It is ironic too that the provision of fiscal largesse during COVID may have finally pushed the economy to a tipping point. With help wanted signs everywhere, labor appears to have finally gained the upper hand. 10,000 workers went on strike at Deere last week and 1400 are out at Kellogg. There may or may not be an intentional work slowdown/sickout going on at Southwest Airlines. 32.000 nurses are considering a strike against Kaiser Permanente. American Airline pilots are picketing in Miami. A strike was barely averted in Hollywood by backstage workers after they got basically everything they asked for. It isn’t just union workers either as the Quits rate proved last week. I’ve written in the past about the surge in new business formations since the onset of COVID and that is part of this too. There’s a lot going on in the labor market right now and how it impacts the economy is almost impossible to say. At this point rising prices are eating up wage gains but that may not last and if it doesn’t then workers gains may turn into profit margin losses. Or it may be the spur for investments that improve productivity. Companies aren’t racing to perfect self-driving vehicles because they’ll be safer. They’re doing it because truck drivers are expensive and Uber drivers want health insurance.

This problem of perception versus reality is important for investors. Your reality does not necessarily bear on how the economy is perceived by the majority. Even objective reality doesn’t really matter for the markets in the short run – which can be a lot longer than you think. Markets tell us how the majority perceives it, not necessarily its real condition today. We have to invest based on that perception, not on reality, until we believe the gap between the two is so large that the current perception becomes untenable and has to shift to something new. And we need to understand that it is often the perception that creates the reality, the markets that shape the economy rather than the other way round.

At Alhambra, it is Jeff Snider’s job to describe the objective reality of the economy – how it really is. He is, however, human and so his perception of the economy is skewed by his own experiences and relationships. But he knows that and I know that and I think he does a pretty good job of describing the way things really are. We don’t always agree on how he describes it, the language he uses, but in general I think he gets a lot more right than most of the people in our business trying to decipher the myriad human relationships that create an economy. But the reality he describes does not always align with how we invest. It is at turning points, when the gap between Jeff’s reality and the market’s perception get too wide, that his research bears most on our investment choices.

Right now, the dominant narrative in markets is about inflation. Jeff and I agree that what is happening today is not real inflation (a monetary phenomenon) but rather rising prices that are a result of the supply side nature of the last recession. And in particular it is a condition created by government intervention, as first the Trump administration and now the Biden administration applied demand side government solutions to a – mostly – supply side problem. In short, the real problem right now is not actually supply but rather that demand is excessive due to the largesse of government “stimulus” (there are exceptions to that such as semiconductors). It was certainly necessary to support those who were truly hurt by the pandemic shutdowns. Service workers who were put out of work by government diktat certainly deserved a helping hand from that government. But the payments to those who didn’t need it – and that was and continues to be (child tax credits) a large cohort – were unnecessary, counterproductive and now hurting those who actually needed assistance. Rising prices hurt the poorest among us the most.

But the fact that today’s rising prices are from fiscal and not monetary excess is largely irrelevant to the markets and to individuals dealing with them. Investors are reacting to the “inflation” just as they would if it were driven by monetary factors. They are buying commodities, TIPS and other assets they perceive will protect them from it. And in doing so, they change markets in ways that can affect the nature of the future economy. As an investor it doesn’t matter if commodities are rising for the “wrong” reason. What matters is that they are and if you aren’t allocated there you’re missing a source of return for your portfolio. It also doesn’t really matter whether some individual commodity isn’t participating in the rally or if the general commodity indexes are rising mostly because of energy. Investors aren’t focused on whether platinum or iron ore is going up. They are focused on “commodities”, on the idea that in inflationary times “commodities” go up and they want to own them.