By Michael Every of Rabobank
The financial economy and real economy used to live with each other happily: now they are in a long-distance relationship reliant on logistics to keep in touch. What happens when those logistics break down? (Very bad things, as I was discussing here the other day.)
We have covered the ocean-carrier side of this crisis (‘In Deep Ship’), and the new fee equivalent to $1m a day, and rising $1m each following day, for a 10,000 TEU vessel whose cargo is stuck in LA/LB port. However, we stressed in that report that the supply chain issue is more systematic. So, allow me to share quotes from an article exposing there is ‘No Trucking Way’ we are about to return to normal:
“Think of going to the port as going to WalMart on Black Friday, but imagine only ONE cashier for thousands of customers…Most port drivers are ‘independent contractors’, leased onto a carrier who is paying them by the load. Whether their load takes two hours, fourteen hours, or three days to complete, they get paid the same, and they have to pay 90% of their truck operating expenses…I honestly don’t understand how many of them can even afford to show up for work…In some cases they work 70 hour weeks and still end up owing money to their carrier.
So when the coastal ports started getting clogged up last spring due to the impacts of COVID on business everywhere, drivers started refusing to show up. Congestion got so bad that instead of being able to do three loads a day, they could only do one. They took a 2/3 pay cut and most of these drivers were working 12 hours a day or more…Many drivers simply quit. However, while the pickup rate for containers severely decreased, they were still being offloaded from the boats. And it’s only gotten worse…The ‘experts’ want to say we can do things like open the ports 24/7, and this problem will be over in a couple weeks. They are blowing smoke, and they know it.”
The author also points out a crippling shortage of truck chassis; warehouse workers, again due to low-pay and Covid, so unloading takes longer; and warns soon there will be less, not more truck drivers. Crucially, he bewails that ocean carriers, ports, trucking companies, warehouses, and retailers are all making great money – so won’t invest before the system collapses further. If so, this book-ends the 1980 deregulation of the US trucking industry under President Carter.
Meanwhile, Senator Manchin just said ‘No Trucking Way’ to the White House’s fiscal plans, again, which already fail to address the above logistical problems. Perhaps it’s time for US economists to study what weak, share-cropper logistics and on-off fiscal and central-bank liquidity largesse do for emerging markets’ macroeconomic and financial stability?
Indeed, Bloomberg reports: “Chinese households are encouraged to stock up on a certain amount of daily necessities, such as vegetables and meat, in preparation for the winter months, according to a notice from Ministry of Commerce aimed at ensuring supply and stabilizing prices of such items for the next few months. Major agricultural distributors are encouraged to sign long-term contracts with producers. Reserves of meat and vegetables will be released on a timely basis to replenish market supply.” At least they are being proactive on supply chains.
This news, the US trucking/logistics tragedy, and much else that is going around us in politics collectively reminds me of a classic Soviet joke:
It’s winter in a rural town in the 70’s USSR. The town radio crackles: “All comrades, please come to the town square to receive a ration of fresh red meat!” The people gather, hungrily. The radio continues: “Please wait to receive your ration from the glorious Soviet system!” After a frosty hour, the radio says: “We regret there is not as much meat as we had expected. All Jews, go home now.” One third of the town trudges off. After another bitter hour, the radio says: “We regret there is not as much meat as we had expected. All non-Party members, go home now.” Another third walk off. After another two freezing hours, the radio says: “We regret there is no meat today. Go home now. Glory to the Soviet Union!” As people are leaving, one man turns to another and asks: “Why do the Jews always get the preferential treatment?”
So, that’s the real economy for you – and ironically, four decades of neoliberalism has delivered a supply-chain system that in some ways risks becoming as structurally inefficient as six decades of central planning. For years, I have quipped that just as the USSR wrestled with its self-admitted structural problems, and yet always ended up building another statue of Marx or Lenin as a can-kicking compromise, so neoliberalism says Build Back Better….and then builds another skyscraper plutoflat or business park. Even in space now. Which the Soviets also did while still not being able to feed their people properly, by the way.
And what does that mean for the financial economy? Nothing, apparently - central banks are acting like the Soviet voice over the radio!
Today it’s the RBA. What exactly can they say to calm volatile markets given they are tipped to retreat from their policy of yield curve control (YCC) even though it costs them nothing to retain it, and in doing so, the market will chatter louder about when the first rate hike comes – and it will not be late 2024 they have in mind? I doubt the RBA will come up with a sophisticated way to sell a humiliating and prima facie unjustified-by-data policy U-turn today. They will probably just tweak a few key phrases in their statement, and may even retain the 0.1% YCC target while de facto ignoring it. In short, parading with the calm dignity of an emperor with no clothes, as the little boy of the yield curve points at them in hysterics, yelling “Policy error!” The housing-market hysterics, of a different sort, will begin later.
Of course, it’s the Fed’s turn tomorrow, so any bad Aussie headlines will only last just over 24 hours, and then the brickbats can head at a different set of dingbats. As Philip Marey notes in his FOMC preview: “During the press conference Powell is likely to stress again that the end of tapering does not automatically mean the start of hiking. And that the high inflation readings are transitory. We’ll put $5 in the Atlanta Fed’s swear jar.”
Lastly, COP26 is underway, where President Biden has just channeled the 70’s Brezhnev vibe further by falling asleep in front of the camera. Can you blame him though? As my wife asked when seeing queues of private jets, thousands of globe-trotters staying in heated hotel rooms, and mass gatherings, are our elite trying to be helpful by showing us what we shouldn’t all be doing if we want to deal with the climate and virus crises? Greta “How dare you?!” Thunberg, who of course wasn’t invited to Glasgow, seems to think so on the former at least. She says there is ‘No Trucking Way’ this confab will produce the desired outcome. We shall see.