Month: October 2021

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

“When you subsidize something, you get more of it.”

– RON PAUL

I have a friend who once described Bitcoin to me as an organism which feeds on electricity subsidies. Bitcoin searches out the lowest cost of electricity available and consumes as much of it as it can to produce profit for the miners, since electricity costs are their biggest costs.

This is partly why China, for years, attracted the lion’s share of Bitcoin mining. Miners could co-locate next to hydroelectric power plants in China and suck up every extra available cheap and subsidized kilowatt-hour.

This is the essence of the free market. It finds inefficiencies and exploits them as capital flows to where it is treated best. It may be ‘predatory’ from the central planners’ point of view, but they opened themselves up to this effect the moment they intervened by subsidizing the market in the first place.

Bitcoin exposed a structural weakness in China’s electricity grid this summer which was under massive stress thanks to drought conditions there dimming the output of its hydroelectric generators. This is partly why Chairman Xi Jinping took the aggressive steps to kick the Bitcoin miners out of China this summer.

He could see the real costs of electricity rising as coal, oil and natural gas prices skyrocketed but, because of rate subsidies to end-users, revenue to power generating companies was flat. It served him in other strategic ways, like kicking out the flow of Bitcoin within the Chinese economy, cutting down would-be mining company financial oligarchs and ultimately lessening competition for the Digital Yuan.

The response from the Socialist is always the same, however. Today Russia is getting blamed for gas prices in Europe.

Price gouging in a crisis a moral failure, not the original wealth transfer (itself a theft) from one group of people to another, which is what an electrical subsidy is.

They see this as a market failure because to them the greater good is served by subsidizing certain aspects of the economy to achieve political and/or social goals. And, in some ways, they may be correct, but you’ll never know it because there can be no rational calculation of the costs versus the benefits, c.f. Mises’ critique of Socialism from 1921.

You see, the market is neutral. It doesn’t have a perspective other than expressing the very human response of seeing an arbitrage opportunity and exploiting it.

Rather than being a failure of the free market, Bitcoin miners seeking out and exposing the unsustainability of electricity subsidies is a massive success of market principles. It is firmly rooted in actual human behavior rather than some fantastical one created by a central committee and the force of the gun.

China kicking out the Bitcoin miners only forestalled the day of reckoning for its energy industry because their presence was a symptom of a deeper problem not the source of the problem itself. Today, four months later China is now rationing electricity to force demand down.

Rather than let market forces raise the prices, divert capital away from energy intensive (and possibly uneconomic) activity and give accurate signals to producers and consumers, China will do the authoritarian thing to blame the people and take away a basic function of a first world society.

This is a simple, yet dramatic, example of what’s fundamentally wrong with the world we live in today. China isn’t the only one guilty of this. Subsidies like these are everywhere and they do nothing except create pricing dislocations which attract massive amounts of capital creating economic bubbles in price.

If you’re wondering where this headline could come from:

Zerohedge answers it with the pullquote.

In fact, it is the Austrian School critique of these subsidies which is its core competency; to explain in real terms why government intervention in a market ultimately subsidizes overinvestment in one activity at the expense of another.

Capital at any given moment is finite. That means there is competition for it ceteris paribus. That competition means that if better profits can be made mining Bitcoin in China rather than building a new road or gas pipeline, then that’s what will happen.

We can create more capital but that requires time, ingenuity and labor. Capital compounds at a pretty linear rate and all we do with things like deficit spending is pull forward capital from the future to subsidize production in the present.

Today we produce far more electricity than we use. It’s estimated that as much as 30% of global electricity goes to ground. Bitcoin uses up less than 0.5% of that wasted electricity. It’s actually performing a major market function to blow apart these layers of bureaucratic insanity by preying on a fraction of this over-production.

Since prices are set at the margin, small demand or supply shocks can create massive spikes or drops in price if the market is operating at peak capacity.

If you really stop to think about it, it’s quite astounding that the world’s economic system is this vulnerable to this basic application of free market principles. Today Bitcoin mining is co-locating next to the cheapest electricity produced on the planet, next to volcanos and nuclear power plants. It’s coming to America in a big, big way where it will further expose rural electrical subsidies here in the U.S. just like it did in China.

But, for now, this organism is healthy, strong and in no danger of dying from the heavy hand of inept socialists.

French Fried Grid Lines

What prompted this article was my reading with a certain perverse glee that France is dealing with the same problem China has but in a different way. They are now suspending a planned tax hike in electricity tariffs because prices to the French consumer are spiking thanks to rising gas, oil and coal prices that its nuclear power infrastructure can’t overcome.

Even if France fully passed on the input cost rises to the consumer, the tariffs the government charges for using electricity are another form of subsidy, not to the electricity generator, but to government itself. Why was France considering raising taxes on electricity during a global energy price spike?

Because its government spends too much money, doing what…?

…regulating its economy, which it has done an objectively miserable job of.

So, to subsidize its bloated and now openly tyrannical government France wanted to squeeze its citizens for more money to keep that arrangement in place: to fund The Davos Crowd’s mandates about COVID-9/11 vaccines, restrictions on travel, blasting protestors with water cannons… you know, protecting and serving the public.

But with massive protests around the country and the people’s falling confidence and patience with its government, France had to back off lest this latest tax hike enflame passions there even more six months out from a Presidential election.

In typical central planner Newspeak they called the simple act of not raising taxes, the ultimate form of government aggression, ‘price protection.’ It’s patently absurd for them to frame it this way when the last thing the French government actually does is protect its people, except those that work for it, from, well, anything.

He {French Prime Minister Jean Castex} said any new natgas tariffs following Friday’s scheduled 12.6% hike would be postponed until prices decrease in late March/April, adding that it will shield 5 million households who are on floating-rate contracts.

Castex said the French government would lower taxes on power prices, capping the scheduled increase in residential electricity tariffs at 4% in February.

In the midst of an energy price crisis the French government, in a blatant pander to voters for the 2022 election, not only scrapped raising taxes but also further subsidized lower income households, encouraging them to use even more electricity and worsening the government’s fiscal position.

Someone has to pay to move those electrons around just not those that might vote to re-elect Emmanuel Macron.

These are decisions not made with any long-term economic benefits in mind, but rather the most crass short-term political consequences trying to put a band-aid on a government-inflicted wound on the people themselves.

“The government is good at one thing. It knows how to break your legs, and then hand you a crutch and say, ‘See if it weren’t for the government, you wouldn’t be able to walk.”

– HARRY BROWNE

Capital Gone Walkabout

Meanwhile, Germany is now running out of coal, as a major coal power plant there had to shut down because it ran out.

German utility Steag halted its coal-fired power plant Bergkamen-A after it ran out of hard coal supplies amid an energy crunch globally and logistics challenges domestically, the company told Bloomberg on Friday.

“We are short of hard coal,” Steag spokesman Daniel Muhlenfeld told Bloomberg via email.

Germany has been the poster child for Europe’s Quixotic quest for carbon-neutrality. What it’s wound up with is windmills not spinning (and the birds chirped in excitement), solar panels covered in snow when the cloud cover clears and gas prices never before seen in history, at over $1200 per thousand cubic meters.

Oil prices keep trying to fall and new conflicts and controls keep trying to push the price higher, be it from OPEC+ members trying to subsidize their national governments, or the U.S. actively pushing supply off the market to subsidize its LNG exports. But, none of the price rise is because we’re running out but because supply is being artificially restricted by central planners wanting to create a false reality.

How does anyone expect the mighty German industrial economy to absorb these costs without some kind of output slowdown? The answer is no one. In fact, if you think through the situation, it’s clear Davos is happy about this because this puts downward pressure on growth, starving out Germany’s powerful industrial and middle class, who stand confused as to the cause, if the results of the election there are any indication.

Because those people produce wealth. Growing wealth to those of limited understanding is problematic. If the world is finite, they argue, growth must be finite. That’s only true, however, at any single point on the timeline of our understanding of the universe.

Tomorrow we’ll figure out some new thing, some new efficiency, material or overcome some obstacle we didn’t have time for yesterday. We’ll take our surplus time we earned as profit today and deploy it to fix some other problem tomorrow, opening up new pathways for growth.

But this type of growth, where it isn’t directed by oligarchs and governments who stand in front of them, is somehow evil or unsustainable.

Yeah, for them.

For the past fifty years they’ve been telling us peak oil would end modern civilization and yet, absent their manipulations of energy markets through lockdowns, wars, currency manipulation and regulation, the real price of oil has risen just 12% over the past fifty years, when indexed for inflation, which they manipulate to the downside to sustain their power.

One could easily argue that today’s price shocks aren’t any more sustainable than any other commodity whose supply and demand fundamentals are driven by politics more than they are the markets themselves. Remove those obstacles and I bet we’ll see oil production subsidies driven out of the market the same way that bitcoin drove China and France to ‘protect consumers’ from electricity subsidies.

We had to invent a new word to describe the fight over energy, geopolitics, because of our adherence to the socialists’ maleducation on basic human behavior. We also had to invent a new definition of inflation in the age of money unmoored from the stored energy of gold and other hard assets, based on prices not the supply of money.

Instead of basing our money on our past work, tokenized by gold, they gave us a money based on what we will produce for them, debt. What I didn’t show in the above graph is the stability of oil in real terms before we entered this era.

All Malthusian arguments about the end of cheap energy are themselves indefensible and unsustainable and yet that is all we are ever told is coming. They deny the Marginal Revolution (1871-74) in economics, which negated all of Marx’s complaints about capitalism before his death (1883), and yet his idiotic ideas fuel the unquenchable thirst for power of midwit oligarchs and the envy of their socialist useful idiots.

When someone is lying to you, you really owe it to yourself to ask why.

Davos has broken the world supply chain for energy for the sole purpose of proving a point that history itself has already debunked, Facebook be damned.

They do this, nominally, in the name of sustainability, arguing the wastefulness of capitalism is the end state of it.

But, as I’ve already shown with bitcoin and electricity, oil and money printing, it is the over-production of something through subsidization that creates unsustainable waste and malinvestment which eventually has to be liquidated in a rational system.

But instead of bowing to the rational, ending that system of privilege for them, they make the monetary system ever more irrational to the point of absurdity.

Last year, Paul Krugman was calling the $1 trillion coin “an accounting gimmick” that “wouldn’t even fool anyone”, now he’s all in on the illegal power grab with a New York Times column headlined, “Biden Should Ignore the Debt Limit and Mint a $1 Trillion Coin”.

That only took a little over a year.

 

The End of Socialism

This brings me to the final point of this essay. They are losing. They are losing not because they aren’t powerful or aren’t making our lives miserable but because their system of subsidy, which produces unearned wealth (or rent) for them is failing rapidly.

They embarked on this Great Reset solely for the purpose of defaulting on their socialist promises made by buying off present generations with the labor of future generations. We call this in modern parlance debt.

Now that the debt is unpayable and the future liabilities of their governments overwhelming everything they have unleashed a torrent of policies around the world to starve, freeze and kill off entire generations of taxpayers who they can’t afford to bribe anymore.

COVID-9/11, no matter how you look at it, as a political operation has shortened lifespans in the U.S. by 18 months in 2020, according to the CDC. What will those numbers look like in 2021? This is a radical contraction which lifted trillions of unfunded liabilities in Social Security and Medicare payments from future U.S. governments.

And they call libertarians heartless?

Draw your own conclusions from this but I think you know what it means.

Davos is purposefully shrinking the division of labor in order to prove the Marxist critique of capitalism correct when it has done nothing but lift billions out of poverty which the Malthusian central planners told us a century ago then was unsustainable.

Central planners aren’t rational. They are simply tyrants who prey on the fear and weakness of people grown soft through abundance. Because in their mind sustainability is only measured by the continuity of their power over society not the actual economics of that society. The instability, chaos and conflict come from their inability to accept that someone else may have a better solution to society’s problems than they do.

And what truly keeps them up at night is the gnawing feeling that the best system is the one where no one person or group of people could ever manage a system as complex and dynamic as seven-plus billion people acting in their own self-interest creating a spontaneous and self-correcting order which doesn’t need their help.

When I look out today and see bills in the U.S. Congress to deny unvaccinated people from flying or children from getting an education all I see is a failing system of energy distribution and subsidy trying to protect itself from the ravages of its own stupidity.

I’ve said it before and I’ll say it again here, power doesn’t prove you’re smart, it simply makes you stupid.

Bitcoin, among other technologies, is slowly eating away at these unsustainable markets while the socialists in China, France and yes, Washington D.C. scramble to keep the central planners’ dream alive of a world where they control access to everything you need to live your most productive life.

They are scared to death of a private banking system that doesn’t need them or a division of labor that coordinates production where their toll booths can’t collect. To them we are just livestock to be farmed, batteries to be discharged and liabilities on their balance sheets to be written down.

Energy isn’t scarce, it is abundant. Human energy, that is. Oil is finite. So is gas. So is coal. But until we properly price its costs, we’ll never figure out what’s the best replacement for them and at what point in time that change should occur.

Between now and then it will be a long, cold winter.

“I know you’re out there. I can feel you now. I know that you’re afraid. You’re afraid of us. You’re afraid of change. I don’t know the future. I didn’t come here to tell you how this is going to end. I came here to tell you how it’s going to begin. I’m going to hang up this phone, and then I’m going to show these people what you don’t want them to see. I’m going to show them a world without you, a world without rules and controls, without borders or boundaries, a world where anything is possible. Where we go from there, is a choice I leave to you.”.

– NEO, THE MATRIX

*  *  *

Join my Patreon if you want to subsidize the truth

BTC: 3GSkAe8PhENyMWQb7orjtnJK9VX8mMf7Zf
BCH: qq9pvwq26d8fjfk0f6k5mmnn09vzkmeh3sffxd6ryt
DCR: DsV2x4kJ4gWCPSpHmS4czbLz2fJNqms78oE
LTC: MWWdCHbMmn1yuyMSZX55ENJnQo8DXCFg5k
DASH: XjWQKXJuxYzaNV6WMC4zhuQ43uBw8mN4Va
WAVES: 3PF58yzAghxPJad5rM44ZpH5fUZJug4kBSa
ETH: 0x1dd2e6cddb02e3839700b33e9dd45859344c9edc
DGB: SXygreEdaAWESbgW6mG15dgfH6qVUE5FSE

House progressives have just become the first to blink in a congressional standoff with Senate moderates over the price tag on the Biden administration’s massive domestic agenda – and are now open to scaling back programs by attaching expiration dates, rather than them be permanent according to Bloomberg.

“One of the ideas out there is to fully fund what we can fully fund, but instead of funding it for 10 years, fund it for five years,” said Rep. Alexandria Ocasio-Cortez (D-NY) in a statement to CBS‘s “Face the Nation.”

WATCH: @RepAOC tells @margbrennan one way to met in the middle is to “fully fund what we can fully fund” and suggests scaling back the time table on how long some programs are funded for. pic.twitter.com/1mb8iFSJDt

— Face The Nation (@FaceTheNation) October 3, 2021

The move comes days after House Speaker Nancy Pelosi canceled a Friday vote on a $1.2 trillion infrastructure package, which House progressives refuse to pass unless the $3.5 trillion ‘social safety net’ and taxes increases are passed alongside it. 

Now progressives – coached by White House Chief of Staff Ron Klain, say they’ll come down on the $3.5 trillion ‘within limits’ – balking at moderate Democrat Sen. Joe Manchin’s offer of $1.5 trillion.

“That’s not going to happen,” Rep. Pramila Jayapal (D-WA) told CNN‘s “State of the Nation” on Sunday. “Because that’s too small to get our priorities in. So, it’s going to be somewhere between $1.5 and $3.5. And I think the White House is working on that right now, because, remember, what we want to deliver is child care, paid leave, climate change, housing.”

“There’s no number on the table yet that… everyone has agreed to,” Democratic Rep. Pramila Jayapal tells @DanaBashCNN when asked about the ongoing negotiations on the larger spending package. Adding, $1.5 trillion is “too small to get our priorities in.” #CNNSOTU pic.twitter.com/KV2EZ3Ig49

— State of the Union (@CNNSotu) October 3, 2021

More via Bloomberg:

On Thursday, Manchin said he was willing to accept as much as $1.5 trillion if it meant getting infrastructure passed, and if liberal Democrats want more they should “elect more liberals.”

Jayapal said reducing the length of time for authorizing that spending could provide a path forward. Federal budget rules tally spending in 10-year budget windows, so authorizing spending for only five years would significantly cut down the price tag. 

Cedric Richmond, a White House senior adviser, wouldn’t commit to a timeline or a price tag. But he said having programs expire could be a possibility. “We don’t look at this as a number. We look at this as what programs are we going to deliver?” he told “Fox News Sunday.”

That said, House progressives say that several items in Biden’s “Build Back Better” plan are non-negotiable, such as climate programs. 

“The clean-electricity standards really do need to be in there for a 10-year period, because it takes time to cut carbon emissions,” said Jayapal. “And we need to have that certainty in order for the market to move in that direction.”

While the Taliban are clearly preoccupied with the security situation inside the Islamic Emirate of Afghanistan, as emphasized by Sunday’s bombing at a major mosque in Kabul (ironically, the former insurgents are facing an insurgency of their own led by ISIS-Khorasan, the Islamic State’s Central Asian faction), there’s an even more pressing issue currently confronting Afghanistan’s new leadership.

It’s looking increasingly likely that the Central Asian suppliers who contribute roughly half of the country’s electricity are getting ready to pull the plug, according to the guy who used to run Afghanistan’s state power authority, Da Afghanistan Breshna Sherkat, which he quit roughly two weeks after the Taliban takeover and likely fled. He at least felt safe enough to tell WSJ that the consequences of the Taliban not making good with Afghanistan’s Central Asian power suppliers could be “really dangerous.”

“The consequences would be countrywide, but especially in Kabul. There will be blackout and it would bring Afghanistan back to the Dark Ages when it comes to power and to telecommunications,” said Mr. Noorzai, who remains in close contact with DABS’s remaining management. “This would be a really dangerous situation.”

Afghanistan lacks a national power grid, and is thus dependent on a network of suppliers in Turkmenistan, Tajikistan and Uzbekistan to supply roughly half the country’s power, while Iran supplies some in the western part of the country. Domestic production inside Afghanistan mostly relies on hydroelectric power grids, which haven’t been functioning at anywhere near full capacity due to a drought.

Right now, Kabul is enjoying a “power honeymoon” of abundant electricity suppliers. But as the Taliban’s relationship with Tajikistan, which has given shelter to leaders of the anti-Taliban resistance, such as former VP Amrullah Saleh. Tajikistan recently deployed additional troops to its border with Afghanistan, prompting Russia to call on both countries to de-escalate.

The bigger problem, at the moment, is that many of Kabul’s residential customers don’t have the money to pay their bills since food prices surged in the wake of the Taliban takeover.

“Our problems are growing every day,” said one Kabul resident who spoke with WSJ, and requested that only his first name be used.

Another salesman in Kabul painted an even more vivid picture.

Farooq Faqiri, a 32-year-old market-stall holder who sells plastic jewelry, said that his family of seven used to be able to eat meat every day, but now they live on potatoes. Buyers have plunged amid Kabul’s economic crisis. For him to pay his electricity bill, his family would have to start skipping the meager meals they currently have. 

He said that they would have to skip even some of those meager meals to save enough to pay the electricity bill, which is a month in arrears. “The electricity comes from a corporation so they will not let us off the bill,” said Mr. Faqiri. “If they cut us off, we will have to go back in time and use oil for light and heat in our rooms.”

At DABS, the state power company, the situation is also pretty dire. The leadership has been replaced by clerics, with the old managers now serving as deputies. But pretty much everybody with any usable knowledge is trying to get out any way they can.

Too bad the mullahs won’t be able to turn to its new allies in Beijing…they’re somewhat preoccupied with a power crisis of their own right now.

By Michael Every and Matteo Iagatti of Rabobank

Summary

• It is impossible to ignore the current shipping crisis and its impact on global supply chains 

• A common view is that this is all the result of Covid-19. Yet while Covid has played a key role, it is only part of a far larger interconnected set of problems

• This report examines current shipping market dynamics; overlooked “Too Big to Sail” structural issues; a brewing political tsunami as a backlash; possible Cold War icebergs ahead; and the ‘ship of things to come’ if maritime past is a guide to maritime future 

• The central argument is that while central banks and governments both insist inflation is transitory and will fall once supply-chain bottlenecks are resolved, shipping dynamics suggest they are closer to becoming systemically entrenched

• Moreover, both historical and current trends towards addressing such problems suggest potential global market disruptions at least equal to the shocks we have already experienced. Many ports will get caught in this storm, if so

Ready to ship off?

It is impossible to ignore the current shipping crisis and its impact on global supply chains and economies.

Businesses face huge headaches as supply dries up. Consumers see bare shelves and rising prices. Governments have no concrete solutions – save the army? Economists have to discuss the physical economy rather than a model. Central banks still assume this will all resolve itself. And shippers make massive profits.

The giant Ever Given, which blocked the Suez Canal for six days in March 2021, is emblematic of these problems, but they run far deeper. This report will explore the shipping issue coast-to-coast, and past-to-present in six ‘containers’:

“Are you shipping me?”, a deep-dive into market dynamics and supply-demand causes of soaring shipping prices;

“To Big to Sail”, a key structural issue driving things;

“Tsunami of politics” of the looming backlash to what is happening;

“Cold War icebergs” of fat geopolitical tail risks;

“Ship of things to come?”, asking if the maritime past is a potential guide to maritime future; and

“Wait and sea?”, a strategic overview and conclusion.

Are You Shipping Me?

Since 2020, global shipping has been frenetic, with equally frenetic shipping rates (figure 2); difficulties for both businesses and consumers; and container-carrier profits.

Is Covid-19 driving these developments, or are there other structural and cyclical factors at play? Let’s take stock.

One root of the problem…

In 2020, COVID-19 become a global pandemic, and lockdowns ensued: factories, restaurants, and shops all closed, bringing global supply chain almost to a halt. In this context, container carriers had no visibility on future demand and did the only reasonable thing: cut capacity.

There is no economic sense in moving half-empty ships across the globe; it is costly, especially for a sector operated on tiny margins for a very long time. The consequence was widespread vessel cancellations, which soared in the first months of 2020 (figure 3). Progressively, more trade lines and ports were involved as containment measures were enacted globally.

By H2-2020, virus containment measures were over in China, and many other nations eased them too. Shipping cancellations did not stop, however, just continuing at a slower pace. Indeed, capacity cuts have plagued supply-chains in 2021.

Excluding the January-February peaks, from March to September 2021, an average of 9.2 vessels per week were cancelled, four vessels per week more than the previous off-peak period of July to December 2020 (figure 3).

Cumulative cancellations (figure 4) underline the problems. Transpacific (e.g., China-US) and Asia-Northern Europe lines saw the largest capacity cuts, but Transatlantic and Mediterranean-North America vessels also reached historic levels of cancellations.

Transpacific and Asia-Europe lines are the backbone of global trade, each representing 40% of the total container trade. More than 3 million TEUs (Twenty-foot Equivalent Units, a standard cargo measure) are moved on Transpacific and Asia-Europe lines in total per month. Due to cancellations, more than 10% of that capacity was lost in early 2020.

In such a context, it was only normal to expect a rise in container rates. Over January-December 2020 the Global Baltic index (the world reference for box prices) increased by 115% from $1,460 to $3,140/TEU.

However, as figure 2 shows, things then changed dramatically in 2021 for a variety of reasons.

As can be seen (figure 5), cancellations alone cannot explain the price surge seen in the Baltic Dry Index — the leading international Freight Rate Index, providing market rates for 12 global trade lines– and on key global shipping routes (figure 6).

So what did?

We have instead identified five key themes that have pushed up shipping costs, which we will explore in turn:

• Suez – and what happened there;

• Sickness – or Covid-19 (again);

• Structure – of the shipping market;

• Stimulus – most so in the US; and

• “Stuck” – as in logistical congestion.

Suez

On March 23rd 2021, a 20,000TEU giant vessel, the Ever Given, owned by the Taiwanese carrier Evergreen, was forced by strong winds to park sideways in the Suez Canal, ultimately obstructing it. For the following six days, one of the fundamental arteries of trade between Europe, the Gulf, East Africa, the Indian Ocean, and South East Asia was closed for business.

While the world realized how fragile globalized supply chains are, carriers and shippers were counting the costs.

370 ships could not pass the Canal, with cargoes worth around $9.5bn. Every conceivable good was on those ships. The result was more unforeseen delays, more congestions and, of course, more upward pressure on container rates.

Sickness

New COVID-19 Delta variant outbreaks in 20201 forced the closure of major Chinese ports such as Ningbo and Yantian causing delays and congestion that reverberated both in the region and globally. Vietnamese ports also suffered similar incidents.

These closures, while not decisive blows, contributed to taking shipping capacity off the global grid, hindering the recovery trend. They were also signals of how thin the ice is that global supply chain are walking on. Indeed, Chinese and South-east Asian ports are still suffering the consequences of those earlier closures, with record queues of ships waiting to unload.

Structure

When external shocks cause price spikes it is always wise to look at structure of the sector in which disruption caused the price spike. This exercise provides precious hints on what the “descent” from the spike might look like.

Crucially, in the shipping sector, consolidation and concentration has achieved levels that few other sectors of the economy reach.

In the last five years, carriers controlling 80% of global capacity became more concentrated, with fewer operators of even larger size (figure 7). However, this is just the most obvious piece of the puzzle.

In our opinion, the real change started in 2017, when the three main container alliances (2M, THE, and Ocean) were born. This changed horizontal cooperation between market leaders in shipping. The three do not fix prices, but via their networks capacity is shared and planned jointly, fully exploiting economies of scale that are decisive to making a capital-intensive business profitable and efficient. Unit margins can stay low as long as you move huge volume with high precision, and at the lowest cost possible.

To be able to move the huge volumes required by a globalized and increasingly e-commerce economy at the levels of efficiency and speed demanded by operators up and down supply chains, there was little other options than to cooperate and keep goods flowing for the lowest cost possible at the highest speed possible. A tight discipline of cost was imposed on carriers, who also had to get bigger.

This strategy more than paid off in the Covid crisis, when shippers demonstrated clear minds, efficiency in implementing capacity control, and a key understanding of the elements they could use to their advantage: in other words – how capitalism actually works.

Carriers did not decide on the lockdowns or port closures; but they exploited their position in the global market when the pandemic erupted. In a recent report, Peter Sands from BIMCO (the Baltic and International Maritime Council) put it as follows: “Years of low freight rates resulting in rigorous cost-cutting by carriers have left them in a great position to maximise profits now that the market has turned.”

Crucially, this market structure is here to stay – for now. It is a component of the global system. Carriers will continue to exert pressure and find ways to make profit but, most importantly, they will make more than sure that, this time, it is not only them that end up paying the costs of rebalancing within the global system.

In short, the current market allows carriers to make historic levels of profits. However, in our view this is not the end of the story – as shall be shown later.

Stimulus

2020 and 2021 saw unprecedented economic shocks from Covid-19, as well as unprecedented economic stimulus from some governments. In particular, the US government sent out direct stimulus cheques to taxpayers. With few services to spend the money on, it was instead centred on goods. Hence, consumer demand for some items is red-hot (figures 8-10).

The consequences of this surge in buying on top of a workforce still partly in rolling lockdowns, and against a backlog of infrastructure decades in the making, was obvious: logistical gridlock.

Moreover, with the US importing high volumes, and not exporting to match, and its own internal logistics log-jammed, there has been a build-up of shipping containers inside the US, and a shortage elsewhere. Shippers are, in some cases, even dropping their cargo and returning to Asia empty: the same has been reported in Australia.

Against this backdrop, the US is perhaps close to introducing further major fiscal stimulus, with little of this able to address near-term infrastructure/logistical shortfalls. Needless to say, the impact on shipping, if such stimulus is passed, could be enormous.

As such, while central banks and governments still insist that inflation is transitory, supply-chain dynamics suggest it is in fact closer to becoming systemically entrenched.

Stuck

In normal times, a surge in consumer spending would be a bonanza for everyone: raw material producers, manufacturers, carriers, shippers, and retailers alike. In Covid times, this is all a death-blow to global supply chains.

Due to misplaced global capacity, high export volumes cannot be moved fast enough, intermediate goods cannot reach processors in time, and everybody is fighting to get a container spot on the ships available.

Ports cannot handle the throughput given the backlog of containers that are still waiting to be shipped inland or loaded on a delayed boat. It is not by chance that congestion hit record peaks at the same time in Los Angeles – Long beach (LALB), and in the main ports in China, the two main poles of transpacific trade.

Clearly, LALB cannot handle the surge in imports, the arrival queue keeps on growing by the day (figure 11). There are now plans to shift to working 24/7. However, critics note that all this would do is to shift containers from ships to clog other already backlogged areas of the port, potentially reducing efficiency even further.

Meanwhile, in Shanghai and Ningbo there were also 154 ships waiting to unload at time of writing. The power-cuts seeing Chinese factories only operating 3-4 day weeks in many locations suggest a slow-down in the pace of goods accumulating at ports, but also imply disruption, shortages, and delays in loading, still making problems worse overall. Imagine large-scale US stimulus on top of a drop in supply!

Overall, “endemic congestion” is the perfect definition for the state of the global shipping market. It is the results of many factors: vessels cancellations and capacity control; Covid; bursts of demand in some trade lines; imbalances in container distribution; regular disruption in key arteries and ports; a backlog and increasing volumes cannot be dealt with at the same time, all creating an exponentially amplifying effect.

The epicenter is in the Pacific, but the problem is global. At present 10% of global container capacity is waiting to be unloaded on ship at the anchor outside some port. Solutions need to be found quickly – but can they be?

The Transpacific situation is particularly delicate, stemming from a high number of cancellations, ongoing disruption, and the highest demand surge in the global economy. However, this perfect recipe for a disaster is also affecting Asia–Europe lines where shipping rates hikes also do not show any signs of slowing down.

…and unstuck?

The shipping business would logically seem best-placed to get out of this situation by increasing vessel capacity. Indeed, orders of new ships spiked in 2021, and in coming years 2.5m TEUs will come on stream (figure 12). However, this will not arrive for some time, and may not sharply reduce shipping prices when it does.

Indeed, the industry –which historically operates on thin margins, and has seen many boom and bust cycles—knows all too well the old Greek phrase: “98 ships, 101 cargoes, profit; 101 ships, 98 cargoes, disaster”. They will want to preserve as much of the current profitability as possible, which a concentrated ‘Big 3’ makes easier.

Tellingly, a recent article stressed: “Ship-owners and financiers should avoid sinking money into new container vessels despite a global crunch because record orders have driven up prices, according to industry insiders.”

True, CMA CGM just froze shipping spot rates until February 2022, joining Hapag-Lloyd. Yet in both cases the new implied benchmark is of price freezes at what were once unthinkable levels – not price falls.

To conclude, shipping prices are arguably very high for structural reasons, and are likely to stay high ahead – if those structures do not change. On which, we even need to look at the structure of ships themselves.

Too Big to Sail

Shipping, like much else, has become much larger over the years. Small feeder ships of up to 1,000TEU are dwarfed by the largest Ultra-Large Container Vessels (ULCVs), which start from 14,501 TEUS up, and are larger than the US Navy’s aircraft carriers.

Of course, there is a reason for this gigantism: economy of scale. It is a sound argument. However, the same was said in other industries where painful experience, after the fact, has shown such commercial logic is not the best template for systemic stability. In banking we are aware of the phenomenon, and danger, of “Too Big to Fail”. In shipping, ULCVs and their associated industry patterns could perhaps be seen as representing “Too Big to Sail”.

After all, there are downsides to so much topside beyond the obvious incident with the Ever Given earlier in the year:

• ULVCs cannot fit through the Panama Canal;

• Not all ports can handle ULCVs;

• They are slow at sea;

• They are slow to load and unload;

• They require more complex cargo placement / handling;

• They force carriers to maximize efficiency to cover costs;

• They force all in-land logistics to adapt to their scale;

• They force a hub-and-spokes global trade model; and

• They are vulnerable to accident or disruption, i.e., they were designed for an entirely peaceful shipping environment at a time of rising geopolitical tensions (which we will return to later).

In short, current ULCV hub-and-spokes trade models are the antithesis of a nimble, distributed, flexible, resilient system, and actually help create and exacerbate the cascading supply-chain failures we are currently experiencing.

However, we do not have a global shipping regulator to order shippers to change their commercial practices!

Specifically, building ULVCs takes time, and shipyard capacity is more limited.

As shown, the issue is not so much a lack of ULCVs, but limited capacity from ports onwards. That means we need to expand ports, which is a far slower and more difficult process than adding new containers or ships, given the constraints of geography, and the layers of local and international planning and politics involved in such developments. There is also then a need for matching warehousing, roads, trucks, truckers, rail, and retailer warehousing, etc. As we already see today, just finding truckers is already a huge issue in many  economies.

Meanwhile, any incident that impacts on a ULCV port –a Covid lockdown, a weather event, power-cuts, or a physical action– exacerbates feedback loops of supply-chain disruption more than any one, or several, smaller ports servicing smaller feeder ships would do.

So why are we not adapting? Economic thinking, partly dictated by the need to survive in a tough industry; massive sunk costs; and equally massive vested interests – which we can collectively call “Too Big to Sail”. Naturally, some parties do not wish to move to a nimbler, less concentrated, more widely-distributed, locally-produced, more resilient supply-chain system –with lower economies of scale– while some
do: and this is ultimately a political stand-off.

Crucially, nobody is going to make much-needed new investments in maritime logistics until they know what the future map of global production looks like. Post-Covid, do we still make most things in China, or will it be back in the US, EU, and Japan – or India, etc.? Are we Building Back Better? Where?

Resolving that will help resolve our shipping problems: but it will of course create lots of new ones while doing so.

Tidal Wave of Politics

Against this backdrop, is it any surprise that a tsunami of politics could soon sweep over global shipping?

In July, US President Biden introduced Executive Order 14036, “Promoting Competition in the American Economy”. This puts forward initiatives for federal agencies to establish policies to address corporate consolidation and decreased competition – which will include shipping. Ironically, the US encouraged “Too Big to Sail” for decades, but real and political tides both turn.

Indeed, in August a bipartisan bill was introduced in Congress –“The Ocean Shipping Reform Act of 2021”– which proposes radical changes to:

• Establish reciprocal trade to promote US exports as part of the Federal Maritime Commission’s (FMC) mission;

• Require ocean carriers to adhere to minimum service standards that meet the public interest, reflecting best practices in the global shipping industry;

• Require ocean carriers or marine terminal operators to certify that any late fees –known in maritime parlance as “detention and demurrage” charges– comply with federal regulations or face penalties;

• Potentially eliminate “demurrage” charges for importers;

• Prohibit ocean carriers from declining opportunities for US exports unreasonably, as determined by the FMC in new required rulemaking;

• Require ocean common carriers to report to the FMC each calendar quarter on total import/export tonnage and TEUs (loaded/empty) per vessel that makes port in the US; and

• Authorizes the FMC to self-initiate investigations of ocean common carrier’s business practices and apply enforcement measures, as appropriate.

Promoting reciprocal US trade would either slow global trade flows dramatically and/or force more US goods production. While that would help address the global container imbalance, it would also unbalance our economic and financial architecture. Fining carriers who refuse to pick up US exports would also rock many boats.

Moreover, forcing carriers to carry the cost of demurrage would change shipping market dynamics hugely. At the moment, the profits of the shipping snarl sit with carriers and ports, and the rising costs with importers: the US wants to reverse that status quo.

While global carriers and US ports obviously say this bill is “doomed to fail”, and will promote a “protectionist race to the bottom”, it is bipartisan, and has been endorsed by a large number of US organisations, agricultural producers and retailers.

Even smaller global players are responding similarly. For example, Thailand is considering re-launching a national shipping carrier to help support its economic growth: will others follow suite ahead?

Meanwhile, shipping will also be impacted by another political decision – the planned green energy transition. The EU will tax carbon in shipping from 2023, and new vessels will need to be built. For what presumed global trade map, as we just asked?

The green transition will also see a huge increase in the demand for resources such as cobalt, lithium, and rare earths. Economies that lack these, e.g., Japan and the EU, will need to import them from locations such as Africa and Australia. That will require new infrastructure, new ports, and new shipping routes – which is also geopolitical.

Indeed, the US, China, the EU, UK, and Japan have all made clear that they wish to hold commanding positions in new green value chains – yet not all will be able to do so if resources are limited. Therefore, green shipping threatens to be a zero-sum game akin to the 19th century scramble for resources. As Foreign Affairs noted back in July: “Electricity is the new oil” – meant in terms of ugly power politics, not more beautiful power production.

Before the green transition, energy prices are soaring (see our “Gasflation” report). On one hand, this may lift bulk shipping rates; on another, we again see the need for resilient supply chains, in which shipping plays a key role.

In short, current zero-sum supply-chains snarls, already seeing a growing backlash, are soon likely to be matched by a zero-sum shift to new green industrial technologies and related raw materials. In both dimensions, shipping will become as (geo)political as it is logistical.

Notably, while tides may be turning, we can’t ‘just’ reshape the global shipping system, or get from “just in time” to “just in case”, or to a more localized “just for me” just like that: it will just get messy in the process.

Cold War Icebergs

The US is now pushing “extreme competition” between “liberal democracy and autocracy”; China counters that US hegemony is over. For both, part of this will run through global shipping. Both giants are happy to decouple supply chains from the other where it benefits them. However, the larger geostrategic implications are even more significant.

Piracy and national/imperial exclusion zones used to be maritime problems, but post-WW2, the US Navy has kept the seas safe and open to trade for all carriers equally. This duty is extremely expensive, and will get more so as new ships have to be built to replace an ageing fleet. Meanwhile, China is building its own navy at breath-taking speed, and a maritime Belt and Road (BRI). As a result, a clear shift has occurred in US maritime strategy:

• 2007’s “A Co-operative Strategy for 21st Century Sea Power”, stressed: “We believe that preventing wars is as important as winning wars.”

• 2015’s update argued: “Our responsibility to the American people dictates an efficient use of our fiscal resources.”

• 2020’s title was changed to “Advantage at Sea: Prevailing with Integrated All-Domain Naval Power”, and stressed: “…the rules-based international order is once again under assault. We must prepare as a unified Naval Service to ensure that we are equal to the challenge.”

The US is also pressing ahead with the AUKUS defence alliance and the ‘Quad’ of Japan, India, and Australia to maintain naval superiority in the Indo-Pacific. This is generating geopolitical frictions, and fears of further escalation of maritime clashes in the region. The Quad has also agreed to key tech and supply-chain cooperation, with Australia a key part of a new green minerals strategy – a race in which China is still well ahead, and the EU lags.

Should any kind of major incident occur, shipping costs would escalate enormously, as can easily be seen in the case of US-UK shipping from 1887-1939: this leaped 1,600% during WW1, and these shipping data stopped entirely in September 1939 due to WW2.

Crucially, US naval strategy is rooted in the post-WW2 power structure in which it benefitted from such control commercially. That architecture is crumbling – and there is a matching US consensus to shift towards “America First”, or “Made in America”. The thought progression from here is surely: “Why are we paying to protect shipping from China, or economies that do not support us against China?”

In short, the strategic and financial logic is: surrender control of the seas, or ensure commercial gains from it.

There are enormous implications for shipping if such a shift in thinking were to occur – and such discussions are already taking place. July 2020’s “Hidden Harbours: China’s State-backed Shipping Industry” from the Center for Strategic and International Studies argued:

“The time is long overdue for the US to reinvigorate its maritime industries and challenge the Chinese in the same game by using the very same techniques the Chinese have used to gain dominance in the global maritime industry.

The private-sector maritime industry cannot do this alone—the US maritime industry simply cannot compete against the power of the Chinese state.

The US and allied governments must bring to bear substantial and sustained political action, policies, and financial support. To do anything less is to cede control of the world’s maritime industry and global supply chains to China, and perhaps to force the US and its allies to enter their own ‘century of shame.’”

Meanwhile, stories link ports and shipping to national security (see here and here), underlining logistics are no longer seen as purely commercial areas, but rather fall within the “grey zone” between war and peace – as was the case pre-WW2. This again has major implications for the shipping business.

Expect that trend to continue ahead if the maritime past as guide, as we shall now explore.

The Ship of Things to Come?

US maritime history in particular holds some clear lessons for today’s shipping world if looked at carefully.

First, the importance of the sea to what we now think of as a land-based US: the US merchant marine helped it win independence from the powerful naval forces of the British, and the first piece of legislation Congress passed in 1789 was a 10% tariff on British imports, both to build US industry and merchant shipping.

Indeed, the underlying message of US maritime history is that the US is a major commercial force at sea – but only when it sees this as a national-security goal.

Following independence, US commercial shipping and industry surged in tandem, with an understandable dip only due to war with the British in 1812. The gradual normalisation of maritime trade with the UK after that saw a gradual decline in the share of trade US shipping carried, which accelerated with the end of steamship subsidies –which the British maintained– and the US Civil War.

By the start of the 20th century, W. L. Marvin was arguing: “A nation which is reaching out for the commercial mastery of the world cannot long suffer nine-tenths of its ocean-carrying to be monopolized by its foreign rivals.” Yet 1915 saw the welfare-focused US Seaman’s Act passed and US flags move to Panama, where costs were lower. However, WW1 saw US shipping surge, and the Jones Act in 1920 reaffirmed ‘cabotage’ – only US flagged and crewed vessels can trade cargo between US ports.

The 1930s saw global trade and the US maritime marine dwindle again – until 1936, when the Federal Maritime Commission was set up “to promote the commerce of the US, and to aid in the national defense.” WW2 then saw US mass production of Liberty Ships account for over a third of global merchant shipping – and then post-1945, this lead slipped away again, and the US merchant marine now stands at around just 0.4% of the world fleet.

Indeed, in 2020, US sealift capability was reported short on personnel, hulls, and strategy such that the commercial fleet would be unlikely to meet the Pentagon’s needs for a large-scale troop build-up overseas. As we see, the US has been here several times before. If the past is any guide for the future response, this suggests the following US actions could be seen ahead:

• Use its market size to force shippers to change pricing – which may already be happening;

• Raise tariffs again (on green grounds?);

• Refuse to take goods from some foreign ships or ports;

• Force vessels to re-flag in the US, at higher cost;

• Build a rival to China’s marine BRI with allies;

• Massive ship-building, for the 3rd time in the last century;

• Charter US private firms to bring in green materials; or

• The US Navy stops protecting some sea lanes/carriers, or forces the costs of their patrols onto others.

It goes without saying that any of these steps would have enormous implications for global shipping and the global economy – and yet most of them are compatible with both the strategic military/commercial logic previously underlined, as well as the lessons of history.

Wait and Sea?

We summarize what we have shown in the key points below:

Markets

For markets, there are obvious implications for inflation. How can it stay low if imported prices stay high? How will central banks respond? Rate hikes won’t help. Neither will loose monetary policy – and less it is directed to a directly-related government response on supply chains and logistics.

This suggests greater impetus for a shift to more localised production on cost grounds, at least at the lower end of the value chain, if not the more-desirable higher end. Yet once this wave starts to build, it may be hard to stop. Look at EU plans for strategic autonomy in semiconductors, for example, which are echoed in the US, China, and Japan.
For FX, the countries that ride that wave best will float; the ones that don’t will sink.

Helicopter view of ships

Clearly, shipping will continue to boom. There are huge opportunities in capex on ships, ports, logistics, and infrastructure ahead – as well as in new production and supply chains. Yet one first needs to be sure what, or whose, map of production will be used for them!

As the industry sits and waits for the wind and tide to change, logically one wants to position oneself best for what may be coming next. That implies global consolidation and/or vertical integration: Large shippers looking at smaller shippers to snuff out alternative routes and capacity; shippers looking at ports; ports looking at shippers; giant retailers/producers looking at shippers; importers banding together for negotiating power in ultra-tight markets. Of course, nationally, governments are looking at shippers, or at starting new carriers.

If this is to be a realpolitik power struggle for who rules the waves –“Too Big to Sail”, or a new more national/resilient map of production– then having greater scale now increases your fire-power. Of course, it also makes you a larger target for others.

Let’s presume current trends continue. Could we even end up with a return to older patterns of production, e.g., where oil used to be produced by company X, refined in its facilities, shipped on its vessels, to its de facto ports, and on to its retail distribution network. Might we even see the same for consumer goods? That is the logic of globalisation and geopolitics, as well as the accumulation of capital.

However, if history is a guide, and (geo)politics is a tsunami, things will look very different on both the surface and at the deepest depths of the shipping industry and the global economy. Much we take as normal today could become flotsam and jetsam.

To conclude, who benefits from the huge profits of the current shipping snarl, and who will pay the costs, is ultimately a (geo)political issue, not a market one.

Many ports are likely going to be caught up in that storm.

On Saturday the China’s People’s Liberation Army (PLA) jets flew another huge jet formation in breach of Taiwan’s air defense zone for a second consecutive day, despite leaders in Taipei still bristling and issuing condemnations over the initial major Friday incursions. 

Following Friday’s record-setting total of 38 jets on two separate occasions, the next day the PLA flew 39 jets, breaching the defense zone. The latter too involved a pair of incursions, with one wave coming during the day and the next in the evening. 

Taiwan’s Prime Minister Su Tseng-chang in weekend statements blasted the flights as “brutal and barbarian actions” which are damaging to regional peace.

Previously the record number of aircraft to breach the Taiwan ADIZ stood at 25, which had happened on a couple of occasions, with the first last April. The initial Friday incident occurred on China’s National Day, a national holiday marking the establishment of the communist People’s Republic of China on October 1, 1949.

On the initial Friday breach, Taiwan Foreign Minister Joseph Wu described that “Oct. 1 wasn’t a good day. The PLAAF flew 38 warplanes into Taiwan’s ADIZ, making it the largest number of daily sorties on record. Threatening? Of course. It’s strange the PRC doesn’t bother faking excuses anymore.”

Thus it appears the follow-up Saturday flyover was a glaring ‘message’ from Beijing signaling that it doesn’t plan to heed any words of condemnation or warnings from Taiwan.

A new record incursion by 39 Chinese warplanes after 19 more jets entered #Taiwan ADIZ on Saturday night. https://t.co/6Iyxbcei2g

— Amber Wang (@ambermywang) October 2, 2021

All of this also comes on the heels of Taipei moving forward with ramping up military spending with a recently approved $9 billion boost, citing the “severe threat” from China.

By Peter Tchir of Academy Securities

Chaos Theory is often associated with a quotation, something along the lines of “a butterfly flapping its wings in Tokyo leads to a storm in Manhattan”. I’ve always taken that to mean that if we had sophisticated enough models and data collection, we could determine that a butterfly flapping its wings in Tokyo would cause a storm in Manhattan. That despite this seeming like an unlikely correlation that no one could foresee, there is actually a cause and effect. We just don’t have the data or the models  (currently) to link that butterfly to the storm in New York.

I think this is relevant today as I “sense” (for lack of a better word) that one or more butterflies have flapped their wings and the impending storms are on their way. Yes, maybe it is a cop-out that I will be a bit vague, but I can’t help thinking that important things have occurred and in the coming days and weeks we will see their effects:

• Afghanistan. From the moment this occurred, not only were the president’s approval ratings affected, but the media coverage of this administration shifted. This is playing out in real time as both parties (and the factions within each party) try to cobble together infrastructure deals. Expect disappointment.

• Energy Problems in Europe and China. Many would argue that Europe has been “way ahead” of the U.S. in terms of shifting their energy reliance from fossil fuels to other sources. Many have argued, or at least I have, that while sustainability is an admirable goal and one that we must push for, we must ensure that it is done in a way that is both achievable and doesn’t severely hamper our ability to compete globally. China’s energy problems are different, yet highlight the risks to the global economy when the largest manufacturer has issues beyond the already problematic supply chains. I’m not sure what will happen from this sudden focus on energy, but I suspect it will change the narrative in many ways, which will create opportunities and problems.

• Jobs. Complete confusion about the number of unfilled jobs. This is incredibly puzzling and as we move into October, the explanations that many used (including myself) to explain the issue, seem to not be doing a good job of explaining the dynamics. I’m at a loss for a good explanation, but I’m increasingly concerned that the jobs wanted will disappear before they get filled, leaving us in a precarious position. I hope I’m wrong, but…

• Transitory Inflation. Even some central banks are trying to redefine transitory as not having a specific timeframe. With the energy problem and job market issues described above, it is more difficult to see inflation as transitory. Also, since it has been at least six months of “transitory this and transitory that” where some inflation spikes up whenever another area calms down, this makes it hard to say this is transitory.

• Central Banks. While it is difficult to say that the Fed isn’t accommodative, they are poised to be less accommodative than they were. That is happening across the globe.

• China Real Estate. I think Evergrande may be the Mothra that flapped its wings.

In Chaos Theory, patterns only emerge over time and only once those patterns emerge can we see them for what they were. I think we have had several critical events and “moments” that will play out in the coming weeks and most seem bad (except that they do reinforce my longer-term view that we will develop a domestic manufacturing base in the coming years).

One way or another, Tesla deliveries continue to set records.

Even though the company’s relationship with Beijing has been under the microscope for the better part of 2021, Tesla was still able to report record deliveries for Q3 2021. Almost all of the deliveries came from the company’s Model 3 and Model Y vehicles, as its Model X and Model S sales continue to phase out.

The automaker delivered 241,300 cars worldwide, beating both the company’s previous record of 201,250 and consensus estimates for the quarter, which were at 223,667. 

The number also beat the average projection of 221,952 that Tesla provided to its investors. 

After announcing the numbers on Saturday, Tesla stated: “We would like to thank our customers for their patience as we work through global supply chain and logistics challenges.”

A meaningful portion of Tesla’s production comes from China, where Elon Musk’s relationship with the government has been tense at times. However, over the last few months, Musk has spoken at several Chinese technology conferences and has praised the country for its advances in technology and electric vehicles.

Tesla’s Q3 numbers stack up well when compared to competitors like General Motors, who we noted at the end of last week, saw its sales plunge.

♥️♥️ Congrats Tesla team! ♥️♥️ https://t.co/mPFAVePVVn

— Elon Musk (@elonmusk) October 2, 2021

GM reported that in Q3, dealers delivered 446,997 vehicles in the US, down 218,195 units, or almost a third, from a year ago. GM blamed the semiconductor shortage, while also highlighting historically low inventories, too.

As Bloomberg noted, this shouldn’t be too surprising since GM told investors that its wholesale volumes in North America in the second half of 2021 would be down about 200,000 units from the first half. GM said that supply disruptions in Malaysia caused by Covid-19 hit hard during the quarter.

With dealer inventories already at record low – as we reported earlier this month, total dealer inventory dipped below 1.0 million in August, down from 2.5 million in August 2020…

… car prices have soared to record highs, and even used car prices – long seen as a key inflection tracker of the “transitory inflation” thesis – are once again rising according to Mannheim.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Stocks Snap The 6-Month Win Streak. What Happens Next?

In mid-August, we discussed the rarity of markets churning out 6-positive months of returns in a row. To wit:

“Using Dr. Robert Shiller’s long-term nominal stock market data, I calculated positive monthly returns and then highlighted periods of 6-positive market months or more.”

Importantly, all periods of consecutive performance eventually end. (While such seems obvious, it is something investors tend to forget about during long bullish stretches.)

The data shows that nearly 40% of the time, two months of positive performance gets followed by at least one month of negative performance. Since 1871, there have only been 12-occurrences of 6-month or greater stretches of positive returns before a negative month appeared.

For September, the S&P turned in a negative 4.89% return. While the decline was average for a market correction period, the financial media made it sound like the market just “crashed.”

These types of headlines tend to drive investors to make emotional decisions. However, while it appears the market won’t quit declining, the correction was much needed.

Seasonally Strong Period Approaches

With the market now pushing into 3-standard deviation territory below the 50-dma and oversold technically on other measures, the reflexive rally on Friday was not surprising.

As noted in our daily commentary (subscribe for free email delivery):

“We agree with Stocktrader’s Almanac:

“Many of the same geopolitical, political, fundamental, and technical headwinds we highlighted in the September and October Outlooks remain present. Congress passed the funding bill to avert a government shutdown just before the market closed today ahead of the September 30 midnight deadline. The biggest risk to the market remains the Fed. An uptick in taper talk or chatter about the Fed raising rates ahead of schedule could trigger another selloff.”

However, it is worth noted there are two primary support levels for the S&P. The previous July lows (red dashed line) and the 200-dma. Any meaningful decline occurring in October will most likely be an excellent buying opportunity particularly when the MACD buy signal gets triggered.

The rally back above the 100-dma on Friday was strong and sets up a retest of the 50-dma. If the market can cross that barrier we will trigger the seasonal MACD buy signal suggesting the bull market remains intact for now.

“Seasonality is alive and well. So we stick with system. “ – Stocktrader’s Almanac

If you didn’t like the recent decline, you have too much risk in your portfolio. We suggest using any rally to the 50-dma next week to reduce risk and rebalance your portfolio accordingly.

While the end of the year tends to be stronger, there is no guarantee such will be the case. Once the market “proves” it is back on a bullish trend, you can always increase exposures as needed. If it fails, you won’t get forced into selling.

Lessons To Learn From The Recent Decline

As noted, we expected the recent decline and previously discussed raising cash and reducing risk. Such allowed us to weather to correction without losing (too much) sleep at night. However, for most, the recent decline brought to light just how much risk exposure many have in portfolios.

While the decline was minimal, many investors suffered damage far more significant than the overall market decline. Such came from two sources:

1. For those “doing it themselves,” much of the damage came from more speculative stocks investors piled into to chase market returns.

2. Individuals who had financial advisors, also suffered damage as they put their “financial advisors” into the position of chasing market returns or suffering career risk. 

Such should not be surprising. I consistently meet with individuals who swear they are conservative when it comes to investing. They don’t want to take any risk but require S&P 500 index returns. 

In other words, they want the impossible:

“All of the upside reward, but none of the downside risk.” 

The lesson we seem to need to learn continually is the understanding of risk. The demand for performance above what is required to reach our goals requires an exponential increase in risk. When clients demand greater returns, such forces advisors to “chase returns” rather than “do what is right” for the client. 

For the advisor, such leads to “career risk.” Specifically, if the advisor doesn’t acquiesce to client demands, they lose the client to another advisor who promises the impossible.

Such is why “buy and hold” index investing has gained such popularity with advisors. If the market goes up, clients get market returns. When the market crashes, the excuse is,

“Well, no one could have seen that coming. But remember, it’s ‘time in the market’ that matters.”

Media Driven Hype

While the advisor takes no liability for giving clients average performance, the client loses the ability to reach their financial goals.

“But if I had been conservative, I would have missed out on the bull market.” 

Almost daily, there is some advisory firm, financial media type, etc., suggesting that you need to buy and hold an S&P 500 index fund if you want to get rich.

During bull markets, such advice certainly seems sound. But, unfortunately, during bear markets and even near 5% corrections, the error of excessive risk becomes prevalent.

The truth is that a more conservative approach to investing can not only get you to your financial goals intact but can do so without triggering the numerous emotional mistakes that lead to worse outcomes.

Shown below is the total inflation-adjusted return of stocks versus bonds. Since 1998, the difference between a 100% stock versus a 100% bond portfolio is just $50. More importantly, during the two major bear markets, an all bond portfolio vastly outperformed with much lower volatility.

A 60/40 blend performed substantially better than an all-stock portfolio and currently only lags by $18. An all-bond portfolio outperformed an all-stock portfolio until 2019. That underperformance will likely revert to outperformance over the next decade.

It is hard to resist getting caught up in an accelerating market.

However, remember that while the cost of entry into the casino is cheap, the exit can be expensive.

Things You Can Do To Perform Better (And Sleep At Night)

Here are the core principles we use with every one of our clients.

• Understanding that Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.

• Checking emotions at the door. You are generally better off doing the opposite of what you “feel” you should be doing.

• Realizing the ONLY investments you can “buy and hold” are those that provide an income stream with a return of principal function.

• Knowing that market valuations (except at extremes) are very poor market timing devices.

• Understanding fundamentals and economics drive long term investment decisions – “Greed and Fear” drive short term trading.  Knowing what type of investor you are determines the basis of your strategy.

• Knowing the difference: “Market timing” is impossible – managing exposure to risk is both logical and possible.

• Investing is about discipline and patience. Lacking either one can be destructive to your investment goals.

• Realize there is no value in daily media commentary – turn off the television and save yourself the mental capital.

• Investing is no different than gambling – both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.

• Most importantly, realizing that NO investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

Markets are not cheap by any measure. If earnings growth continues to wane, economic growth slows, not to mention the impact of demographic trends, the bull market thesis will fail when “expectations” collide with “reality.” 

Such is not a dire prediction of doom and gloom, nor is it a “bearish” forecast. It is a function of how the “math works over the long term.”

Not Out Of The Woods Just Yet

Yes, September was a rough month for the market. However, as we noted previously, a 5-10% correction would “feel” much worse due to the high levels of complacency. Judging by the amount of “teeth-gnashing” on the financial media, you would have thought the roughly 4% correction for the month was a massive bear market.

With the recent sell-off working off some short-term overbought conditions, the market is now better positioned for the “seasonally strong” period. As shown, while October can also tend to be a weaker month, it tends to be stronger than September. November and December are usually well into the green.

However, such is not a guarantee. The end of 2018, as the Fed was tapering its balance sheet and hiking rates, was not a positive experience for investors.

While the Fed is likely many months away from hiking interest rates, they are some very definite headwinds facing stocks into year-end.

• Valuations remain well elevated.

• Inflation is proving to be much sticker than expected.

• The Fed will likely move forward with “tapering” their balance sheet purchases in November.

• Economic growth continues to weaken

• Corporate profit margins will shrink due to higher inflationary pressures.

• Earnings estimates will get revised downward keeping valuations elevated.

• Liquidity is contracting on a global scale

• Consumer confidence continues to wane

While none necessarily suggest a more significant correction is imminent, they will make justifying current valuations more difficult. Moreover, with market liquidity already very thin, a reversal in market confidence could lead to a more significant decline than currently expected.

Such is why we have been adding bonds as of late.

Bob Farrell’s Rule #5

Bob Farrell once quipped that investors tend to buy the most at the top and the least at the bottom. Such is simply the embodiment of investor behavior over time.

Our colleague, Jim Colquitt of Armor ETFs, reminded us of that axiom with a recent post.

The graph below compares the average investor allocation to equities to S&P 500 future 10-year returns. As we see, the data is very well correlated, lending credence to rule #5. Note the correlation statistics at the top left of the graph.

More importantly, current allocations to equities are more than two standard deviations above the norm. Per Jim:

“Since 1952, we’ve only had 4 quarterly observations above the two standard deviation line. Each of which resulted in negative returns (CAGR) for the subsequent 10 years. We now have a 5th.”

Over the next decade, there is a genuine possibility that bonds will provide a higher return than equities on a “buy and hold” basis.

Such is something worth considering.

*  *  *

We live in a world where the degree of disinformation and outright lying of the corporate media has reached a pinnacle point where average folks are becoming well aware of this malarkey. 

The latest example of gaslighting by the corporate press occurred Saturday evening during an NBC News interview with the NASCAR Xfinity Series Race winner at Talladega, Brandon Brown. The reporter distorted offensive chants about President Biden and quickly spun them as chants for Brown. 

During the interview, hundreds if not thousands of fans were in the stadium seating section of the raceway while Brown spoke with the reporter. The chants from the crowd increased in loudness and could be heard as “F**k Joe Biden.” The reporter, quick on her feet, told Brandon and viewers the chants were “Let’s Go Brandon.” Here’s the video so you can hear for yourself: 

NBC reporter attempts desperate damage control as crowd chants “F Joe Biden” pic.twitter.com/1iYZel4zFT

— Jewish Deplorable (@TrumpJew2) October 3, 2021

The reporter who acknowledged the chanting either genuinely misheard it or twisted reality for viewers at home by saying the chants were for Brandon. 

According to RT News, the video went viral and was shared by NASCAR but then deleted without explanation later. 

It’s hard to tell if the reporter was gaslighting or an honest mistake, but such anti-Biden chants have occurred nationwide over the last month, primarily at football stadiums. For the “most popular president ever” to receive such negative chants speaks to the volume of distrust for the most powerful person in the world. 

In recent weeks, new polls by Axios/Ipsos found trust in the president continues to slide. The first real glimpse of Biden’s poll slippage was in late July when a Gallup poll found his approval ratings began to turn lower. 

Compound the botched exit of Afghanistan, southern border crisis, and soaring food, gas, and rent prices; it is no surprise that the president’s ratings continue to tumble and the “F**k Joe Biden” chants grow louder, forcing corporate media into damage control.

By John Kemp, Reuters energy reporter

Europe’s rising energy prices will force factory closures

Europe’s increasingly expensive gas and electricity prices are sending a strong signal to manufacturers to consider temporary plant closures and to home and office owners to turn down thermostats to conserve fuel this winter. Front-month gas futures are now more than six times more expensive than at this point last year, as the region struggles to import enough gas to refill its depleted storage ahead of the winter peak heating season.

 
Regional storage sites are still only 74.7% full, the lowest for more than a decade, and compared with a pre-pandemic five-year seasonal average of 87.4%, according to Gas Infrastructure Europe.

 
In the short term, Europe is unlikely to attract significantly more gas because production is fixed and there is already a worldwide shortage, which is also pushing up prices in Northeast Asia and North America.

Escalating futures prices signal traders think lower consumption will be necessary to prevent stocks eroding to critically low levels and risking fuel supplies running out this winter.  Rising prices will find the path of least-resistance to cut consumption – with the most price-sensitive and least politically sensitive customers forced to reduce gas and electricity use first and most deeply.

In theory, the crisis could be resolved easily by homes, offices, schools and factories turning down thermostats by 0.5-1.0 degrees this winter; the result would be an enormous fuel saving with only a minimal impact on comfort.

In practice, policymakers will be reluctant to call for thermostat reductions since it implies a policy failure and has unpopular associations with one-term U.S. President Jimmy Carter.

European governments are instead trying to shield residential and small business customers from the full force of increasing energy prices on utility bills through price caps, rebates and tax cuts.  But if the crisis continues to worsen, and especially if the winter proves colder than normal, shielding residential customers could prove unsustainable and calls for energy conservation may become inevitable.

In the meantime, policymakers are likely to explore other fuel saving measures, including reduced street-lighting and extended closures of government buildings, offices and schools over the mid-winter holiday period.

More significant savings could be made if manufacturers close their operations temporarily, cutting consumption and potentially reselling energy into the spot market if they have already contracted to buy it.  Steeply rising energy costs will force many manufacturers to reassess their production plans this winter, especially those with energy-intensive processes and/or limited ability to raise the price of their own products.

For manufacturers, short closures have the double benefit of cutting energy costs and also driving up the price of their products, helping protect margins against rising power and gas prices.

Once enough credible plant closures and other energy-saving measures are announced futures prices are likely to moderate. Plant closures would, however, worsen problems throughout the supply chain and intensify the upward pressure on inflation, as well as disrupting long-standing customer relationships.

But unless the winter proves mild, price rises and physical shortages of gas, coal and electricity are unlikely to remain confined to energy markets, rippling out to the rest of the economy as is already happening in China