Who’s to blame for the supply chain c ollapse? Everybody…

Wednesday, 25 May 2022 — Albert Park

[7 min read]

Dear Reader,

By now, it should be clear that we’re in the midst of a supply chain collapse. It’s everywhere you look — at the shops, the fuel pump…and explained clearly in Jim Rickards’ latest editions of The Daily Reckoning Australia.

At this point, the same question tends to arise — who’s at fault? The answer might not be something you like…because it’s everybody.

Given the complexities of global supply chains, everyone — from truckers to customers — has played a role in getting us to where we are now.

So, what do we do now? That question doesn’t have such a simple answer…

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

What’s at the root of the supply chain breakdown? That’s a critical question, but the answer is almost irrelevant. The supply chain is a complex, dynamic system of immense scale. It’s of a complexity comparable to the climate, as a system. This means that exact cause and effect can’t be computed because the processing power needed exceeds the combined processing power of every computer in the world.

The core problem is that supply chain experts have spent the last 30 years making supply chains more efficient. Supply chains impose costs on business. Efficiency amounts to cutting costs. Cutting costs increases profits. The supply chain revolution since the early 1990s has been about cost reduction, which gets passed to consumers in the form of lower prices. That practically explains the entire phenomenon.

For decades, we’ve heard about trade deals such as the North American Free Trade Agreement (NAFTA) and China’s admission to the World Trade Organisation (WTO). Tariffs were cut on a bilateral basis even when multilateral agreements were not in play. Even larger trade deals have been implemented recently, including the Trans-Pacific Partnership (TPP). Historic predecessors included the European Free Trade Association (EFTA) and the European Union (EU).

All of this was done under the banner of ‘free trade’. That’s a high-minded purpose, but the not-so-hidden agenda was to expand supply chains without tariffs so that cheap labour could connect with rich consumers.

Paying the price for cheap goods

The supply chain revolution involved more than cheap labour (mostly in Asia). It also involved scarce commodities from Africa, high technology from Taiwan, financial capital from the US, and high value-added human capital from Europe, Canada, and the US, among other sources.

Supply chain managers and consultants became experts at optimising the links and cutting costs. A more distant source might be more efficient than a local source because of cheap labour. More expensive air transport might be more efficient than ships because the goods would spend less time in inventory.

Long-term purchase agreements might be more efficient than one-time purchases because of lower unit costs. Short-term purchase agreements might be more efficient because they allow for substitutions of certain components. There was no single right answer. There was only a relentless search for optimised (that is, cheaper) supply chains.

The touchstone of these efforts was the idea of just-in-time (JIT) inventory. If you’re installing seats on an automobile assembly line, it’s ideal if those seats to arrive at the plant the same morning as the installation. That minimises storage and inventory costs. The same is true for every part installed on the assembly line. The logistics behind this are daunting but can be managed with state-of-the-art software.

All these efforts are fine as far as they go. The costs savings are real. The supply chains are global. The capacity of this system to keep a lid on costs is demonstrable.

There’s only one problem. The system is extremely fragile. One missed delivery can result in an entire assembly line shutting down. One delayed vessel can result in empty shelves. One power outage can result in a transportation breakdown.

Who’s to blame? Everybody…

In a nutshell, that’s what’s happened to the global supply chain. There’s a lack of redundancy. The system isn’t robust to shocks. The shocks have occurred nevertheless (pandemics, trade wars, China-US decoupling, bank collateral shortages, and more), and the system has broken down.

The failures have cascaded. Delays in receiving commodity inputs in China have resulted in manufacturing delays for exports. Energy shortages in China have resulted in further disruption of steel production, mining, transportation, and other basic industries.

Port delays in Los Angeles have resulted in components and finished goods being delayed in the US. Semiconductor shortages have halted production of electronics, appliances, automobiles, and other consumer durables that rely on automated applications (the Internet of Things — IoT).

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.

The supply chain breakdown is not at one single bottleneck. It’s up and down the supply chain at all levels, from component suppliers to manufacturers to transportation providers to customers.

What is the Biden Administration doing about this?

They’re busy making things worse.

First, the Biden Administration ordered the Port of Los Angeles to stay open 24 hours a day and work three shifts in a row to ease the backlog. The problem is that working longer was never the problem. The port can’t unload the vessels because there’s no place to put anything. The piers and storage yards are full. Containers are stacked to the sky. Working longer hours does nothing when there’s no place to put the cargo.

The next Biden Administration move was even more misguided. They proposed a penalty on containers that remained on the docks for more than six days. But no one wants the containers moved faster than the shippers. It’s just a physical impossibility when they can’t get the trucks to the ports. The penalty doesn’t speed up the transportation process, but it increases the cost of goods, making inflation worse and could drive some retailers out of business. A real supply chain crisis with unavoidable delays and added penalty costs is a bad combination for the economy.

In my next edition, I’ll focus more on the science of risk at play behind the current supply chain collapse. Because by properly understanding what’s going on, we can think about solutions that might actually help…instead of hurt.

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,

‘Raise your glass to the hard working people
‘Let’s drink to the uncounted heads
‘Let’s think of the wavering millions
‘Who needs leading, but get gamblers instead

‘Spare a thought for the stay-at-home voter
‘His empty eyes gaze at strange beauty shows
‘And a parade of the grey suited grafters
‘A choice of cancer or polio’

The Rolling Stones

Today, we continue our salute to the common man. We give thanks to truck drivers who deliver the goods…roughnecks who work on drill rigs…bar keeps who serve a glass of whiskey when we need it…and all the other drawers of water and hewers of wood who make life tolerable.

But wait, first, we should raise a glass to our leaders…to the people who rule us. We thought they were corrupt and incompetent. But it’s thanks to them that we now have a Baby Food Airlift. Bless their hearts; here’s The Daily Beast:

‘The first shipment of baby formula under President Joe Biden’s “Operation Fly Formula” initiative landed in the U.S. on Sunday; the airlift totals 78,000 pounds and will provide enough food to fill more than half a million baby bottles. The delivery of Nestlé formula—which was trucked from Switzerland to Germany and then flown to Indianapolis—is the first of multiple flights expected this weekend, which will import three different types of formula from Europe.’

Operation Fly Formula! Thank God! It makes us all tingly with patriotic pride. We see the Stars and Stripes flapping in the breeze. And our soldiers snap to attention as the first litres (this is from Switzerland…it’s the metric system) come down the ramp. In a real crisis, we can still count on our government to come through for us.

But let’s not get distracted…

The biggest rip-off of all

We introduced Mr Charles Stallworth yesterday; he’s a ‘blue-collar’ worker with a chip on his shoulder. He thinks the suits show him no respect. He complains, for example, about the Biden Team’s plan to forgive college loans. He and his fellow labourers didn’t get any college loans. And now, they will be expected to pay for the college educations of those who despise them — including 30 members of the Biden Administration.

And what about all those working-class kids who played the game fair and square…who worked nights and weekends in order to pay their college expenses? And what about those who skipped college but learned a valuable trade on the job? They contributed to the wealth and happiness of others — parking their cars, serving their hamburgers, stocking their shelves; why should they have to pay for college for those who earn more than they do?

But Mr Stallworth seems unaware of the biggest rip-off of all.

Today, he and other ordinary citizens pay nearly 10% of their incomes — the ‘inflation tax’. It’s just the beginning of the huge bill they will have to pay for the expensive shenanigans…and wealth transfer programs…of the last 20 years.

The ‘system,’ put in place by suited-up, college-educated politicians and policymakers — and largely administered by an unelected group of bankers and economists at the Fed — has been catnip for the upper 10%. In the stock market alone, they gained some US$30 trillion from the Fed’s rate rigging. But now, working-class incomes are being tapped to pay for it.

‘What is the end game of this contempt?’ asks Mr Stallworth. ‘How much longer can you continue to rely on the labor of skilled tradesfolk while looking down your nose at them, explicitly or implicitly?’

The poor man just doesn’t ‘get it’. Disrespecting the deplorables is an essential part of the program.

Sliding college doors

He would see things differently if he had gone to college and been properly indoctrinated. He would know, for example, that ‘climate change’ is not just a hypothesis; The Science is ‘settled’, whatever that means. Had he the benefit of higher education, he would know too that babies are not born either male or female; gender is a ‘social construct’…or something like that. Had he sat through the coursework in politics and government, he could take more of an interest in the affairs of Ukraine…he would know that a 2% inflation rate is an idea…and, of course, it would have been revealed to him that the problems of the Black community are all his fault.

And now…without the four years of heavy drinking and occasional drugs — a real ‘college experience’! — his head might be clear enough to notice that his ‘betters’ start wars that can never be won. They ‘stimulate’ the economy…and it runs more slowly. They promote ‘equality’…and the rich get richer than ever.

He may have had a hunch too, that the incompetence of the elite is of a very special sort; it comes as a punishment to the working man, but it has always been a boon to the policymakers themselves.

Working class kids came back from the Middle East missing arms or legs. But the suits in Northern Virginia’s ‘defence’ industries built bigger and bigger houses.

Four million ordinary households lost their homes in the mortgage finance crisis of 2008–09. But Wall Street honchos, who brought their companies to the edge of bankruptcy, still got million-dollar bonuses.

And who struck it rich in the COVID Panic? The millions of people who were locked in their homes, counting on handouts from the feds? Or the big pharma companies — Pfizer, AstraZeneca, Johnson & Johnson, Moderna? Or how about Novavax, whose shares rose more than 1,000% in the 12 months following March 2020?

What to make of it?

What we make of it is that Charles Stallworth is almost right. The government is no longer run ‘for the people’ or ‘by the people’. It’s run by an elite…who scorn them.

But not everybody with a white collar is a ‘grey-suited grafter’. More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia