As you will remember, this was a week when Unhedged did not talk about inflation. For example, today we are talking about bottlenecks in critical supply chains. The bottleneck is something that makes you think that there is inflation when there is no inflation. This is very different.

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Or, more precisely, Luuummmberrrrr!

Here are some data from Bloomberg:

Rising timber prices have always been everyone’s favorite example, illustrating the result of the pandemic supply chain blockage and the booming economy following the virus. They left other rapidly rising commodity prices in the dust. The production and distribution of wood are hampered by the virus, although demand remains strong due to the boom in locked home renovation projects. With the opening of the United States, housing construction has flourished. Soaring timber prices have pushed up housing prices and raised concerns about the ability of the economy to return to normal.

But things have begun to return to normal-soon. As shown in the chart above, timber futures have given up half of the pandemic gains in just a few weeks.This is from Bloomberg story few days ago:

“Sawmills seem to be catching up with rampant demand for housing construction… Analysts said that buyers are hesitant to wait for more supply at prices that are still at historic highs, triggering a chain sell-off.

“Yesterday’s activity became active, became lethargic, and ended up quite sluggish,” William Gigley bought and sold Eastern Spruce for Sherwood Lumber Company in Massachusetts, he said in a report. [on] Friday. ‘There is a large amount of wood available from the factory, and there is sufficient willingness to sell it. What’s missing is the buyer’s sense of urgency. ‘”

The imbalance between supply and demand has begun to be corrected. However, as shown in the figure, prices are still at multiples of historical normal levels. Whether the pandemic or other changes in the economy has changed the balance of supply and demand in a sustained manner is still an open question.

I asked Paul Jannke, head of timber at Forest Economic Advisors, a consulting company. He said that the supply disruption was not only the virus, but also the very cold weather in February in parts of the southeastern United States, and most of the country’s timber was felled. Demand is strong, because consumers have little to spend money on except for home improvement.

However, at the top of the market, this demand is hardly met. Jannke said that when the price rose to around $1,600, very little wood was sold. There is almost nothing to buy, and even fewer buyers are willing to pay. The tip of the price spike is the product of a moment of extreme market weakness.

Now, he says, both sides of the supply and demand equation are normalizing. The supply chain is back, consumers have other things to spend money on, and high timber prices have caused many DIY enthusiasts to postpone their projects.

Mark Wilde, a forest products analyst at BMO Capital Markets, believes that the decline in home renovation spending is particularly important to the price decline. Prices of wood panels used as substrates for walls and ceilings in residential buildings have been strong. Deck and home improvement projects that are two by four and other things have plummeted. He said he had talked with a private timber supplier, and he said that orders from large DIY chains had been reduced by half compared to the peak period.

Housing construction is still hot, but it has cooled, mainly because high prices discourage buyers. The National Housing Builders Market Index Association tracks housing market conditions based on surveys of housing builders, hit This week hit the lowest level in 10 months. Chief Economist of NAHB Say Driven by rising labor and material costs, rising prices “are forcing some buyers to wait and see.”

Here comes from Pantheon Macroeconomics. It is a chart showing NAHB’s Buyer Flow Index (a survey data on how many shoppers are looking for new homes) and an index of mortgage bankers’ applications for purchases of mortgage loans. They are laid flat and flipped:

Why do we people in the financial market care about all this? Because of the soaring timber prices, the typical representative of this year’s commodity price increase looks like a Covid-specific phenomenon, which is now weakening, rather than the result of people worrying about continued inflationary fiscal and monetary policies.

(I admit it! I keep talking about inflation! I just can’t help it!)

Yes, low interest rates stimulate home purchases, but people moving out of the city and into the suburbs and rural areas are also part of this story. Many wood demand surges are DIY projects for bored homeowners trapped in their homes. This is the end. On the supply side, the effects of the virus and the cold winter are also quickly fading. The soaring timber prices are driven by exogenous shocks, and it seems that it is solving on its own in the way people hope. We can hope that other price spikes will also begin to correct. Calm down everyone.

However, there is a longer-term reason to expect wood prices to rise. Both Jannke and Wilde believe that although timber prices are unlikely to remain around $1,000 for a long time, they should remain above the historical average in the next few years. This is because since the financial crisis, the United States has not built enough houses to keep up with the population. It must catch up:

The reason I mention this is that the current high housing prices are related to low interest rates and stimulus checks, but also related to not enough housing. There are not enough houses, because a legacy of the real estate bubble is insufficient housing investment for ten years. When we talk about inflation, we need to talk about policies. But perhaps we should also start talking about low investment rates.

Think about the dollar again, and then I shut up, I promise

In yesterday’s sheet Regarding the trade deficit, capital surplus and the US dollar, I accept Michael Pettis’s view that the U.S. trade deficit is caused by the capital account surplus, not the other way around. Capital eagerly wants to enter the United States and enter US dollar assets. This money is “outflowed” from the country in the form of a trade deficit. It is necessary to ensure the balance of the two accounts. This is an incomprehensible point, but my colleague Brendan Greeley sent a good way of thinking via email:

I think that creating dollars in the United States is a product. The stock market, real estate, national debt, anything securitized-there is such a huge demand for any dollar-denominated assets that we created the dollar as a product to meet this demand. .. Just as the oil economy was distorted to place oil production above everything else, the US economy was also distorted, requiring the creation of dollar-denominated financial assets.

Read Brendan’s full case study on this idea HereI believe that this crazy demand for US dollar assets is largely due to the excessive savings of other countries, and it also reflects the “excessive privilege” of the US dollar as the world’s reserve currency and trade currency.I again recommend John Plender (John Plender) recently Threat To that privilege. But one reader raised a threat that John hadn’t considered: the international community’s anger at the US’s use of its currency as a geopolitical stick.

Caleb Johnson of Harbour Macro Strategies wrote:

In the early 2000s. .. We understand how targeted sanctions can allow the United States to reduce the intensity of the war. .. We may have learned this lesson well. Obsessed with sanctions, we have deployed so many sanctions that American opponents are increasingly concerned about the need for more transactions in other currencies. Russia has recently dumped US dollars from its reserve fund and has been more active in pushing Russian companies to trade in euros as much as possible, and you will see this. You will see it elsewhere, even small central banks are experimenting with digital currencies.

I’m not sure how significant this is, but it might be a good idea to consider the dollar from the perspective of geopolitical competition.

A good book

I don’t know how i missed it This guide Become a sell-side economist, launched by research institute TS Lombard last year. It’s interesting. As a chart person, I just wryly smile at this truth bomb:

Master the chart: The relationship between almost any two variables in macroeconomics can be displayed, as long as you can display them on two axes and are willing to spend enough time to manipulate the second axis, try to lag and invert the data Or various moving averages. If you still can’t make this relationship work, please extend your history to cover the global financial crisis; during the global financial crisis, everything seems relevant.