The link between the supply chain collapse and globalisation

Wednesday, 11 May 2022 — Albert Park

[5 min read]

Dear Reader,

In his last edition of The Daily Reckoning Australia, Jim Rickards began his in-depth look at the supply chain collapse by explaining the deep complexities and vulnerabilities of supply chains.

Today, Jim moves on to the current situation — the breakdown in supply chains. But again, it’s far more complex than you may realise…and it has been massively impacted by one process: globalisation.

It’s vital that you, as an investor, understand the real impact globalisation has had (and might continue to have) on your investments.

Read on below to find out more.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: ‘Be fearful when others are greedy, and greedy when others are fearful.’ So says the greatest investor of all time — Warren Buffett. Well, there’s plenty of fear on the ASX right now. Personally, I think it’s time to go shopping! For my best ideas on that, go here now for a free taste of my newsletter.

Dear Reader,

It’s unclear if the breakdown can be arrested quickly — or at all. Consumers (and investors) should expect worse effects in the months ahead. How much worse remains to be seen…

Take the simple loaf of bread example we discussed last week. What could cause that supply chain to fail? The list of discrete points of failure is long. The farm might suffer a drought or lose its water allocation, causing the wheat crop to be delayed or to fail entirely. There might be a shortage of truckers to make timely deliveries to the wheat processor, the oven factory, or the bakery.

The baker might suffer labour shortages. Unionised workers in the grocery store might go on strike, causing trucks to be backed up on the loading dock or shelves to remain unstocked. The power grid might fail, stopping all of the processes in the chain at once. Baked bread might go stale before it can be delivered. The consumer might fear going outside because of the pandemic, leaving bread piled up on the shelves. Or all of the above.

Just as my supply chain description was simplified, this list of potential breakdowns and bottlenecks is also simplified. The point is just to acquaint you with how complex supply chains really are and how vulnerable they are to breakdowns.

All of the supply chain links, and possible bottlenecks described above, are purely domestic. I’ve described local farms, factories, bakeries, and stores. Consider that very few supply chains are actually that local. CEOs, logistics engineers, consultants, and politicians have spent the past 30 years making supply chains global. You’ve heard discussions of globalisation since the early 1990s. What one may not have realised is that the process that was being globalised was the supply chain.

The global assembly line

You know your iPhone comes from China. Did you know that the specialised glass used in the iPhone comes from South Korea? Did you know the semiconductors in the iPhone come from Taiwan? That the intellectual property and design of the iPhone is from California? On top of all of that, the iPhone includes flash storage from Japan, gyroscopes from Germany, audio amplifiers, battery chargers, display port multiplexers, batteries, cameras, and hundreds of other advanced parts from all over the world.

In total, Apple works with suppliers in 43 countries on six continents to source the materials and parts that go into an iPhone. That’s a quick overview of the iPhone supply chain. Of course, every supplier in that supply chain has its own supply chain of sources and processes. Again, supply chains are immensely complex.

Once the global perspective is added, we have to expand our transportation options from trucks and trains to include ships and planes. That means ports and airports are additional links in the chain. Those facilities have their own links and inputs, including cranes, containers, port authorities, air traffic controllers, pilots, captains, and the vessels themselves. And to our list of trucks, trains, ships, and planes, we can add pipelines that transport liquids such as petroleum, gasoline, and natural gas.

Supply chains affect everything. When they break down, everything gets worse at the same time.

Bottlenecks, backlogging, and breakdowns

The evidence for supply chain breakdown is clear. The chart below shows an index of backlogged orders in the global manufacturing supply chain (blue) and an index of delivery times in the supply chain (red):

As can be seen from the chart, backlogged orders have spiked to the highest levels since at least 2015. This is happening even with delivery times lengthening to the longest delays over the same period, even longer than the delays during the pandemic lockdowns in 2020.

The next chart shows further evidence of a supply chain breakdown, with specific reference to the global container ship bottleneck. Containers are typically referenced as 20-foot equivalent units (TEUs), which refers to one standard 20-foot container.

Standard containers can also be 40-feet long, which equals two TEUs. The largest container ships in the world may carry 20,000 TEUs, although ships of that size can’t pass through many ports and canals.

This chart shows that vessels with a total of 2.1 million TEUs are currently waiting to unload at global ports. This is substantially more than the 1.7 million TEU backlog at the height of the 2020 pandemic lockdowns (when dockworkers and crews were frequently under quarantine) and is far more than the usual 1.3 million TEU backlog that prevailed from 2017–20.

It’s also noteworthy that this container cargo backlog is not limited to the US. The Chinese component is larger than the US, and the rest of the world is almost equal to the US and China combined. Again, this illustrates the global nature of the problem.

In my next edition, I’ll focus on one particular bottleneck in this global problem…make sure you tune in to find out all about it.

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.

Dear Reader,

It must take a special talent to wreck the world’s largest and most wealth-creating economy.

For example, if knowledge produces wealth, every American should be as rich as a Rockefeller; the US graduates 60,000 new PhDs every year. Whatever they’re learning, it doesn’t seem to make us more prosperous.

The US’s entrepreneurs should have been producing new wealth at record rates. The US has the world’s largest single consumer market. We have more people with more money than anywhere else. And we’re ready to spend on whatever new gizmo comes along.

Our 32 million small business owners get up in the morning with a single objective — to increase the GDP. New products, new services, new ways of doing business — they’ll try anything to help their customers and fluff up their bottom line.

And the nation’s investors are ready to fund them. About half of the population owns stocks…worth nearly US$50 trillion. They’ve proven that they’ll back almost any crackpot corporation that comes along. It doesn’t even have to make money.

And what about ‘the science’? Isn’t American science also second to none — on the cutting edge of every breakthrough…adding to our wealth-enhancing knowledge every business day? And our new technologies — 5G…the cloud…the metaverse…NFTs…birth control patches…self-driving cars — surely, they presage vast new industries — and untold wealth…ahead.

Going, going…gone

Given these conditions, you’d think the country would be unstoppable…getting richer than ever.

But the US is no longer getting richer…it’s going the other direction.

Disposable personal incomes are dropping — down 20% from March ‘21 to March ‘22. Of course, the steep drop is the result of winding down the Fed’s COVID gimmie/stimmy programs. But ignoring the ‘transfer payments’ still shows falling incomes. While wage increases are running at about 5%, consumer prices are rising at nearly 9%.

GDP is falling at a 1.4% annual rate.

The trade deficit just hit a new record high — at US$109 for April.

Productivity is in retreat — down at a 7.5% annual rate…the worst since 1947.

Consumer prices are rising at the fastest pace in 40 years…

Rents in Miami are up 40% year-to-year…22% in Orlando…17% in Las Vegas…

…the stock market just had the worst first quarter since 1939…

…and investors are realising that many of the most promising breakthroughs were just fads. NFT sales are down 92% from the peak. An NFT of Jack Dorsey’s first tweet sold for US$2.9 million a year ago; now it’s on sale...top bid so far: US$14,000.

Fed footprints

What’s the ‘takeaway’?

What failed? Who to blame?

Did investors forget how to put their money to work? Did entrepreneurs decide not to work so hard? Do our schools teach claptrap? Is ‘the science’ bogus?

Probably.

But if this were a crime scene, we’d take a careful look at the footprints. And we’d find those of the Fed governors.

This remarkable slowdown of the US economy comes after the Fed pumped up its balance sheet by US$8 trillion since 1999…and then increased the money supply by 50% over the last three years (the biggest increase ever).

In other words, this was the most bombastic episode of economic ‘stimulus’ in the history of the world. Never before have US authorities intervened so boldly to improve and protect the economy.

With their ‘dynamic stochastic’ modelling by the Fed’s 400-plus PhDs…

And their theories — the ‘neutral rate’ for interest rates, the wealth effect, ‘full capacity,’ and ‘data dependence’…

…they have made 330 million people poorer.

Regards,

Bill Bonner,
For The Daily Reckoning Australia