Shipping Crisis

This short article went viral on social media recently. It offers a compelling explanation for at least part of the supply chain problem. The outlook isn’t good if he is correct.

Ports don’t have enough workers to run fluidly and wages have not risen enough to attract more.
Equipment shortages including trucks, container chassis and railcars are a major problem.
Ports can’t move containers without chassis, so the containers back up.
Warehouses where the containers are eventually deliverer are also shortstaffed and delayed.
Shippers and carriers have no financial incentive to invest in the needed new infrastructure.
Running ports 24/7 won’t help due to all the other shortages.

US shipping infrastructure is so highly optimized, a failure at any point bottlenecks the whole system. Every link needs to be fixed at the same time. We expect no improvement and for the crisis to only get worse. But we also don’t consider the possibility that demand for all these goods could decline. That might ease the shipping gridlock… though the alternative could be worse.

Bottlenecks are clearly visible in the PPI across the supply chain.

Inflation

The CPI report was a shocker, with last month’s inflation rising much faster than markets expected.

On a year-over-year basis, CPI gains were at multi-decade highs.

And it wasn’t just the strength of the CPI gains that spooked the markets. It was the breadth of inflationary pressures. Using a ten-year period, the core CPI index level is now running well above the 2% line (the Fed’s price target). The markets had a strong reaction to the CPI beat.

Treasury yields climbed across the board
The probability of three Fed rate hikes next year climbed above 80%.
The US dollar jumped as the market expects the Fed to get more hawkish.
Stocks were lower
Gold surged, despite a stronger dollar.
Bitcoin hit a new high
Crude Oil sold off as the US Dollar advanced

The chart below shows 3-measures of inflation:

CPI
Core-CPI (Less food and energy,) and
Variable-CPI (Less healthcare and rent.)

Ray Dalio on Inflation

This from Ray:

Wednesday, November 10, 202 inflation report showed inflation raging so you are now seeing inflation erode your wealth. That is no surprise. At this time:

The government is printing a lot more money,
People are getting a lot more money, and
That is producing a lot more buying, which is producing a lot more inflation.

Some people make the mistake of thinking that they are getting richer because they are seeing their assets go up in price without seeing how their buying power is being eroded. The ones most hurt are those who have their money in cash.

The United States now is spending a lot more money than it’s earning and paying for it by printing money that is being devalued. To improve we have to raise productivity and cooperation. Right now we are on the wrong path.

I think it is quite possible we will have a very low-growth 2022 accompanied by uncomfortably high inflation. Fed officials are way behind the curve. They have now painted themselves into a corner. How do you tighten to the extent needed when GDP growth is only 1–2%?

An entire generation of portfolio managers and investors have never dealt with inflation, except in the theoretical context of an economics book. Inflationary periods have often not been kind to stock market investors. I literally have no idea what Jerome Powell (assuming he is reappointed) will do. He will only have bad choices. Doing nothing is a bad choice. Reducing QE, let alone raising interest rates, will likely prove uncomfortable for markets, to say the least. I would expect a lot of volatility over the next 14 months.

Chinese Exports Surge

The other side of US import problems is a surge in exports, mainly from China. This chart shows Chinese export volume hitting record levels in the most recent data. It’s not just the US demanding more imported goods. Others are, too.

China, with its harsh but effective health measures, actually benefited from COVID related closures in some of its manufacturing competitors like Vietnam and Malaysia. It also exported higher-value products, with automobile exports more than doubling so far in 2021. The Chinese economy still faces serious headwinds as domestic issues cut into consumer spending at home, but the export segment is booming for now. This has other consequences, too. Many of these transactions are settled in US dollars, raising demand for the greenback and helping to keep US interest rates low. We will see in the coming months how that interacts with the Fed’s tapering decision.

Hip Replacement

Many of our clients have had or will have a hip or knee replacement. I wanted to share my experience. I went to an orthodepic surgeon about my hip pain. The pain was so intense it was keeping me up at night. They took an X-ray and told me I needed a hip replacement. They showed me the femur hitting the bone in the hip joint. Made sense to me but……..I ALWAYS want surgery to be a last resort for my body so I got a second opinion. Another orthodepic surgeon took and X-ray but asked quite a few more questions about WHERE my hip pain was. My hip pain was NOT where the joint was located, it was where the bursa was located. The doctor informed me that I had bursitis and a cortisone injection was all I needed. That was last week and I am pain free for the first time in MONTHS!! No need for a hip replacement!

Twenty years ago I experience excruciating pain in my left foot arch. I went to a podiatrist. Plantar fasciitis, he pronounced and said I needed surgery. I asked if there was a middle option, you know, like using insoles. He said that he knew I needed surgery.

I went and got insoles and my pain went away. That was twenty years ago!

We are all getting older. Please make sure you get a second opinion before surgery! J

US Economy

The payrolls report surprised to the upside, with over 600k private-sector jobs created in October. Moreover, there was a 235k upward revision to earlier data.
The unemployment rate continues to trend lower.
When will supply chain issues ease? Here is a survey from Evercore ISI.

The Dodge Momentum Index, which tracks planned non-residential construction projects, hit a multi-year high last month.
Warehouse construction is surging.
Oxford Economics expects CPI to moderate in the second half of next year, especially as energy supply comes back online. But the CPI peak is yet to come.
The NFIB small business sentiment ticked lower

…driven by concerns about inflation.

Are labor shortages peaking?

Companies are boosting wages and plan to keep doing so in the months ahead.
Companies also increasingly plan to boost prices.

Will rapid wage growth put downward pressure on corporate margins? Below is a comment from Pavilion Global Markets.

Business outlook has deteriorated further.

And yet, very few companies complain about poor sales.
US consumers expect to boost spending at the highest pace in years.
Auto dealers continue to struggle with supply constraints.

Market Data

US stocks have outperformed all other developed markets over the long term.

Has the outperformance peaked for now?

Whether or not you think the market is in a bubble is mainly irrelevant. What makes a market function is a group of investors willing to buy assets at any price and those that think they are wrong.
The Treasury Bond curve continues to flatten. The markets are less upbeat about economic growth as the Fed begins tapering.
The market now expects the Fed to start hiking sooner, but it also sees the central bank slowing/pausing rate increases in 2024.
With real rates deep in negative territory and stocks at record highs, Goldman’s indicator shows extraordinarily accommodative financial conditions in the US.
Analysts have been concerned about wage gains and higher input costs pressuring margins.

But companies have been able to pass on higher costs to their customers.
How long can they keep doing so?
Larger firms tend to have the widest margins and can better withstand higher costs.