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Making Sense of the “Bert and Ernie Market”

Posted October 20, 2021

Zach Scheidt

By Zach Scheidt

Making Sense of the “Bert and Ernie Market”

One of my favorite childhood books was a Sesame Street story about Bert and Ernie.

In the story, Ernie breaks the cookie jar and has to put the cookies in a different container.

This sets off an entire chain reaction where the cookies get moved to the sugar bowl… the sugar is then placed in the flower pot… Bert’s flower goes to the milk bottle and on and on.

They even created a song from the story and you can see the lyrics here.

As I look at the challenges in today’s global economy, I’m reminded of this chain reaction. With so many similarities, you could easily call this the “Bert and Ernie market!”

While the book was comical, there’s really nothing funny about the way the dominoes have fallen in our current market.

Fortunately, there are ways you can profit from these crazy reactions. But you have to understand how the pieces all fit together.

Connecting the “Bert and Ernie Market” Dots

The global economy is coming back to life after more than a year of coronavirus lockdowns and restrictions.

That’s a good thing for businesses, employees, investors and pretty much all of us. But the recovery comes with its share of challenges.

Lately, a widespread “everything shortage” has started causing serious problems for our economy.

The shortages have caused inconveniences and annoyances in our everyday lives. And they’ve also led to more serious issues that can cause danger — and even loss of life. So it’s important to take these shortages seriously and work toward solutions.

True solutions will require Wall Street, Main Street and even Washington to all work together. In the meantime, we’ve got a “Bert and Ernie market” where each problem seems to trigger a new issue farther down the economic chain.

Let’s take a look at a few of these chains individually...

Labor, Wages and a Shortage of Services

One of the first challenges that hit our economy was a shortage of workers.

When the coronavirus first hit, companies laid off hundreds of thousands of employees. With lockdowns in place, it was clear that businesses would suffer. And without cutting labor costs, these businesses would go bankrupt!

Fortunately, the government stepped in with programs to help businesses keep their employees, along with extra payments for people out of work.

But a combination of government payments and concern about catching and transmitting the virus has led to a major demographic shift. Today’s labor force is much smaller after many workers decided to quit working altogether.

With fewer workers available, businesses are competing for scarce human resources. The number of employees quitting one job to take another (higher-paying) job is skyrocketing. And with these higher wages, many families now have more discretionary cash available to buy things.

Here’s where the “Bert and Ernie market” starts to snowball.

The tight labor market has led to understaffing at ports, along with a shortage of truck drivers.

This has made it harder to get merchandise to stores and harder to get food and supplies to restaurants.

Economics 101 tells us that tight supplies lead to higher prices. High demand also leads to higher prices.

And in today’s market, we’ve got both tight supplies and strong demand. No wonder the inflation rate has been hovering at the highest level in recent history.

Let’s take a look at another area of concern…

Energy, CapEx, and “Winter Is Coming”

The coronavirus crisis caused a drop off in demand for oil. Factories shut down and vehicles were pulled off the road. In short, global energy needs dropped sharply.

But even before the crisis, environmental policies were creating challenges for oil exploration and development companies. And this caused underinvestment in finding and developing new oil reserves.

Policies in China have reduced access to coal reserves. Coal is the primary fuel used to generate electricity for the country’s growing population.

Across Europe (and the U.S.), natural gas pipeline projects have been canceled. And without these new pipelines in place, certain geographical areas have very limited access to important resources.

Many of these policies were put in place with good intentions.

But policies that reduce carbon emissions (without adding adequate amounts of renewable energy) cause more problems than solutions.

Today, oil prices are spiking because we haven’t put enough money into developing new reserves.

China is running out of power because they don’t have enough coal (or natural gas) to generate electricity.

Without electricity, China can’t manufacture enough steel and other industrial metals. This, even though the world desperately needs China to export these metals.

Natural gas prices are at multi-year highs. And with a cold winter on the way, this could cause a crisis for communities in Europe — and the U.S. too — unable to heat their homes.

It’s like the butterfly effect. Every decision in one area leads to another challenge. And just like the Sesame Street story, this “Bert and Ernie market” solves one problem only to create another.

Inflation, Interest Rates and Risk for Retirees

Shortages create higher prices. That’s an economic fact.

Today’s higher prices are showing up at the gas pump. They’re in the record costs of rent.

Costs are rising for cars, clothes and even to ship gifts to loved ones. And while wages are also on the rise, that doesn’t help retirees who are on a fixed income.

Worse, as inflation picks up, so will interest rates. Market interest rates have already started rising and the Fed is expected to hike rates twice in 2022.

This hurts savers invested in Treasury bonds. It’s ironic because Treasury bonds are supposed to be safe investments.

Higher interest rates cause the value of bonds to move lower. And for long-term bonds, these values can plummet!

Many wealth advisors tell you not to worry. Eventually the bonds will mature and you’ll get your money back.

But if you’re holding a 10-year bond, you have to think about inflation. Yes, the U.S. government will always pay. But while you’re waiting, the value of your cash erodes. And you will miss out on other opportunities with higher rates of return.

Meanwhile, if you have a financial emergency you could have to sell your bonds at a lower price. So there’s more risk as interest rates rise even if you intend to hold your bonds until they mature.

Profiting From the Bert and Ernie Market

Fortunately, there’s good news even with these challenges.

The “Bert and Ernie market” (moving the goldfish into the cowboy hat — or the oil into a diesel burning tanker truck) comes with opportunity as well as risk.

Capitalism has a creative way of solving problems. In most cases there is a profit incentive for creating solutions.

Higher prices entice businesses to provide resources. As more businesses chase these profits, more resources come online. And the increases in supply help to send prices lower.

What does all of this mean for us as investors?

Today, investors can buy shares of companies that profit from higher prices. These companies then help to alleviate the shortages.

These stocks include:

  • Shipping and logistics firms…
  • Oil producers, refiners and pipelines too!
  • Companies that produce materials and natural resources…
  • Even technology companies help ease bottlenecks and shortages.

As investors it’s up to us to pick out winners and losers. By putting capital with the companies solving problems, we’re part of the solution ourselves!

I’ll do my best to help you find those opportunities. And I’m excited to hear how you do with the investments and trades we find along the way!

Here's to living a Rich Retirement,

Zach Scheidt

Zach Scheidt
Editor, Rich Retirement Letter
RichRetirementFeedback@StPaulResearch.com

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