One Stuck Box of Fertilizer Shows the Global Supply Chain Crisis
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At work, we sell robot kits and parts to schools. Schools are coming back from summer break. We are completely out of stock of every complete kit and many important parts. We're missing out on maybe 50% of our sales for the year because we can't get inventory. What the hell am I supposed to do for the next six or twelve months, sit at my desk and whistle? We have literally nothing to sell!
I look at a car mechanics subreddit, and the exact same story: no parts, customer vehicles sitting in the yard for a year waiting for replacements: https://www.reddit.com/r/Justrolledintotheshop/comments/podi...
The situation reminds me of February 2020, after the first COVID deaths in the US, with comments on HN by managers talking about complete carnage in the sales forecasts, but the markets floated along, ignorant of reality.
For a while.
It’s probably a good time to slaughter a few sacred cows as well.
In some ways it could be good for them.
https://www.motor1.com/news/532591/mercedes-bmw-keep-prices-...
If this happens in a large scale, inflation will rise.
Multiple reasons IMO:
- the stock markets have long ago diverged from reality towards "financial engineering"
- tech and service companies which form an ever larger share of the economy aren't hit by supply chain issues at all, the only thing that hit a bit was big advertisers cutting the ad budgets early in the corona crisis
- lots of stocks are held by pension funds and other slow-as-molasses, long term holding entities
- for those parts of the markets that still are based on the real world, it's betting on the future - and the corona disruptions are going away rather sooner than later, at least for the Western world plus China where by the end of the year even children should be able to get vaccinated (and governments seem to shift towards "if the unvaccinated want to die by corona, let them die", which is crass given that at the moment children can't be vaccinated at all, but understandable from a politics point of view). South America and Africa aren't important markets or labor source for companies on the Western stock markets which means the stock markets don't (have to) care about the low vaccination rates there.
- in contrast, companies that are hit hard by supply chain issues (like your company, farms and other small businesses) aren't listed on the stock exchanges meaning their issues don't get passed through on the stock market
- for some of the companies (esp. the car industry), the stocks have taken a bit of a downturn (e.g. Ford -10% over 6M), but again - most people are believing that once the supply chain issues resolve themselves, customers will come and make all the purchases they couldn't over the last two years thanks to corona
They actually are: try buying eg. recent AMD chips in bulk, some models of laptops, GPUs... even home office gear like webcams and printers were in short supply last year, although this seems to have largely sorted itself out.
But agreed, these are rarely showstoppers and you can usually work around them.
A lot of companies are trading at values that don't look at all unusual given their actual financial returns.
Think about how you can produce the stuff you sell, not just pass it from hand to hand. Being an intermediary is the first job to disappear, the schools can order directly from China and maybe they should. That will take out some inefficiencies from the chain.
(Or perhaps it's happened (to other listings), and they do a good enough job I haven't realised. But there's just so much tat to wade through on Amazon these days, that would all sell better if it were just listed/branded/marketed etc. by an English person. I'm not saying I'd do a better job of selling in China - just that as local and culturally familiar people as possible should do that. Spend a fiver on Upwork or whatever and a have a native look it over.)
For cheap trinkets that I do not care about, maybe.
For anything else, I am going to Costco/Nordstroms/Apple/Target/Home Depot etc for reputable brands and reliable supply chains. And that is just for small value home goods. For even higher value goods like construction materials, business equipment, labor, and other capex, no platform today is good enough to offset personal relationships and trust built over many years.
Of course, the brands the items are sold under themselves might be swapping out their previously higher quality components for lesser components, and who would know until you have sufficient data from experience.
The economy needs building blocks and raw materials and that's why there are companies that provide those things. It isn't practical for every company to vertically integrate everything, there just aren't enough resources to do that.
If it is a hard deadline that does not change, well I guess we can just write off 2022 for a lot of industries right now.
I looked and couldn't find a name for it but there's an accordion effect that flows through supply chains after a big disruption. This is just part of it. The problem is that it's not an acyclic graph, e.g. chip suppliers need robots too, so it can take a long time to shake out of the system.
The bullwhip effect[1]. Although in this instance, it's inverted from its traditional direction. Generally the closer you are to the consumer/end product in the supply chain, the less impacted you are by the bullwhip effect. Tiny deviances between your actual and forecasted/expected demand can result in reactionary changes to materials orders, which grow in magnitude and volatility as you follow the downstream supplier chain. So the whip goes from those closest to the consumer upstream to those further away.
Car companies canceling chip orders at the beginning of the pandemic are an example of what's generally considered the bullwhip effect. Suppliers generally have little choice but to put up with the volatility, because if they don't they risk their customer sourcing a different supplier that _will_ and losing the account entirely.
That said, the power dynamics now are different. Many suppliers have more demand than their ability to service it right now, either because of constrained materials supplies themselves, lack of manpower, or lack of additional capacity. And those capacity constraints are hitting suppliers industry wide, so the "upstream" consumers of those materials have no alternatives to source. Hence why the bullwhip is going in reverse from how it typically does, where the ones closest to the end product are the ones at the mercy of the suppliers they source materials from.
Historically, the majority of actors in the stock market had a pessimistic response to negative events. A few outliers discovered that optimism in the face of pessimism has big rewards... word spread, and now everyone is optimistic, all of the time. There is no risk, only rewards of varying sizes. The markets were never based on reality, there was just a period of convergence between the attitudes of people living in reality and the attitudes of market actors.
As Warren Buffet didn't once say, "be greedy when others are fearful, and remain greedy when others are greedy. be greedy."
It didn't pay off to be optimistic in 1930.
The government got into the business of subsidizing asset prices at all costs after The Great Depression, and especially after The Subprime Crisis in 2008.
I don't see this ever changing. But if it does, ignorant optimism probably won't be a good strategy anymore.
It depends on the timeframe. First, you got a lot in dividends (which were much higher rates than today’s dividends on average). Secondly, by the end of the war, you were at least break even, and by the early 1950’s you probably more than doubled your money.
Now, if you had been patient and been optimistic in 1932/3 at the very bottom of the market, you would have made a killing, nearly 10x your investment by the early 1950’s, plus all the dividends!
But, I get your point and agree with the rest of your comment.
Especially if you have to pay tax on the "profit".
Okay - sure - maybe given the environment, "good" investments were few and hard to come by.
1968-1982, the S&P 500 essentially went nowhere.
1998-2012, the S&P 500 essentially went nowhere.
Those dead periods represent ~28 out of the last ~53 years.
That's a long time for the market to produce mediocre results, especially compared to expectations today.
The long-term chart and valuations of the S&P 500 are looking pretty comical at this point, in terms of irrational exuberance in the present. It's pricing in an extraordinary economic golden era of super growth, which isn't going to happen.
This is basically the same as saying 2005-2020. Just because there was a temporary crash for one year, does not mean 1998-2012 was a bad time for investment.
The US Government was well into its asset subsidization spree by then. 1999 tech stocks were not a good investment. Other than that, this was a pretty good time to invest.
Markets with very heavy debt and forward speculation have a way of delaying any sort of consequence for actions. It’s almost like a juggling act, which so far has been able to keep going for so long that people are starting to realign their view of moral hazards and not punishing bad debt.
China is a great example of this but the US pioneered this stuff with the massive finance industry which is built on this sort of complex financial maneuvering, creating an abstraction layer disconnected from market corrections.
Doesn't affect the casino so why would we see a reaction? The financial system is mostly fictional by now.
Companies switched from having warehouses as building to having warehouses on the road, mainly in ships and trucks.
We had some problems too getting parts for our products, mainly chips of course. Until some weeks ago we still felt the Ever Given in the Suez Canal because our suppliers were out of stock as well. Many businesses were relaxed on contractual penalties because it affected everyone. Of course Covid is still a factor, although it really didn't hit many industries too much.
When I buy VTI, I am not concerned about sales today, tomorrow, or even 2 years from now. I have cash and bonds for that. For my equities, I only care that their underlying companies are going to exist in 10, 20, 30 years and are going to be relatively successful in the marketplace.
Of course, it is possible things are going to hell in a hand basket and none of these companies will be around in 10, 20, 30 years, but I am betting I will have bigger problems than the resell value of my equities if that is the case.
Because the stock market doesn't care about any of that.
If reason commanded the financial system, pretty much the entirety of manufactories would never had moved to South Asia. They moved not because it was in the interest of the people or the several countries, but because it was more favourable to the shareholders, and all these "businessmen" who have no loyalty to any country.
That seems... totally consistent with reason? Companies cutting costs to increase shareholder profits is totally consistent with reason. It might not be consistent with reason for the welfare for the entire country, or for the poorest, but that doesn't mean it's not reasonable.
Companies have to stop working because the supply chain is a mess? Very reasonable.
Your post doesn't sound like mental gymnastics at all.
What bailouts are you talking about? The only ones that come to mind are the 2008 financial crisis and covid. The latter seems less "the whole economy is a house of cards" and more "we had to shut down the economy for several months".
Also, how is this related to the original comment about offshoring being unreasonable? It looks like you saw a "the economy is bad" post and wanted to chime in with your own "the economy is bad" thoughts.
>Companies have to stop working because the supply chain is a mess?
or you know, covid.
It seems to me a whole lot of people were given authority to make decisions and agreements that collectively whittled away at the ability of participants in US markets to be responsibly prudent. We allowed players in the market not subject to labor, quality, ecological, or criminal accountability, promoting an endless deluge of cheap crap at the expense of business (and thus economic) resilience. This led toward more consolidation, with acquisition and endless growth replacing reserves and correct planning for lean times, ensuring that only the biggest players in a rule abiding market can survive.
When tshtf the boomers will die first. As the world burns we can at least enjoy a little schadenfreude.
The west is focused on quarterly profits (you get what you measure). China is focused on global domination.
While the west thinks that they are exploiting cheap Chinese labor and shipping, the CCP is exploiting they west's myopic focus on short-term profits.
So while the west "wins" for a few years by under-paying poor Chinese workers, China wins over decades and centuries by ensuring they extract maximum intellectual property and manufacturing know-how, and corner key markets, to the level that the supply chain is now a key military threat.
This will be recorded as a strategic blunder of historic proportions.
1. alternative is that they don't and their competitors do, and they get driven out of business. "Long term" doesn't mean anything when you're bankrupt short term.
2. my point in the previous comment is that the parent commenter explicitly said it was favorable to the shareholder, which contradicts his assertion that it's "not reasonable".
>The west is focused on quarterly profits (you get what you measure). China is focused on global domination.
The same investors that buy stocks at 34x annual earnings, necessitating more than three decades to make back their investment?
The point is that the western leaders SET IT UP THIS WAY.
Effectively, they externalized the costs of losing the massive geopolitical/economic strategic advantage onto future generations, who will have to deal with the fallout of an authoritarian regime in a very strong geopolitical position.
And these "leaders" effectively sold out for a very transient advantage.
What could have been done differently? 1) Implement laws preventing transfer of IP to China, to counter their laws requiring it. 2) prevent critical components of defense systems from being made there, both to avoid technology transfer and to maintain onshore manufacturing skills 3)Implement quotas and tariffs that reflect the actual costs of the strategic loss. 4) Encourage investment in other low-wage countries that do not pose the same geopolitical risk. This is just the beginning, and none of it was done.
Once those restraints were removed, of course it becomes in the interest of every manager to offshore to the newly opened areas.
>> The same investors that buy stocks at 34x annual earnings, necessitating more than three decades to make back their investment?
Nonsense, decades is not the typical investment expectation. If they are investing at 34X PE, they expect bigger returns sooner. Amazon is a great example, whee you could invest at effectively infinite PE ratios and double your money within years, or get 10X within 7 years. Recent price $3475. It passed $340 in Q1 of 2015, and at that time the P/E was effectively infinite with negative earnings per share. [1] Your example more even proves the point of short term focus. By your example, if investors lost money really means that they're investing for the long term - preposterous.
[1]https://www.macrotrends.net/stocks/charts/AMZN/amazon/pe-rat...
Where's the line between "massive money sink" and "investments for 'geopolitical/economic strategic advantage'"? Afghan/iraq reconstruction? Belt and road initiative? Hell, you could even argue some of the favorable treatment given to china was for "geopolitical/economic strategic advantage", because the hope was that they'd move away from communism.
>Nonsense, decades is not the typical investment expectation. If they are investing at 34X PE, they expect bigger returns sooner.
Who are they selling those stocks to? Is everyone on wall street seriously planning to sell all their investments a few decades from now, before everyone else does?
Obviously, it is not drawn by God or nature - it is up to us to draw.
Also obviously, not all investments are a sure thing.
But we can start by actually bothering to do a reasonable threat evaluation and looking at meta-issues such as authoritarianism vs democracy, expansionist intent, scale, costs being externalized, etc. In this case, it seems that the major drivers were politicians catering to corps wanting to increase their short-term profits, and not to any serious long-term analysis.
>>Is everyone on wall street seriously planning to sell all their investments a few decades from now, before everyone else does?
NO, they are looking for outperformers, who will create value far faster. And yes, some are playing the Greater Fool theory, and some even succeed at that. But your implied idea that just because someone buys as a valuation that you don't like means that they are therefore long-term investors is, ummm.. so bad it's not even wrong (as physics professors say about the cranks who write them).
Someday, at least try to make a cogent point - after multiple exchanges, the only thing that is evident is you don't like something and do like sophistry.
car companies can and do issue buybacks to bolster stock prices, and since interest on their debt is practically zero (or actually zero in many cases) theres no pressure from shareholders to do anything.
the fed seems content to ride out what they believe is short-term inflation as a tax on wealth, in lieu of blowing up the credit market with interest rate hikes. the real problems will begin if inflation begins to rise uncontrollably due to covid this winter and further employment stagnation.
I believe this inflation will continue to rise. the US is ill equipped for covid even in 2021, and no matter the wage hikes, employees seem to be firmly against going back to whatever it was that constituted "work" for them in the past without more meaningful reforms (healthcare, pto, etc...)
In particular, it's worth noting the lumber market, where supply chain issues are starting to resolve themselves despite predictions that something was fundamentally broken.
Local restaurants and fast food places have been marking a lot of items as unavailable.
A lot of packaging (drink containers, take-out containers) have been unavailable, then replaced by a similar but not-identical model, recently.
I'm surprised the panic buying hasn't started yet, frankly. Supply of lots of important stuff (though I don't think toilet paper, yet? Hahaha) looks a lot worse than it did during the panic buying last year, and that's without a run on goods, so must be a sign of actual problems.
It's crazy silly how short-sighted people are.
My school had a kitchen in the 90's but they closed it in 2001 when my other started (and started to outsource). For 20 years, outsourcing worked just fine and saved them a ton of money.
You can see this in the design of public school meals: they're very concerned with pushing calories, because some kids won't eat much else that day.
[EDIT] this is also why schools offer breakfast programs for poor students, which I assume are similarly affected by these shortages.
Yes there is a shortage of containers. But a container is nothing but a metal box with a wooden floor. More containers can be made and are being made. Yes there is a shortage of container ships. But that is because there is 50 container ships waiting in a huge line in front of long beach to be unloaded. Once they get unloaded they will start sailing back and forth and there will no longer be a shortage. Yes there is a shortage of workers and truck drivers. So the companies will raise wages and hire more.
In general stock market investors do not worry too much about excessive demand. What keeps them up at night is lack of demand.
What happened in march 2020 is that the stock market was spooked about lack of demand. People feared that the virus will wipe out large part of the population and the rest will be hunkered down trembling in fear and saving every penny.
There was a lot of government mismanagement in handling the virus (especially in some countries) and it killed and is killing way more people than it should have, but it is not affecting demand. Furthermore, governments and central banks correctly put in welfare and support programs in order to prevent a wave of poverty and collapse of demand.
So currently the problem is not lack of demand but lack of supply. Which is very much fixable.
I always respond to this the same way. What reaction _should_ the market have? And is that reaction 100% (or even say... 75%) predictable based upon the available information today? And then if it is, what consequence would that have on your ability to invest immediately afterward?
So, my answers are... the market should largely ignore short term (<5 year) factors and the response should largely be unpredictable based upon the behavior of the masses. Most investments should have time horizons that make these movements irrelevant to 10+ year profit estimates.
But I feel like a lot of people want responses that are more like this: The market should drop precipitously based upon the information that short term profits (and thus P/E ratios) will fall. Based upon this, I should be able to immediately invest all available cash and reap a windfall when mean reversion occurs within 1-3 years.
I think one of these is a more realistic scenario than the other, regardless of which world we'd like to live in.
The market prices in expected movements!
(P.S. on HN, you can use asterisks around words instead of underscores for italics)
It happen one already in a similar manner in 2008 and it'll happen again because we didn't learn our lessons the first time.
Inflation. In the stock market, yes.
There's a lot of money with nothing else to do. Somebody puts some in the market, stock prices go up, and everyone says, "hey, stocks are going up!" Lather, rinse, repeat.
Remember, the market can remain irrational longer than you can remain solvent.
Hard deadlines are a really underappreciated factor in JIT supply chain issues. When deadlines are softer, time itself can act as a buffer to smooth out the supply chain --- e.g. if the latest iPhone needs an extra month to finish production, that's not the end of the world. But with stricter deadlines like planting, you don't have the same release valve for supplier pressures. When your Just-In-Time becomes Just-Outta-Time, you've got to scrounge up the necessary inputs ASAP, and that sends price spikes reverberating throughout the system, or worse, cascading downstream failures in the event that you're unable to find enough inputs for what you're already in the process of producing.
China has strong electric subsidies. Both in cash, and in allowing a high coal dependency. This means China has some of the lowest electricity rates in the world.
Aluminum production costs are dominated by electricity costs. You can think of exporting aluminum as exporting electricity. Any business in china which can get permission to export an aluminum product has a license to print money. They are in effect reselling subsidized electricity.
I've heard talks of a mass exodus from some areas here as people just can't rebuild again if they have to wait a year for materials. Not that I think it's a bad idea to move out of some of these areas, but its a big change from how we normally operate.
Insurance typically has to pay out within a year of the event, however they've been handing out waivers left and right because the damage across Iowa was so substantial, contractors had such a huge backlog, materials were so far delayed, and to some extent I'm sure, prices were so high insurers were welcoming the prospect of delaying the higher costs or letting prices become more reasonable.
Another oddity they found was when pricing vinyl siding, the thickest material was cheaper than the medium grade material.
In industries that require more different inputs than clothing, the problem gets even worse, I expect. The term "complexity catastrophe" comes to mind.
John Harrelson, John Harrelson, you are a wretched creature,
You’ve added to this war a new and awful feature,
You’d have us think while every man is bound to be a fighter,
The ladies, bless their pretty dears, should save their p* for nitre,
John Harrelson, John Harrelson, where did you get this notion,
To send your barrel around the town to gather up this lotion,
We thought the girls had work enough in making shirts and kissing,
But you have put the pretty dears to patriotic pissing
The incidental problems stemming from labor-shortages, short-term factory and harbor closures caused by covid, have simply accelerated and exposed the weaknesses of our monopolistic, global just-in-time economies.
[0]https://mattstoller.substack.com/p/counterfeit-capitalism-wh...
Are we witnessing a trade war?
Or
Are supply chains being used to prepare for global war?
After all that's happened, I'd be more surprised if the supply chains hadn't been affected.
I'm sure interested parties are also making full use of the chaos to futher their own ends.
The current supply chain issues are mainly due to China’s zero-covid policy and a typhoon closing down ports.
The western world is basically back to pre-covid business wise, with Asia being the bottleneck
Yes, I did. There is no way that the delicate machinery of international trade has already recovered - large parts of the world were still in lockdown last summer!
You mean the article that says a key port in Shenzhen was shut down in May 2021 due to a COVID outbreak? That one?
http://moc.oocl.com/nj_prs_wss/#/sailing_schedules/search?PR...
How are you reaching your 7 day calculation? 7.5k nautical miles at 15-20 knots would be 15-20 days.