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Tuesday, June 15, 2021

A transitory surge cools off.

Two months ago it took only one thing to be rich.

And that was a piece of lumber.

Through the spring, the surge in lumber prices became the market narrative as it covered every pandemic-related trend: Labor shortages, shipping constraints and housing demand — all in one place.

But now it looks like the latest mini-bubble to hit the market has started to pop, and offers us a preview of what's to come across the economy.

On Monday, the lumber futures contract traded back below $1,000 per thousand board feet for the first time since late March. A level that is still elevated to be sure, but back in line with pandemic-era peaks seen in late summer 2020, and the early winter of 2021 (before the spring's epic short squeeze).

During the housing bubble, the futures contract for random length lumber never traded above $500 per board feet. But by early May, lumber futures were trading hands for more than $1,600 per board feet. This surge was adding as much as $36,000 to the cost of a new home; on average, new homes sell for around $400,000.

So while Cathie Wood may have become the face of the pandemic stock market rally, actual wood had become the market's hottest trade.

We've called this recovery the "not enough" economy as demand for almost everything — workers, vacations, dinner reservations, and so on — outstrips supply. Another way to slice this narrative is, as Bloomberg's Joe Weisenthal has argued, to call this an economy facing a series of short squeezes.

Used car prices, for instance, have been ripping higher as demand rises and supply is constrained. The used car market is, in essence, facing a short squeeze.

So too is the global shipping market, as Insider's Rachel Premack outlined in a piece last week. And on the housing side, economist Ali Wolf told Bloomberg recently there's been something of a "buyer's protest" in the market as prices for single-family homes in the U.S. have exploded over the last year.

But each of these markets — autos, shipping, housing, among others — has become imbalanced, because of one-time surges related to a dramatic and synchronized shutdown, and then re-opening the world's largest economy.

When the Fed says inflation pressures will be "transitory," what they mean is that prices across each of these categories facing short squeezes right now will start to make more sense. It just so happens that lumber is just showing us the way.