inflation Archives

If you’re involved in global shipping or even a consumer who recently purchased furniture or other bulky items, you’re well aware of the sorry state of global logistics. The pandemic and its knock-on effects have created global shipping chaos and driven astronomical shipping costs. While we are all enduring the consequences, the big question now is when will global logistics return to normal? Will it happen after peak season this year? I am less optimistic about a quick turnaround. Here are three data points that highlight why I believe the current situation will drag on longer than anticipated.

Inventories are way down and retailers want to hold more of it in the future.

The pandemic created a unique situation. Manufacturing and distribution capacity declined, but consumer demand didn’t. Retailers have seen their inventories cut as consumers continue buying, but they cannot replenish their stocks. According to the US Census Bureau, the inventory to sales ratio is down more than 25% since the beginning of the pandemic (see Figure 1).

The chart also shows a general decline over 2 decades in the inventory to sales ratio, which is a testament to retailers and their logistics partner continually improving their supply chain performance. That trend is about to change as many retailers are deciding to hold more inventory as a hedge against greater supply chain uncertainty. So, what does that mean? Retailers will be buying more than what they need in the short-term to build their stocks to larger acceptable levels. This will continue to put more pressure on supply chains and logistics operations—not reduce it—even after the peak season ends this year.

Figure 1: Retail Inventory to Sales Ratio

Inflation is up, but still viewed as manageable and history says it can go higher before stunting demand.

The Federal Open Market Committee (the Fed) just released its revised forecast for inflation. The forecast did rise by 1% to 3.4% for the year; however, that is more than manageable and unlikely to suppress consumer demand as longer-term inflation is being forecasted at 2%. In addition, if inflation were to go higher, that wouldn’t necessarily mean that US import volumes would decline and take pressure off the current situation. The last time inflation breached 5%, as it did in May, was in August 2008 when it reached 5.8%. As you can see from the US maritime import chart (see Figure 2), import volumes continued to increase.

Figure 2: US Maritime Import Volume

Source: Descartes Datamyne

The economy continues to reopen and the Fed expects robust job creation through the fall. This is a good news/bad news story. As states continue to relax or eliminate COVID-19 related restrictions, parts of the economy such as restaurants, tourism and other service industries will return to more normal capacity, increasing demand for goods many of them import. The Fed is also predicting robust job growth into the fall. The continued opening up of business will drive job growth and consumer spending as those hit hardest by the pandemic have more cash to spend. Again, more pressure on global supply chains.

The protracted situation means that short-term plans that increase costs but get goods to market may make more sense than waiting for the global shipping situation to get better on its own. However, retailers and other importers should evaluate their supply chains now for the alternate sources and paths their goods take to get to market. This evaluation should take into account the impact that highly concentrated and congested trade lanes have on the risk to fulfilling customer demand. For example, the concentration of manufacturing in countries such as China and the use of ports like LA/Long Beach. We can see today the delays that are happening and it won’t take much to see additional delays at some level with disruptions in the future. Now is the time for importers to engineer the risk out of the supply chain.

The past year has been one of exceptional volatility – volatility for personal lives while dealing with COVID restrictions, volatility in job markets due to government-mandated shutdowns, and volatility in markets as economies collapsed and began to rebound. After a drop of over 10,000 points from February to March 2020 at the onset of the COVID crisis, the Dow Jones Industrial Index entered a strong recovery. Investors flooded back into the market, driving prices to new heights in early 2021.

Much of this new investment came as investors responded to positive news about the launch of COVID vaccines and the prospect of world economies reopening. Markets began to show the effects of herd mentality investing as investors pursued profit opportunities. While herd investing may lead to profitable spikes, it is also capable of causing sudden drops with accompanying losses for the herd.

Understanding the herd

Humans are naturally prone to herding. While perhaps originally a protective measure against predators, herding spread through every facet of human life. Throughout their lives, people join any number of herd groups – social groups, religious groups, political groups, sports groups and others. They rely on the mutual support found in these settings and the information sharing that occurs in the group.

Herd investing behavior has many underlying causes. Some seek to achieve the same wealth and status as the successful investors they see in the news. Many people who know little to nothing about investing but who also want to take advantage of investing in markets rely on the herd to provide them with information about investment opportunities. Many investors just have FOMO – the fear of missing out on a good thing.

Frequently, it is uninformed investors, and those with the most to lose, who form the bulk of the investing herd. Trying to get rich quickly by following the example of successful traders, they wind up losing everything.

But even with post-COVID volatility roiling markets, there are good opportunities in the markets for informed investors who pursue sensible investing strategies.

The dangers of following the herd

Unfortunately, herd mentality all too frequently results in the herd running off a cliff together. The history of markets is replete with examples of investors driving markets drastically upwards, only for herd panic to crash those markets.

The dangers of herd investing first appeared in the 17th-century tulip buying craze in the Netherlands. Tulipmania, as it is now known, was the first market bubble. Just before the bubble burst, the most sought-after tulips were selling for upwards of 5000 florins.

To put this in context, at the time, you could buy four oxen (and not just any oxen, fat ones) for 480 florins. A thousand pounds of cheese was 120 florins, and the equivalent of 65 kegs of beer was 32 florins. The cost of tulips grew to exceed annual salaries, and the most expensive tulips cost more than a house.

Using margin contracts, buying on credit, leveraging assets, investors did whatever was needed to get their hands on tulip bulbs. But prices began to fall, and the market quickly and completely collapsed, leaving many investors bankrupt.

History has repeated itself several times since the beginning of the 20th century. The Great Depression of the 1920s, the dotcom bubble in the late 1990s and early 2000s, and the subprime mortgage crisis culminating in the housing crash of 2008 are all examples of herd-driven bubbles.

Herd activity drives market volatility

Herd investing appears to be increasingly driving market volatility. The past year alone has seen several glaring examples of herd-created bubbles.

The herd creates crypto bubbles

A more recent example of herd investing is the explosion of interest in the cryptocurrency markets. From October 2020 to April 2021, the price of Bitcoin increased sixfold, from $10,000 to over $60,000. Since that time, it has lost a third of its value. And this is the second crypto bubble in less than five years. In early 2018, Bitcoin lost 65% of its value in a single month. By the end of 2018, cryptocurrency markets had seen a larger percentage decline than the stock market did during the dotcom bubble.

Cryptocurrency is an attractive investment. But it is notoriously volatile, and the crypto investing herd quickly responds to even minute suggestions about price direction. Tesla founder Elon Musk’s support for dogecoin helped its price skyrocket in early 2021. But when he made a joke on Saturday Night Live about dogecoin being a “hustle,” the price quickly plummeted.

Robinhood and GameStop

The GameStop price rollercoaster in early 2021 is a particularly alarming example of herd investing because it involved an intentional manipulation of the herd. A group of investors decided to punish investment firms that were relying on shorting stocks by driving up the prices of those stocks. They then promoted the stocks on an investment board on Reddit. GameStop became the poster child for their efforts, but other frequently shorted stocks also began to rise.

GameStop’s price skyrocketed as social media-based investors followed the Reddit group. Trading volume increased as well, with GameStop becoming the most traded stock on the S&P 500 at one point. Once again, Elon Musk got involved, sending out a tweet about GameStop that exacerbated the frenzy, causing the price to nearly double shortly after the tweet.

GameStop quickly fell again after the Robinhood trading platform and others suspended trading. The fallout from this event is ongoing.

Fears about post-COVID inflation

At present, the herd is spooked about the prospect for significant inflation as world economies rebound from the COVID crisis. Consumer prices have been rising, even more so than expected at this point in the recovery. And, despite reassurances from the Fed that the inflationary spike is temporary, the fears of the herd have made themselves known in the markets.

The fastest increase in the consumer price index in nearly fifteen years caused selloffs in the markets. At the same time, yields on treasury bonds have been rising. Home prices are also experiencing rapid upswings, leading to fears of another housing bubble.

The herd may be edging towards its next cliff.

Don’t get trampled by the herd

Knowledgeable and prudent investors can still take advantage of hot market opportunities while avoiding suffering substantial losses by simply following the herd. Portfolio diversification is one important tool savvy should employ to counteract the effects of market volatility. Balancing risky herd-friendly investments with more stable options like bonds, mutual funds, or even gold helps portfolios avoid wild swings from market volatility.

There are also positive herd-style options, such as investment funds, that take advantage of the knowledge of investment experts. According to London-based financial advisor Alex Williams of Hosting Data, investment funds are a collection of capital that is owned by a conglomeration of investors.

“These investors collect shares together, while each member remains in full ownership and control of their own individual shares,” says Williams. “The benefit to investment funds is that you have a wider selection of investment options and opportunities. You can also get access to better management expertise and there’s less commission than you’d be able to get on your own.”

And for those investors who do want to rely on social media, like the Reddit GameStop investors, without risking the downsides of herd investing, there are more well-founded options. Social investing platforms (distinct from socially responsible investment platforms) allow inexperienced investors to benefit from the knowledge and insights of experienced traders through copy trading and mirror trading.

Conclusion

With a bit of effort and prudent selection of a range of investments, even the most novice investors can take advantage of a booming stock market while protecting themselves from the whims of the herd.

3 Reasons Why it’s Going to Take Longer to Unravel the Current Global Logistics Mess