I’m not very active on Twitter.
I use it to curate specific news feeds that follow macroeconomic trends, natural resource fundamentals, geopolitics — particularly China — and sector-specific equity analysts I admire.
I also follow a handful of “personalities” related to investing… names you’re likely familiar with.
I usually try to keep my thoughts to myself… But from time to time, those “personalities” step outside of their comfort zone and into my arena — the natural resource and industrial supply chain.
And surprisingly often, they say something spectacularly wrong about things I happen to know a great deal about… That’s when it’s hard to keep my fingers off the keyboard…
The following word salad is meme stonk darling and Ark Invest CEO Cathie Wood’s inflation projection…
Source: Twitter
I couldn’t help but respond because her inflation projection couldn’t be more wrong.
First off, you can’t use a single metric to draw broad conclusions about inflation.
Secondly, what the heck does she think cars are made of, unicorns and fairy dust?
My Rant on Cathie Wood’s Inflation Projection
Sure, used auto prices will turn around. That’s obvious.
But those only account for 3.5% of the Consumer Price Index (CPI) calculation.
Meanwhile, about 50% of the manufacturing costs of new cars — 3.7% of CPI — are raw materials. Of those raw materials, steel accounts for about 50%.
We talked a lot about raw materials this week, but as a refresher in case you haven’t actually seen a chart of steel prices over the past few months, I’ll post it below… total hockey stick territory.
Source: Bloomberg
A 300% increase in steel alone implies a 50% rise in automaking costs.
And it’s not like steel is the only commodity the industry consumes. Cars are essentially computers now, so they require a hefty amount of cabling…
Copper? It’s up 113%.
Source: Bloomberg
And every manufacturer is trying to improve gas mileage by using lighter materials… such as aluminum — which is up 82%.
Feeling good about your inflation projection yet, Cathie?
Source: Bloomberg
Engines and other custom components require more durable materials that can stand the test of time, such as cast iron… up 124%.
Source: Bloomberg
Then there’s the high-density polyethylene (HDPE) that makes up most of the dashboard and other molded parts. Basically, it’s plastic, which is up 195%.
Source: Bloomberg
Did I mention cars were pretty much just big computers? So they need chips, and semiconductors are up 159%.
Source: Bloomberg
And most people prefer to have cars with seats. Leather costs are up 224%.
Source: Bloomberg
And, finally, the cherry on top: We’re slowly adding labor cost inflation to top it all off.
In materials alone, those price increases add another 35% or more to automaking costs relative to last year, and that’s in addition to the 50% increase brought on by steel.
If labor follows suit — there are several United Steelworkers Union contracts being negotiated this year — then 2021 auto-making costs could double relative to 2020 by the end of the year.
That means for Cathie Wood’s inflation projection of being “transitory” to actually come true, used cars will have to decline by roughly 110% to offset the rise in new supply costs.
And I don’t know about you, but I don’t think used car salesmen are going to be giving handouts anytime soon.
Sorry, Cathie… You’re dead wrong on this one.
All the best,
Matt Warder
