Month: March 2022

As Apple prepares to launch new financial services (including its Apple ‘Buy now, pay later’ program), the company is reportedly planning on cutting ties with its financing partners and instead bring all financial services “in house”.

While Apple shares rallied ever-so-briefly before returning to unch on the day…

…the news rattled shares of its (soon-to-be-former) partners including Green Dot and Goldman Sachs, along with payments rivals like Square and PayPal.

• APPLE RISES ON EFFORT TO BRING FINANCIAL SERVICES IN-HOUSE
• APPLE’S CURRENT PARTNERS INCLUDE GOLDMAN, CORECARD, GREEN DOT
• AFFIRM QUICKLY TURNS NEGATIVE ON APPLE’S FINCL SERVICES EFFORT
• GREEN DOT, GOLDMAN FALL AMID APPLE FINANCIAL SERVICES EFFORT

Here’s how the news impacted shares of Green Dot…

…Square…

…and PayPal.

Other companies, including erstwhile Apple card partner Goldman Sachs, also saw its shares edge lower on the news.

By Tsvetana Paraskova for Oilprice.com

• The U.S. shale industry is racing to ramp up production, “but it won’t be quick.”

• Supply chain bottlenecks are putting a cap on short term output growth.

• At this rate, the United States will not be able to close the global oil supply gap caused by the ban of Russian oil.

All those who have hoped that the U.S. shale patch could ramp up oil production quickly to fill the gap that Russian supply is leaving in the Western oil market are in for a disappointment—at least this year.  Supply chain bottlenecks from workforce to frac sand and equipment are holding back a surge in America’s oil production, even as the White House has changed the tune in recent weeks and called on U.S. producers to increase output. Production is indeed growing, but not at a fast enough pace to offset losses of global supply elsewhere. Not even $120 a barrel oil can prompt shale producers to embark on a surge in output. That’s not only because of capital discipline, which investors demand. Constraints in the supply chain are also hindering massive growth in U.S. oil production. 

So, America’s oil production—while growing—will be unable to offset an expected decline in Russian seaborne oil exports amid a “buyers’ strike” to purchase cargoes from Russia after Putin invaded Ukraine. 

U.S. Production Growth Insufficient To Close Supply Gap 

Rising American oil production is one of the options for closing the global supply gap, “but it won’t be quick,” Claudio Galimberti, Senior Vice President of Oil Markets, Head of Americas Research at Rystad Energy, wrote earlier this month. 

“Any material change is unlikely in the country’s current growth profile in 2022, even amid extremely high oil prices. US oil production will come close to its pre-pandemic levels by growing by about 900,000 bpd from December 2021 to December 2022,” Galimberti added. 

The big difference in U.S. production could be in 2023 if oil prices remain well above $100 a barrel. American production could rise then by up to 2 million bpd, far exceeding the pre-pandemic peak of 12.9 million bpd, according to Rystad. 

Driven by rising oil prices, crude production in the United States is expected to rise in 2023 to a record-high on an annual-average basis of 13.0 million bpd, the EIA said in its Short-Term Energy Outlook (STEO) for March earlier this month. The current estimate is now raised from the 12.6 million bpd forecast for 2023 in the February outlook.

More recently, Ryan Hassler, senior analyst at Rystad Energy, told the Financial Times, “You can’t just immediately turn on the taps.” 

“It will take some time to reactivate the equipment and staff the crews and bring on the additional sand capacity,” Hassler added.   

Frac sand in the biggest U.S. shale play, the Permian, is in short supply, threatening to slow drilling programs at some producers and sending sand prices skyrocketing. This adds further cost pressure to American oil producers, who are already grappling with cost inflation in equipment and labor shortages.  

The U.S. oil industry cannot boost supply significantly right now, as the U.S. Administration wants. 

 For example, even if ConocoPhillips decided to pump more oil today, the first drop of new oil would come within eight to 12 months, CEO Ryan Lance told CNBC earlier this month. 

Despite its flexibility to respond to soaring oil prices, the U.S. shale patch cannot come to the rescue of the increasingly tightening oil market in the short term, commodity intelligence firm Kpler said earlier this month.

Supply Chain Bottlenecks Hinder Massive Near-Term Growth

“Labor and equipment shortages, along with inflation in oil country tubular goods and shortages of key equipment and materials, will limit growth in our business and U.S. oil production. In particular, truck drivers are in critical shortage, perhaps due to competition from delivery services,” an executive at an exploration and production firm wrote in comments to the quarterly Dallas Fed Energy Survey published last week. Another executive noted: “The largest cost increase over the past 12 months for the oil and gas industry is from tubular steel. The inventory has shrunk and lead times have increased. Steel availability and pricing are also delaying quick activity ramp-up among several operators. This is impairing the ability to bring production online faster.” 

Yet another comment reads: “Elevated geopolitical risk, persistent supply-chain issues, continued labor shortages, shrinking capital availability and rising inflation have impacted the ability of small upstream producers to undertake projects that they would otherwise be readily engaged in at current commodity price levels.” 

Supply chain issues, continued limited sources of capital and debt, and severe workforce shortages impact growth prospects. 

Several E&P executives also noted the U.S. Administration’s policies toward fossil fuels that hinder growth and weigh on both the short-term and long-term visibility, with one saying, “The regulatory environment is not friendly.” 

“Washington’s immature “finger-pointing” attitude of blaming the oil industry is sickening and tiring. I wish our administration would wake up and start doing some of the right things. We could use some leadership,” another E&P executive said. 

All in all, U.S. production is growing, but not as fast as the share of global oil supply that may come off the market in the coming weeks and months.   

Two tickets advertised online this week for the N.C.A.A. men’s Final Four basketball tournament on Saturday in New Orleans are some of the highest prices “in recent history,” according to Bloomberg. 

Ticket reseller Gametime listed two tickets in section 113 and 13 rows up from the home bench for an astonishing $18,510 each at Caesar’s Superdome. The tickets are all-sessions and only offered as a pair which means someone will have to fork out $37,000. 

Bloomberg says all sessions tickets “are the most expensive in recent history.” Prices on other ticket reselling platforms like StubHub have fetched around $13,000 for all-session passes. 

This Saturday, StubHub’s average ticket prices cost around $1,071, nearing an all-time high of $1,260 in 2015. 

The lowest cost tickets average around $381, much higher than any other tickets for the Final Four games in the last decade, according to TicketIQ. 

A spokesperson for StubHub, Michael Silveira, said the demand for the Final Four games in New Orleans “is huge.” He said average prices are 80% higher than the 2019 average. Remember, 2020 and 2021 were pandemic years where prices were distorted, which is why StubHub’s spokesperson references 2019 prices (pre-COVID times). 

Bloomberg believes ticket prices are higher because this year is the final appearance of Duke’s basketball coach Mike Krzyzewski, who is expected to retire after a four-decade run. Also, they note it’s the first-ever appearance of Duke versus its archrival UNC. 

Besides the sports aspect of why ticket prices are soaring, there’s also an inflation component. The Federal Reserve has created a wealth effect for 10% of Americans who own most of the assets. This gives people confidence and the ability to spend more. 

Authored by Bill Blain via MorningPorridge.com,

“I would like to come back as the bond market. You can intimidate everybody.”

In bonds there is pain as prices tumble – but that does not change the fundamentals of investing in bonds. The risk is rising bond yields will expose the dangerous over-valuations low rate distortion has caused across other financial-assets, perhaps causing more than a few bubbles to pop.

I think we should pay a quick visit to Bond Market 101 this morning.

Stock markets might move higher because Tesla and Amazon announced stocks splits – bizarrely leading retail investors to believe they can own more of the company for less, or because vague indications of a Ukraine solution mean infinite upside. These illustrate the equity market is a perverse voting machine, reflecting flawed expectations because participants think as clearly as mud.

Bonds are different. Bond markets are also subject to participant voting, but they move with mathematical grace and elegance… or, at least they are supposed to. It’s the maths that makes them so critical for institutional investors in terms of their predictability to meet future liabilities and generate dull and boring returns. In Equities there is the excitement of potential appreciation, in bonds there are steady returns – which is why the old adage about the percentage of bonds in your portfolio should match your age.

Judging by the number of articles in recent weeks panicking about “catastrophic” bond routs, and inverted yield curves, it might be time to remind ourselves on the fundamentals of bond markets, and why bond traders and fixed income managers are the smartest bods in finance.

The mathematics of bonds, and concepts like duration and convexity (which measure the sensitivity of a bond to changes in yield and price) are as complex as you want to make them – but fear not… I shall try to explain them in simple terms even I can understand by simply not mentioning them again….

(Christ on a bike – why am I even trying to explain bonds??? Trying to explain fixed income to equity investors is about as likely to succeed as teaching a rhinoceros to juggle monkeys, and vice-versa.. (Picture, if you will, an equity monkey trying to explain Tesla to bond rhinos!))

But, hey-ho, let’s give it a go…

In recent weeks bond yields have risen as central bank tightening and inflation expectations take hold… Rising yields means prices fall. (Doh!) Prices of low coupon bonds are more sensitive to changes in yields than high coupon bonds, and as 95% of global bonds have been issued in the ultra-low rate environment of the last 10-years, thus the price falls look precipitous even though yields have only risen less than a hundred basis points or so.

Let me try to illustrate the most dramatic aspect of this “Bond Catastrophe” with a classic horror story: Austria’s Euro 4 billion 0.85% 2120 “Century” Bond.

• It was launched in June 2020 at a yield of 0.88%,

• As interest rates fell, it rose to a price of 133.00 in Nov 2020.

• The price has tumbled by more than half – it now trades at a price of 65.00%,

• The yield has risen to 1.55%, thus,

• The price collapse is dramatic,

• But it will pay investors 85 cents per Euro 100 each year, and repay in full at 100% in June 2122 (subject terms and conditions, such as Austria still being there…)

Ah.. the magic of bond maths! (Yes; maths, not “math” as dyslexic Yanks misspell it.)

As a result of spectacular bond price changes, it’s no surprise I’ve been reading a plethora of despairing articles about bond market doom’n’gloom. There is lot of “End of the world” stuff. Financial scribblers have picked-up my mantra about “in bond markets there is truth”. They assume tumbling bond prices must mean bond markets are about to deliver death and destruction in the way the Kremlin can only dream of.

There is destruction if you bought bonds to trade – that a function of price. You have lost – thus far. Many people think bond yields could reverse and prices rise again: for all the tough talk about rising rates, they reckon central banks will blink and bail out markets by keeping rates low. It’s a contrarian trade.. and it might happen.

Meanwhile, the scribblers write how rising yields have  triggered a massive collapse in bond values. But, even that’s not actually true – rising yields don’t change the “value” of a bond. They change its price – which is a different although very painful thing when yields rise. All things being equal it will still pay its annual coupon and redeem on its maturity date. In bonds there is certainty and dull, boring, predictability… (Which is why I hang around with equity people at parties..)

Let’s go back to bond basics.

A bond is a simple IOU. You lend me $100 and I agree to pay you $5 each year in coupon, plus $100 back in 5-years time. Thus it’s a 5% 5-year Bond.

There are lots of different types of bonds:

Sovereign bonds – a county with financial sovereignty (one that controls the printing presses for its own currency) will not default. It sets the risk-free interest rate all assets in that currency are valued against. I put a level between them and…

Government/Semi-Sov bonds – (not everyone with agree with my nomenclature) are bonds issued by governments without financial sovereignty – like any European Euro nations, or agencies guaranteed by sovereign or government bond. Why the distinction?

The UK will always be able to repay Gilts by printing sterling. (That has potential other consequences like currency markets, but for the sake of the argument, let’s not worry.. this morning.) In contrast, the Italians have to politely ask Germany to agree to supporting the ECB lending them more to repay existing debt or approving more bond issuance when they are already up to the eyeballs in debt.… It’s an unsubtle difference.

Generally, the market likes to pretend this is not an issue – or a minor quibble at most. But the reality is Italy and Greek spreads to Germany (how much more yield they pay than Germany) widens every time people realise/remember the EU is not guaranteeing or standing behind Greek or Italian debt. That was illustrated when ECB head Mario Dragi said he’d “do anything”, including dancing naked with a unicorn.. Greece was yielding 25 percentage points more than Germany at the time. Now its 140 basis point – 1.4 percentage points. Draghi’s promise worked, although the unicorn said Dragi stepped on her hooves… Yeah, sure.. Greece is just a tiny bit more risky than Germany… (Choked and muffled laughter…)

Euro government credits are therefore a greater risk than US Treasuries, UK Gilts and Japanese JGBs for the simple reason the ECB is a political construct trying to align the bickering tribes of Europe, rather than a sovereign nation, while hoping German workers will pay the pensions of the French and Italian comrades.

Then you have the credit markets..

Credit markets feature the additional dimension of credit risk – the risk the company won’t repay. That is why they yield more than Govies. Corporates can explode, go bust, default or restructure. Credit risk changes in line with interest rates – generally credit risk rises as interest rates rise because financially stressed companies struggle to pay higher interest charges.

Credit markets can be further subdivided into areas like bank debt, which can be senior, subordinated, perpetual capital and a host of other things designed to obscure and complicate the matter. And then there is secured debt and securitisations.. and other loverly ways we used to relieve German banks of their deutschemarks… ah these were the days…

Bond markets have one apex predator. Inflation. It’s the big issue.

• Lets assume you lend Germany 100 Euros for five years at 0% in a period of zero inflation, its safe money. You get back 100 Euros. The gain is you got your money back – and in such a deflationary market, you might have lost money in gold, housing or stocks.

• If you lend Germany 100 Euros for five years and inflation is 5% per annum, then the value of your 100 euros in 5-years is about 28% less than what you initially invested.

• In the case of the Austria bond 5% inflation means you will have lost about 1100% of your purchasing power within 50-years, so your Euro 100 will be effectively worthless… at least your annual 85 cents will buy you a drop of water – not.

Lots on investors are prepared to take the inflation risk – calculating inflation is often transitory and its worth trading it against the risks of a higher yielding asset that may be less damaged by inflation. They may also believe the world is moving towards deflation, and that the security and risk characteristics of a bond are better than anything else, and that the bond pixies will look after them.

But… The truth is hard to bear…

The real reason everyone is panicking about bonds is nothing to do with the maths of the bond market, or the perfectly predictable shift in prices we are seeing. …

What you need to understand about bonds is that they are very, very, very important. Equity is nothing more than pastry decoration on the financial market pie. Bonds… are the filling. That is because the yield of the bond markets is the de-facto baseline for every other price… As the perceived risks of any financial asset (bond, equity, gold, housing, real assets…) rises, the wider it trades to that base. We call that Govt Bond base yield the Risk-Free Rate.

But a problem has arisen. Since 2008 – when central banks intervened to save markets post Lehman, the waters have become murky… There is the ongoing expectation the Central Banks will step in again, and QE has introduced serious ongoing market distortion from monetary experimentation and artificially low interest rates.

If you artificially keep the baseline bond yield artificially low it makes every other financial asset look more attractive on a relative basis because they yield more… That simple fact basically explains the massive financial asset inflation we’ve seen since QE and central bank bond buying started… Its what’s driven equity prices higher, made the rich richer, and fuelled inequality.

But if you are an equity investor, you don’t call it financial asset inflation – you’ve embraced it as the great 2009-22 Equity Bull Market.

 Sorry to burst your bubble… but its low interest rates rather than fundamental corporate value that underlay the bull market…

And now its about to pop.

This is where reality punches you harder than Will Smith ever could. We’ve all known that ever since Central Bank started distorting markets it would come to an end. When bond yields start to normalise… well that’s when the pain will spread not just to the inflated equity markets – but everything else priced of the Govie risk free rate – which is basically everything…

And that, boys and girls, is why you shouldn’t panic about bond markets…. you will likely get your money back (minus inflation.) In fact, that’s why bonds will be a safe-haven if things really deterioriate..

Don’t panic about bonds… but maybe just a wee bit of panic about every other asset in your portfolio…

Ouch….

When OPEC+ meets on Thursday in what is set to be another extremely short meeting, the world’s largest oil exporters will ratify another scheduled oil production increase of ~400k b/d to avoid “public rupture” with Russia, RBC oil strategist Helima Croft said in a report. Still, “there could still be scope for a policy shift at a later date” if the Russia-Ukraine war drags on and the U.S. offers key Middle East members a new security arrangement. We would beg to differ with RBC, and we’d claim that in a market so jittery oil has traded from $98 to $128 to $98 to $121 to $110 in 30 days, expect OPEC+ to do absolutely nothing for a long time.

Meanwhile, separately OPEC predicted that the oil surplus in the first three months of the year was much smaller than the cartel had expected, even before Russia’s invasion of Ukraine upended the market. According to Bloomberg, OPEC analysts slashed their estimates of the first-quarter surplus to 600,000 barrels a day on Tuesday, down from a prediction of about 1 million a day earlier this month. Back in January, the group had projected a glut of 1.4 million a day.

While the committee’s deliberations – in preparation for a meeting of OPEC ministers on Thursday – are still ongoing and the figures could be revised, there are plenty of reasons why stockpiles haven’t piled up as much as anticipated. On the demand side, consumption has bounced back from the pandemic far more vigorously than predicted, as the easing of restrictions gets drivers back on the road and economic activity generally resumes. At the same time, the supply side has seen a variety of disruptions, from the impact of freezing storms in North America to militia sabotage in Libya. And the OPEC+ alliance itself has struggled to restore production halted during the pandemic.

Looking further ahead, OPEC has a softer view than it did before: the group now expects an excess of 2.5 million barrels a day in the second quarter, instead of 1.6 million. For the year as whole, that means an overhang of 1.3 million a day versus 1.1 million projected earlier this month.

But, as Bloomberg’s Grant Smith notes, with so much turmoil in the market, it’s hard to see those forecasts surviving the turn of events. In late March, Russia’s exports slumped by at least a quarter amid an international boycott, so if anything the outlook may turn even more bullish.

Meanwhile, speaking of oil price’s rollercoaster moves, the high level of anxiety in the oil market is a danger to the frothy risk rally under way globally Smith notes, adding that we had a glimpse of what a de-escalation in the war in Ukraine might look like overnight. However, oil’s implied volatility is still near multi-month peaks, even though the VIX index has tumbled to well below its pre-war levels.

Heading into tomorrow’s OPEC+ meeting, crude is already rebounding as its price risks remain tilted to the upside on multiple fronts, and while OPEC+ will stick to only a modest output gain despite calls for more supply, prices will stay supported as long as the war goes on, keeping traders on edge over supply shortage concerns in a tight market. In turn, sustained gains in energy costs should continue adding upward pressure to inflation.

Via SchiffGold.com,

Is the US about to go the way of Japan?

The Japanese yen tanked after the Bank of Japan vowed to buy an unlimited number of Japanese government bonds in order to hold the 10-year yield under its 0.25% target.

This is literally quantitative easing infinity. If the central bank is going to buy an “unlimited” quantity of bonds, that means it will create an unlimited quantity of yen out of thin air.

No wonder the yen tanked.

The Bank of Japan followed through, buying just over $500 million in bonds on Monday and another $2 billion on Tuesday morning.

Think about this from an investor perspective. If the Bank of Japan is willing to buy bonds at an artificially high price, why wouldn’t you sell your bonds to them? This creates a scenario where the central bank could potentially own virtually all of the government’s bonds if it follows through with this scheme to the bitter end.

Why did the Japanese central bank make this extraordinary move? Why is the Bank of Japan price-fixing the yield on government bonds? Why is it trying to control the long end of the yield curve?

The Bank of Japan has been monetizing Japanese government debt for decades. The debt to GDP ratio in Japan is at about 250%. They justified this by claiming there wasn’t enough inflation in Japan. In fact, Japanese officials have blamed the economic malaise in the country on a lack of inflation. In his podcast, Peter Schiff said this has been a lie all along. The lack of rising prices isn’t a bad thing.

Today, CPI in Japan is 2.7% and wholesale inflation is 9,3%.

How can anybody argue that the problem in Japan now is not enough inflation and the Bank of Japan should double-down, in fact, infinity-down on the very policy that was pursued when their goal was more inflation?”

If the Bank of Japan’s goal was to create more inflation, it succeeded. Why doesn’t it now let interest rates rise? Why keep printing money?

No. They’ve got all this inflation, and apparently, they need more. Apparently, it’s not enough. What that shows you is that this was never about inflation.”

So, what is it about?

Why was the Bank of Japan buying all of these government bonds? Why was it trying to keep interest rates from going up? Because the Japanese government has so much debt that if interest rates went up, all hell would break loose because the Japanese government would then have to level with Japanese voters and say, ‘You know what? We racked up all of this debt. Time to pay the piper. We’re going to have to have huge tax increases to cover this exploding debt burden.’”

Of course, Japanese politicians don’t want to be held accountable for their reckless spending. They don’t want to have to give voters the bitter medicine of tax increases. They don’t want to cut government spending. So, the only way they can spare the Japanese people from higher taxes is to buy bonds, monetize the debt and keep interest rates artificially low.

But now they have an inflation problem. In fact, they likely had one all along. The Bank of Japan’s monetary policy likely robbed the Japanese of falling prices they would have enjoyed from their productivity. But now, prices are rising and the central bank is pouring gasoline on the fire because it’s more concerned about the Japanese government’s ability to service its debt.

Peter said he thinks at some point, the Bank of Japan will have to flip and turn away from this extraordinary loose monetary policy. If it doesn’t, the central bank’s balance sheet will explode. And inflation will explode.

The Japanese are going to get clobbered by the inflation tax. The Bank of Japan is trying to spare Japanese politicians from the embarrassment of having to raise taxes. Well, the Japanese public are going to pay taxes one way or another. It’s either going to be official tax increases or it’s going to be the inflation tax.”

Does this sound familiar? Because the question is how long before the Federal Reserve has to turn Japanese?

Peter said he thinks what is happening in Japan right now is going to happen in the United States.

Say what you will about Germans, they have a distinct hate-hate relationship with hyperinflation, having been one of the very few “developed” nations to experience it in the not too distant past courtesy of Rudy von Havenstein’s application of “Modern Money Theory” to the Weimar Republic back in 1921 with less than stellar results. Well, Germany may soon enjoy double (and triple) digit price gains quite soon.

When asked by Frankfurter Allgemeine Zeitung about the possibility of double-digit inflation rates, Volker Wieland, a member of the German government’s council of economic advisers said that “it can’t be ruled out, especially if Russia stops oil and gas deliveries or if there’s a total import embargo, then I think inflation rates in this magnitude would be conceivable.”

Now if only Germany hadn’t allowed its energy policy to be determined by a petulant, publicity obsessed Swedish teenager, and if the country actually had some strategic views on how to maintain at least some energy independence, none of this would have happened (as we warned last summer in “Will ESG Trigger Energy Hyperinflation“). Unfortunately that wasn’t the case.

Surprisingly, Wieland didn’t fully lay the blame for Germany’s upcoming hyperinflation on Putin sand said that the “future path of inflation is very strongly linked to what the ECB does.” adding that “personally, I would be in favor of acting more quickly and of raising interest rates briskly.” Which is a great idea, if only the ECB didn’t have a rather catastrophic track record of hiking rates into an economic debacle and sparking historic sovereign debt crises in the process.

ECB sarcasm aside – which is not easy as one can never be sarcastic enough about the world’s most clueless ‘buy only’ hedge fund central bank – the reason why the topic of double-digit German inflation emerged is because earlier today analysts were shocked (again) when German headline inflation printed 7.6%yoy in March, sharply above consensus expectations of 6.8%, and up from 5.5% in December.

Here are some more details courtesy of Goldman:

• 1. German headline inflation was 7.6% yoy in March, sharply above consensus expectations, and up from 5.5%yoy in December. The press release highlights the rise in energy prices following the outbreak of the war in Ukraine and supply chain bottlenecks as driving forces behind the high March print. According to the release, an equivalently high inflation rate was last recorded in the autumn of 1981 in Germany.
• 2. With the German and Spanish releases in hand, we update our tracking estimate of Friday’s flash March Euro area HICP inflation (Exhibit 1). We upgrade our headline inflation forecast to 7.72%yoy, from 7.56%yoy previously, signalling sizable upside risk to consensus expectations. We leave our core inflation tracking estimate unchanged at 3.12%yoy. With a few more days of energy price data, we also increase our Italian headline HICP inflation forecast to 7.9%yoy (from 7.4%yoy previously) and lower our French headline inflation forecast to 6.1%yoy (from 6.3%yoy previously).

Finally, for those who think that double digit inflation is in the bag but triple digit is clearly hyperexageration, here is what German PPI looks like: in February it hit 25.9%… and that was before the Russian invasion really pushed commodity prices into overdrive.

So how long before German prices double over the past year (i.e., 100%+) and how long after that before they are passed on to consumers? And to think that at least Germans were smart enough to recognize those clueless politicians who would sell them down the river for just a few minutes in the global virtue signaling limelight with the likes of John Kerry, even if the outcome was the second coming of Weimar hyperinflation…

U.S. consumers’ loyalty to brand names at supermarkets is quickly evolving as they try new grocery products amid snarled supply chains and high inflation. 

Top food companies like Kraft Heinz Co. and Kellogg Co. are at dire risk of losing market share as supermarket operators grapple with shortages and fill empty store shelves with lower-cost brands, industry insiders told WSJ. 

American households are money-conscious more than ever as inflation hits four-decade highs and takes a bite out of their monthly spending budgets. Some consumers have broken ranks of years and years of brand loyalty only to buy whatever is on the shelf, often generic brands.

“We see people make more choices on items because they are available,” said Tony Sarsam, chief executive officer of grocery chain SpartanNash Co.

Sarsam said SpartanNash had reduced shelf space for food products from major brands because of shortages, allowing it to expand room for local brands, which had more dependable supply. 

Private-label consulting company Daymon Worldwide Inc. conducted a survey between May 2020 and August 2021 and found 70% of U.S. consumers bought new or tried different brands in a post-pandemic world. This means brand loyalty could be collapsing as consumers buy what is available and the cheapest. 

Even though consumers generally buy familiar brands, industry analysts show high inflation and belt-tightening by households have forced many to find a better deal to make their dollars go further, even if that means buying generic brands. 

84.51 LLC, a data analysis business of supermarket giant Kroger Co., also confirms consumers are switching to low-cost brands. 

Kroger’s 84.51 said that 90% of consumers are willing to try another brand if their primary brand is unavailable. 

WSJ spoke with one consumer in Fort Lauderdale who has been, like many other Americans, trying out new brands because the ones they wanted were out of stock or because prices were too high. 

The days of supermarkets carrying only top-shelf brands could be over as shortages and inflation open new opportunities for food companies that can deliver low-cost products. 

The shift in shopping behavior is a significant warning for major brands as supermarkets are desperately trying to fill shelf space amid shortages. People are more inclined to try new brands, and many seek low-cost ones. 

“There hasn’t been a lot of customer resistance,” said Jonathan Weis, chief executive of Weis Markets Inc., referring to consumers trying generic brands. “They’d rather get orange juice than no orange juice,” he added.