulus. The BOC has reduced government bond buying to $2 billion a week from $5 billion a week at the outset of the pandemic. In last week’s post, we also looked at the trends that have created tepid growth over the last few decades—including declining the demographic trends of wealthy nations. We can add in technology as a major disinflationary force. It’s certainly possible that we could have a soft landing coming out of the pandemic and with respect to the stimulus-inspired economic recovery. If everything goes right, recent
