Rabobank: We’re About To Add A $1.8 Trillion Stimmy To A Logistics Network That Can’t Take It… Then We Are Really In Deep Ship
By Michael Every of Rabobank
The White House just reiterated its concerns at the monopoly global carriers hold over shipping: “This lack of competition leaves American businesses at the mercy of just three alliances. Retailers are charged fees for their container remaining on the docks, even if there is no way to move their containers. If the alliances decide to not accept exports, agricultural exporters will not be able to fulfil their contracts, and farmers’ perishable products may be left to rot.” It also argues laws do not require basic transparency of detention and demurrage fees carriers charge. This is why our ‘In Deep Ship’ report stressed the US has historically resisted such scenarios: as W. L. Marvin argued in 1903, “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.” More so when it has military control of the oceans but allows others to make the money from them.
In July 2020, the CSIS’s ‘Hidden Harbours’ argued: “The time is long overdue for the US to reinvigorate its maritime industries…The private-sector maritime industry cannot do this alone…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.’” An October 2021 Forbes op-ed bewailed the ‘Dwindling US Merchant Fleet is a Crisis Waiting to Happen’, stating mandating “a certain percentage of imports and exports be carried on US-flagged vessels.” As ‘In Deep Ship’ noted, the first Congressional legislation in 1789 was a 10% tariff on British shipping to build US industry and its maritime marine: it worked brilliantly.
This week, the White House says the Federal Maritime Commission (FMC) should “use all of the tools at its disposal to ensure free and fair competition,” and while the three carrier alliances receive statutory immunity from antitrust laws, the FMC can challenge those agreements if they “produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost or…substantially lessen competition.” That sounds like the White House backs the ‘Ocean Shipping Reform Act 2021’, which could flip demurrage charges from importers to the port or carrier: imagine if they were the ones facing massive bills, rather than massive profits. The carriers respond they are not to blame, and there is a shortage of trucks, chassis, truckers, rail, and warehouses. There is indeed – and truck drivers aside, they are also seeing vast profits by *not* investing more to resolve it. Welcome to capitalism.
The key point is we are not going to see a quick ‘return to normal’. A key fallacy of neoclassical economics is that ‘things mean revert’: covid has seen disruption to supply chains, so when Covid goes, supply chains will ‘revert’. But supply chains are complex, non-linear, dynamic systems with emergent –and political– properties. You can reach tipping points where they spiral upwards or downwards. If the US acts politically, the disruption could be deflationary, if shipping charges plunge, or inflationary, if carriers stop servicing US ports – and the US has no merchant marine to fill the gap. If the US does not act, we see structurally higher prices.
Now, this is not the same as y/y inflation rates. If the price of bread leaps from $1 to $2, that is 100% inflation. If it then goes up to $2.20, it is 10% inflation. If it then goes back to $2.10 it is deflation, as is going to $2.09 and $2.08 in following years. Yet anyone thinking that after a massive price spike, such ‘deflation’ means things are back to normal in a staple like bread needs their neoclassical head examined. In an actual complex, non-linear, dynamic system with emergent –and political—properties, wheat prices are soaring due to high fertilizer prices; most non-Russian oil exporters are major wheat importers, and want oil to move with wheat; and as oil moves higher, so does natural gas; and so does fertiliser; and then so does wheat. This system reverts with ‘Arab Springs’ among those who buy oil and wheat. Which is a segue to the financial economy’s tenuous relationship to the real one.
Bloomberg notes ‘Getting Inflation Right Is a Make-or-Break Trade on Wall Street’, which got inflation wrong this year by never having visited a warehouse or port. “After a three-decade hiatus, anxiety about rising consumer prices is testing the analytical skills of money managers and professional traders like nothing since the short-lived pandemic panic…For people working in finance, it’s a moment of extreme career risk – or a chance to be a hero to their bosses and their clients if they get it right. Many have never been here before.” Of course they haven’t. The last three episodes were 1948, when the US economy readjusted to post-WW2 demand vs. the shift from military to civilian production; the 1970’s oil shocks; and the pre-GFC commodity surge. Right now we have a mix of all three – with the caveat the US doesn’t have any civilian production.
Bond-meister Mohamed El-Erian on CNBC today argues while current inflationary pressure is led by deficient supply relative to demand, only part will likely prove transitory, while part may prove more persistent “due to longer-term structural changes in the economy…company after company is rewiring their supply chain to prioritize resilience over efficiency…US labor force participation is stuck at a low 61.6% even as unemployment benefits have expired, suggesting that people’s propensity to work may have changed…Survey-based inflation expectations are not well anchored; both short and long-term expectations compiled by the New York Federal Reserve have already risen above 4%. Companies are warning about inflationary pressures well into next year and potentially beyond.” He notes market-based expectations remain better anchored, but says this is distorted by the Fed. There is a very valid argument Fed QE has actually raised, not lowered yields via stimulus: but in the ECB’s case this is clearly the reverse with peripheral bonds – what if the Fed is now acting like the ECB, repressing yields, and what if it stops via tapering and rate hikes? El-Erian nonetheless argues the Fed has to do to so to deal with the non-transitory inflation pressures that are building.
I share this view not because it is gospel, but because it underlines what Bloomberg said: getting this right is make or break, “many have never been here before,” and it offers huge volatility and pain either way.
One wonders what the Fed Chair, whose name we should find out today, will think of an inflation dilemma which separates the wheat from the chaff. They will also note the CBO have scored the White House’s Build Back Better bill as adding $367bn to the federal deficit over time, as the legislation comes up for a vote.
If it fails, we move closer to a deflationary tipping point after an inflationary interregnum; if it passes, we add a $1.8 trillion stimulus on to a logistics network that can’t take it (and a Japanese promise of a record near $500bn package to boot): then we are really in Deep Ship. The two events may even be linked: if the BBB bill passes, I would wager Powell’s odds improve; if it fails, won’t the Democratic Progressives want some hope and change elsewhere, like the Fed?
Fri, 11/19/2021 – 09:56