When the Ever Given got stuck in the Suez Canal back last March, it was a perfect metaphor for the times. Among the largest ships ever built, crashing headlong into the right bank of the narrow waterway left one of the busiest shipping lanes completely blocked off. Yet another bottleneck in a series of bottlenecks to plague the global economy in 2021.
In response, shipping companies worldwide scrambled to rebook sailings before they left harbor while rerouting those already steaming on their way. Cargo deliveries would necessarily suffer even more delays, end-of-the-line buyers/users complaining while becoming all the more impatient.
These companies, however, didn’t actually suffer for all their trouble. On the contrary, last year was an absolute boon for them. Long before, and then after, the Suez breakdown, shippers have been posting breathtakingly positive financial results.
A.P. Møller - Mærsk AS (APM-M) is perhaps the most recognizable name in this business. You can’t go practically anywhere on an American or European highway without running across a shipping container bearing the Mærsk name on its side being hauled by surface tractor.
The Danish-based carrier had long dominated ocean container shipping, having been surpassed after a quarter-century by Switzerland’s MSC only just recently. Either way, APM-M is still a very close second boasting a worldwide capacity of 4.28 million twenty-foot equivalent units (TEU) spread amongst a fleet of 738 container ships.
Earlier this week, APM-M’s management held its quarterly conference call to discuss its blowout results from the fourth quarter of 2021. Revenue during those three months surged 77% year-over-year. For last year as a whole, sales were $48.2 billion compared to $29.2 billion for 2020, good for a 65% full-year jump.
Profits were just wow, too. The company reported Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) of $7.3 billion in Q4 alone, a record (by far) operating profit margin of 50.3%. Stating the obvious, this latest earnings presentation included this explanation:
“Ocean was considerably affected by congestion and network disruptions, which continue to put pressure on global supply chains.”
To achieve these results in spite of so many challenges, including the Suez debacle, APM-M had to add significant capacity – 305,000 FFE (or forty-foot equivalent units) - just like its competitor MSC had. In addition, the company says it opened an extra eighty-five warehouses last year.
Wait, warehouses?
Shippers don’t usually like that kind of overhead, preferring to mostly move product from one lower part of the supply chain if only to hand it off directly to the next link above. No one expects to sit on goods “in transit.”
Yet, that’s exactly what happened last year. Those eighty-five warehouses were needed just to have some place to store goods that weren’t easily delivered from point to point like they had any other year (except 2020, of course).
It wasn’t like APM-M had been confronted by a flood of goods, either, that there had been so much more product than the company (or any other shipper) could handle for all its gigantic capacities and that’s why the warehouse space was needed. Even the additional FFE’s weren’t because of the amount of product, rather to help make up for lost time spent dealing with these logistical challenges.
Actual shipping volumes were down at APM-M in Q4.
That’s no misprint; in the fourth quarter of ’21, Mærsk says its loaded volumes were 4% less than they had been in Q4 2020 when the pandemic was still pre-vaccine stifled. For the whole year, company volume was only a tiny fraction more than for all of recession-hit 2020. And 2021 volume was still materially below what APM-M had handled in either 2019 or 2018.
This is not just a single anecdotal instance. These results are copied all over the global trade map by companies large and small (though there’s mostly large firms left in it). In terms of actual number or weight of goods being moved around, the world lags substantially behind where it had been for 2019’s globally synchronized downturn heading toward pre-COVID recession.
So, how did Mærsk or everyone else post such impressive revenue and profit numbers despite the capital and overhead costs of trying to manage such repeated and immense “congestion and network disruptions?” You already know the answer.
For APM-M, while loaded and shipped volume declined in Q4 ’21, its average freight rate skyrocketed 83%! The price of shipping, as the price of goods being shipped, went higher because…economics, not money.
Interviewed on BloombergTV earlier this week when these earnings and company estimates were published, Mærsk’s CEO Soren Skou had this to say about prospects for ’22:
“We are trying to guide as best as we possibly can, not to be optimistic or pessimistic. We do not have much visibility to what will happen when people return to work, when bottlenecks open up and a lot of the capacity tied up today in Los Angeles and Long Beach gets released - how is that going to work out. We'll have to see.”
You have to admire his diplomacy, the intentionally missing candor given the pretty obvious implications. The company right now expects ocean-going volumes to rise maybe 2 to 4% for all of 2022; implying worldwide global trade to still be behind – in volume terms – where it had been on the downswing in 2019, even farther behind the 2018 peak which will be four years distant.
And even then, management hedges: “subject to high uncertainties related to the current congestion, network disruptions and demand patterns.” You might think the company is talking about further “inflation” disruptions when they’re actually warning about what is most likely to happen once “normal” or something like it does arrive.
It doesn’t take much or any true insight to figure out what happens once “bottlenecks open up” and the flow of goods isn’t snarled in lengthened supply chains including hundreds of last minute-acquired shipper warehouses. The price of shipping, and the prices of the goods being shipped, will begin to revert toward volumes.
Supply shocks always work out in this fashion.
Policymakers at the Federal Reserve, however, are no longer content to gamble (as they now see it) on such basic economics (small “e”). Since the “central bank” isn’t one, no one there does money, staff projections on economic variables like inflation get produced by different sets of convoluted theories rather than properly based on monetary conditions.
Briefly, officials have become very concerned Americans will normalize to the high rates of consumer price increases reflected in recent CPI numbers; including yet another 40-year high for the measure released just this week about prices during January 2022. Those voting (and not voting) at the Fed’s FOMC worry inflation “expectations” will “unanchor” from their current low status, and if they do the fear is for an inflationary self-fulfilling prophecy.
There is, even today, no actual evidence expectations contribute anything to actual consumer price levels.
On top of this dubious CPI acclimatization idea, the FOMC is also worried the low unemployment rate represents a realistic snapshot of the labor market. Down to 4.0% again currently, it is also suggested by similar non-money theory such a “tight” employment situation could easily add more to inflationary pressures bubbling underneath already-accelerative prices.
To get ahead of these “problems” before they get out of hand, QE is being tapered and ended while rate hikes are set to begin at the next FOMC meeting in March 2022. With this week’s faster CPI, there is good reason to suspect the initial rate hike might even be a double – a fifty bps increase to the federal funds target range rather than the typical twenty-five.
Given the probabilities of non-money monetary policy changes, the front end of the Treasury yield curve has sold off if only for that reason – not the CPIs nor the longwinded inflation theories those at the Federal Reserve are using for their strategy guide. The long end of the yield curve, however, it continues to be a very different story.
Actually, no, it’s the same story we’ve seen repeated countless times; nearly every time the Fed starts hiking rates.
Perhaps the best and most fitting analogy to our current “conundrum” isn’t actually the last time we did this just a few years ago in 2018, though the current episode exhibits a lot of the same tendencies already compared to that one. Maybe the Fed’s inflation panic during the year 2000 is as good or better.
Short-term UST rates such as the (nominal) yield for the 2-year Treasury note (2s) began to zoom upward two-thirds of a year before the first rate hike would begin during that “cycle.” From a low just less than 4.00% set in October 1998 (Asian Financial Crisis; or, regional dollar shortage), the 2s added about 150 bps by the time Alan Greenspan’s Fed voted in June ’99 to get going on what it saw as building late-nineties inflationary pressures.
The 2s would then rise another 100 bps in yield (a selloff in terms of Treasury prices), always staying ahead of the next rate hikes. By January 2000, that yield was up around 6.50% for the given federal funds target (it had been a single target rate back then rather than the range used by the FOMC today) of just 5.00%. The market was pricing both those prior rate hikes along with staying ahead of likely more to come.
At the longer-end of the Treasury yield curve, the benchmark 10-year rate (10s) had moved higher, too. Pushed upward largely as a result of the short-end pricing the Federal Reserve’s policy shift, it had gone from around 4.30% late in ’98 to around 6.80% by January ’00.
Beyond that point, however, the market “broke”; in the sense that yields at the long end no longer matched or correlated with those at the short end. From January 2000 forward, LT yields like the 10s or the 30s began to drop, the curve flattened then quickly inverted.
This all came to a climax after May 2000 when Greenspan’s FOMC fearing inflation had already gotten out of hand doubled up at that particular policy meeting with a fifty bps rate hike. Their reasoning back then sounds today, well, pretty familiar:
“Last month [April 2000], the unemployment rate edged below the 4 percent mark for the first time in more than thirty years, a development entirely consistent with the anecdotal reports in the Beige Book and elsewhere of an extremely tight labor market. Against this backdrop, and with the effects of the steep run-up in oil prices of the past year filtering through the economy, we are not surprised to be seeing some signs of a general pickup in wage and price inflation.”
The only difference is that “seeing some signs” in 2000 is in 2021 consumer prices that aren’t merely threatening.
But are non-money monetary policymakers about to commit to the same error in rationale? The bond market doesn’t just think so, it is betting more and more heavily on it.
As of trading yesterday when the January 2022 consumer price estimates were released, short-term rates exploded higher while longer-term yields rose substantially less. The 2-year note rate, for example, gained fifteen bps while the 10-year added nine. Not only that, the yield for the 7-year is now dead even with that for the 10s, a stunning development even for someone like me who has watched the yield curve for more time than I care to recall.
This absolutely crucial middle piece of the curve is the tiniest sliver from being inverted as I write this. And we haven’t even gotten to the first rate hike yet!
The whole yield curve itself is being distorted in very ugly fashion, very reminiscent of past periods like the year 2000 when the Fed’s always-underlying inflation prejudice proved to have been not just fantasy but more importantly thinking the economy (including beyond the US) was heading in the opposite direction from where it actually ended up.
Where it ended up was in recession, not inflation.
As has been the case repeatedly, before as well as after 2000, the Fed more often than not (including 2018) tends to hike its short-term rates into a slowdown none of its models ever seem able to see coming (“maybe” not doing money has rendered its regressions blind). This is the basis for the yield curve’s ugly distortions, including the stage where suspiciously calendar spreads at key intervals just vanish before then flipping upside-down.
The Fed is entering another inflation panic, and short-term rates have to price it, but people outside of long-term Treasury holders don’t seem to remember the Fed is almost always panicking about inflation at moments very much like these. What we continue to find is policymakers focused on the wrong variables for the wrong reasons consistently leading to the wrong conclusions.
The anecdotal case provided by Mærsk merely illustrates this tension. The global economy has suffered from a lack of recovery (see: volume and money illusion worldwide) combined with the confusion surrounding this supply shock creating these familiar conditions for official overreaction. Throw recent Chinese economic data into the mix, and it is a recipe for repetition where curves and economy meet yet again in the same future place no one is currently expecting.
No one outside the twisted, distorted curve, that is.
