The Independent Market Observer

Unpacking the Supply Chain Issues

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 28, 2021 2:25:42 PM

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supply chainThis post will be on the short side, as I am leaving Laguna Niguel in California at the end of the Commonwealth Summit Club conference. I wanted to take some time, however, to comment on something that has been forcing itself to my attention all week: the supply chain issues that are driving much of the current inflation concerns.

What has been forcing this issue are the dozen container ships I can see from the hotel here, all within a couple of miles of the coast. Reportedly, the water is too deep to moor, so those ships have their engines going to maintain steerage, with all the cost, noise, and pollution that entails. And it is not just a dozen—there are others both up and down the coast, too far to see from shore. This is a very visible symptom of what is happening around the world. And it’s not the only one.

A Fundamental Shortage?

One advisor from Indiana talked about the thousands of finished Ford trucks parked around his city, sitting there waiting for transport to dealers. In Britain, gas stations are sitting empty due to a lack of truck drivers to deliver more fuel. And everyone is talking about toilet paper again. (As an aside, I was advised this morning that while deep value strategies can work for investments, they are a bad idea for toilet paper.)

With this many issues, in different industries and in different countries, clearly something is going on. The question we need to ask is whether it is a fundamental shortage of supply (is there really not enough stuff out there?) or a matter of coordination, where there is enough stuff but it isn’t being delivered to the right places at the right times.

A Lack of Coordination?

Evidence suggests that, in most cases, it is the latter. Both the Ford trucks and the British fuel shortages are due to transportation issues. The ships are out there because they cannot be unloaded. There does seem to be enough stuff, but the linkages that deliver that stuff to customers are broken. Looking forward, this scenario is both good and bad. It’s good because at least the stuff exists. It’s bad because problems of coordination can last a long time.

For some insight, look at the beer game. Even in a simple simulation, lack of information and coordination can severely mess up supply chains. When you translate those results into the infinitely more complex real world, where orders and supplies have both been disrupted by the pandemic, it is small wonder we see the problems we do. It also makes it seem much more likely that those problems will last longer than many (including me, until recently) think.

Where Do We Go from Here?

While I still think we will return to a smoothly functioning economic system, it now looks like it might take years to really get there. And, when we look at other changes that are being made, with production and supply chains being modified to be more robust at the cost of economic efficiency, it seems doubtful we will ever get fully back to where we were. I wrote starting several years ago that the world would be deglobalizing, as politics started to dominate economic efficiency. The pandemic has accelerated that process and left us struggling to cope. Going forward, both the amount and the availability of stuff are likely to be worse than they were, even when we get back to something like normal.

Bah Humbug?

In the immediate future, what worries me most is the potential effect on Christmas, the most important shopping season of the year in the U.S. Consumer confidence is already trending down, and the impact of severe product shortages then could hit it even more. There are a lot of presents sitting on those ships off the California coast. If Santa can’t make it this year, for whatever reason, that could be another knock to both confidence and spending. And with the pandemic still with us and the economy showing signs of slowing, we really don’t need the Grinch to show up as well.

The Christmas shopping season is always important as a sign of how the economy is doing, largely because of what it tells us about the consumer. This year, it will be even more important for what it tells us about the world as a whole.

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