Oct

28

Supply, from Duncan Coker

October 28, 2021 |

Yes, it is a different mind set and self fulfilling. I am thinking about replacing some wood flooring and got a quote and now makes me think better do it now before the wood becomes less available and/or more expensive. Meanwhile cash is losing 5% this year. Multiply this mindset x 100m people and you get some inflation. Fed won't raise rates, wages won't keep up, but assets should do well until the yield curve is so steep that rates have to go up, which is the big unknown. Who will be our Volcker of 2020s? Does this not make the case for all the supply-siders. You can demand all you want, but someone has to make the stuff.

Steve Ellison adds:

I worked in technology supply chain management in a previous career and have been thinking about a scenario called the "dreaded diamond".

Technology part shortages occurred with some frequency as the transition from designing a next-generation product to ramping up production did not always go smoothly. And even before covid, accidents happened; some years ago, a factory in Japan caught fire. Many specialized components have only one supplier.

What typically happened in shortage situations was that the supplier would allocate the limited supply among the buyers. The buyers would try to game the system by placing 3x to 5x their normal orders, hoping that would increase their share of the allocation. Meanwhile, executives would want daily updates on the situation: how many units were delivered, and what the likely delivery schedule was.

This situation might continue for some months, with buyers continuing to place inflated orders, and the apparent shortage stretching out longer into the future with the higher orders.

As actual deliveries increased, one day, all of a sudden, the buyer would cancel all the excess orders. As other buyers did the same, the demand on the supplier would crash to near zero. This phenomenon of illusory orders that would vanish later was called the "dreaded diamond". A few quarters later, there would be big inventory write-downs because technology products lose value fast as they age.

Maybe some variation of this scenario could occur in the general economy as some of the shortages are alleviated in the course of time. We might find out the shortages have been exaggerated by purchasers trying to maximize their own supply.

Alston Mabry offers:

The Odd Lots podcast (BBG) had a recent episode about the chip shortage, and the guest described this exact scenario, where a customer orders 10x chips and is told by the supplier, "We can deliver 1x chips now, and the rest within 50 weeks." So the customer then orders 100x chips, hoping to get a 10x allotment, after which they cancel the rest of the order. But suppliers must be catching on.

A reader comments:

Sounds like how the Street allocates hot deals. The “pad-my-order-by-a-factor-of-10” move can’t help but to attract attention on the syndicate desk… and the result rarely benefits the customer.

A reader adds:

This has been my base case for some time. Interestingly, I get the sense that complacency is increasing lately, which us odd.

I expect a deflationary shock from overproduction within 24 months, globally synchronized. The delay us from supply chain snafu’s continuing for about another 18 months.

The difference between this and the diamond is deliveries being made and a simultaneous demand drop (ie they get their increased orders).

Hybrid system in time models are rolling out still.

Pamela Van Giessen writes:

This is not rocket science or even dismal science.

Quit testing healthy people for covid so companies that engage in non-Zoom activities can work at capacity and people aren’t "scared" to be around other people. We are still testing well over 1M and sometimes 2M people daily. ~2.5M people were unable to work between June-Sept because of covid. Since there weren’t that many sick people the bulk of them were out of work due to covid related quarantines. And I can promise you they weren’t the zoom class. Supply issues and inflation last as long as covid is a 24/7 threat that "must be conquered."

Our World in Data: Daily COVID-19 tests: USA

Yes, hoarding makes the problem worse but that will evaporate in 2 seconds once we have reliable supply.

Last week I saw a man on a bike wearing a mask in Park County MT where we have nearly 3000 sq mi and a population of ~16k. No helmet but he had a mask on. I should have snapped a pic as it was a perfect illustration of the brainwashing insanity that plagues our economy and health right now. The vaccines may prevent serious illness/death from covid but they don’t seem to be good for much else be it the supply of canola oil, engines, or other health conditions/injuries, etc.

Duncan Coker writes:

The reformers always make the assumption that supply will just naturally bubble forth like a spring constant and unaffected by the world around, be it for labor, capital, services, products. It is assumed no incentives apply and the curve is a vertical line stretching to the the outer limits of the universe. However, this assumption is always wrong and being tested right now.


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