Monday, 20 June 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[3 min read]

Dear Reader,

In today’s edition of The Daily Reckoning Australia, Jim Rickards zooms in on one particular part of the supply chain crisis — the traffic jam at the Port of Los Angeles.

This is just another example of the law of unintended consequences — and that law is even worse when it has to do with politicians.

And worse still when it impacts your investments…

Read on below to find out more.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

By Jim Rickards Editor, The Daily Reckoning Australia

Dear Reader,

You might have read in recent months about the backlog of cargo vessels at the Port of Los Angeles in the beginning of the year and supply chain disruptions.

The number of ships waiting offshore at the Port of Los Angeles dropped from 84 vessels to 44 vessels from mid-November 2022 to January 2022 — a 47% decline. But those figures are limited to the queue in what’s called the Safety and Air Quality Area (SAQA), which extends 150 miles west of Los Angeles and 50 miles to the north and south.

This decline was due to the fact that the Biden Administration imposed steep fines on vessels in the SAQA that could not get their cargo unloaded in a timely way. The fines were ridiculous because no one wanted the cargo offloaded faster than the shippers themselves. The reason for the backlog was not that shippers were dilatory. It was because the port itself was jammed. There weren’t enough trucks or railcars to move the containers. As a result, there was nowhere to put new ones.

To avoid fines, the vessels simply moved outside the SAQA. Using GPS and the Pacific Maritime Monitoring System (PacMMS), the Marine Exchange of Southern California was able to determine that the total number of vessels in the queue for the Port of Los Angeles had actually increased to an all-time record of 96 ships between 25 October (the day the penalties were announced) and 29 November — a 27% increase:

The ships were still in the queue for Los Angeles but had moved down the coast to Mexico’s Baja Peninsula or were even backed up in Taiwan and Japan, waiting for the chance to deliver in Los Angeles. Some vessels were closer to LA but waited further out to sea, outside the SAQA. What had been a backlog in Los Angeles had now become a transpacific traffic jam.

‘I’m from the government, and I’m here to help’

This turn of events is a good lesson in the law of unintended consequences. Biden’s regulatory ‘solution’ only made things worse and spread out the problem. It’s also a lesson in how complex supply chain logistics really are. Glib headlines about an easing in the backlog of unloaded ships are not only wrong but also give a false sense of accomplishment to government bureaucrats. Analysts of the situation need to rely on logistics experts, not government officials, if they want to understand what’s happening.

The number of ships waiting to unload cargo in Los Angeles and other major American ports such as Tacoma, Miami, Houston, and New York are not the only measure of the extent of the supply chain bottleneck. Another measure is the number of days it takes to deliver cargo from China to the US.

As shown in the chart below, the end-to-end transit time for ocean freight delivered from China to the US has grown from 40 days in late 2019 (before the pandemic) to 73 days in late 2021:

We can’t make the supply chain breakdown go away. What we can do is analyse it, understand it, and make solid recommendations for surviving it from an investor’s perspective. The store shelves may be bare, but your portfolio should be fully stocked with great ideas to weather the crisis.

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

Dear Reader,

‘Look what he’s done. Look what Joe Frazier has done!’

Howard Cosell

The other day was a big day for the Fed. The cameras rolled. The reporters leaned in. Inquiring minds wanted to know:

‘Which way will it go? What are you fellows going to do?’

In the old Soviet Union, no one was sure of anything until it was officially denied. And last week, we got our official denial. From Ben Bernanke, probably the least conscious central banker in US history, came this:

‘…history teaches us…inflation will not become self-perpetuating, with price increases leading to wage increases leading to price increases, if people are confident that the Fed will take the necessary measures to bring inflation down over time.

‘The Fed’s greater policy independence, its willingness to take responsibility for inflation and its record of keeping inflation low for nearly four decades after the Great Inflation, make today’s Fed much more credible on inflation than its counterpart in the ’60s and ’70s. The Fed’s credibility will help ensure that the Great Inflation will not be repeated, and Mr. Powell and his colleagues will put a high priority on keeping that credibility intact.’

Yep. It’s official. The Fed is going to win this fight, says the old humbug.

Out of shape

Is it? While we’re trying to keep an open mind, a Fed victory seems less and less likely. Yes, Fed governors are out of rehab and back in the gym. They promise to stay off the drugs and booze. ‘Early to bed and early to rise,’ says Chairman Powell.

The papers reported not only that the Fed raised rates by 75 basis points…but that it intends another big increase next month. The Wall Street Journal:

‘The supersized rate rise put in place by the Federal Reserve Wednesday may not be the last one, Federal Reserve Chairman Jerome Powell said Wednesday.

‘Speaking about the Fed's rate rise, Mr. Powell said, “Clearly, today’s 75-basis-point increase is an unusually large one and I do not expect moves of this size to be common. From the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting.”’

Not since 1994 — 28 years ago — has the Fed acted with such resolve. But the Fed is facing the fight of its life. And it is old, ‘out of shape’ and unprepared. 

Economists describe the US’s central bank as ‘way behind the curve’. They’re talking about the inflation/Fed Funds curve. A ‘normal’ or ‘neutral’ interest rate for the Fed is about 2%. As inflation rises, so should the Fed’s key rate. But that’s 2% in real terms. That’s 2% ABOVE the inflation rate. So, at today’s CPI, the current Fed Funds rate should be more than 10%...not today’s 1.5%.

That would mean a rate increase of not 75 basis points…but 900 points. And that would be the biggest shock to the markets ever seen in the US. Even if Fed governors were the grittiest, dirtiest, toughest fighters in the ring, they still wouldn’t dare throw a punch like that.

Which is why you hear commentators say the Fed has ‘lost control’ of inflation. It can’t do what it needs to do.

Sucker punched

In 2018, the Fed was raising rates, trying to catch up with soaring stock market prices. That was the time for a 1% increase…followed by another 1% increase…and another one. That would have gotten the Fed where it needed to be — ahead of the curve.  

But as the hot summer came to an end, and investors drove home from their vacation houses, they looked in their rearview mirrors and saw the Fed gaining on them. Fearing a bear market, they began to offload their overpriced stocks in September. By the end of the year, the S&P was down 17%.  

This caused Janet Yellen, then the Fed jefe, to make what will probably be regarded as one of the worst mistakes in central banking history. Instead of continuing the fight to get back to a normal position, she took a dive. The Fed ‘paused’ its rate increases…and then collapsed the Fed Funds rate down to zero, where it remained until this year.

And while the Fed lay as lifeless as a comatose heavyweight, consumer prices rose…to the point where they are now going up approximately nine-times faster than the Fed’s key rate. Even with rate increases of 0.75% a quarter, it will take four years to catch up. And that is only if the CPI stays still. Which is very unlikely.

Just look at the Producer Price Index. It is rising at more than 10% per year. Those are the costs that will work their way into finished, consumer prices later.

Mortgage rates are rising too. They’ve approximately doubled this year. On a US$350,000 house, for example, the monthly payment has gone up from about US$1,500 to US$2,100. Still very low. But the pool of people who can afford to spend US$2,100 a month is vastly smaller than the pool of those who can afford to spend US$1,500. So sales go down. And so do prices.

The jig is up

You’ll recall from Monday, too, that wage increases have in no ways kept up with these price increases. The average family struggles to keep up with the basics — food, fuel, and shelter — leaving it with less and less money to spend on other things.  

Over in the corporate world, the situation is not much different. Businesses — including many ‘zombie’ companies that lose money rather than make it — stayed alive by refinancing their debt at lower and lower interest rates. That jig is up too. While the average junk bond yield (what bad corporations pay to refinance their debt) is still below the inflation rate, it’s now twice what it was last December.

That’s why we’re seeing such a bloodbath in the zombie sector. Last week, we looked at MicroStrategy…a money-losing company that pinned its hopes on Bitcoin [BTC]. But when the cryptos went down…down went MicroStrategy, losing 90% of its peak value.

Stocks are falling. Bonds are falling. Houses are falling. Inflation is rising. And a recession has probably already begun.

Nobody knows how this fight will end. But if the Fed can get up off the mat and land a knockout punch, it will be one for the history books…as if Howard Cosell had decked Joe Frazier with a baseball bat. 

Regards,

Bill Bonner,
For The Daily Reckoning Australia