In today’s Exponential Investor

  • No doors for you, or a new car, for that matter…
  • Higher rates and recrunched numbers…
  • Coinbase proves that…

We’re looking to do some renovation work on our house.

The problem however is that we can’t get anyone to do the work. It seems that the demand for builders has gone through the roof.

Whilst attempting to get a builder, we figured that we may as well start looking to get some of the major materials needed, or at least quotes for them.

In doing so, we found that there’s a fair bit of glazing we need… for bifolds, doors, etc.

Without exception, every company contacted has preached at us from the same gospel. They told us to expect delays in delivery, as they are pushing out anticipated delivery dates due to Covid-19.

This is commonplace it seems.

Every builder we have spoken to as well, has explained that they’re busy and booked also because jobs that should take days, take weeks. Jobs that take weeks, now take months and some that take months, are taking many months.

Supply chain blues

This is all due to issues with supply chains.

This in turn is also making the cost of work more expensive.

Shortages of supply, at a time of rising demand, will squeezes prices higher here in the UK.

This is on top of the other effects of the actions that governments and central banks have taken during the last 18 months to boost economic activity – such as quantitative easing (QE – the creation of money and the purchase of bonds by central banks).

Together, these issues represent a double whammy – boosting inflation.

Therein lies opportunity though.

The opportunity is investment in some of the key industries that can become more profitable as they can adjust margins to benefit from these pressures.

Here’s a look at two of those industries which we believe investors should be taking a harder look at…

Construction

In construction, the shortages in materials have stemmed from the post-pandemic building boom.

Demand for new-build homes has soared, as people have adapted to increased home working.

Also, many are dipping into their increased savings accumulated from being sat at home twiddling their thumbs.

Home improvements and renovations have also been a feature of the pandemic.

But ultimately, all those swanky, and probably “OTT” new home offices have come at a cost to the construction industry.

It has led to demand for “construction materials” which includes materials used for building purposes, such as timber, steel and cement, rapidly outpacing supply.

As a result, the price of these materials has, on average, risen by 14.7% compared to this time last year.

Construction output growth reached a 24-year high in June 2021.

You can only imagine the sort of prices that are being passed on to the consumer.

Perhaps many people are thinking like us – looking to put any non-urgent home renovations on hold for a little while until the delays and costs settle back down.

Semiconductors

Another shortage, that has been well documented here at Exponential Investor, is the shortage in semiconductor chips.

They are an essential component in car systems, including display, safety and braking.

Production lines across major car companies have been severely affected.

According to a report by Fleet News, delivery times for cars has doubled from three to six months. In addition, UK car factories only produced 69,097 new units in June 2021 – the lowest outcome since June 1963.

This has contributed to the sharp rise in the price of second-hand vehicles.

It’s no wonder that every other advert these days seems to be Philip Schofield doing a handstand for WeBuyAnyCar.com.

Car retailer BuyaCar.co.uk reported has seen the average price of a used car rise from £13,108 in January 2021 to an all-time high of £15,399 in May 2021.

It has been the only conceivable way for consumers to get their hands on a car, without a long wait for a new one.

The shortage has stemmed from the pandemic. Heightened demand for electronic devices bought about by increased home working has led to a supply and demand imbalance.

In addition, car factory closures and a spike in demand for cars, has created supply bottlenecks, which simply cannot be unblocked in a hurry.

At the forefront of the demand for new cars have been electric vehicles (EVs) – which are now being produced at a large scale as the world undergoes a wholesale transition to green energy.

With the semiconductor shortage and high car prices showing little sign of waning, it might just be worth getting out a form of transport which had something of a revival during the depths of the first lockdown.

The transportation in question has tried and tested technology, can be parked almost anywhere and produces zero carbon emissions…

… so, our suggestion is to “get on yer bike”.

Will you be able to afford your house in two years’ time?

Construction and semiconductors are indeed two areas where supply chain squeeze results in price inflation and potential reward for investing in the right companies.

But runaway prices also mean something else.

Something that you need to be prepared for, that we suspect many people aren’t.

When inflation starts to become an issue in an economy, the central bank typically needs to act to “cool” the economy, stifle growth and keep prices under control.

Historically their most popular method to achieve this is to lift the interest rate.

It doing so, this discourages borrowing, aiming to quash investment, and just ease some brakes on to growth.

This is in theory designed to just keep growth under control, prices under control and allows the economy to settle itself without destroying people’s purchasing power.

That’s a simple way of explaining what happens when inflation can get out of hand.

The problem with this is that also tends to hammer the housing market if rates must rise by a lot to halt runaway inflation.

We’re not talking raising rates by 0.25%. In fact, we mean consecutive raises, so that the rate goes back to levels like 3% or more.

Now, imagine that you come out of a fixed-rate period on your mortgage which is around 1.75% now. The next deal you can lock in is 3.75% or more.

Let’s say you’ve got a £225,000 mortgage for 30 years. At 1.75% you’re paying around £804 a month.

If rates bumped to 3.75% then you’d be looking at a monthly repayment of £1,043 per month. That is almost a 30% rise in the biggest monthly costs most households have.

But rather than think of it as a 30% jump in monthly costs, think of it as a 30% pay cut.

If rates were to rise to control an uncontrollable economy, do you have 30% wiggle room in your budget?

Think about it.

… Wall St doesn’t get crypto

Finally, if you were in any doubt about how misunderstood crypto investing is the conventional financial markets in the United States, just look at the latest filings from listed crypto-exchange Coinbase.

Wall Street analysts had been expecting Coinbase to post revenues around $1.85 billion for the quarter. In fact, the company reported $2.23 billion.

The analysts had been expecting trading volume to be around $381 billion. Coinbase reported $462 billion.

It’s not uncommon for analysts to publish estimates that are too pessimistic (or too optimistic).

However, the size of the discrepancy goes a long way to showing that the don’t understand the capacity for the crypto community to ramp up activity; nor do the analysts properly recognise the flow of new users into the crypto revolution.

All this is at a time that Coinbase’s share price has fallen from where it was just after the company’s initial public offering – and that is additional food for thought.

Until next time…

Sam Volkering
Editor, Exponential Investor

PS We know what inflation means for real life. But what about for financial markets? The answers for UK investors can be found in the Money Map – which has been successfully used over the years by a professional wealth manager who has since become an investment guru here at Southbank Investment Research. For more information click here.