Warned more than six months ago it was all starting to seriously go awry, the steady stream of increasingly dire messages went unheeded. The eurodollar futures curve first inverted way back on December 1, though hardly anyone noticed (or had any idea what eurodollar futures, even eurodollars, are). Everything that has unfolded between then and now sticking tight to the script written by the market.
As sounds of the R-word grow louder and louder reaching the middle of 2022, confusion continues where clarity is right there available for everyone. Recency bias, confirmation bias, rampant illiteracy, and that’s just central bankers.
The retailer Target, for example, just issued yet another profit notice, this more recent one specifically about its ridiculously bloated inventories; what a difference from #emptyshelves. As the company had reported several weeks ago, along with larger competitor Walmart, consumers aren’t spending the way they had previously.
Loaded beyond capacity (truly) with unsold inventory, this presents a costly problem (thus, profit warning). To deal with it, the company announced it must, obviously, begin canceling orders for new goods while also selling off what’s already on hand at heavily discounted prices.
Target won’t be the only one, the historic flood of inventory has been widespread throughout the retail and wholesale industries. As more and more rethink their current practices, the discounting will go economy-wide, too, and therefore that will be the end of the “inflation” (apart from gasoline, of course).
But if you’ve confused the CPI for the economy over the past year, as pretty much everyone has, then this sounds like trouble…for Target and its peers.
A new macro excuse has been birthed to reconcile the misperception: these inventory woes due to little more than the end of “pandemic spending.” An example from the Chicago Tribune:
“The speed at which Americans pivoted away from pandemic spending was laid bare in the most recent quarterly financial filings from a number of major retailers. Target reported last month its profit for the fiscal first quarter tumbled 52% compared with the same period last year. Sales of big TVs and small kitchen appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that it said must be marked down to sell.”
There is no one who will tell the public the difference, even assuming anyone in Economics can tell. Phillips Curves of all kinds litter the mathematical landscapes of econometrics. The word inflation is carelessly tossed around all day every day, having been conflated with a red-hot economy operating near, at, even above the indeterminable max employment point rather than a surplus of money for decades.
Rather than rely on Phillips, look no further than ports.
At those two key West Coast terminals, LA and Long Beach, the unnecessary 2020 contraction began with about one in five longshoremen being let go. That part made sense; governments shut everything down, so no need of the same workforce to unload boats that weren’t coming.
While a reasonable response, unintended consequences of artificial, non-economic interference followed. Helicopter redistribution under the unwise CARES Act combined with cabin fever among America’s suddenly massive at-home prison population created this perfect storm. Rather than go out to do things, even to shop at brick-and-mortar retail places, we all went straight online to Amazon.com to load up on formerly cheap Asian-made stuff paid for by Uncle Sam’s nickel.
By October 2020, literal boatloads began to show up off the coast of Los Angeles, except no one bothered to tell port operators who were still running smaller crews. According to Port of Long Beach officials, there would end up being 104 unscheduled container ship calls in the second half of 2020, quadruple the number from the same months of 2019.
Rehiring those laid off longshoremen? Not so easy with pandemic restrictions making a mockery of what should have been flexible capacity. With successive “waves” of COVID making the rounds, officials said at one point early in 2021 – just as another helicopter-induced Amazon free-for-all was being primed – 800 out of 15,000 dockworkers were unavailable after testing positive for the virus.
Another 600 or so were also out of action for just being in contact with someone somewhere who had likewise tested positive.
As all those scheduled and unscheduled ships laden with overflowing cargoes reached the coast, they had to wait for want of workers as well as for space to open up. The lack of sailings during the first half of 2020 had created two problems for the ports, the one being too much labor.
The other was containers.
Because the US doesn’t make much anymore, its massive merchandise trade deficit in technical terms means huge ships show up here with containers filled with goods made in China and then sail back across the Pacific with the empties. While a regrettable fact of post-eurodollar life, it was what used to be a well-organized, well-timed dance making sure these basic metal boxes ended up where they needed to be when they were needed.
With no ships arriving to take back the empties, these began to pile up on the docks (and other places) creating a physical bottleneck port officials at first believed they’d have plenty of time to work through.
Once it became clear they didn’t, it was too late.
The situation then compounded; the flood of ships late in 2020 and then a bigger rush in 2021 after the biggest of the helicopters, all the while never sufficient workers trying to work around growing piles of empty containers, further producing delays in unloading as well as reloading empties.
Shipping companies naturally reacted by chartering what are called blank sails. Because queues for every activity had grown so long, it had become worth it to just head back to China with the whole boat totally empty. Along with the fact US exports were very slow to recover, the rest of the world in really bad shape throughout, it was a total mess.
With so many containers stacked up in the US and no ships to take them back to China, or anywhere else, the world faced what was called a shortage of containers when it was the organic byproduct of unforeseen rigidity; inelasticity. There were plenty of containers, as many as there had been before 2019, just no efficient way to move them from LA and Long Beach.
As you’ve certainly heard over the last year, the performance of shipping container prices bested most cryptocurrencies. This wasn’t any problem for shippers, certainly not for the few – in China, of course – who made containers about to reap a pointless windfall, everyone passed on the costs to the end user, adding so much to “inflation.”
Freightos’ Baltic Index, an amalgamation of container prices along various global trade routes, perfectly pictured this container storm. Between May and October 2020, the first rush of reopening and Amazon shopping, container rates leapt from slightly elevated around $1,500 to more than $2,200.
From late October to January 2021, average rates reached $4,400 as the inelasticity intensified. But it was the third helicopter which sent prices skyward, from early April 2021 still around $4,400 to over $10,000 by July!
Container rates for specifically China/East Asia to US West Coast destinations were double those.
American consumers absorbed these costs if only because they were not spending on services and because the increased prices were financed by Uncle Sam’s redistribution(s). As the latter would eventually run out, what might happen then?
According to mainstream assessments, nothing. Orthodox Economics says that “stimulus” of just this kind contributes lasting positive effects (a multiplier greater than one). Regardless of when the container mess cleared up, consumer spending was widely expected to be as or nearly as robust moving forward.
The container-stuffed CPI was therefore conflated with an “overheating” economy, especially as the unemployment rate tumbled during 2021 allowing everyone from Jay Powell to President Biden to bring in Mr. Phillips’ work.
Markets were never once fooled as to the difference. Start with the fact employment is nowhere near maximum (the Establishment Survey remains, more than two years later, almost one million jobs short of February 2020’s peak, before then considering the five million jobs that should’ve happened but never did). Then discount the assumption “stimulus” is anything more than temporary.
Those two together proposed a very different situation for the US (and globally; this situation wasn’t entirely unique to America) in 2022. Therefore, first flattening curves throughout the latter months of last year before then one inversion becoming plenty.
The market price for shipping containers actually concurred. Peak rates were last seen around last October. And while freight prices came down only a little at first, since February the declines have only accelerated.
Container prices for that dominant China/East Asia to US West Coast route structure went from a top of $20,500 to $16,000 late February to barely $10,000 as of the latest quote. While still historically high, you can see the trend here.
That trend includes a whopping 12% decline just last week, a sharp drop that has confounded shippers in the same way the Chicago Tribune is confused about consumers. Many had presumed the decline in container rates just a reflection of Xi Jinping’s overly aggressive lockdowns in China. Once those were lifted, as they’ve been, shipping and freight rates would immediately pop right back up.
They did not.
According to Freightos’ most recent commentary (June 9), most are perplexed by this if only because of Economics:
“Many observers have expected a surge in volumes out of China as Shanghai reboots. But if the net underlying demand actually deteriorated during the lockdown, or enough importers had already pulled orders forward, then there may be no surge in the short term and less chaos and pressure on rates during peak season when compared to last year’s peak.”
The implications are a bit more consequential than soft rates, to put it mildly, yet Freightos like the mainstream media isn’t seeing the big picture. The company goes on to note that shippers expect the summer to be good anyway in a way that sticks Target’s difficulty to Target.
What if it’s not? I wrote elsewhere last week:
“Here’s a thought: what if retailers and wholesalers in the US have instead used the Shanghai mess to just cancel orders? Hey, since you all are closed anyway, just don’t bother. Save us the fuss. We all heard from Target and Walmart about consumers. They aren’t buying much high value stuff at least not from these big boxers, though anecdotes are spreading among other retailers, too.”
While that would mean less of a mess in the US West, it would also (help) spread economic slowdown (or worse) quickly across the world, from Long Beach to China and all of East Asia, from there Germany, Europe, emerging markets and everywhere in between. A global system already sputtering much worse than America now about to lose its one key (artificial) source of momentum.
While the media clings to the notion that this is all just consumers adjusting away from “pandemic spending”, even the normally empty suit Economists are beginning to publicly worry it’s instead the R-word. Reacting to his organization’s historically downward June 2022 outlook, World Bank president David Malpass confessed, "for many countries, recession will be hard to avoid."
Avoid? Many countries? Markets.
CPIs are not, in fact, the economy. They aren’t even inflation. The US and global economy never recovered from the full range of unjustifiable 2020 interventions, and what happened to consumer prices wasn’t “pandemic spending” so much as a supply shock resulting from those intrusions.
The impacts produced were always going to be, to borrow a word, transitory. Though the vast majority of the public won’t associate anything longer than a few weeks, maybe a couple months with the term, on macro scales it doesn’t matter how many months, it only ever mattered the underlying truth.
Truth is the ultimate in inelastic.
