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Breaking The (Supply) Chains

Breaking The (Supply) Chains

By Nick Colas of DataTrek research

“Supply chain disruptions” has become a catch-all phrase to explain product…

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This article was originally published by Zero Hedge

Breaking The (Supply) Chains

By Nick Colas of DataTrek research

“Supply chain disruptions” has become a catch-all phrase to explain product shortages and inflation. But how exactly does that work, and why is this problem taking so long to fix? For Story Time this week, Nick uses his 30 years of experience analyzing the US auto industry to explain what’s going on. It all comes down to “lean manufacturing”, which started in Japan after World War II and caught on worldwide in the 1980s/1990s. The pandemic has created systematic challenges to “lean”, enough that structural inflation is a threat.

Here is a story about how supply chains work and why they are so snarled just now. Yes, a grimy topic compared to some of our others, but important and my personal history as a long-time (30 years) auto industry analyst gives me a unique perspective on the issue.

To understand how global supply chains operate the way they do today, you really need to go back to Japan just after World War II.

The country, defeated and impoverished, desperately needed to restart its industrial base. It did so by producing what it could with a minimum of capital. That meant, for example, no capital-intensive vertical integration; there were parts suppliers, and then there were final assembly companies. It also meant keeping the supply chain tightly integrated to maximize throughput.

This spawned a new production model, now commonly known as lean manufacturing, and Japan’s auto companies led the way in its adoption.

Parts like exterior metal stampings and interior trim like seats and dashboards all arrived at automotive final assembly plants from suppliers within a few hours of when they were installed in a vehicle moving down an assembly line. Also, vehicle designers thought not just about how a vehicle looked or drove, but how it would be assembled. They designed for ease and cost of manufacturability and long-run quality as well as for consumer tastes.

For decades, this process was mostly unique to Japanese manufacturing.

American car companies like Ford and GM remained vertically integrated after World War II. And, because there was no shortage of capital in the US, there was no need to limit work-in-process inventory. In fact, plant managers preferred having spare inventory because they were not as tightly integrated with their suppliers (even internal ones) and they needed that buffer stock to assure smooth day-to-day operations.

Then, in 1991 a group of MIT researchers published a book titled “The Machine that Changed the World”, essentially a benchmarking study of auto manufacturers in the US, Europe, and Japan.

No prizes for guessing what they found. US and European companies were much less efficient than Japanese manufacturers. The root cause of that difference was lean manufacturing, and even Mercedes – long considered the “best” car company in the world – was woefully behind.

The anecdote from the book that got the most attention: it took more than 50 hours of assembly time to produce an S-Class and several of those came at the end of the process when trained engineers manually fixed all the problems each car had. Toyota was producing higher quality vehicles (lower defect rates) in less than 20 hours.

The publication of “Machine” in 1991 is as good as any single event if you want to assign a date to the West’s transition to lean manufacturing, especially its focus on tightly integrated supply chains.

By the end of the decade, GM had spun off its supply network (Delphi Automotive), as had Ford (Visteon). Vertical integration, made famous by places like Ford’s River Rouge facility where raw iron went in one end and finished cars went out the other, gave way to a focus on efficient final assembly and managing complex third-party supply chains.

The Japanese manufacturing approach also spread to China, as that country industrialized in the 1990s. In 1992 I was part of a team that took the first Chinese company public on the New York Stock Exchange.

China Brilliance, as it was known then, had two products. One was a locally designed/produced minivan, made in plant that looked like it was out of a Dickens novel. The other was also a minivan but produced under license from Toyota. The goal here was to work with Toyota to recreate its lean manufacturing system in China by having local suppliers produce copies of the components needed to eventually make the minivan in-country.

While I’ve focused on the automotive side of this story so far, it’s certainly not just car companies that learned the value of “lean manufacturing” from 1990 onwards.

Apple, the world’s most valuable company by market cap, has its name on hundreds of millions of physical devices but operates no factories. It designs, it innovates, it develops software, and it markets. When it buys machinery (and it does, to the tune of billions of dollars a year), that still goes in one of their suppliers’ plants. Apple is essentially the leanest manufacturing company in the history of global commerce.

Now, lean manufacturing only works well when 1) final demand is predictable and 2) the supply network is operating reliably. Both are equally important. To illustrate, consider the very prosaic example of the seats in a passenger vehicle:

  • No car company we know of makes its own seats anymore. They are produced by firms that specialize in this product and other interior trim items like floor coverings and headliners. Most car companies use only 1 seat supplier for any given vehicle.

  • Car companies schedule their assembly plants 3-6 months in advance, deciding exactly what vehicle with what options will run down the assembly line at exactly what time.

  • It then orders seats for those exact vehicles from the supplier. They, in turn, order everything from foam to leather/cloth, metal frames to motors and switches, from their suppliers. These are also supposed to deliver their products “just in time” to the seat manufacturer so they don’t bear the burden of excess working capital.

  • Any disruption to this supply chain, whether it be from sudden shifts in orders from the car company due to recession/sudden demand to a shortage of any individual part, essentially crashes the entire production process. Lean it may be, but flexible it is not.

The point to today’s Story Time is, therefore, that decades of global corporate focus on lean manufacturing has put the world’s manufacturers in a very difficult spot because of the operating challenges thrown up by the pandemic.

Semiconductors have been the system’s Achilles Heel, because on top of the complexities we’ve described today there is now also a global chip shortage. But that is really only part of the story, as we’ve tried to describe.

Stepping back for a moment, I can’t help but wonder if the pandemic’s disruptive effect on global supply chains is in some ways similar to the 1973 oil shock. When oil prices spiked in 1973/1974 due to the Saudi oil embargo, US inflation rose quickly because the American economy was set up for structurally low energy prices. When gasoline prices tripled in a year, for example, the supply chain for everything from food to apparel to durable goods had to pass along those costs.

You know how that story ended: another oil shock in 1979 forced Paul Volcker’s Fed to raise interest rates to dampen demand and bring inflation back under control. Let’s hope history does not repeat itself in 2022.

Tyler Durden
Tue, 10/05/2021 – 06:30





Author: Tyler Durden

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Loonie Soars After Bank of Canada Ends QE Early, Accelerates Rate Hike Timing To Mid-2022

Loonie Soars After Bank of Canada Ends QE Early, Accelerates Rate Hike Timing To Mid-2022

Another day, another hawkish surprise from a developed…

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Loonie Soars After Bank of Canada Ends QE Early, Accelerates Rate Hike Timing To Mid-2022

Another day, another hawkish surprise from a developed central bank.

While nobody expected the Bank of Canada to hike rates today despite soaring inflation, the BOC did surprise most most traders when it announced it is ending its bond buying stimulus program, and accelerated the potential timing of future interest rate increases amid worries that supply disruptions are driving up inflation.

In a policy statement on Wednesday, Canadian central bankers led by Governor Tiff Macklem announced they would stop growing holdings of Canadian government bonds, ending a quantitative easing program that has poured hundreds of billions into the financial system since the start of the Covid-19 pandemic, to wit: “The Bank is ending quantitative easing (QE) and moving into the reinvestment phase, during which it will purchase Government of Canada bonds solely to replace maturing bonds.” Then again, one look at the BOC’s balance sheet makes one wonder just how long this QE halt will survive…

The Bank of Canada will release details of how it will implement the “reinvestment phase’’ of bond purchases in a market notice at 10:30 a.m. That will be a situation where it acquires bonds only to offset maturities, keeping overall holdings and stimulus constant. Most recently, weekly bond purchases had been C$2 billion. BOC head Macklem will also provide more insight into his policy decision at an 11 a.m. press conference.

In any case, the BOC also signaled it could be ready to hike borrowing costs as early as April, as supply constraints limit the economy’s ability to grow without fueling inflation.

Macklem maintained his pledge not to raise the benchmark overnight policy rate until the recovery is complete, but officials now believe that will happen in the “middle quarters’’ of 2022, bringing it forward from the second half of next year as previously thought.

We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022. In light of the progress made in the economic recovery, the Governing Council has decided to end quantitative easing and keep its overall holdings of Government of Canada bonds roughly constant.

The language will reinforce market expectations the Bank of Canada is poised to quickly pivot to a tightening cycle amid growing price pressures. Investors are anticipating the Canadian central bank will start raising interest rates within the next six months, with markets pricing in four rate hikes next year.

The Bank of Canada has been using two major tools to keep borrowing costs low: maintaining its policy interest rate near zero and buying up Canadian government bonds from investors to keep longer-term borrowing costs in check. The benchmark interest rate was left unchanged at 0.25% on Wednesday. The central bank has increased its bond holdings by about C$350 billion since the start of the pandemic.

“Shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity,’’ the BOC said adding that “although the impact and persistence of these supply factors are hard to quantify, the output gap is likely to be narrower than the bank had forecast.’’

The more hawkish tone at the bank on Wednesday comes even amid a less rosy outlook for the economy. The central bank cut its growth estimates for both 2021 and 2022, but officials said much of that reflects worse-than-expected supply disruptions in the global economy.

Because of those disruptions, the Bank of Canada marked down estimates of “supply’’ by more than their downward revisions to output. That means the central bank now sees less excess capacity in the economy, and less reason to accommodate demand with cheap borrowing costs.  The build-up of inflationary pressures also appears to be testing the Bank of Canada’s patience. The Bank of Canada revised higher its forecasts for inflation — to 3.4% in both 2021 and 2022.

This means that the BOC is joining the Fed in tightening into a stagflation.

“The main forces pushing up prices — higher energy prices and pandemic-related supply bottlenecks — now appear to be stronger and more persistent than expected,’’ policy makers said. “The bank is closely watching inflation expectations and labor costs to ensure that the temporary forces pushing up prices do not become embedded in ongoing inflation.”

In the accompanying Monetary Policy Report that contains the Bank of Canada’s new forecasts, policy makers also said upside risks to inflation have become a greater concern because price increases are above the central bank’s 1% to 3% control range.

In response to the surprise announcement, the Canadian Dollar soared as much as 0.6%, rising to 1.2309 against the USD…

… while the Canadian 2Y yield spiked more than 24bps above 1.00%…

… in a day defined by violent treasury moves, first in the UK and now in Canada.

Tyler Durden
Wed, 10/27/2021 – 10:16










Author: Tyler Durden

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The Bond Market “Paradox”

The Bond Market "Paradox"

Authored by Peter Tchir via Academy Securities,

I don’t remember a lot from the 90’s, but one memory has come…

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The Bond Market “Paradox”

Authored by Peter Tchir via Academy Securities,

I don’t remember a lot from the 90’s, but one memory has come back with vivid clarity.

Working with friends and colleagues, who were taking start-up projections and being “conservative” yet completely impossible.

Yes, in their models, users slowed from 200% growth to 50% growth a few years down the road, but their projections still gave them more users than humans within a few years.

That reminds me of legend about grains of rice and a chessboard. According to legend, a ruler asked a servant what they wanted as a reward for some incredible deed. The person asked for one grain of rice to be placed on the first spot on the checkerboard. Two on the second. Four on the third and so on. Doubling the number of grains for each new space on the checkerboard. While that seemed like an absurdly low reward to the ruler, who was probably expecting to be asked to pay his weight in gold (too bad we didn’t have bitcoin back then), but it turns out to be an impossibly large number.

Which brings me to Tesla’s recent price action. Up 12% on Monday, up 7% on Tuesday morning before falling by almost 9% from that level. While at a glance, the percentage moves are on the high side, it is the market cap moves that are simply astounding. 100’s of billions of market cap are being created and sometimes lost, in hours. Even as someone who doesn’t believe in efficient markets, that seems bizarre, at best. According to the WSJ, $16.1 billion of option premium was traded on Monday on Tesla. Which was more than the next 99 most actively traded option tickers combined! What is amazing about that is it includes contracts on S&P and Nasdaq futures and ETFs like SPY and QQQ. I assume they only publish the top 100, so if the value of Tesla option contracts wasn’t more than the value of every other option contract traded on Monday, I’d be surprised.

Whether we are at a blow-off top or not, remains to be seen, but

  • Those sorts of market cap swings seem inexplicable

  • Those sorts of option trading volumes seem inexplicable

But since they happened, the inexplicable must be explicable, I just wish I had a good explanation other than it is a gambler’s market and true liquidity, low at the best of times, is being severely tested by gamma squeezes and portfolios need to be hardened against that (or positioned to take advantage).

The Bond Market “Paradox”

We went into more detail on this in Sunday’s “Clear as Mud” but the following seems to be happening:

  • The market is pricing in the Fed hiking sooner. This is causing yields at the front end to rise. I think it is the wrong thing for the market to do, but I think the headlines will help that trade move along (so I’m betting on something happening that I don’t think should happen, but it is also too early to get in the way of the theme). I continue to believe that the next act in the play of not hiking will be to switch from talking “transitory” to talking “long term averages” but that isn’t the narrative the market is fixated on, at least not yet.

  • The long end rallies on Fed hikes. The simple narrative would be that the Fed is going to raise rates, which causes bond yields to rise. That is currently not the reaction, as bond investors are sniffing out the potential for the Fed to slow growth too early, or at exactly the wrong time. So fears of a more hawkish fed are driving curves flatter in a “pivot” sort of format (this morning, the pivot point is around 5 years, with bonds less than 5 years to maturity are seeing yields rise, while those longer than 6 years, are seeing yields fall).

  • Stocks No Longer “Love” Lower Long-Bond Yields. Parts of the stock market that had been positively correlated to bond prices are now “normalizing” and trading as though they are negatively correlated. That makes sense, because if longer dated bond yields are going lower because of fear of the Fed snuffing growth out, it just isn’t good for the market (unlike when yields are going lower because the Fed is buying so much and there is no material threat of sustained inflation).

Longer dated bond yields could benefit from a “risk-off” type of move, which the market seems far less positioned for today, than they were a few weeks ago.

I do miss the 90’s, but those are stories for another day.

Tyler Durden
Wed, 10/27/2021 – 10:46



Author: Tyler Durden

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Shiba Inu and other dog coins on heat despite market dip; will ASS explode next?

While Bitcoin and most other top coins take a bath, Shiba Inu is still leg-humping its way up the market. … Read More
The post Shiba Inu and other dog…

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While Bitcoin and most other top coins take a bath, Shiba Inu is still leg-humping its way up the market. Meanwhile, an Aussie-themed dog coins is having a crack, and FLOKI is being flogged on the London Underground.

Bitcoin (BTC), Ethereum (ETH) and most other cryptos are having a dog of a day so far, so what’s with Shiba Inu (SHIB) and why is it up 22 per cent since this time yesterday, when it was already pumping like crazy?

In fact, the surging dog memecoin hit a fresh all time high a few hours ago, amid the market dump. And it’s up 100 per cent over the past week, 689 per cent over the past month, and… um… 66.6 MILLION per cent over the past 12 months.

SHIB still seems to be riding on the fervent speculation it has an imminent listing on the popular Robinhood trading exchange. It’s now number 11 on the CoinGecko market-cap leaderboard, with a valuation of US$27.9 billion, ahead of Afterpay and Fox Corporation and closing in on Deutsche Bank. Ridiculous? Hell yeah. But, woof… welcome to crypto.

As Fortune reports, a petition on Change.org is requesting  Robinhood list SHIB — and it now has more than 326,000 signatures. On the company’s earnings call Tuesday, Robinhood CEO Vlad Tenev said the exchange is “carefully” considering adding new coins to its offerings.

“We feel very, very good about the coins that we’re currently listing on our platform and any new coins that we add we want to feel equally, if not more good,” Tenev said, making a slight dog’s breakfast of his sentence.

 

Is Shiba Inu ‘pointless’?

Shiba Inu – it’s just a complete joke coin for pure speculators who don’t understand market cap and think it can hit one US dollar… right? Yes, and no.

Despite Michael “Big Short” dismissing the coin as “pointless” just recently, the project does actually have a bit more to it than first memes the eye.

Looking at the project’s website, and as the YouTuber Altcoin Daily recently admitted, the thing actually has some surprising utility and an ecosystem built around decentralised finance tenets. These include liquidity provision through ShibaSwap to earn yield in a sub-token called BONE; staking tokens (“burying” BONE); an upcoming layer 2 scaling solution and more. It even has its own NFT marketplace.

So, yep, it’s a meme coin, but as Altcoin Daily points out in a video essentially apologising to the “SHIB Army”, it’s clearly developed into something quite a bit more.

Not financial advice, but especially after the kind of pumps it’s had, investors might consider SHIB a pretty risky buy right now. A Robinhood listing, though, and who knows what could happen. Buy-the-rumour, sell the mutt? Maybe, maybe not.

 

More canine coins on heat: ASS exploding

A quick scan of some other pooch-powered tokens humping and pumping today, and we can see an Aussie-themed mongrel doing pretty well today, too.

Australian Safe Shepherd, which goes by the ticker ASS, is up a cool 69 per cent (in a coincidental NSFW meme continuation) since this time yesterday.

While this reporter is certainly more of a dog than cat fan, he remains cautious about all this. That said, fans of ASS certainly believe it’s going to “explode”.

Australian Safe Shepherd appears be building some expansive DeFi utility around its ASS token, too, as well as having numerous other community-driven activities on its roadmap.

As for some other hounds in the crypto pack today, “the Bitcoin” of meme coins, Dogecoin (DOGE) needs to stock up on its worming tablets – it’s down about 10 per cent.

Others posting ridiculously healthy gains, though, include Safemoon Inu (SMI), +82%; CorgiCoin (CORGI), +41%; Dogelon Mars (ELON) +22%; Baby Doge Coin (BABYDOGE), +20%; and Kuma Inu (KUMA), +15%.

 

 

The post Shiba Inu and other dog coins on heat despite market dip; will ASS explode next? appeared first on Stockhead.


Author: Rob Badman

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