"Bad News, I’m Afraid"

"Bad News, I’m Afraid"

by Jim Rickards

"The breakdown of global supply chains is well-known by now. Whether it’s finding groceries in your supermarket, buying a new car or buying appliances like dishwashers and refrigerators, goods are scarce. Also, deliveries take forever and choices are limited.

Many people wonder why the problem isn’t going away. Here’s the answer: The supply chain is a complex dynamic system. When any complex system collapses, you can look for specific causes but that’s usually a waste of time. Systems collapse internally because they are too large and too interconnected and require too many energy inputs to keep going. Any specific cause is more likely to be a symptom than a true cause. It’s frustrating, but that’s the answer.

Most Americans’ first encounter with the supply chain meltdown was in the spring of 2020 during the first wave of the coronavirus pandemic. Shoppers noticed that items like hand sanitizer and paper goods at Costco and other big-box stores were cleaned out. It seemed that Americans who were locked down and quarantined at the time were hoarding these products because they had no idea when they would be allowed to venture out again. The shortages were real, but were limited to specific products. The other aisles at Costco were stocked and so were all the other stores around (at least those that were allowed to remain open).

Now It’s Everything: But it’s not just Costco this time. It’s every supermarket, convenience store and other retail outlet from coast to coast. And it’s not just cleaning products and paper goods. Your local supermarket might have bare shelves for eggs, peanut butter, milk and other staples. It’s not a case of being stocked out of all goods all the time. Your store is like a box of Cracker Jack – you never know what’s inside. Many items are available, but many are not. It’s a case of stockouts of certain goods from time to time. But you can be sure that something will be missing and some of the shelves will be bare.

Still, there’s a narrative around that the crisis is temporary, that steps are being taken to alleviate shortages and backlogs and things will soon be back to normal. The narrative blames the shortages on the pandemic and the number of workers home with COVID. It says that things will clear up when the virus is under control. That’s the narrative, but it’s not the reality. The evidence is that the supply chain crisis is just getting started. It’ll be with us for years and have huge negative economic effects.

All Connected and All Collapsing at Once: No one doubts that the pandemic, especially the Omicron variant, has had a major impact and has caused millions to fall ill and miss work. It’s also likely that the missing employees due to illness are part of the reason shelves are not fully stocked. But they are not a prime cause of the supply chain chaos.

Even if stores were fully staffed, there would still be shortages and delays due to everything from a shortage of truck drivers, late container cargo shipments from Asia, manufacturing delays due to lack of inputs, energy shortages and many other impediments. That’s the point.

The supply chain is collapsing at every stage due to bottlenecks at every other stage. Commodity inputs are scarce, partly due to energy shortages at mines. Manufacturing is behind due to lack of commodity inputs. Deliveries are behind due to manufacturing delays. And finally, shelves are bare due to nondelivery of orders and a worker shortage. It’s all connected and it’s all collapsing at once. So don’t believe the happy talk about a “temporary” supply chain crisis. I’ll say it again: The crisis will last for years with predictable negative effects on economic growth.

The “Factory to the World” Is Closing Down: One major concern is China. China is currently pursuing a COVID Zero policy. This means that China has zero tolerance for even a single case of COVID. If COVID appears, China will isolate the individual, do a massive track-and-trace operation and then forcibly remove entire neighborhoods to quarantine camps outside the city limits for mandatory lockdowns of 14 days or more.

If more than a few cases are detected, China will follow the same procedure but on a much larger scale. They will relocate hundreds of thousands of people if needed and shut down entire cities. This has already happened in Xi’an, a city of 1.5 million people and a major manufacturing center. A new lockdown just arose in Henan province, which is the center of Chinese electronics production. China has also locked down the port of Ningbo, which is the second largest port in China after Shanghai, and one of the largest in the world.

China has also required that crews on arriving vessels must be confined to the vessel and are not allowed onshore for normal rest and recreation. Since these crews often spend six months or more at sea, vessel operators are starting to schedule trips that avoid China. That means that even when goods are produced, they cannot necessarily be shipped because of a shortage of vessels and crews. The situation is getting worse, not better, and will deteriorate even more as we move toward the Beijing Olympics and the Lunar New Year holidays in China.

In effect, the “factory to the world” has decided to shut down the factory, or at least large parts of it for months to come. This will continue to impact the U.S., which Americans are not accustomed to or prepared for.

Forced Labor: Americans associate bare shelves with Third World countries or perhaps East Germany during the Cold War. That last time Americans have had to deal with shortages on this scale were the gas crises of the 1970s and rationing during World War II.

Importantly, the phenomenon is not limited to the United States – it’s a global event. And it’s leading to extreme government measures. Take a look at Australia. As in the U.S., Australia has large numbers of unemployed workers. They receive benefit payments similar to welfare and unemployment from an agency called Centrelink. Well, the government has now declared that unemployed benefit recipients must work several hours per week to restock supermarket shelves in order to keep their Centrelink benefits. So, social benefits are being used to draft forced labor to deal with a supply chain problem.

Australia has become a kind of prison camp based on government dictates concerning the virus. It’s a good example of how COVID has empowered governments to dictate every aspect of citizens’ lives. This won’t be the last government mandate in Australia or here. And there’s a powerful lesson to be learned here: Once governments get a taste of neo-fascism, they always want more. That’s true even in a liberal democracy like Australia. We’re seeing similar phenomena play out in western European democracies as well.

A Race Against Time: The other thing we can be sure of is that these mandates will slow the economy and destroy wealth. The bad news for investors, again, is that this situation will persist for years. It’s not easy to correct and definitely not something that can be corrected quickly. In markets, this will play out as higher costs, lower earnings and ultimately lower stock prices. With markets still close to all-time highs, this could be a good time to lighten up on stocks before the supply chain reality catches up with the stock market bubble. When it does, it won’t be pretty."

- dailyreckoning.com

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