SMID Composite Returns
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Price increases are broadly apparent.
Traditionally, shipping companies provided price increase warnings months in advance. Despite raising prices during the pandemic, package delivery firms have recently made statements regarding an almost immediate 5% price increase due to rapidly increasing costs.
Heating and air conditioner firms are readying their fourth price increase since the pandemic. Expect that announcement in January.
Food companies continue to raise prices to offset higher costs. Many food companies and department store suppliers have contract agreements forcing three-to-six-month notices of upcoming price increases. Store contracts may have clauses limiting price increases to 4%-5% every six to twelve months. Those suppliers will face declining profit margins as it takes them years of price increases to offset recent cost increases.
Massive cargo ships were unloaded seamlessly pre-pandemic when there were just enough freight liners. Today, ships arriving in China are put into quarantine for a week before unloading can begin. Upon arriving at a clogged US port on the West Coast, ships can anchor in queue for weeks. As a result, the number of cargo ships actually moving at any point in time has dropped considerably resulting in capacity constraints.
Loading and unloading goods are further delayed due to a shortage of trailers, chassis and pallets. Due to limited pandemic labor hours, some of this equipment was left at other sites. Some terminals are clogged with excess shipping containers and equipment, while other locations facing shortages charge premiums. As freight is finally unloaded in the clogged port, tight work hours of ports and trucking firms provide additional delays and capacity constraints.
Due to similar congestion and tight labor, many warehouses are less efficient. This leads some firms to strategically delay delivery of their cargo from terminals. It is better for non-perishable goods to sit in a sealed container somewhere else than clog a retailer’s warehouse. Some warehouses are in such disorder, they ask their suppliers to circumvent them by shipping items directly to their stores. One day this month, one of our investments shipped 8,000 boxes of their products to retail stores. Their superior capabilities enable them to win market share, but overworked employees are tired and demanding raises.
It is evident that some store shelves will show higher prices and less inventory. Finding holiday gifts this December may seem as futile as searching for paper goods in March of last year.
With near-term import, labor and shipping constraints, the availability of some goods will be limited. However, the Fed is printing more money and government is spending more money.
When more money chases the same amount of goods, there is inflation. This is not transitory. It is recurring until numerous causes are treated.
Higher hourly wages and labor shortages are prevalent news. Next year, salaried workers will demand raises. As some workers are offered more money elsewhere, they will just not show up at their previous job. Recently, at one worksite six employees earning $14 per hour did not show up for work one day because a new distribution center offered them $20 an hour.
As companies strive to grow earnings over time, they will need to raise prices to overcome higher energy, labor, materials, shipping and various other costs. Many costs will continue to rise next year. Many price hikes will be implemented in 2022 to cover previous costs. Even more price increases will be needed to overcome next year’s cost increases. This inflation is recurring.