September 2, 2021 | The Monstrous Flow of Free Money and the Shortages

The shortages are not at Costco or Safeway, though they too might run out of a few weird items here and there. But other retailers are complaining about them, including apparel retailers and shoe retailers – yup, it took five weeks for my running shoes to arrive after I ordered them online, when normally I’d get them in a day or two.

There are shortages cropping up in different types of equipment and appliances and electronics. There are reports of shortages of certain types of fasteners and all kinds of doodads that you’d normally take for granted.

The shortages are all over the auto industry, driven by the global semiconductor shortages that keep getting dragged out and are now expected to abate maybe, hopefully, possibly in 2022.

It isn’t that there aren’t any new vehicles out there, but there are not enough of them. Inventories have been depleted in a historic manner. And customers are buying vehicles as soon as they come off the car carrier, or they order them and wait patiently till they arrive.

There are now huge storage areas around auto manufacturing plants were automakers store vehicles that are essentially ready to go but are still missing a component or two because some chips couldn’t be made, and when those components arrive, they’ll be installed and the vehicles will then be sent to dealers.

These semiconductor and component shortages have shut down auto assembly plants in the US and around the world for weeks at a time, all year long.

So everyone in the auto industry is prioritizing their high-end most profitable units and their most profitable channel, which is retail. The huge rental fleets that together would normally buy close to 3 million new vehicles a year in the US alone, but usually lower-end models, with large discounts, well, they’re being de-prioritized because no one is making money on selling to rental fleets.

Rental car companies have been complaining since the first quarter this year that they cannot get enough vehicles from automakers because automakers are prioritizing the most profitable high-end vehicles that they then sell through their highly profitable retail channels.

Automakers have slashed their incentives, and so effectively, prices of these vehicles have jumped, and dealers are selling hot models over sticker. Dealers and automakers are making out like bandits.

In normal times, demand for new and used vehicles would have collapsed after these kinds of price spikes as most consumers don’t have to buy a vehicle today. They can just drive what they have for a while longer.

But not this time. Now, Americans, after they’ve gotten this free money, don’t mind paying out of their nose for new vehicles, instead of haggling over them as they used to do.

And rental car companies are not getting enough vehicles built, and so there are rental car shortages in some areas. Rental car companies have responded by not selling their older rental units, as they would have normally done, but instead they keep them longer, and the mileage with which they’re now running them through the auction has nearly doubled over the past year. And they’re running fewer cars through the auction.

Rental car companies supply the used-vehicle market with close to 3 million used vehicles a year. And that number has plunged because rental car companies have trouble getting new vehicles to replace their current units. So this triggered the used vehicle shortage.

Then there is the infamous container shortage. It isn’t that there aren’t enough containers out there. It’s that containers are hung up on huge ships that each carry many thousands of containers, and those ships are waiting in large numbers to get into ports.

Yesterday, just outside the ports of Los Angeles and Long Beach, a record 44 container ships were anchored, waiting. And there are hundreds of these ships hung up somewhere globally, trying to get into a port, or they’re being rerouted to different ports. And all this takes time.

And containers are stuck in ports because railroads are backlogged, trucking companies are troubled by driver shortages, and containers are hung up in railyards and clog them up to where some railroads have stopped routing trains to those particular railyards until the backlog is cleared, thereby further contributing to the pileup of containers at ports.

And each extra day that a loaded container doesn’t get to its destination is a day that it cannot be unloaded and returned to the flow of containers, and cannot be sent to a manufacturer that has goods ready to ship but cannot ship them because they cannot get empty containers.

This chaos in the container industry caused the rates of shipping containers from Asia to the US to spike four-fold and five-fold from before the pandemic.

Last week, it cost on average $11,300 to ship a 40-foot container from Shanghai to Los Angeles, over five times the typical rate before the pandemic of around $2,000, according to Drewry.

Clothing retailers have had trouble restocking their merchandise. Some of the big names that complained about this during their earnings calls are Nordstrom and Abercrombie.

Nordstrom said that the brands it sells are having trouble getting their merchandise produced and shipped, and so they were prioritizing selling directly to consumers online, which is a lot more profitable for them, and they’ve de-prioritized Nordstrom, and Nordstrom’s sales got hit because it had shortages in its inventory.

Abercrombie said that the factory upheaval in Vietnam due to the rapid spread of the delta variant is now, quote, “out of control,” as plants shut down to deal with the infections of their workers. Vietnam is the second-largest supplier of apparel and shoes for US retailers.

In terms of shipments, once the merchandise is made, Abercrombie said that it is seeing shipping delays of one to three weeks on average. And it started using air cargo to get around some of the container chaos.

All of this creates additional expenses, and retailers are going to try to pass them on to consumers.

And there has been a shortage of plastics, and prices have jumped to record highs. This started during the big freeze that hit Texas that disrupted the petrochemical industry along the Gulf Coast. It accounts for nearly 20% of the global ethylene production, and three quarters of that production along the Gulf Coast was knocked out during the big freeze.

By the end of February, all of the production of epichlorohydrin was offline, along with 90% of the production of ethylene glycol, 70% of the production of polypropylene, 60% of the production of epoxy resins, and 40% of the production of propylene.

Some plants were damaged during the big freeze. Production eventually and mostly recovered, but then there was the huge backlog due to the production shutdowns.

And now, a hurricane is barreling into the Gulf Coast, and that may entail further disruptions of production.

These materials go into everything, all kinds of consumer goods, from water bottles to automobiles, all kinds of packaging, and all kinds of industrial goods, such as PVC pipe that is used in new construction.

So everyone is prioritizing what they produce because they don’t have enough materials or components or labor to produce everything they could sell. And so they prioritize high-end products, or high-volume products, or high-margin products, and they de-prioritize other products, which might not get produced until this settles down.

Or if a manufacturer needs 10 empty containers to ship their merchandise but they can only get five containers to ship them in, then they prioritize, shipping their high-priority items first, and the other stuff whenever.

This is happening everywhere. When supply gets tight, everyone is prioritizing what gets produced, who gets what, what gets shipped, and when it gets shipped.

All of this is vastly complicated by labor shortages. Whatever the reasons may be for these labor shortages – and I have discussed various aspects of them – they cause real problems throughout the supply chains and transportation systems.

So there are lot of reasons for these tangled up supply chains: natural disasters such as the big freeze in Texas that knocked off several semiconductor plants in Austin for a period and slammed the petrochemical industry on the Gulf Coast; Covid that has shut down factories; a fire at a semiconductor plant in Japan; consolidation in the container shipping industry after the rough period of 2015 and 2016 when several container carriers went bankrupt; material shortages; labor shortages, etc.

All of this could have been worked out more or less, with some disruptions, and maybe a few minor shortages here and there, because shit happens often enough, and companies are prepared for some disruption and know how to deal with them up to a point.

When an item is in short supply, the price tends to jump, which reduces demand until supply catches up, and normally the shortage goes away.

But not this time. This time came the stimulus-fueled historic explosion of demand for goods, not just in the US but globally.

Governments borrowed trillions of dollars and euros and yen and whatever, and handed them directly and indirectly to consumers to be spent, and central banks printed trillions of dollars and euros and yen and whatever, and spread it across the financial markets, which caused asset prices to blow out. After a while, it caused people to spend some of their gains or borrow against their inflated assets and then spend the borrowed money, and the world has never seen a sudden spike in demand for goods like this before. And no one was ready for it.

To this day, the fiscal and monetary stimulus continues, though some central banks have started dialing it back, and the Fed said that it will dial it back, and governments are continuing to spread borrowed money around hand over fist.

As this combination of artificially fueled demand for goods and supply-chain problems spread across the economy, what resulted for all to see were higher prices and in many cases much higher prices. That much could be expected.

What was unexpected was that enough consumers – not all, but enough – were suddenly more than willing to pay those higher prices, particularly for the big-ticket items that they didn’t really have to buy, such as houses and cars.

They didn’t even care about the prices, now that they’re flush with all this free money. This is when inflation took off – meaning when companies got away with raising prices: when higher prices didn’t cause a drop in demand, but might have actually spurred demand, powered the fear of missing out, as money suddenly didn’t matter anymore since it had just fallen into their laps.

Pricing regulates supply and demand, as higher prices normally boost supply and slash demand. But free money has destroyed the pricing mechanism, and demand has soared despite much higher prices.

Wolf Richter September 2nd, 2021

Posted In: Wolf Street

Next: S&P 500 Rallies To New All-Time Highs – Are The Market About To Break Higher Ending Q3:2021? »