Back to my favorite topic – inflation watching.
I’m not entirely convinced that we in the developed world should be too much concerned about inflationary trends. As I noted last week, there’s absolutely no evidence that normally price inelastic, sticky-price goods are starting to cost a great deal more. That might change – who knows. But I think the evidence for price inflation in the developing world is more substantial. Bloomberg News – here: https://www.bloomberg.com/news/articles/2021-04-24/the-grocery-food-price-bill-is-going-to-get-more-expensive?sref=YsjYbPpy – carried a fascinating story last week. “This week, the Bloomberg Agriculture Spot Index — which tracks key farm products — surged the most in almost nine years, driven by a rally in crop futures. With global food prices already at the highest since mid-2014, this latest jump is being closely watched because staple crops are a ubiquitous influence on grocery shelves — from bread and pizza dough to meat and even soda.” The chart below explains why this food inflation matters in much of the rest of the world. In places as diverse as Nigeria, Kenya, India, and even Turkey, food comprises at least 20% of the total consumer basket of spend. So, if food prices start to rise sharply, that means real pain for many hundreds of millions of people. Thank god for cheap Walmart and Tesco.
Most developed world investors I suspect are rather more concerned about more mundane matters such as dividends. Here in the UK, there was relatively good news this week from the Link Dividend Monitor which reported its Q1 numbers today. This reveals that UK dividends fell at their slowest rate in Q1 since the pandemic began, signaling the start of recovery. About half of the cuts in Q1 came from the oil sector, and we saw the second-highest level of one-off specials on record. More granular detail below:
- Payouts fell 26.7% to £12.7bn in Q1 year-on-year on an underlying basis
- But the decline was the slowest in a year and half of companies increased, restarted or held dividends steady
- Q1 cuts totalled £5.8bn – about half came from the oil sector
- Headline dividends jumped 7.9% thanks to the second-highest one-off specials on record
- Over the last twelve months, the pandemic caused a 41.6% fall in dividends – cuts totalled £44.8bn, as two thirds of companies made reductions
- Greater clarity on outlook for banking payouts means Link Group’s best-case forecast for 2021 reduced to £66.4bn (excluding one-off specials), an increase of 5.6% year-on-year; headline payouts will jump by a sixth to £74.9bn
- Worst-case sees upgrade thanks to greater visibility. Instead of a 0.6% decline, dividends should rise no less than 0.9% this year on an underlying basis
Last but by no means least, I assume most readers saw the excellent Carbon Tracker report on the future of cheap, plentiful renewable energy. You can see a summary of the report here : https://carbontracker.org/reports/the-skys-the-limit-solar-wind/. The headline claim was “with current technology and in a subset of available locations we can capture at least 6,700 PWh p.a. from solar and wind, which is more than 100 times global energy demand”. This is a useful counter to all the doomsday deep Greens who say that technology won’t save us and we need to baton down the hatches, cut back growth and simply consume less. But there are a few challenges. The first is that the technology with the sharpest price declines is incredibly reliant on Chinese imports. As Michael Shellenberger of the (pro nukes) Environmental Progress lobby group reminds us:
“Even the best performing models of the most common types of solar panels only saw their efficiency rise by 2-3 percentage points over the last decade. As such, it is impossible that efficiency increases accounted for the two-thirds decline in the cost of solar panels over the same period. Solar panel makers have in recent weeks sought to reassure lawmakers and journalists that they will quickly and easily relocate their facilities out of Xinjiang to somewhere else in China, and thus that there is no need for the White House and Congress to ban the importation of their panels. Over 200 solar companies so far have signed a pledge to relocate from the region. “Our understanding is that all the major suppliers are going to be able to supply assurances to their customers that their products coming into the U.S. do not include polysilicon from the region,” said a solar industry spokesperson. But supply assurances is very different from supplying solar panels assured to be free of coerced labor. And even moving some factories out of Xianjiang would not address the genocide, noted The Times. “Some Chinese companies have responded by reshuffling their supply chains, funneling polysilicon and other solar products they manufacture outside Xinjiang to American buyers, and then directing their Xinjiang-made products to China and other markets.”
I’d also draw attention to the fascinating chart below from CarbonTracker. It shows the amount of land needed in key geographies to produce all energy from solar – obviously, wind doesn’t figure in this equation. Peering at the chart it suggests something like a bit over 7% of all land in Japan, over 3% in Europe, and not that far under 1% in the US. I’m not entirely convinced that most citizens will be terribly happy if they were told that something like a few percent of all land was being used for solar panels. Clearly, this is only one part of the picture – wind will help and there will be other sources of energy. But I do think that critics will latch on to the argument that we are industrializing our rural landscape. That said, look at the numbers for places like Africa, Australia, and the Middle East. They clearly would only need to ‘glaze’ over with silicon a much smaller proportion of their land.