By Tim Courtney, Chief Investment Officer

The process of bringing a product from its beginnings to the hands of a consumer is complex, but for many years, the process worked so efficiently that we took it for granted. That is changing as problems have multiplied since the pandemic. The Red Sea, a vital route for international trade, is experiencing disruptions as attacks on shipping companies have affected a major trading artery, putting ships at risk and impacting the flow of goods.¹ Simultaneously, on the other side of the world, a severe drought has limited the water supply needed to operate the Panama Canal Authority, causing cargo delays in another one of the world’s leading trading passages.² These challenges are raising concerns about the reliability and efficiency of global trade routes. 

Over the past several decades, the United States has heavily relied on outsourcing for supply chain and production, with the military safeguarding shipping lanes. This model worked well, keeping inflation low (roughly around 1.5% on average)³ and trade flowing smoothly. However, the challenges abroad combined with labor shortages in the United States and a heightened regulatory environment worldwide are making it harder to maintain the status quo. The outsourcing to cheaper countries is facing increasing complexity and unreliability, and companies are reconsidering their supply chain strategies. Many are opting to bring production closer to home in the United States, Mexico or Canada.⁴

Moving production away from lower-cost areas to higher-cost locations is likely to be inflationary. Further, the market continues to be more heavily focused on solving digital problems over physical ones. Capital has poured into digital assets and solutions while physical infrastructure (i.e., everything that it takes to move energy, goods and agriculture around the world), including roads, bridges, ports and energy, are relatively neglected. This disconnect also raises concerns about potential inflation; the costs associated with upgrading and securing physical infrastructure are inflationary. The transition to electric vehicles, for example, will require the creation of additional physical infrastructure and more labor.

For several decades we got used to inflation at a little under 2%.⁵ The market today also expects inflation to head in that direction. Based on bond prices, the market is pricing in an inflation expectation of 2.25% over the next decade.⁶ However there are so many variables changing today it is not at all clear that we’re headed back to what we were, up until recently, so accustomed to. No doubt markets and innovation will work as forces to pull prices lower. But other forces are working in the opposite direction, and it is probably premature to declare victory over inflation as some did in December.⁷ This risk remains, uncertainty is higher than it was before the pandemic, and portfolios should still be structured to hedge inflation risk. If you have any questions, don’t hesitate to contact your Exencial advisor.

Sources:  

1. AP News (12/21/23) — How Houthi attacks on ships in the Red Sea are affecting global trade
2. Reuters (12/11/23) — Panama Canal drought to delay grain ships well into 2024
3. U.S Bureau of Labor Statistics Data (1/9/24) — Consumer Price Index for all urban consumers (CPI-U)
4. Supply Chain Management Review (3/2/23) — Supply chain design meets the reshoring trend
5. Investopedia (1/18/24) — U.S. Inflation Rate by Year: 1929–2023
6. Axios (11/15/23) — Americans believe high inflation is the new normal
7. MarketWatch (12/14/23) — Markets are declaring victory over inflation for Powell, and that has some economists worried

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.