3 Interesting things that happened last week #4

We tend to be busy with all the things coming up next week, but sometimes it’s good to look back through the rearview and see what’s behind us.

Here are there interesting things that happened last week…

1. A STORY ABOUT BITCOIN AND PIZZA

I’m sure you’ve seen and read a lot about Bitcoin over the last week, so I’ll do my best not to bore you with more!
Last week was a very special day in the history of Bitcoin. Because on May 22, 2010, the first purchase of goods in Bitcoin happened. What were these pioneering purchases? Two pizzas were bought for 10,000 Bitcoin, the equivalent of US$41 at the time. Even then that was a lot for two Papa John’s.
A decade later, those 10,000 Bitcoin have been worth as much as $630 million when Bitcoin hit it all time – and I thought you had made some bad financial decisions.

What Does A Decade of Technical Data on Crypto Tell Us?

Cryptoassets are still very new compared to more mature asset classes like shares and bonds. But they not as new as they were when a couple of people on a message board were still trying to figure out how to buy pizza with Bitcoin.
Looking back on the historical data of bitcoin, its last major collapse was in 2017. A supply-reduction year (halving) happened the previous year in 2016, and the dip lasted until 2019. Halving also took place in 2020 and since the all-time high for Bitcoin earlier this year, the prices of crypto have collapsed in 2021.
Since 2010, the average fall from a record high has been 48%. As the numbers in dollar terms have gotten bigger so the falls have become more and more newsworthy.

Is Volatility Bad?

There has been a lot of negative news about the volatility in crypto. But what if I told you about a company whose share price falls on average 31% a year? And that on 5 occasions its share price has fallen over 50%. Twice it has even fallen over 90%. In the first few years, its volatility averaged over 100%.
Last year alone it fell 20%, then rose 90% before falling nearly 15%.
Any idea which NASDAQ listed company has averaged 80% volatility in its 24 years since it first went public?

Volatility Can Be Your Friend

Bitcoin shares the metric with the world’s dominant seller of goods via the internet. Amazon stock has a very similar level of volatility to Bitcoin, especially in its first decade. According to Bloomberg, Bitcoin’s appears on track to become less volatile than Amazon’s reading in 2022. However, Bitcoin’s volatility is only likely to continue until it reaches greater market depth.

Global Digital Reserve Asset Bitcoin vs. Plenty of Speculation Bitcoin

Bitcoin is rare in that it has a fixed mining schedule and this plays an important role in its supply and demand dynamics, which in turn plays an important role in price discovery. Bitcoin has an annual compounded growth rate of 223% per year for 11 years, so upside volatility can clearly be your friend. Some would argue holding an asset that has volatility is the whole purpose of investing. That is the game speculators play.
Its unique attributes are propelling it toward the status of a global digital reserve asset, which differentiates the benchmark from the 8,000 plus crypto-assets.
Volatility can often evoke emotional responses from people, especially when it comes to cryptocurrencies. I personally don’t think the selling is over just yet.
 

2. CONSTRUCTION MATERIALS SHORTAGE

The re-opening has been much needed. Lockdowns are lifting, economic activity is rising, and we are even allowed to hug again.

A Tale of Two Cities

You just have to look at the London skyline over the last few weeks and you will have noticed the speed and scale that large new cranes have cropped up. The construction industry has experienced a different pandemic to some of the others industries, like the restaurant industry for example (next week I’ll talk about the restaurants).

Costs Rise at Fastest Pace Since 1997

There is a construction boom going on, not just in the UK, as governments try to build themselves out of the Pandemic Recession.
The UK housing sector remains underpinned by a massive supply-demand imbalance that has been exasperated by the pandemic, and this is leading to double-digit inflation.
Last week IHS Markit released the latest Purchasing Managers’ Index. It showed that overall construction costs were rising at the fastest pace for 24 years and rising at the fastest pace since the survey began in April 1997. In the survey, construction firms also said that new orders were rising at the fastest pace for almost seven years.
Official data from the Office of National Statistics show that construction and infrastructure was the first sector to exceed pre-pandemic output levels as early as far back as November last year.
Then in April, the UK government said it will allow construction companies to claim a super-deduction. That means 130% tax relief on all new plant and machinery. Who wouldn’t take advantage if they could?
And it’s not just private companies driving this construction activity. Civil activity increased in April with Highways England also seizing the opportunity to fast-track projects. And as other infrastructure projects such as HS2 also ramp up, there is an inevitable impact on supply/demand balance.

Demand Booms

Demand for building materials has skyrocketed more recently as housebuilders try to catch up on the progress they missed during the latest lockdown. This is creating massive shortages of construction materials such as aggregates, timber, steel, cement and concrete products. High international demand has also prevented UK-based buyers from rebuilding their stock.
On the one hand, the strong demand has contributed to the rise in costs. On the other hand, this is leading to much longer wait times for deliveries from suppliers. The cost of a number of materials had risen by almost 20 per cent since April 2020.

Key Items in Short Supply

Timber, roof tiles and roof membranes are the worst-affected products. Timber, in particular, has seen an upping in demand with a renewed focus on green energy and net-zero construction, as timber has large carbon-storage potential. Imported wood rose prices were up 16.6 per cent in the year to March 2021.
There have been also shortages and depleted stocks of raw materials like polyethene and polypropylene, used in plastic pipes, meaning plastic prices have shot up.
Last week British Steel stopped taking orders on structural steel sections due to what they called “extreme demand”, and there are concerns about the move will lead to “panic buying”, making the situation even worse. Fabricated structural steel prices have risen by 17.6 per cent.

Brexit-related complications haven’t helped

In some cases, 80% of construction materials come from Europe. For new-builds, this can be up to 90% according to the Department for Business, Energy and Industrial Strategy (BEIS).
Cement is one material where the vast majority used in the UK is actually produced in this country. This hasn’t stopped cement being added to the list of items facing shortages as supply has also been hit by production constraints. The price of concrete reinforcing bars was up 19.8 per cent as producers have struggled to source hauliers to transport cement around the country.

The Biggest Increase in Demand for Workers Since December 2015

The booming work levels have led to the steepest increase in demand for workers since December 2015. Contractors in the commercial market have seen a surge in work and the sector, like many others, is facing a labour shortage. Vacancies rose 50% according to Hays.

Skills Gap

Employers are beginning to identify a big skills gap in the construction sector with demand and supply not matching up. Brexit hasn’t helped here either. According to the ONS 113,000 EU-born professionals currently work in the skilled construction and building trade in the UK – a 46 per cent decrease from previous ONS data which reported 208,000 skilled EU workers.
 

3. IS GOLD STILL A GOOD INFLATION HEDGE?

The benefits of a recovering global economy are being weighed against the possibility of high raw materials and a higher velocity of money as economies open up. If inflation does take off this year, you won’t be able to say we weren’t told and there has been a lot said about the inflation risks for many months now.
Even the legend Warren Buffett joined the growing ranks of nervy inflation watchers.
We’re seeing very substantial inflation – it’s very interesting. I mean, we’re raising prices. People are raising prices for us. And it’s being accepted… The costs are just up, up, up. Steel costs, you know, just every day, they’re going up… But there’s more inflation going on than – quite a bit more inflation going on than people would have anticipated just six months ago or thereabouts.
– Uncle Warren
The supply squeeze has meant commodities from copper and iron ore to lumber and corn are sky rocking in value, most of them are at record highs. The next “commodities supercycle” is well underway.

Can Gold Be A Hedge Against Inflation?

Gold is often seen as an asset that stands to benefit from rising inflation. This is because inflation progressively reduces the buying power of cash, including how much gold you can buy with your cash.
The fact that it can’t be devalued in the way that fiat currencies can mean historically its value tends to rise with inflation. So it’s true that gold has been more likely than not to do well when inflation is high, but it is not certain to do so.
In fact, gold has been poor protection against inflation. For example in 1975, when inflation was almost 25 per cent, gold prices actually fell. Since the global financial crisis and the subsequent European sovereign debt crisis, the link between gold and inflation has grown weaker. Part of this is down to the QE unleashed post-financial crisis flowing mainly into financial assets like shares, bonds, and property. Consumers missed out and inflation stayed low.
I would go as far as saying that if gold was really a great short-term hedge against inflation its price in real terms – that is, adjusted for inflation – would never fall. Unless there was deflation.
If we do get a strong economic recovery, and inflation rises, investors tend to dump safe-haven assets like gold under those conditions in favour of riskier assets, like shares. Also, if interest rates do begin to rise, gold pays no income and becomes less attractive to investors.
Inflation in the future isn’t guaranteed and Central Banks disagree with Uncle Warren about the potential direction. The Bank of England expects an uptick in inflation to be modest and transitory. Over the medium term, economic slack and the deflationary forces of new technologies and innovation could keep inflation at low levels as they have been for the last decade.

Sign-up to get free insights that will help you Get Rich Slowly!