“In my world, things change radically and quickly every day,” said Dr. Chris Kuehl, managing director and co-founder of Armada Corporate Intelligence.
Kuehl, an economist, was the guest speaker at a luncheon last week hosted by CREW KC.
Pushing those changes are black swans, a term coined by economists 25 or 30 years ago, to explain things that we couldn’t explain, Kuehl said. Today, those black swans which impact the economy are in abundance as we’re still recovering from the black swan of COVID.
“We now know that virtually everything we did in 2020 was stupid. We didn’t know what we were dealing with and we showed that ignorance. So we ended up putting the economy into a tailspin; and we reacted the way you’re supposed to when there’s a recession. You throw money at the consumer and hope that they spend their way out of the recession unless you close everything,” he said.
With the lockdowns in 2020, consumers had nothing to do with the excess funds they received from the government, so they saved. Kuehl said the normal savings rate is 6 percent. But, in 2020, that savings rate rose to 38.7 percent. In 2021, that money came “flying out” and put a lot of pressure on the economy, driving up prices in significant ways.
The second black swan hit when Russia invaded Ukraine, and the United States and its allies, including Germany, imposed sanctions on Russia.
“[Putin] thought the Germans wouldn’t back the sanctions. . . .Germany is in and everybody is in, and you’ve got a much more aggressive response. But, that triggered the energy crisis because if you sanction the second largest oil producer in the world, you have created an artificial shortage of oil and gas. There’s plenty of it, but it just can’t get out of Russia,” he said.
“So, we have an inflation spike that’s been caused by an unexpected black swan war. How long will this last? Who knows,” said Kuehl.
“[Inflation] could moderate really suddenly. If the sanctions were loosened, if Russia starts to negotiate . . . the prediction is the per barrel price of oil drops by $50, $60, $70 literally overnight. The market would respond that fast because the oil is there. It’s in storage. It’s in pipelines. It’s on ships. All it has to do is go to market and it’s out there instantly. So that inflation driver could disappear right away,” he said.
Kuehl said the war in Ukraine also accounts largely for the rise in food prices.
“Russia and Ukraine combined account for 25 percent of the world’s wheat and about 20 percent of the world’s corn. Literally everything you eat has corn in it. So the price of corn goes up, the price of everything goes up,” he said.
Kuehl said the sticky inflation, which is not food or oil related, has remained fairly steady for several years.
“Where we’re seeing all the inflation is fuel and food and all the things that carry from there. . . So we’re seeing a lot of inflation percolating through a lot of stuff, but when you start tracking it back, it goes back to the same origin,” said Kuehl.
Another black swan has been China’s zero tolerance policy regarding COVID, causing a supply chain gridlock. Kuehl said there are 900 container ships, each carrying between 5,000 and 6,000 containers, stuck in port in China.
“If China finally gives up on the zero tolerance nonsense, which isn’t working and hasn’t and can’t, then suddenly the supply chain opens up, and we have product,” he said.
Although the Federal Reserve has raised rates to help curb inflation, Kuehl said it takes anywhere from 18 to 24 months for the Fed rate to have a real impact on the economy, and none of the world’s central banks have much control over the two factors driving prices—the energy crisis and the supply chain issue.
Kuehl said the unemployment rate is unlikely to change much. The United States has seen a labor shortage for the past 10 years. Approximately 20 million baby boomers retired in the last seven or eight years. Jobs abound, but workers are finding new ways to earn money, such as driving for Uber and Lyft or doing laundry in their homes.
The labor shortage has fueled companies to focus on and invest in robotics and automation, he said.
Kuehl said non-residential construction spending has rebounded into positive territory and is being driven by manufacturing and logistics. He said the metro area is going to be the beneficiary of that boom because of the merger of Kansas City Southern and Canadian Pacific Railway.
Rail shipments--somewhere is the vicinity of 800,000 to 1.5 million containers--will be coming into the middle of the United States to do the break bulk.
“And the two biggest railyards in the United States are Chicago and Kansas City. So guess where the storage is going to be. So if there is not a warehouse in your backyard, there will be by the end of the week,” Kuehl said.
And, there is good news about the supply chain as 95 percent of U.S. companies doing business in China actively are looking for alternatives, including Vietnam, Malaysia, Thailand and moving back to the United States. Kuehl said the U.S. already has seen $1 trillion of reshoring this year and probably will see another trillion before year’s end.
The largest solar farm in the world will be hosted on undeveloped land at Kansas City International Airport, which, Kuehl said, will account for approximately 70 percent of the energy in the Kansas City area. Kuehl said he is aware of at least five steelmakers that are looking to relocate to Kansas City because of the cheap power that the solar farm will produce.
Kuehl delivered more positive news generated by Armada’s tracking data.
“We’re definitely going through a slump, but it ends second quarter of next year,” he said.
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Feature photo credit: Marcia Charney | MWM KC