If Supply Chains Are Breaking Down, the Economy Is Breaking Down…
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Wednesday, 8 June 2022 — Albert Park  | By Callum Newman | Editor, The Daily Reckoning Australia |
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[6 min read] - How to worsen supply chain chaos
- The supply chain crisis was inevitable
- The solution
Dear Reader, Jim Rickards has explained many aspects of the global supply chain collapse in his recent editions of The Daily Reckoning Australia, from what’s happened to who’s to blame. But today, he focuses on what this all means for us now. As an investor and a consumer, it’s vital to know if it’s going to get worse before it gets better…and the response to the current collapse could definitely make things worse… Below, Jim explains where the supply chain collapse leaves us now and why it may have been inevitable to begin with… Regards, Callum Newman, Editor, The Daily Reckoning Australia
A Short-Term Problem or a Long-Term Catastrophe? |
 | By Jim Rickards | Editor, The Daily Reckoning Australia |
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Dear Reader, The supply chain difficulties will certainly grow worse. Even more troubling is the fact that the remedies will take years and sometimes decades to implement. The reasons for this have to do with long lead times in implementing onshoring. For example, the US can cut its dependence on Asian semiconductor imports by building its own semiconductor fabrication plans (fabs). The problem is that these plants take from 3–5 years to build, and the scale needed is enormous. There are impediments to supply chain recovery that are not directly related to particular supply chains that nonetheless hurt the process of adaptation and substitution. There’s already a labour shortage in the US. The causes are complicated. There’s no literal shortage of potential workers, but many workers prefer to stay home because of some combination of government benefits, childcare responsibilities, or inadequate pay offered by employers (who can’t afford to pay more themselves because they’ll go out of business). A lot of this labour shortage centres on lower-wage jobs such as waiters, store clerks, fast food staff, and office assistants. But there’ll be a labour shortage coming soon in more high-skilled areas such as engineers, pilots, machinists, and medical personnel. This shortage will not be due to low pay, but instead vaccine mandates. Advertisement: DO NOT BUY THE DIP!! Mainstream wisdom says that in times like these you should ‘buy the dip’! Or buy gold…certain treasury bonds…money market funds…and consumer staples. Or just hold your stocks, don’t do anything, just stay in the markets. DO NOT BELIEVE ANY OF THAT. Instead, Jim Rickards and his team have curated a better way to cover your portfolio for what’s happening right now. You can check it out here. |
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How to worsen supply chain chaos President Biden ordered that all federal contractors must be fully vaccinated by 8 December 2021. (That’s in addition to federal workers and the military who are already subject to vaccine mandates and have no choice.) This federal contractor mandate is different from the OSHA vaccine mandate that applies to all employers with 100 or more employees. The vaccinated rate among federal contractors is actually lower than the country as a whole. The national vaccination rate is approaching 70%, while the federal contractor rate is closer to 60%. It’s even lower in some specialties such as avionics. These workers know the vaccine is available, understand the risks (both ways, given the side effects), and have chosen not to be vaccinated. It’s almost impossible to change their minds at this point. The Biden administration hasn’t backed off the mandate. The federal contractor workforce is huge — in the 10s of millions. This could cause a massive wave of resignations and terminations among highly skilled workers on 8 December. Professionals and high value-added blue-collar workers from Boeing to Textron, and hundreds of thousands of other firms, will be fired or quit that day. The US economy is already weak. The supply chain is already in disarray. This mass termination of skilled contractors could put the economy into a recession. Some analysts have even suggested that the global supply chain is being sabotaged by major participants, such as China, to hurt Western economies for geopolitical reasons. It’s difficult to tell if the supply chain is being intentionally sabotaged or whether it’s just collapsing under its own weight. Possibly both. The supply chain crisis was inevitable In a way, it doesn’t matter what caused the supply chain crisis, because anything as complex and as highly scaled as the global supply chain will always collapse. It’s just a question of when. For 30 years, the goal of supply chain management has been efficiency (as noted above), usually defined as the elimination of redundancy, inventory, and latency. That’s fine in the short run, but it results in a system that is brittle and has no tolerance for even small perturbations. It’s also the case that each participant in the supply chain achieves its own efficiencies, but no one is looking at the global system in terms of aggregate resilience. The nature of complex systems is that small causes have tremendous impacts, to the point of total collapse. It’s possible that one or more parties chose to disrupt the system intentionally without realising how vulnerable the entire system really was. This combination of intentional acts and unintended consequences is a staple of history, including the outbreak of the First World War. The point is that once the implosion begins, there’s no way to stop it until you have devolved to a simpler but almost unrecognisable state. For these and other reasons, our expectation is that the supply chain crisis will grow worse from here and persist for years to come. The solution In future editions of The Daily Reckoning Australia, we’ll look at potential remedies to the current shortages. These remedies include onshoring manufacturing and fabrication, shorter supply chains to reduce potential disruptions, redundancy in suppliers and commodity sources, improved communication among supply chain participants, more diverse delivery channels, and a greater willingness to carry inventories. Of course, these changes may increase costs in the short run, but they can reduce disruptions in the long run, which can lower overall costs. Consumers may come to view slightly higher costs as a kind of insurance premium they pay to avoid having no goods at all. Investors may come to view important links in the supply chain as great opportunities to explore. On the one hand, we take supply chains for granted. On the other hand, we can’t live without them. If supply chains are breaking down, the economy is breaking down. If the economy breaks down, the breakdown of social order isn’t far behind. The costs of social disorder are far higher than any possible savings from supposedly efficient supply chains. Regards, Jim Rickards, Strategist, The Daily Reckoning Australia This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.  | By Bill Bonner | Editor, The Daily Reckoning Australia |
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Dear Reader, Elon Musk has a ‘super bad feeling’ about the future. Jamie Dimon says he thinks a ‘hurricane’ is coming…we imagine it’s all swirling around in his brain. The Fed’s ‘tightening cycle’…soaring gasoline and diesel fuel prices…federal deficits out the wazoo…war…sanctions…God knows what else. Already, Americans — especially those who live in trailers — are putting up plywood and checking their toilet paper supply. The LA Times: ‘Americans at the low end of the income spectrum are once again struggling to make ends meet. ‘A confluence of factors — the expiration of federal stimulus checks and surging inflation on staples such as gas and food — is driving an even bigger wedge between the haves and have-nots. ‘Although wealthier shoppers continue to splurge, low-income shoppers have pulled back faster than expected in the last two months. They’re focusing on necessities while turning to cheaper items or less-expensive stores. And they’re buying only a little at a time.’
And of course…there’s ‘The Great Baby Formula Crisis’. Charlie Bilello: ‘Baby formula shortage continues to worsen, with 74% of stores across America out-of-stock (a year ago the rate was less than 5%). 10 US states now have out-of-stocks rates that are 90% or higher, including the most populous state (California). ‘Hopefully, measures taken to increase supply will soon take effect, as 75% of babies use some formula by 6 months of age.’
Don’t worry, Charlie. Babies grow up. Then, they’re able to eat hamburgers. This wicked world As we explored yesterday, most problems are self-correcting — including inflation. The cure for high prices, in an honest world, is high prices. Price increases inhibit buying…which means less demand. They also motivate producers to bring more product to market, which means more supply. This is the opposite of what causes inflation. The result should be deflation. But is that what ‘ought to happen’? Well, yes. But it’s not an honest world we live in. It’s a wicked one. And one in which the deciders — the ruling caste — seem to have an almost miraculous stupidity. If they were weathermen, you wouldn’t want to rely on them for their forecasts. ‘Hey, Lael’ says Jerome Powell to one of the other Fed governors, ‘Look at this. What’s that big mass of clouds out off the coast?’ ‘I don’t know, Jerry. Looks like they’re wheeling around a calm spot in the center. And headed for Boca Raton.’ ‘Probably nothing…let’s put it into the model; see what it says.’ A few minutes later… ‘Just what I thought. It says…well…just another sunny day in South Florida.’ Mo’ money Even in an honest economy there are booms and busts, prices increase and decrease. But the storm on the horizon is not a normal weather event. Instead, it’s what you get when you print US$8 trillion…and then stifle output with regulations, sanctions, shutdowns, and phony interest rates. More money. Fewer goods and services. What ought to happen is inflation, a tempest of price increases and shortages. The Fed, meanwhile, is packing its picnic basket. Its ‘baby step’ rate increases measure only a half a percentage point each. Even if they did this every quarter, it would take nearly four years before their key lending rate pulled, even with inflation. We predict that the storm will hit long before that happens. Even if the Fed really were in inflation-fighting mode, it would still take stiff measures — and time — for the storm to pass. MarketWatch: ‘Investors may be in for a rude surprise: History shows inflation can take years to return to normal even when the Fed hikes interest rates above 10%
‘That risk was highlighted on Thursday by BofA Securities strategists Vadim Iaralov, Howard Du and others, who point to the period between 1974 and 1988 as the most comparable time in which the annual headline U.S. consumer-price index was rising at a pace similar to the U.S.’s pandemic era of 2019-2022.
‘In 1980, with the Fed’s main policy rate target already above 10% for most of that year, the annual headline CPI, also in double digits, still did not fall back below 3% after 36 months “even on the back of unprecedented rate hikes enacted by Fed Chairman Paul Volcker,” they said.’
Out of control What really ‘ought’ to happen? It will only be clear after it has happened. In the meantime, we guess: the persistence of inflation…at perhaps even higher levels…is likely to stiffen the Fed’s backbone. Fed governors won’t want to let inflation get ‘out of control’. They’ll express their determination to bring down inflation. And some people will take them seriously. Investors will panic. Businesses will pull back. Households will hunker down. Prices will fall! Like Elon Musk, they will have a ‘super bad feeling’…which will lead to the hurricane Jamie Dimon fears. And then, hallelujah…the Fed governors will be spared. No need to hike rates, after all. No need to endure the wrath of a desperate nation. No need to try to undo what they have done. If they’re lucky, they may even be able to retire in the eye of the storm…before the wind knocks them down. Regards, Bill Bonner, For The Daily Reckoning Australia Advertisement: The Aussie Start-up Playing in TWO Billion-Dollar Markets This ASX-listed firm discovered a unique chemical ‘cracking’ process that produces two crucial by-products. One is a clean energy source — dubbed ‘the ultimate green fuel’ by The Wall Street Journal — that’s at the centre of a $120 billion industry. The other is an often overlooked player in the US$46.03 billion EV battery market called lithium’s ‘little brother’. The best part is that this Aussie company has a market cap of just $100 million — and it’s currently selling for less than $1 a share... Could this be the best dark horse energy play on the Aussie market? |
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