We Are About to Run Out of Some Stuff

It's not about the pace, it's about the direction we've set. The pace is of course a function of many factors, including the magnitude of the supply shock. But what's probably more important is the probability of the supply shock translating into sustainable embedded inflation.” – Marek Belka

You’ve probably never heard of Yantian International Container Terminal, the busiest port of Shenzhen. Overall, Shenzhen is the third largest container port in the world, roughly three times as big as the largest US port, Los Angeles. Not that far away sits another place you’ve never heard of, Guangzhou Harbor, the world’s fifth largest container port. Together, these two ports handled nearly 50 million twenty-foot equivalent units (TEUs) of cargo in 2018.

In about a week, these ports will be all you hear about.

The Chinese province of Guangzhou is dealing with an outbreak of the Delta variant of COVID-19, a highly contagious form of the virus originally discovered in India. The Chinese Communist Party (CCP) has a history of aggressively dealing with localized COVID-19 outbreaks, and this time is no different, global supply chains be damned. And damned they will be. In late May, the CCP effectively shut down these two ports, leading to an unprecedented shipping logjam that will make the March 2021 blockage of the Suez Canal by the Ever Given seem downright trivial.

Global container shipping was already a mess before this incident. Below is a chart of the cost to ship a 40-foot container from Shanghai to Los Angeles as far back as my Bloomberg machine has been keeping score. We were cast away in uncharted waters well before this latest shipwreck.

Reports from China indicate a spike in estimated wait time to dock at these two ports from half a day to 16 days or more. The ports are beginning to partially reopen, although this is doing little to alleviate the growing backlog.

Brian Glick, founder and CEO at supply chain integration platform Chain.io, was quoted in a CNBC article this morning. Here’s his key message:

Many small- and mid-sized shippers are throwing up their hands as the cost of shipping is surpassing the margins on the products they’re trying to move. Shipping costs are at all-time highs with anecdotal quotes coming in at 5 to 10 times historical norms. We’ve broken through so many price ceilings that nobody can say where this will peak.

What do I think is going to happen? I think we are about to see random shortages of critical intermediates and finished goods alike. I think prices for all manner of products are going to continue their upward trajectory, building on the recent inflation momentum. Supply chains weren’t built for this level of disruption. We long ago decided to trade robustness for efficiency, and this chicken thinks those chickens are about to come home to roost. Trust me, I know my chickens.

I closed my debut Doomberg piece, Reflections from the Lake, with the following:

However, I believe we are experiencing a convergence of three forces unprecedented in our history. These are (1) a combination of extreme easing of BOTH monetary and fiscal policy, (2) huge supply chain hiccups globally, and most unique to today, (3) an interconnected global zeitgeist shaped (controlled?) by social media via viral videos, memes and other dopamine-inducing tools. This last point is critical. Inflation is fueled by FOMO – people assume the today’s price is worth paying, no matter how high, because they KNOW it is going higher tomorrow. We’ve never experienced a bout of inflation in the era of TikTok, Twitter, Instagram and Facebook. What happens when a TikTok video of the first $20 Big Mac goes super viral?

That second point, huge supply chain hiccups globally, understates what we are about to experience. If you’ve been putting off a few purchases waiting for prices to come down or selection availability to go up, I suggest you reconsider. Stuff isn’t getting cheaper anytime soon. Instead, we’ll be glad there’s any stuff to choose from at all.

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