Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls?
This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.
In general, there are two types of assets,
- They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or Baseball cards or
- They can generate cash flows over time – GaveKal
Creating An Illusion Of Scarcity
Scarcity relative to the money stock is what its all about now, folks.
It probably won’t be long before the Fed has to bailout the baseball card market, no?
Full disclosure, I do own a Mike Trout rookie card.
Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to rationalize and drive speculation.
Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain, and super charge the price ramp by snapping a pictures of each sample and converting them to NFTs?
Then again, maybe all this is signaling the start of a big, big inflation cycle?
Can you believe it, folks?
Shadow Inflation: Shipping Costs Are Up Way More Than You Think
Shadow Inflation: Shipping Costs Are Up Way More Than You Think
By Greg Miller of FreightWaves,
Name something that costs far more than it…
Shadow Inflation: Shipping Costs Are Up Way More Than You Think
By Greg Miller of FreightWaves,
Name something that costs far more than it did before the pandemic that simultaneously gives you far less value for your money than it used to.
Of all the goods and services in the world, it’s hard to find a better pick than ocean container shipping. As rates have skyrocketed, delivery reliability has collapsed amid historic port congestion. Ocean cargo shippers are paying more than they ever have before for the worst service they’ve ever experienced.
The true COVID-era inflation rate for ocean shipping, when adjusted upward to account for lower quality, is much higher than the rise in freight rates.
Rates spike, quality plummets
For businesses that rely on imports and exports, ocean shipping is a necessity, not a luxury, so pricing rises if demand exceeds supply regardless of how bad the service is. U.K.-based consultancy Drewry recently upped its forecast and now predicts that global container rates will increase by an average 126% this year versus 2020, including both spot and contract rates across all trade lanes.
Norway-based data provider Xeneta sees most long-term contract rates in the Asia-West Coast route averaging $4,000-$5,000 per forty-foot equivalent unit, double rates of $2,000-$2,500 per FEU at this time last year. Spot rates have risen much more than that, both in dollar and percentage terms. The Freightos Baltic Daily Index currently assesses the Asia-West Coast spot rate (including premium charges) at $17,377 per FEU, 4.5 times the spot rate a year ago.
Service metrics have sunk as rates have risen. Denmark-based consultancy Sea-Intelligence reported that global carrier schedule reliability fell to 33.6% in August, an all-time low. In August 2019, pre-COVID, reliability was more than double that. Sea-Intelligence calculated that the global delays for late vessels was 7.57 days, almost double the number of days late in August 2019.
U.S.-based supply chain visibility platform Project44 highlighted the diverging paths of pricing and quality by contrasting its data on average days delayed with Xeneta’s short-term rate data. Between August 2020 and this August, project44 found that the monthly median of days delayed on voyages from Yantian, China, to Los Angeles increased 425%, from 2.46 days to 12.93. Over the same period, average short-term rates jumped 102%.
Neil Irwin of The New York Times recently wrote about “shadow inflation” — when you pay the same as before for something that’s not as good as it used to be, so you’re effectively paying more. A pre-COVID example of shadow inflation: the infamous Lay’s potato chip incident of 2014. Lay’s intentionally included about five chips less per bag, lowering content from 10 ounces to 9.5, yet still charged $4.29 per bag, meaning customers were paying (and Frito-Lay was making) 5.3% more per ounce of chips.
The opposite — and until COVID, far more common — scenario is when product quality rises faster than pricing, decreasing effective inflation, as in the case of computers and other tech products. This downward effect on inflation is incorporated into the Consumer Price Index (CPI) via so-called hedonic adjustments.
As recounted by Irwin and Full Stack Economics author Alan Cole, COVID flipped hedonic adjustments in the other direction, toward lower quality per dollar paid, the equivalent of inflation. Pointing to restaurants and hotels, Irwin wrote, “Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not only by raising prices), but by taking steps that could give their customers a lesser experience.”
According to Cole, “Over the last 18 months … goods and services are getting worse faster than the official statistics acknowledge,” implying that “our inflation problem has actually been bigger than the official statistics suggest.”
Shadow inflation and container shipping
Ocean container shipping is an extreme example of the “services are getting worse” trend, despite enormous freight-rate inflation.
Measuring quality adjustments to inflation is inherently difficult, which is why very few CPI categories have hedonic adjustments. One way to do a back-of-the-envelope estimate of ocean shipping shadow inflation is to focus on time: the longer the delays, the less quality, the higher the cost fallout, the higher the effective inflation above and beyond the rise in freight rates.
Jason Miller, associate professor of supply chain management at Michigan State University’s Eli Broad College of Business, suggested using accounting of inventory carrying costs to measure the time effect.
“If I already own a product and I took possession of it overseas at the port of departure, and it’s on my balance sheet and it’s just sitting on the water, then in inventory management, there is a charge incurred every day it’s not sold,” he explained.
Miller explained, “There is the cost of capital. Every $100 in inventory is $100 that can’t be allocated elsewhere for a more value-producing purpose. There is also the cost due to obsolescence. It’s essentially opportunity costs. The longer the delay, the more additional costs from stockouts [as shelves empty] or the need to buy more safety stock.”
Rate rises affect different shippers differently
Whether it’s price inflation from rate hikes or indirect shadow inflation from slow service, different shippers are affected very differently.
On the rate side of the equation, Xeneta data shows a massive $20,000-per-FEU spread between the lowest price paid by large contract shippers in the trans-Pacific trade and highest price paid by small spot shippers.
Erik Devetak, chief data officer of Xeneta, told American Shipper, “We see the very bottom of the bottom of the long-term market at approximately $3,300 per FEU, although there are very few contracts at this price. On the other hand, we see the short-term market high up to $23,000 per FEU, again, in rare situations.”
In the latest edition of its Sunday Spotlight report, Sea-Intelligence analyzed how rate hikes affect different shippers and found a huge competitive advantage for larger shippers given this gaping freight spread.
Sea-Intelligence, using Xeneta data, estimated that a large importer on contract (in this case, in the Asia-Europe trade) shipping a 40-foot box with $250,000 of high-value cargo would see freight costs rise from 0.5% of the cargo value a year ago to 1.8% currently — an easily digestible increase. A small shipper in the spot market moving the same load would see freight costs jump from 0.7% of cargo value to 6.2%.
Sea-Intelligence then ran the same exercise with a low-value cargo worth $25,000. It said that in this case, the large contract shipper’s freight-to-cargo-value ratio rose from 5% last year to 18% currently, while the small spot shipper’s freight-to-cargo-value “exploded” from 7% to 62%.
Service delays affect different shippers differently
Rising rates affect high-value cargo the least because the freight rise equates to a small proportion of the cargo value. But with shadow inflation from voyage delays, it’s the opposite, according to Miller. Shipments of high-value goods get hit much harder than low-value goods.
Accounting carrying costs are derived from cargo value. The higher the cargo value, the higher the carrying costs. “Where these delays especially matter is for high-value imports,” said Miller. “It’s ironic. The importers that are least affected by high spot prices are the ones who are getting really hurt most by the delays.”
One example: A large importer pays $4,000 in freight under a contract to ship a high-value cargo of $250,000 worth of electronics in a 40-foot box. There is a 30% annual carrying cost, in part due to high obsolescence risk, thus a carrying cost of $205 per day, so a 10-day delay would equate to an accounting cost of $2,050, adding 51% on top of the freight cost.
A contrasting example: A small importer pays $15,000 in the spot market to ship a low-value cargo of $25,000 worth of retail products in a 40-footer, with a 20% annual carrying cost. A 10-day delay would equate to an accounting carrying cost of $137, just 1% more on top of the freight rate.
It’s not just high-value cargoes that suffer from delays, Miller continued. Obsolescence risk is key. On the high end of the value spectrum, that relates to goods like electronics; on the low end, to things like holiday items and seasonal fashion.
Another major factor: whether the delayed import item is a component in a manufacturing process. In that case, the cost of ocean shipping delays can be enormous, dwarfing the increase in freight rates.
American Shipper was recently contacted by a manufacturer that has a vital component of its production process trapped in containers aboard a Chinese container ship that has been at anchor waiting for a berth in Los Angeles/Long Beach since Sept. 13.
“When imports are actually inputs into a production process, and if a stockout is going to shut down a plant, you are now facing a huge opportunity cost,” warned Miller.
Weekly Market Pulse: Inflation Scare!
The S&P 500 and Dow Jones Industrial stock averages made new all time highs last week as bonds sold off, the 10 year Treasury note yield briefly breaking…
The S&P 500 and Dow Jones Industrial stock averages made new all time highs last week as bonds sold off, the 10 year Treasury note yield briefly breaking above 1.7% before a pretty good sized rally Friday brought the yield back to 1.65%. And thus we’re right back where we were at the end of March when the 10 year yield hit its high for the year. Or are we? Well, yes, the 10 year is back where it was but that doesn’t mean everything else is and, as you’ve probably guessed, they aren’t. In the early part of this year, the 10 year yield was rising as anticipation built for a surge in post vaccination economic growth. The 10 year yield rose about 85 basis points from the beginning of the year to the peak in late March. 10 year TIPS yields, meanwhile, were also rising, a little more than 50 basis points. There was agreement between the two that growth expectations were improving, inflation expectations rising a bit more than real growth expectations. The 10 year Treasury ended March right about where it was last Thursday, 1.7%. But there is considerably less agreement between the two markets now with the 10 year TIPS yield still 35 basis points lower (more negative) than the March peak.
So, no, things are not back where they were. The recent rise in nominal bond yields is much more about inflation fears than growth hopes. Markets provide us with a wealth of information that allows us, to some degree, to get inside the heads of investors. The changes in the bond markets recently show that investors have a very specific and nuanced view about the economy. They are certainly concerned about inflation and doing what people do when they are scared – trying to protect themselves. TIPS have been very popular of late for exactly that reason, as the inflation narrative gets louder and louder. But what is interesting is that, in a way, investors are taking the Fed at its word, that the inflation is transitory. The 5 year breakeven inflation rate hit 2.91% last week while the 10 year rose to 2.64%. But the 5 year, 5 year forward rate (5 year inflation expectations starting 5 years hence), has fallen over the last week to 2.37%. Investors think inflation will average nearly 3% over the next 5 years but less than 2.4% over the following 5. So investors do see inflation as transitory even if their definition of the term seems quite a bit different than the Fed’s.
Another big difference between now and March is the steepness of the yield curve. The 2 year note yield has been on a steep rise of late, up 140% since the beginning of September, with most of that coming in October. The 2 year rate roughly doubled in the early part of the year too but the absolute change was small because rates started so low. The recent change in the 2 year has been more rapid than the 10 and is being driven by expectations for Fed policy changes. The 10/2 curve was 1.58% at the end of March but just 1.18% today. The short term trend is still toward steeper but the climb has stalled a bit:
I interpret these changes in the obvious way. Nominal growth expectations are rising with most of the recent change focused on inflation but with some pickup in real growth expectations too. In addition, investors do not seem willing to believe yet that inflation is a long term problem. Given the high profile of the inflation narrative and the lack of much concrete evidence of a growth pickup, these changes seem perfectly rational and reasonable. I think it is important to note too that these changes in inflation expectations are small but also rapid. The 10 year breakeven rate is up about 65 basis points this year but over half of that has happened in the last month. The same is true for the 5 year breakeven rate. As for the change in real growth expectations I’d just say that it isn’t very impressive regardless of the rate of change. Unfortunately, that makes sense too since, as I discussed last week, we haven’t done anything to change the trajectory of either workforce or productivity growth. My long term expectation for growth hasn’t changed much since the first few months of COVID. We came into it with growth averaging roughly 2.2% over the previous decade. After adding a lot of debt to that economy during the pandemic my assumption is that, when things finally settle out from the virus and the response to it, economic growth will be lower. How much? I don’t know of any way to quantify that.
But that long term expectation is just that, long term. It doesn’t say anything about growth over the near term, the next 6 to 12 months. We’ll get a report on Q3 GDP next week and all indications are that it will be a pretty big fall off from the first half of the year. But anyone who’s been paying the slightest bit of attention knows that so it really won’t matter. Investors will be focused on the current quarter and the one after that. Will there be a reacceleration in growth as the delta variant fades? Will businesses be able to get goods for Christmas or will America get a lump of coal in its stocking? Or are we out of coal too? I don’t know but I do think we need to be careful about getting too negative about, at least, the immediate future. Inflation expectations can change rapidly while growth expectations take more time so TIPS and nominal yields are often on different songs, even if in the same hymnal.
I don’t generally put much emphasis on the PMIs or regional Fed surveys. They are basically sentiment surveys and rely on people’s anecdotal observations which, as we know, can be skewed for a whole host of reasons. But they can be interesting at turning points, inflection points, where sentiment does have a bearing on actions and ultimately the economy. While I don’t think we’re near a negative inflection point, the Philly Fed survey and the Markit PMIs do seem to point to a more positive near term outlook. The Philly Fed survey itself was down considerably from September but it is still higher than 3 months ago and the details hint at a near term pickup. The new orders index rose to 30.8 from 15.9, employment to 30.7 from 26.3. They also asked a special question about capital spending plans that showed expectations for increased spending in 5 of 6 categories for next year:
Of course, those expectations could change dramatically if Q4 turns out to be a bust but it is, for now, a positive indication for future growth.
The Markit PMIs also offered some near term optimism as the overall measure rose to 57.3 from 55 in September. That’s the best in 3 months with a sharp rise in service sector activity and a 3rd consecutive month of slowing in manufacturing activity (which is still at a high level). New orders in services rose at the fastest pace in 3 months. Job creation was the highest since June although companies still report having a hard time finding workers. All of this is perfectly consistent with the expectations for a growth resurgence post delta. Will those expectations be met? I don’t know obviously but if these expectations start to be met, we should see a response in the bond market with better balance between TIPS and nominal bonds.
There was also some potentially good news in the Census Bureau’s weekly household pulse survey which showed a big drop in people reporting not working.
Again, I don’t think we should put a lot of emphasis on these surveys. I’m always more interested in what people are doing rather than what they say they’re doing and especially what they say they intend to do. But these seem to be more significant changes than we’d normally see month to month.
We’re going through a bit of an inflation scare right now and we can see the changes in markets. They are fairly small changes though and they can, probably will, change again in coming weeks. Growth and inflation expectations are always changing as new information enters the market. Millions of investors speculate about how the future will look and their bets on that future move markets as new consensus expectations emerge. And the market changes that come from these new expectations also affect the economy in an ongoing feedback loop that changes expectations and markets again in a never ending search for equilibrium. The ebb and flow of the markets and the economy are intertwined, one influencing the other to produce the best prediction of the future we’ll ever get. Just don’t get too attached to that future because it can – and often does – change quickly.
The economic environment is unchanged.
The trend in the nominal 10 year rate is obviously up
But we’re interested mostly in real growth expectations and TIPS yields are not in an uptrend yet:
The dollar remains in a short term uptrend but we are at a pretty obvious resistance point. In addition, the futures market shows a pretty strong preference by speculators for the long side of the dollar trade. So the short term trend may be running into some trouble and with real rates still flailing at low levels, I think that makes a lot of sense. The real long term trend of the dollar is no trend at all, still stuck in the middle of a 10% trading range that has prevailed for now 7 years:
Despite my comments above about the Philly Fed survey and the Markit PMIs (not shown here), the economic data wasn’t that encouraging last week. Industrial production was down for the second straight month but there were a lot of caveats. Hurricane Ida is alleged to have taken 0.6% off the total and the auto industry is still flagging due to the chip shortage. Mining output (shale) was down, shocking exactly no one except maybe Joe Biden. On a more positive note, IP rose at a 4.3% annual rate in Q3, the fifth consecutive quarterly gain over 4%.
The Housing Market Index rose in September with single family especially strong. But the news on the new home front otherwise was not that great with starts and permits both down. Existing home sales did have a big rise but that was probably driven by rising mortgage rates.
A lot of data releases next week with GDP the highlight for most observers. The more important items will be the CFNAI to get an idea of how much we’ve slowed overall, durable goods orders and especially core capital goods orders, personal income and consumption and consumer sentiment.
We were reminded last week that US markets are still under the spell of speculators when a SPAC announced a deal with an entity associated with Donald Trump. Digital World Acquisition Corp. rose from $10 to, at one point, over $170 in two days of trading last week before settling the week up a mere 9 fold to $94.20. SPACs are Special Purpose Acquisition Corps or more commonly blank check companies. The fact that these companies with no business plan beyond a vague notion to purchase an operating company are so popular, is an indication by itself, of the speculative nature of these markets. But when a blank check company with no business plan acquires a shell company that consists of a powerpoint presentation and the stock has to come down to be up 9 fold in a couple of days, well, I think we’ve entered something beyond speculation. This is the post-modern economy where value is socially determined, reality is anything but objective, “where there are no hard distinctions between what is real and and what is unreal, nor between what is true and what is false”. It is an absurd world where the value of Donald Trump’s future social media empire is determined through the interactions of speculators on existing social media.
Back in the real world, stocks were up last week with the US continuing to outperform. Growth had a good week and the value/growth debate YTD now amounts to a draw. China rebounded last week as Evergrande made an interest payment and you may see a rebound in Chinese markets as people get comfortable with the heavier hand of the communist party. I’m going to have to miss that if it happens as I am decidedly not comfortable with China. There are other places in Asia that look a lot more attractive in my opinion, Japan prominent among them.
Real estate has recovered quickly and led last week but financials continue to perform well too. Healthcare had a good week after lagging recently.
With stocks near or at all time highs, it is easy to assume that means something about future economic growth. But stocks move based on expectations about future EPS growth which isn’t even close to the same thing. Last week’s move up in stock prices was more likely a consequence of the death of the corporate tax hike as the Biden economic plan continues to get pared down to something more manageable. The economy just isn’t the focus of stock investors right now but that could change if growth doesn’t pick up soon from the big Q3 slowdown. There is little evidence of that yet beyond the surveys I mentioned above so we won’t guess at the outcome. If real rates join nominal rates and start to rise more decisively, that will be a sign that we can be more optimistic. But we aren’t there yet.
Port Congestion Could Be Worse Than “Lehman Crash”, Flexport CEO Warns
Port Congestion Could Be Worse Than "Lehman Crash", Flexport CEO Warns
"The ports shutting down is worse than Lehman Brothers failing….
Port Congestion Could Be Worse Than “Lehman Crash”, Flexport CEO Warns
“The ports shutting down is worse than Lehman Brothers failing. Both can lead to catastrophic failures of all counterparties depending on them. But with Lehman, the government could just print tons of money to flood the banks with liquidity,” Ryan Petersen, chief executive officer of logistics company Flexport, warned Friday after touring logjammed U.S. West Coast ports.
Petersen said his firm hired a boat captain to tour Los Angeles and Long Beach ports, which account for 40% of all shipping containers entering the U.S. He said during the three-hour loop through the ports, passing every single terminal, “we saw less than a dozen containers get unloaded.”
He said the twin ports have hundreds of cranes but only “seven were even operating and those that were seemed to be going pretty slow.” He said the bottleneck that everyone now agrees on is “yard space” and that “terminals are simply overflowing with containers, which means they no longer have space to take in new containers either from ships or land. It’s a true traffic jam.”
“The bottleneck right now is not the cranes. It’s yard space at the container terminals. And it’s empty chassis to come clear those containers out,” he said.
The twin ports appear to be at a standstill even though President Biden issued a directive last week to keep them operating on a 24/7 basis. But that seems to be not enough because the president has weighed the use of the National Guard to alleviate constraints.
Petersen suggested a “simple plan” for the state and federal government to partner with ports, truckers, and everyone else in the chain to create temporary container yards that stack empty ones up to six high instead of the limit of two. This would “free up tens of thousands of chassis that right now are just storing containers on wheels. Those chassis can immediately be taken to the ports to haul away the containers.”
He said it was necessary to correct this bottleneck because it’s a “negative feedback loop that is rapidly cycling out of control that will destroy the global economy if it continues unabated.”
Goldman Sachs’ Jordan Alliger agreed and told clients to monitor the ports. He said, “the most notable congestion indicator is the number of container ships anchored waiting to offload their freight returned to 70 ships anchored on October 18 after hitting a record of 73 on September 19, compared to their pre-pandemic average of 0-1 ships.”
Petersen is right. The monetary wonks at the Federal Reserve are way over their heads. They can’t print their way out of this shipping crisis they helped sparked by unleashing unprecedented monetary injections into capital markets over the last 19 months. The circulatory system of the global economy risks breaking as port congested worsens.
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