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The Great Supply Chain Collapse

December 19, 2021

What’s at the root of the supply chain breakdown? That’s a critical question but the answer is almost irrelevant. The supply chain is a complex dynamic system of immense scale. It is of a complexity comparable to the climate as a system.

This means that exact cause and effect cannot be computed because the processing power needed exceeds the combined processing power of every computer in the world.

Most people have some notion of how supply chains work, but few understand how extensive, complex and vulnerable they are. If you go to the store to buy a loaf of bread, you know that the bread did not mystically appear on the shelf.

It was delivered by a local bakery, put on the shelf by a clerk, you carried it home and served it with dinner. That’s a succinct description of a supply chain – from baker to store to home.

Yet that description barely scratches the surface. What about the truck driver who delivered the bread from the bakery to the store? Where did the bakery get the flour, yeast and water needed to make the bread? What about the ovens used to bake the bread? When the bread was baked, it was put in clear or paper wrappers of some sort. Where did those come from?

Even that expanded description of a supply chain is just getting started in terms of a complete chain. The flour used for baking came from wheat. That wheat was grown on a farm and harvested with heavy equipment. The farmer hires labor, uses water and fertilizer and sends his wheat out for processing and packaging before it gets to the bakery.

The manufacturer who built the oven has his own supply chain of steel, tempered glass, semiconductors, electrical circuits and other inputs needed to build the ovens…

…click on the above link to read the rest of the article…

Supply Chain Disruptions Will Continue

November 15, 2021

Supply Chain Disruptions Will Continue

Forty percent of all the cargo into the United States comes through the ports of Los Angeles and Long Beach. Offshore, there are thousands of containers stacked up on vessels waiting to get in. How many containers can the ports unload on a normal day?

New containers are coming in. There are daily arrivals. When will that supply chain backlog clear?

The answer is never. If there are more coming in than you can unload and you have an existing backlog that’s getting worse, it will never clear.

But let’s just say that with no new shipments coming in, it would take 30 days just to unload what’s already waiting offshore. Thirty days, by the way, puts you into December and the Christmas rush.

And getting it offloaded in California is just the beginning of the supply chain. You’ve got to put it on a train or a truck and get it to a distribution center and put it on another truck and get it to a store.

But wait, there’s also a trucking shortage. That’s a big part of the supply chain problem. If you can unload the merchandise but can’t transport it due to a trucking shortage, what good is it?

So this is not getting better. That’s probably the understatement of the year.

You may have heard about a semiconductor shortage. But you don’t need a computer, so what’s the big deal? Well, no, there are semiconductors in everything. You have semiconductors in your refrigerator, dishwasher, home entertainment system, etc.

The point is we’re highly dependent on vulnerable supply chains that are currently breaking down. Something radical is going to have to happen. We’re just going to have to stop importing goods. And China may actually oblige us, though not for these reasons…

…click on the above link to read the rest of the article…

Lies, Lies, Lies!

October 22, 2021

Lies, Lies, Lies!

Politicians may be morons when it comes to public policy, but they’re geniuses when it comes to inventing new ways to control your life and steal your money.

Tax increases seem old-fashioned compared with new 21st-century ways to take over the financial system to your detriment and make you pay for their pet projects. Take climate, for example…

We’re all familiar with how climate alarm has been used to dictate changes in transportation, energy generation and construction codes. Of course, these efforts have been massive failures, as witnessed by the ongoing supply chain disruptions and energy shortages.

Large parts of Europe, Japan and China may freeze in the dark this winter thanks to efforts to close down nuclear and natural gas-fired electricity generation. The U.S. will be only slightly better off. We won’t freeze in the dark, but we will face much higher prices for home heating and gas at the pump.

The irony is that the U.S. will burn 23% more coal this year because of the shutdowns in nuclear and natural gas and the inability of wind turbines and solar to make up the difference. Nice job by the climate alarmists!

Will they be held to account? Will they see the error of their ways and abandon their delusions? Don’t hold your breath for either. They’ll only dig in harder.

Climate Alarmism Influencing Financial Decisions

Now the elites have a new way to use climate alarm to their advantage. They will use their existing control of the banks to force their climate agenda by dictating how banks lend and how you are allowed to spend.

The Department of Housing and Urban Development (HUD) will be required to factor climate alarm into decisions on federally insured or guaranteed mortgages. The Labor Department will evaluate retirement plan managers, including 401(k) and IRA advisers, based on how they factor climate alarm into their investment decisions.

…click on the above link to read the rest of the article…

Contagion!

October 14, 2021

There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia.

It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.

When that happens, a loss of confidence in the U.S. dollar is not far behind.

And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China.

Greatest Ponzi Ever

I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not.

They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.

Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.

That’s what gave the product its Ponzi characteristic.

The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.

Now the entire edifice is collapsing as I predicted it would.

The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.

…click on the above link to read the rest of the article…

Tyranny

August 20, 2021

Tyranny

I’d like to stop writing about COVID, but I can’t because it has such strong economic implications, which can’t be separated. And I’m afraid policies will be enacted that will only make things worse.

We all know the Delta variant of the COVID virus (SARS-CoV-2) is spreading rapidly in the U.S. and Australia. Major outbreaks have also hit India and Brazil.

What has received less attention is the fact that the Delta variant is now also spreading in China. That’s ironic because the virus started in China at the Wuhan Institute of Virology.

While the virus spread around the world, China quickly eliminated the spread inside China itself. Now, the virus has come full circle and is back in China in a new, more virulent form.

There’s a huge difference in how China approaches the virus from a public health perspective compared to the U.S., Japan or Europe. China’s lockdowns are far more extreme.

Why China Enforces Extreme Lockdowns

China will quickly identify an outbreak and cut off all car, train and air services to the affected area. China will also quickly shut down major ports and distribution centers if even a single case appears.

China knows that the spread of the virus is a threat to the legitimacy of the Chinese Communist Party. China cares more about Party loyalty and Party survival than it does about economic growth.

China is now imposing extreme measures, including canceling many domestic flights, closing ports and restricting vacation travel. China’s economy was already slowing before this new wave of the virus. Given China’s more extreme forms of COVID control, their economy will slow even further.

That’s bad news for China – and bad news for the world. Global growth will slow noticeably in the months ahead, partly because of the extreme nature of China’s lockdown approach.

…click on the above link to read the rest of the article…

Biden’s Crime Against the Economy

June 26, 2021

Biden’s Crime Against the Economy

I try to keep politics out of my economic analyses, and my approach is non-partisan. But sometimes I can’t avoid it because political policies can have significant economic impacts. Today is one of those times.

One of Joe Biden’s first acts as President was to kill construction of the Keystone XL pipeline. This is a pipeline that would bring oil from the tar sands of Alberta, Canada to the Midwest United States. From there it would be moved through other pipelines or refined and distributed to gas stations and industrial users in America.

Biden’s decision was destructive for a long list of reasons.

The immediate impact was to kill about 10,000 high-paying union jobs with benefits in construction, transportation and expert services. The ripple effects were even greater. Once a pipe delivery operation is killed, the trucking company and pipe manufacturer lay off more personnel and those workers stop spending at local restaurants and so on.

But killing the pipeline accomplishes nothing from an environmental standpoint. The decision to end the pipeline is pointless because the oil still moves out of Alberta. In the absence of a pipeline, the oil moves by railroad tanker cars on rail lines owned by Warren Buffett.

Pipelines Are Better for the Environment

It’s just that the railroad uses more energy and has higher CO2 emissions than a pipeline. If you cared about the environment, you’d favor a pipeline over railroads. But opponents don’t really care about the environment, they just want to shut down the oil and gas industries completely.

Shutting the pipeline is a step in that direction. Claims about local environmental damage and crossing Native American tribal areas were just feel-good red herrings. The goal was always just to kill the pipeline. Mission accomplished. Now, the Biden administration may have done more damage than thought at first.

…click on the above link to read the rest of the article…

The Real Russian Threat

June 24, 2021

The Real Russian Threat

I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.

At the same time, I’ve said that such processes don’t happen overnight; instead, they happen slowly and incrementally over decades.

The dollar displaced sterling as the leading reserve currency in the twentieth century, but it took thirty years, from 1914 to 1944, to happen. The decline started with the outbreak of World War I and the UK’s liquidation of assets and money printing to finance the war.

It ended with the Bretton Woods agreement in 1944 that cemented the dollar’s link to gold as the new global standard.

Even after the gold link was broken in 1971, the dollar standard remained because there was no good alternative. Then the 1974 deal with Saudi Arabia (along with other OPEC cartel members) to price oil in dollars created increased global demand for the dollar.

Because of the deal, dollars would be deposited with U.S. banks, so they could be loaned to developing economies, who could then buy U.S. manufactured goods and agricultural products.

This would help the global economy and allow the U.S. to maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need dollars to buy oil.

By the way, behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force.

I personally discussed these invasion plans in the White House with Henry Kissinger’s deputy, Helmut Sonnenfeldt, at the time. But the Petro-Dollar plan worked brilliantly, and the invasion never happened.

Despite all this, nearly 50 years later, the erosion of the dollar’s role has begun and is visible in many metrics.

…click on the above link to read the rest of the article…

Wrong… Again

March 25, 2021

Wrong… Again

The Federal Reserve met last week and voted to keep interest rates unchanged. What a shock!

The Fed also gave an upbeat forecast of economic growth, predicting that the U.S. economy will grow 6.5% this year, its highest rate in nearly 40 years. Its December 2020 forecast projected 4.2% growth.

The Fed also expects that the economy could return to full employment next year and that inflation could hit 2.4% this year before declining again.

In effect, the central bank said they were willing to let the economy run “hot” and risk higher inflation in order to capture the benefits of stronger growth.

Zero rates are essentially a given as far as the eye can see. What about that growth forecast?

The Fed has one of the worst forecasting records of any financial institution in the world. My expectation is that growth is slowing now and will get worse as the year progresses.

I believe this will be especially true as the Biden administration policies of higher taxes, more regulation, and open borders that import cheap labor take effect.

Biden has also shut down new oil and gas exploration and wants to push a Green New Deal that will guarantee higher energy prices. Higher energy prices are a burden on the economy.

Little Cause for Optimism

Where’s the evidence that growth is slower than the Fed expects?

Inflation measures remain weak. The annual core consumer price inflation rate moved down from 1.7% in September 2020 to 1.3% in February 2021.

The overall consumer price inflation rate (including food and energy) rose modestly from 1.4% in September 2020 to 1.7% in February 2021.

On a year-over-year basis, the core personal consumption expenditures rate of increase (the Fed’s preferred index) moved from 1.4% in October 2020 to 1.5% in January 2021.

…click on the above link to read the rest of the article…

daily reckoning, james rickards, fed, us federal reserve, inflation, price inflation, cpi, consumer price inflation,

The Foundation for Potential Price Hyperinflation is Being Laid

February 13, 2021

The Foundation for Potential Price Hyperinflation is Being Laid

The Federal Reserve sure seems to have a tough time finding and reporting signs of rising inflation — especially when it’s hidden in other sectors like a lack of demand for energy.

A recent example of the Fed’s “inflation blindness” comes from a speech Chairman Jerome Powell gave to the Economic Club of New York. According to a MarketWatch piece that reported on that speech:

Powell said he doesn’t expect “a large nor sustained” increase in inflation right now. Price rises from the “burst of spending” as the economy reopens are not likely to be sustained.

It’s odd that Powell would say he doesn’t expect a sustained increase in inflation, because food price inflation has consistently run 3.5 to 4.5 percent since April last year. That sure seems like a sustained increase in food prices.

What Powell seems to have “forgotten” is that some of the overall inflation includes negative energy price inflation (as low as negative 9 percent at one point). But now that the demand for fuel is returning, the official gasoline index rose 7.4 percent in January.

It will be much more challenging for Powell to keep downplaying the risk of hyperinflation once energy price inflation rises back to “pre-pandemic” levels.

In fact, Robert Wenzel thinks the main inflation event is “just about to hit.” If it does, and inflation does rise past Powell’s two percent target, it isn’t likely to stop there. Jim Rickards thinks that’s when hyperinflation can gain momentum:

If inflation does hit 3%, it is more likely to go to 6% or higher, rather than back down to 2%. The process will feed on itself and be difficult to stop. Sadly, there are no Volckers or Reagans on the horizon today. There are only weak political leaders and misguided central bankers.

…click on the above link to read the rest of the article…

The Only Way Out of the Death Trap

February 10, 2021

The Only Way Out of the Death Trap

I’ve said the U.S. is caught in a debt death trap. Monetary policy won’t get us out because the velocity of money, the rate at which money changes hands, is dropping.

Printing more money alone will not change that.

Fiscal policy won’t work either because of high debt ratios. At current debt-to-GDP ratios, each additional dollar spent yields less than a dollar of growth. But because it must be borrowed, it does add a dollar to the debt. Debt becomes an actual drag on growth.

The ratio gets higher, and the situation grows more desperate. The economy barely grows at all while the debt mounts. You basically become Japan.

The national debt is $27.8 trillion. A $27.8 trillion debt would not be an issue if we had a $50 trillion economy.

But we don’t have a $50 trillion economy. We have about a $21 trillion economy, which means our debt is bigger than our economy.

The debt-to-GDP ratio is about 130%. Before the pandemic, it was about 105% (the policy response to the pandemic caused the spike).

Already in the Danger Zone

But even a ratio of 105% is in the danger zone.

Economists Ken Rogoff and Carmen Reinhart carried out a long historical survey going back 800 years, looking at individual countries, or empires in some cases, that have gone broke or defaulted on their debt.

They put the danger zone at a debt-to-GDP ratio of 90%. Once it reaches 90%, debt becomes a drag on growth.

Meanwhile, we’re looking at deficits of $1 trillion or more, long after the pandemic subsides.

In basic terms, the United States is going broke. We’re heading for a sovereign debt crisis.

I don’t say that for effect. I’m not looking to scare people or to make a splash. That’s just an honest assessment based on the numbers.

…click on the above link to read the rest of the article…

The Bogus Case Against Gold

November 14, 2020

The Bogus Case Against Gold

Gold is in the early stages of its third great bull run that will take it to record heights.

The first two great bull markets were 1971-1980 (gold up 2,200%) and 1999-2011 (gold up 760%). After peaking in 2011, gold fell sharply from that peak to below $1,100 per ounce by 2015.

Now the third great bull market is underway. It began on December 16, 2015, when gold bottomed at $1,050 per ounce at the end of the 2011-2015 bear market. Since then, gold is up significantly, but it’s small change compared to 2,200% and 760% gains in the last two bull markets.

Still, most mainstream economists dismiss gold. They call it a barbarous relic and say it has no place in today’s monetary system.

But today, I want to remind you of the three main arguments mainstream economists make against gold and why they’re dead wrong.

There’s Just Not Enough Gold to Support the Money Supply!

The first one you may have heard many times. “Experts” say there’s not enough gold to support a global financial system. Gold can’t support all the world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks and the financial institutions in the world. They say there’s not enough gold to support that money supply.

That argument is complete nonsense. It’s true that there’s a limited quantity of gold. But more importantly, there’s always enough gold to support the financial system. The key is to set its price correctly.

It is true that at today’s price of about $1,875 an ounce, pegging it to the existing money supply would be highly deflationary.

But to avoid that, all we have to do is increase the gold price. In other words, take the amount of existing gold, place it at, say, $14,000 an ounce, and there’s plenty of gold to support the money supply.

…click on the above link to read the rest of the article…

Inflation

July 21, 2020

Inflation

Remember all those “green shoots?”

That was the ubiquitous phrase used by White House officials and TV talking heads in 2009 to describe how the U.S. economy was coming back to life after the 2008 global financial crisis.

The problem was we did not get green shoots, we got more like brown weeds.

The economy did recover, yes, but it was the slowest recovery in U.S. history.

After the green shoots theory had been discredited, Treasury Secretary Tim Geithner promised a “recovery summer” in 2010.

That didn’t happen either.

The recovery did continue, but it took years for the stock market to return to its previous highs and even longer for unemployment to come down to levels that could be regarded as close to full employment.

Now, in the aftermath of the 2020 pandemic and market crash, we’re getting the same happy talk.

Green Shoots, or Brown Weeds?

The White House is talking about “pent-up demand” as the economy reopens and consumers flock to stores and restaurants to make up for the lost spending during the March to July pandemic lockdown.

But, the data shows that the “pent-up demand” theory is just as much of a mirage as the green shoots we heard about a decade ago..

Many of the businesses that closed have failed in the meantime. They will never reopen and those lost jobs are never coming back. Even people who kept their jobs are not spending like it’s 2019, they’re saving at record levels.

Meanwhile, the “reopening” of the economy is now in doubt.

In some cities, the reopening was derailed by riots that left shopping districts in ruins. In other cities, the reopening was stopped in its tracks by new outbreaks of the virus that led to new lockdowns and strict application of rules on wearing masks and social distancing.

…click on the above link to read the rest of the article…

Rickards: This Time IS Different

May 13, 2020

Rickards: This Time IS Different

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

…click on the above link to read the rest of the article…

Worst Recession in 150 Years

April 15, 2020

Worst Recession in 150 Years

The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.

But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.

The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.

The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.

Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.

Not the Early 19th Century Anymore

It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).

…click on the above link to read the rest of the article…

Markets and Black Swans

April 11, 2020

Markets and Black Swans

I began studying complexity theory as a consequence of my involvement with Long-Term Capital Management, LTCM, the hedge fund that collapsed in 1998 after derivatives trading strategies went catastrophically wrong.

After the collapse and subsequent rescue, I chatted with one of the LTCM partners who ran the firm about what went wrong. I was familiar with markets and trading strategies, but I was not expert in the highly technical applied mathematics that the management committee used to devise its strategies.

The partner I was chatting with was a true quant with advanced degrees in mathematics. I asked him how all of our trading strategies could have lost money at the same time, despite the fact that they had been uncorrelated in the past.

He shook his head and said, “What happened was just incredible. It was a seven-standard deviation event.”

In statistics, a standard deviation is symbolized by the Greek letter sigma. Even non-statisticians would understand that a seven-sigma event sounds rare. But, I wanted to know how rare. I consulted some technical sources and discovered that for a daily occurrence, a seven-sigma event would happen less than once every billion years, or less than five times in the history of the planet Earth!

I knew that my quant partner had the math right. But it was obvious to me his model must be wrong. Extreme events had occurred in markets in 1987, 1994 and then 1998. They happened every four years or so.

Any model that tried to explain an event, as something that happened every billion years could not possibly be the right model for understanding the dynamics of something that occurred every four years.

…click on the above link to read the rest of the article…

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