The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. The theory defines the relationship between the price of a given product and the willingness of people to either buy or sell it.
Generally, as price increases, people are willing to supply more and demand less and vice versa when the price falls.
The theory is based on two separate “laws,” the law of demand and the law of supply. The two laws interact to determine the actual market price and volume of goods on the market.
Understanding supply/demand dynamics gives important insights into the future of our portfolio especially today, as we come across challenges of the post “COVID” reality.
The public has woken up after hibernating and has started to require material goods for a more comfortable and efficient lifestyle.
However, the global manufacturing and delivery systems are not ready for this surge in demand. Demand is accelerating much faster than production.
Retail sales are at multi-decade highs with an acceleration of consumers wanting to buy goods. They would spend more if the products were available.
Manufacturing however has returned to pre-COVID levels and is able to meet traditional demand.
It is now struggling to expand capacity to meet the new demand.
Supply Chains & Transporting of Goods
Transportation systems are also not able to meet demand. There are not enough truckers, trains, cargo ships, containers, and warehouse space, etc. For example, in a major Los Angeles Port, there are now 86 cargo ships waiting to unload.
With the COVID-19 crisis, fundamental changes in consumer behavior, supply chains, and routes to market are knocking companies off balance. Responding to the pandemic has underscored the need for leaders to accelerate the adoption of agile ways of working and value chain transformation to help outmaneuver uncertainty.
Supply and Demand in Housing
The supply of housing (especially after the 2008 housing crisis) has not kept pace with increased demand – mostly new family formation and with added immigration in the OECD. The UK has one of the highest population growths among developed nations. They need housing. Even the current levels of buildings are insufficient to meet the need often due to labor and material shortages, cost of land and taxes, government zoning regulations, and community opposition.
This “affordability crisis” problem is extending globally – even the US, which was shocked by rapid housing prices increase (average 18%+ last year). The average US house now sells in just one week and is often subject to bidding wars.
Supply and Demand in the Energy Market
Demand for energy has recovered faster than supply. Environmental concerns target the decrease/ elimination of fossil fuels; this supply decrease is not fully met by more alternative (clean) energy. In addition, very high “costs of capital” demanded by investors to replace depleting supplies also constrains new sources.
Production growth is outsourced to OPEC, a monopoly that is using the opportunity to control supply, and due to this even all energy prices are rising in the short term.
Supply and Demand in the Labour Market
The supply of labor has declined largely due to increased early retirement in the 55+ group.
This is due to their investment wealth, housing wealth, and a comfortable early retirement experience with the initial COVID layoff.
What does this mean for us?
Continued high demand for “high safety” vehicles (savings accounts, fixed income) is keeping prices high and cash and bond yields very low.
Combined with higher consumer inflation, cash and bond after-inflation (real) yields are negative and getting lower.
The continued punishment of fixed income investors (“financial repression”) is increasingly causing the public and institutional investors to reallocate funds towards alternatives and private equities. This will provide long-term support for these strategies.