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Posted May 11, 2021

Byron King

By Byron King

The Death-Knell for Primary Investment

Today well look at inflation, scarcity and what I see as a death-knell for primary investment in the U.S.

Clearly, were experiencing a general unwind in the economy, despite the political-media happy talk and its distracting emphasis on Covid vaccinations and reopening businesses.

Much of whats happening across the economy is toxic fallout from the past year of pandemic disruptions; the business closures, layoffs, entire sectors essentially grounded (literally, in the case of airlines).

More is rooted in the general incompetence and dysfunction of politicized monetary policy, along with capital-destructive government spending and regulation. Details below, of course.

Meanwhile, and as youve likely noticed, prices are rising across the board while many formerly common things are more and more difficult to obtain.

Wheres the relief? Will increased output eventually catch up with higher demand? Will price increases moderate? Put another way, is the cavalry riding to our rescue from over the hill?

Lets dig into these issues

First, set the stage. And this part is easy because when it comes to inflation and scarcity, you may very well be living that dream (or nightmare) up close and personal.

For example, are you trying to buy a new house? Obviously, housing prices are moving up. Theyre soaring in some places and merely super-strong in others.

How about buying a new car, or even a used one? Shortages across the board there, too.

One key reason for the paucity of cars on dealer lots is that there arent enough computer chips for the electronics in new vehicles (i.e., a severe shortfall in that particular global supply chain). For lack of chips, major automakers are actually shutting down assembly plants.

Meanwhile, solid prices for new cars place a strong floor beneath the price-tag for used wheels.

For builders and even humble fixer-uppers, the price of lumber has skyrocketed that is if you can locate what you want. Same thing for many other building and hardware products like pipe, valves, wiring, electrical outlets, etc.

Food of all kinds is pricier too. I heard a new term, shrinkflation, which means that you pay the same price as before, but for lower weights or volumes inside the same sized packaging.

Of course, the price of gasoline and diesel is rising. This was so even before the recent outage of the Colonial Pipeline, which supplies much of the U.S. Southeast and East Coast.

Now, and depending on where you live, we have both high prices and dry fuel tanks at gas stations. Back to the future. Party like its 1973 again.

Gas lines in Raleigh, NC

2021: Gas lines in Raleigh, NC. Screen grab, WRAL.com.

If you were hoping just to relax by the swimming pool this summer, there are already reports of shortages for chemicals like chlorine and water conditioners. So good luck with that.

Higher prices and widespread shortages; the stories are legion.

Which brings us to the point that inflation and scarcity have teamed up to rearrange how you spend your dollars and what you can (and cant) buy.

The inflation angle isnt too hard to figure out. All that stimmy-money from the past year in the range of $5 trillion and more is working its way through the economy. In essence, were experiencing the classic definition of price inflation: too many dollars chasing too few goods.

Ive heard media talking heads say that the current inflation level is transient. The stimmy money will come and go over time, they postulate. Price levels will eventually fall back.

Perhaps. Or perhaps not because theres a deeper, structural angle to all of this as well. And its far from transient.

Begin with the fact that widespread scarcity of many goods reflects a cascade of shortfalls on the productive side of the economy, both U.S. and global. Entire supply chains are distorted, top to bottom.

In essence, the world just spent a year becoming significantly less productive. Consider what happened literally across the globe with Covid and associated restrictions, namely all the closed mines, mills and factories; all the interruptions to transport systems, jumbled distribution systems, etc.

That big box-hauling ship which recently grounded in the Suez Canal scarcely begins to highlight the scope of the global-scale supply chain problem.

Its a mess out there. The question is, how to fix it? And its not like flicking a light switch. Indeed, the whole system has twisted into knots.

While here in the U.S. we have deeper, seismic-level problems.

Ideally the U.S. economy should get back to work.

People are being vaccinated. Governments are easing restrictions. Businesses are reopening and rehiring (if they can find workers). Its time for everyone to lace up their steel-toed boots, put on a reflective vest and grab some gloves and a hardhat, right?

Soon we should see a restart in supply chains. That along with an increase in business investment in order to grow, process, manufacture and generally produce our way out of the problems.

The idea is to get those factories humming and churning; get the distribution channels warmed up again. But

Yes, theres another problem. Something is fundamentally wrong with Americas economic landscape. And it gets back to that comment above about the death-knell for primary investment.

At the outset, lets nail down the terms. What is investment?

Indeed, what does that concept even mean anymore? Because we have deep confusion in language, corruption of the very thinking process.

On that last point, consider President Biden and his infrastructure and investment plan. The propaganda mill wants people to believe that this looming spend-a-thon will pour big bucks into fixing roads and bridges, stringing new wire, and pouring new concrete across the land.

Not quite, as we touched on here.

But media must do their thing. For example, in a recent, utterly saccharine editorial in Bloomberg/Businessweek, one journalist opined that Bidens plan is remarkably ambitious. Indeed, per the New York news conglomerate, the economic future of the U.S. is at stake.1

And its not just Bloomberg going all-in, either. Many other media buy entirely into the trillion-dollar trends emitting from the Biden camp.

Yet all one must do is read to (easily) learn that Bidens proposed $2.3 trillion for infrastructure is perhaps 20% concrete, steel, etc., with the vast balance going for what used to be called social spending.

Not long ago, USA Today broke down the numbers.

Among other things, Biden wants to spend $400 billion (over one-sixth of his proposed plan) to improveaccess to quality, affordable home or community-based care for the elderly and people with disabilities. It would expand a Medicaid program to make more services available and eliminate a backlog that prevents thousands from getting care.2

Caring for the sick and elderly may be a good idea. But its not exactly high-payoff infrastructure investment, like building the Grand Coulee Dam in the 1930s.

Another large chunk of Bidens spending (nearly half; well over a trillion dollars) would go for all manner of alleged research and development, clean energy, job training, regional hub development, public housing, public schools and way more.

Or as old friend Bill Bonner put it the other day, these alleged investments are nothing more than boondoggles, bamboozles, and bribes.

Indeed, theres $50 billion in the Biden plan for a new office to monitor domestic industrial capacity.

Thats a lot of money. It makes one wonder just how much this monitoring ought to cost.

By comparison, the 2020 budget for global operations and maintenance within the entire U.S. Navy was a piddling $57 billion.

Look at it this way. Anymore, money has simply lost its meaning in Washington. We discussed that too, a while back.

Seriously, is this how a great nation goes about doing investment and infrastructure? Throwing astronomical numbers at vague labels?

Call it whatever you like. But the old Washington adage pertains, updated to modern math: a trillion here, a trillion there; soon, youre talking about serious money.

And for all the political rhetoric about invest-invest-invest, will the nation ever see a payoff over the long haul? Its doubtful.

More likely, this is just the Biden administration and its B-team of Beltway retreads, making malinvestments of scandalous, historic scope. While the U.S. economy will be further distorted in ways that signal geostrategic disaster ahead.

Boil it down. This is not tax-and-spend governance because theres no way that taxes will ever pay these kinds of bills.

Its not even borrow-and-spend. Theres not enough money anywhere in the private economy to buy enough bonds to cover the government checks.

No, its just big government creating money out of nothing, via its pet central bank, and pumping it into the economy.

This is, of course, the source of the current inflation and scarcity with much more to come.

And all that spending will not make the nation wealthier. Unpayable debt doesnt work that way. And eventually we will live in a much poorer nation, filled with homeless people camping on the sidewalks. (Oh wait)

Now, lets look at a comparatively small, related example of investment involving a mere $1.5 billion which helps illustrate the point.

Recently, U.S. Steel announced that its cancelling a $1.5 billion upgrade to its 70-year-old coke and steel works near Pittsburgh. This includes formerly scheduled work on its Edgar Thomson plant just south of the city, where much of the equipment predates World War II.

In many respects, this is local news. Its not getting much play outside of Western Pennsylvania.

Of course, local politicians bemoan the cancellation, as do regional workers and union officials. Everyone involved was counting on many cumulative millions of labor hours, with skilled people doing well-compensated craft and trade work over the next couple of years. (Hint: this is what a real economy looks like.)

But this scenario is not to be, per the 120-year-old steelmaker.

According to U.S. Steel CEO David Burritt, the decision to set aside the project was not an easy one. But When facts change, we must change, he said. This is not a decision we took lightly. But the events of the last year gave us the opportunity to reevaluate our capital allocation priorities We know that this difficult decision is the right one for the business.3

What an interesting way to phrase things; that somehow, not upgrading a steel plant is the right decision for a legacy steelmaker. And consider that were currently in the midst of a global boom in the price of steel, iron ore and much more. Apparently, its a cyclical upswing.

But U.S. Steel seems to have better things to do with its money than pour it into an upgrade of facilities in an area where the company has been established since the days of Andrew Carnegie.

When you follow the story, U.S. Steel was shot down by the lack of timely permits to proceed, or soft graft as its called in the regulatory world.

Plus, the company is looking for ways to adapt to the growing body of environmental regulations that crack down on carbon. And making coke and pouring steel from a blast furnace wont get the company there.

Thus we can bid farewell to a $1.5 billion steel mill upgrade. And say hello to less American-based steel, with more foreign imports as time goes by.

Weve touched on this before, here.

On its best days, the U.S. is a tough place to do many forms of business, especially basic industry like mining, milling and primary metal-making. Whatever the industry, whether its steel or something else, the U.S. is expensive.

U.S. real estate is expensive. Regulations and setup costs are high. The legal environment is risky. Wages are first world level (not that theres anything wrong with that!). And there are all those business school lessons about moving production offshore.

In the end, though, the bottom line is that the country will miss out on an upgrade to one of its largest and most iconic steel works. And to make it more bitter, U.S. Steel is backing away from improvements just as the world kicks off on a cyclical upswing.

All this while the Biden administration is embarked on a course to blow giant holes in the federal budget and national credit rating, out of which we might perhaps get a few potholes patched.

Its a sad state of affairs, far above my paygrade to resolve. Indeed, its a cultural thing. That is, collectively its as if the country doesnt know what it is anymore, or where it wants to go. All that our government can offer is stimmy money, ongoing inflation and more scarcity.

And all you can do is invest wisely with your own money and try to stay one step ahead of the wolves at the door.

On that note, I rest my case.

Thats all for now Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King

Managing Editor, Whiskey & Gunpowder

WhiskeyAndGunpowderFeedback@StPaulResearch.com

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1 Bloomberg/Businessweek

2 Joe Biden Wants to Spend $2 Trillion on Infrastructure and Jobs. These 4 Charts Show Where the Money WouldGo, USA Today News

3 Officials Bemoan U.S. Steel Plans to Scrap $1.5B Mon Valley Works Upgrade, Pittsburgh Post-Gazette

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