The supply chain chaos is getting worse, not better

Wednesday, 15 June 2022 — Albert Park

[6 min read]

Dear Reader,

Supply chains are complex. Jim Rickards knows this better than most, and in today’s edition of The Daily Reckoning Australia, he’s exploring just how complex they can be.

While we might understand the different steps in a single supply chain, the true complexity lies in the web of supply chains behind all those steps. Every supplier has its own supply chain, making a complex web of supply chains that interact with each other.

Understanding this complexity could be vital to your investments.

Read on to find out more.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Are you enjoying The Daily Reckoning Australia? Help us spread the word! Share this link (https://go.fattail.com.au/DRAUS) for a friend to sign up and receive a free report from our in-house gold expert.

Dear Reader,

‘Most people think the supply chain is just part of the global economy. That’s not entirely true. The supply chain is the global economy. There is not a single good or service of any kind offered to you that does not arrive through a supply chain. Not one.’

I wrote this in a previous edition of The Daily Reckoning Australia. It’s a big claim, but it’s true.

The term ‘supply chain’ is just a name that we give to a nexus of logistics, inputs, processes, transportation, packaging, distribution, marketing, customer relations, vendor relations, and human capital, which together support the supply and demand of every physical, digital, intellectual, or artistic artefact on the planet and in space. The supply chain is everywhere.

One way to understand the complexity and pervasiveness of supply chain dynamics is to consider yourself as a one-person supply chain, as suggested by MIT scholar Yossi Sheffi in his 2005 book The Resilient Enterprise. Sheffi’s thought experiment goes something like this…

You wake up in the morning to the sound of an alarm clock. It may have been purchased at Walmart and made in China. You roll out of bed and make some coffee (from Brazil or Costa Rica). You prepare a nice breakfast of eggs (trucked in from a local farm), toast (from a local bakery), and orange juice (moved in refrigerated rail cars from Florida).

Once breakfast is done, you check your email and news (on a computer made in China), then hop in your car (made in Tennessee by a Japanese company) and do some shopping. You buy some clothes (made in Thailand and Vietnam), pick up your new glasses at the optometrist (with German lenses and Italian frames), and fill up your car with gas on the way home (with gasoline refined in Philadelphia from oil pumped in Nigeria, shipped to the refinery by a tanker, and delivered by truck to your local gas station). And so on…

You get the idea. You’re surrounded by physical goods and services sourced from all over the world and delivered by truck, rail, or vessel to regional distribution and processing centres, then delivered to your local stores. You complete what’s called ‘the last mile’ delivery in the supply chain by shopping in your own car, or you can have goods delivered to your door through e-commerce vendors like Amazon. You’re at the centre of your own human supply chain.

But it gets even more complex

You get an even better idea of the complexity involved when you consider what’s called the ‘extended supply chain’. This analysis involves taking all of the suppliers in your personal supply chain and thinking about the separate supply chains of those suppliers.

The alarm clock made in China has parts from vendors all over the world (semiconductors, copper cords, plastic mouldings, LED displays, etc.). Your morning coffee is made in a percolator or drip-style coffee maker with stainless steel, tempered glass, semiconductors, and other components from vendors in Germany, Taiwan, and Mexico. The coffee beans were roasted abroad, packaged, and delivered by container cargo on vessels owned and operated by Maersk (Denmark), COSCO (China), or Hapag-Lloyd (Germany).

The vessels themselves were likely built in Korea. The automobile you take shopping may have been made in Tennessee, but it includes semiconductors from Taiwan Semiconductor Manufacturing. The clothes you purchased were made from cotton grown in Egypt and include plastic buttons fabricated in Malaysia.

Of course, we can continue this analysis indefinitely. The plastic resins used in the Malaysian button factory may have come from a chemical firm in Germany. That’s the point. The supply chain is endless because every output has one or more inputs, which also have their own inputs, all the way back to basic industries such as mining and steel foundries. Of course, those industries have their own inputs of machinery and electricity. Making it all work is human capital, from technical expertise to manual labour. The supply chain never ends.

Previously, I’ve looked at specific examples and anecdotes about how the global supply chain is breaking down. We looked at container cargo vessel bottlenecks at major ports, trucker shortages for moving those containers from the ports, and crowded distribution centres that couldn’t handle more deliveries because they couldn’t get the existing stock out the door.

The irony was that these overcrowded ports, trucking lines, and warehouses were offset by bare shelves in bricks-and-mortar stores and limited selection in online purchases. The same forces that jammed up the delivery lanes were also starving the retailers of stock.

As I’ve described before:

‘Everyone is blaming everyone else. Ships that can’t unload at ports blame the truckers who are supposed to remove the containers already ashore. Truckers blame state regulators that make them wait in line for days to pick up containers, only to tell them to come back tomorrow. Retailers blame distributors. Customers blame retailers. The problem is they’re all right.’

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,

The native-born Irish don’t pronounce the ‘th’ sound. So our telephone service, named ‘Three’, is called ‘Tree’ by the locals. This linguistic quirk led American friends of ours, visiting a restaurant in Dublin and enjoying a ‘tree’ course meal, to the following exchange:

Waiter: ‘Are you finished your second course?’

Americans: ‘Yes, thank you.’

Waiter: ‘Then I’ll bring out the t…’

Americans: ‘Wait. Stop. Don’t say it. It will take away our appetite.’

Consumers hate ‘inflation tax’. And the voters go a little sour and threaten to throw out the bums who caused it. Joe Biden’s approval rate is dropping. Townhall:

‘A new ABC/Ipsos poll found that Biden’s approval rating is sinking faster than the Titanic.

‘When it comes to inflation, only 28 percent of voters approve of Biden’s job, with 71 percent disapproving.’

And polls show the Democrats could be facing an electoral massacre in November. The New American:

‘An internal poll conducted for the Democratic Congressional Campaign Committee (first reported by startup political newsletter Punchbowl News and confirmed by The Hill) revealed that Democrats running for reelection in November are in deeper trouble than they originally thought.

‘In a generic matchup between Republicans and Democrats, the generic Republican is beating the generic Democrat by eight percentage points, 47-39.

‘A second poll, commissioned by the Republican super PAC Congressional Leadership Fund (CLF) focused on districts where Biden won in 2020 by more than eight percentage points. Biden is now underwater in those districts by eight points and is dragging down the reelection prospects of Democrats in those districts, from likely to questionable.’

Won’t the Democrats try to save themselves by coming down hard on inflation? That is the question left untouched on Friday, like the ‘third’ course, that we take up today.

It’s the ‘Decision of the Century’. Will they or won’t they? Yes or no? Up or down? Now or never.

So Much at Stake

We remind readers that this decision will probably determine the course of public events for decades ahead. If the Fed halts inflation and lets things return to normal, it will mean a crash on Wall Street…business failures… defaults…unemployment…depression and bankruptcies. But the misery will probably be over in a couple of years.

If the Fed lets inflation continue, on the other hand, the consequences will be ambiguous at first…and then catastrophic, stretched out over many years of war, revolution, hunger, poverty, destitution, and chaos.

With so much at stake…and for the benefit of readers who weren’t paying attention…it’s worth backtracking and looking more closely.

We’ve seen that this is no ordinary business cycle inflation. Nor is it an event-driven ‘inflation shock’, such as when the price of plywood goes up as a hurricane approaches, or gasoline goes up because the Saudis turn off the taps.

If you have that kind of ‘inflation’, you count yourself lucky because it corrects itself — usually quickly and effortlessly. As prices rise, consumers consume less, and producers produce more; problem solved.

Price increases are just information. If the price of bananas rises, for example, it may mean that banana growers suffered a drought or a pest. Or it may mean that people want more bananas.

And when prices for everything go up, it tells us we have a money problem. Our money is losing value. And Friday’s CPI ‘print’ showed no sign of a peak. Bloomberg:

‘US inflation accelerated to a fresh 40-year high in May, a sign that price pressures are becoming entrenched in the economy. That will likely push the Federal Reserve to extend an aggressive series of interest-rate hikes and adds to political problems for the White House and Democrats.

‘The consumer price index increased 8.6% from a year earlier in a broad-based advance, Labor Department data showed Friday. The widely followed inflation gauge rose 1% from a month earlier, topping all estimates.’

Understated

That 8.6% number is a huge understatement. Prices for food, shelter, and fuel are rising much faster. As we saw last week, it takes an average working man twice as many hours on the job to fill his tank today as it did a half century ago.

That was not the result of an accident…or a sudden shock. It was a systematic rip-off. Intentional. Premeditated. It was public policy. And now, it’s getting much worse.

The Fed’s ‘printed’ US$8 trillion new dollars since 1999 — 10 times as much as it had since it was created in 1913. And it forced interest rates below the running rate of price increases. This gave people an incentive to borrow, speculate, and spend — further increasing the ‘inflation’ pressure.

The motive was not hard to spot. This new money fell like manna from heaven. Nobody ever saved it. Or earned it. The feds didn’t have to ask the taxpayers for it. Nor did they have to borrow it from savers. There was no need to say ‘please’ or ‘thank you’. And they could spend it, just as though it was real. On wars. Transfers. Giveaways. Whatever.

But what now? The voters are angry. Can the feds continue with their inflation policy; can they get away with it? What will happen?

Stay tuned...

Regards,

Bill Bonner,
For The Daily Reckoning Australia