Forefront’s Monday Market Update
Key drivers behind global supply chain crisis
I heard a talking head on television over the weekend say that the current supply chain crisis is actually a coordinated event, created by the leaders of the most powerful countries in the world. Joe Biden leads this delegation of world leaders to slow down the supply chain, so that it could prop up Q4 economic numbers.
This was said by an educated, and seemingly intelligent person, on TV, that millions of people will watch and listen to, without a shred of economic knowledge to their name.
They did stir up a lot of fear and anger I am sure, and if the Facebook whistleblowers testimony told us anything, it is that fear and anger are great drivers for engagement. The angrier you feel, the more likely you are to keep engaging with whatever made you angry. Seems crazy right?
Let’s look at a (very) simple breakdown and understanding of the key drivers causing the global supply chain crisis.
The impact we can see
The global impact we are all seeing can be summed up pretty easily by describing the herculean task of buying a dish washer. We have extreme product delays; most manufacturers of appliances and other goods are now anticipating a 2022 delivery date.
If the product isn’t delayed, it might just not be available at all. We have a huge shortage of computer chips in the semiconductor sector. Remember, almost everything has some sort of computer chip in it these days. The semiconductor shortage can be best seen inside of the automobile industry. Just take a look at GM’s Q3 sales numbers. The demand for cars is there, but not the supply.
The internet is awash with images of people flying into LAX taking pictures of the cargo ship back up in the port of Los Angeles. If goods can’t be off offloaded, they can’t be shipped to various parts of the country, exacerbating the supply chain issue we are seeing.
Often times we think the most complicated answers are the correct ones, but that is rarely the case when it comes to the economy. CNBC wants you to keep watching their programming, so making you feel like you NEED them because the issue is complicated is paramount to their success.
We are facing a supply and demand issue, just like we were all taught in ECON101. Supply in this case is referring to anything related to manufacturing goods, production, and transport of those goods. Demand is simply referring to all thing’s consumption based.
Demand is through the roof right now! Consumers have cash and are in a position where they want to spend money. Covid-19 helped people save money because they couldn’t go or do anything for nearly a year, and that same year of not doing anything led to an incredible amount of built-up demand.
Throughout the Covid-19 crisis, consumers have spent far more money on goods than they have on services. That happens because we can enjoy and use goods in our home, but services require us to go somewhere, see people, or have those people come to us. All of which wasn’t allowed during Covid lockdowns.
The supply side requires a bit more explanation and consideration.
We have had factory shut downs due to Covid, mainly in Asia where they have struggled to contain Covid outbreaks within manufacturing facilities. If you read my market notes from the week of October 4th, you will remember China has also imposed restrictions on when factories can be open due to an energy crisis they are not talking about. When you have manufacturing delays upstream, it trickles down and has a huge impact.
What many people don’t realize, and rightfully so, we all have enough going on, is that about 50% of air cargo travels on passenger/commercial flights. When airlines really started to push this capability of theirs to manufacturers across the globe, it opened up a fantastic revenue stream for airlines. Now, post covid, travel has picked up somewhat, but international travel especially, is down dramatically. With less international flights, it has severely limited the air cargo capabilities and capacity.
Let’s not forget we had a container ship blocking one of the most widely used shipped passages in the world for nearly 2 weeks. The Evergreen container ship blocking the Suez Canal in March has had rippling effects that we are all feeling today, and will continue to feel for some time.
In today’s world, we need to blame someone or something! It makes for a great narrative to get you to click on a headline or tune into a television program. There is no blame to go around though, this was a problem that had already been building before Covid, it was just exacerbated by the pandemic, the way many other things were. We have had rising demand for decades now without the infrastructure upgrades or even planning to accommodate for it.
There is no magic bullet, and no way to make the problem disappear, but as investors it is imperative that we look at global economic issues from the standpoint of fact rather than a talking heads opinion.
I write to all of you each Monday for this exact reason, to provide simple, straight forward facts, that hopefully help you better understand the driving forces behind market moves, and overall economic growth and policy.
So how does this impact all of you?
- The global economy is intertwined. Lots of things are a factor in global events, not one single thing to blame
Stock market calendar this week:
|MONDAY, OCT. 18|
|9:15 AM||Industrial production|
|9:15 AM||Capacity utilization rate|
|10:00 AM||National Association of Home Builders index|
|TUESDAY, OCT. 19|
|8:30 AM||Building permits (SAAR)|
|8:30 AM||Housing starts (SAAR)|
WEDNESDAY, OCT. 20
|2:00 PM||Beige Book|
THURSDAY, OCT. 21
|8:30 AM||Initial jobless claims (regular state program)|
|8:30 AM||Continuing jobless claims (regular state program)|
|8:30 AM||Philadelphia Fed manufacturing index|
|10:00 AM||Existing home sales (SAAR)|
|10:00 AM||Leading economic indicators|
FRIDAY, OCT. 22
|9:45 AM||Markit manufacturing PMI (flash)|
|9:45 AM||Markit services PMI (flash)|
Most anticipated earnings for this week: