Jim Bianco Profile picture
Jan 6, 2024 26 tweets 11 min read Read on X
1/23

A long 🧵on the biggest economic issue not being discussed ... global shipping problems and potential return of goods inflation.

Below uses IMF Port call data on shipping traffic (via ship transponders and satellites).



@mercoglianos @johnkonradportwatch.imf.org/pages/port-mon…
2/23

The Bab el-Mandeb is the 16 miles between Yemen and Djibouti, connecting the southern Red Sea with the Gulf of Aden.

This is where the Houthis are causing all the trouble.

BTW, Bab el-Mandeb roughly translates into "Gate of Tears" or "Gate of Grief."

How appropriate! Image
3/23

Between 12% and 15% of world shipping traverses the Red Sea. The Houthis are making an impact.

This chart shows how the volume of trade has collapsed. Updates should show it has fallen further.

FYI - March 2021 was Ever Given getting wedged in the Suez Canal. Image
4/23

High-value cargo ship traffic is down 50% from late November.

Shipping insurance does not cover war risk; that insurance is now up 300% to 500% (0.2% to 0.7% of the value of the ship/cargo).

It is too expensive and risky to travel via this route. Image
5/23

Tankers are impacted, but not to the degree that cargo ships are disrupted.

The Houthis are attacking cargo ships, not tankers. Image
6/23

The Suez Canal is at the (northern) top of the Red Sea and connects it with the Eastern Mediterranean Sea. Image
7/23

This Suez Canal is one of the most important shipping lanes in the world, if not the world's most important.

We are also seeing a drop off in shipping volume moving through it.

(Not as much as the Bab el-Mandeb as the Saudis have ports in the middle of the Red Sea.) Image
8/23

Overall, ship traffic through the Suez is down about 20 ships a day in the last 3 weeks. No container ships are in the Red Sea.

The Egyptians charge a $500k toll to pass through, so they are losing some $10m/day.

There have to be unhappy people in Cairo. Image
9/23

So, where are the ships going?

Around Africa and the Cape of Good Hope.

(Note Durban on the map) Image
10/23

From Asia, going around the Cape of Good Hope (red), versus the Red Sea/Suez (green) adds about 10 days and 3,300 miles to a one-way trip. Image
11/23

Ships are now reaching the Cape (Dec 25 to Jan 2 labels).

This number is expected to spike much higher in the coming days. Image
11/23

When they get there, they have to refuel in Durban, SA.

Refueling or bunker prices are skyrocketing to 6-year highs in anticipation of demand.

The facilities were not built for the huge armada heading its way. So, congestion delays.

oilmonster.com/bunker-fuel-pr…
Image
12/23

In addition to these shipping problems, there are continuing problems in the Panama Canal.

The Canal uses a series of locks and draws water from the lake Gutan. Image
13/23

Every time the locks are used, they empty the equivalent of 400 swimming pools into the ocean.

Combine this water loss with the ongoing drought, and Lake Gutan is at its lowest in years.

(Cannot pump salt water back into a freshwater lake.) Image
14/23

The lake is below the levels where the Canal can operate at maximum capacity. Image
15/23

Consequently, the number of ships passing through the Canal is at COVID shutdown levels of 2020 (black line).

And many of these ships are not fully loaded to keep their drafts shallower. Image
16/23

There are several shipping choke points around the world.

Much of the world's shipping travels through one of these points. Image
17/23

Add it up, and the number of cargo ships traversing all these choke points is at a three-year low.

Why? They are all on the high seas, taking longer routes to get to their destinations. Image
18/23

And the amount of IMPORT cargo reaching all worldwide ports has been plunging the last few weeks.

Currently, import volumes are as low as the COVID shutdowns. Image
19/23

70% of all shipping is on long-term contracts ... a shuttle between ports (Asia and Europe).

If they have to go around Africa, that adds 20+ days to the route.

So, if a ship can make six runs yearly, the extra distance means it can only do 4 or 5 runs yearly. Image
20/23

To make up for this shortfall of runs, excess shipping capacity is contracted on the "spot" market.

We have seen a massive spike in "spot" shipping rates in the last week (bottom panel). Image
21/23

What happens when a ship docks in port? Those 15k boxes (TEUs) are unloaded.

They are put on a truck or rail and sent to an unpacking center where the containers are emptied.

Then, they are put on another truck or rail and sent to distribution centers.

From there, the goods are distributed all over the country to those who purchase those goods.

This is a massive logistical undertaking.

What makes it work is predictable schedules.

Now that ships will be weeks late, the logistical network will get out of balance, and delivery schedules will be a mess for months.

We will see this again?Image
22/23

Leading to goods inflation again?

See what goods inflation did into late 2022 when supply chains were messed up in 2020 and 2021. Image
23/23

Goods are fungible. They will be diverted from the US if they get higher prices in Europe.

So yes, if these shipping problems persist, they will impact the US.

This could disrupt the "last mile" to 2% inflation and many Fed rate cuts in 2024.
Bonus

Why doesn't the US Navy end the Houthi threat to shipping?

That involves picking a side in a Sunni/Shiite Arab civil war and the potential for civilian casualties.

Very tricky politically.

What about getting more involved in "defensively" protecting ships.

This means an open-ended commitment to using weapons that cost millions to stop Houthi weapons that cost thousands.

The US tried to get other countries to sign up to help (Operation Prosperity Guardian), but that effort has yet to be successful.
I got really good feedback on this thread. I'm glad it was snowing in Chicago yesterday, which kept me inside to finish it.

One follow-up. The problem is shipping, not "stuff"(goods).

In 2020/2021, the problem that led to the rise in goods inflation (chart below) was not a lack of stuff.

The problem was it was in all the wrong places.

* In China, in the shipping department of its manufacturer

* In a container anchored off San Pedro Bay, wait for a berth in the port of LA or Long Beach to unload

* in a stack of containers waiting to be unpacked in the yard of the port.

* In a distribution center because it arrived weeks late and had no delivery scheduled (because it missed it).

And remember, a lot of "stuff" is not end-user consumer goods that go straight to the shelves. It is parts and supplies that go into other products.

So even though US car production slowed from 209K in July 2020 to 84k in September 2021, all the parts to make 200k cars every month existed, they were all in the wrong places (see the list above). This is why production slowed. The Achilles Heel of "Just-in-Time."

Goods inflation spiked (chart below) because a lot of stuff has inelasticity. This is a fancy economics term, meaning you want it now and will pay up to get what is available.

This is why cars were trading well over sticker price in 2021; you needed one now and were not going to wait months or a year for all the stuff to get to the right places so manufacturing schedules could return to normal.

The current problems with shipping described in the thread above are worrisome. Are we about to have another round of stuff all in the wrong places? And when that happens, will people start paying up to get what is available, a.k.a. goods inflation?

With stock and bond prices rallying hard in the last few months, they have profits they can use to pay up.

The thread above shows that the shipping problems are a couple of weeks old. Tell me how long this disruption will last, and I'll tell you how bad goods inflation will get.

If it ended tomorrow, the answer is not that bad. But it does not look like it is ending tomorrow, and no apparent solution to getting stuff to the right place on time is currently visible. That visibility will come; these issues will not last forever.

How long will it take?

@mercoglianos @johnkonradImage

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More from @biancoresearch

Oct 20
1/5

Over the weekend I posted the thread below noting that liquidity was getting “worrisome.”

On Thursday, SOFR was 4.30%, for a spread over IOR of 12 bps (the widest such spread since March 2020, not shown).

(All this is explained in the reposted thread.)
2/5

This morning Friday’s SOFR was reported at 4.18%, down 12 bps. (SOFR is reported every morning for the previous day.)

So, is the liquidity problem now over? Not exactly.

Here is a version of the last above, but it only shows the last 6 months, and the SOFR/IOR spread in the bottom panel is daily (not a moving average).Image
3/5

See the average in the first (repost) chart above, the SOFR/IOR averaged -8 bps back to 2022. See the chart immediately above, the SOFR/IOR averaged -5 bps.

A “normal” liquidity environment is one where the SOFR/IOR spread is around -8 to -5 bps. See the last five or six weeks, lots of “green bars” (positive SOFR/IOR spread). With some “red bars” interspersed in between. In Wall Street parlance, this spread “random walks” so look to the larger trend, not day to day movements.

What the larger trend shows is this measure of liquidity is still “worrisome.” Not a crisis, but worrisome. And note that over the last few months trend is moving toward larger green bars.
Read 5 tweets
Oct 18
1/6

Are Banks Having a Liquidity Problem?

tl:dr, Liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

When the financial plumbing gets stressed, it is when bad loans (aka "cockroaches") get noticed.

(long thread, tried to write it so "normies" can follow.)
---

Wall Street is famous for diagnosing symptoms, not causes. I believe they are doing this again with the banking issues of the last few days., I do not think this is a "cockroach" problem (bad credit/loans) waiting to get disclosed publicly.

It is a liquidity problem that makes the "cockroaches" matter.

Banks (all 4,000+) hand out a trillion in loans. So, they will always have "cockroaches." So, it is not an issue of whether cockroaches exist; they always do. Instead, it is the environment in which such disclosures are made. Does the market care or not?

Now it cares. Why?

---

@NickTimiraos said below:

How to define "temporary" and "modest." Repo rates in the last two days have moved up to the top of the fed-funds range and around 10 bps above IORB, but it's only been two days.

---

I would argue it has not "only" been two days; worsening liquidity in the funding market has been unfolding for weeks. It just got noticed in the last two days.

This chart shows Secured Overnight Financing Rate, or SOFR (orange), and Interest on Reserves, or IOR (blue). The bottom panel shows the spread between these two, along with some metrics (dashed line = average, shaded area = standard deviation range).

See the arrow; this spread (3-day average, so it is less noisy) has been tightening for weeks. This spread moved to positive territory in early September and has remained there for weeks. The last time it was positive for this long was in March 2020 (not shown).Image
2/6

A positive spread is typical around month- and quarter-end "window dressing," when financial institutions need to report their positions and want to show conservative cash positions. Now it has been weeks, and it is in the middle of the month.

This chart shows that liquidity has been worsening for weeks. It was two days ago that it finally got noticed.

But note that Jay Powell noticed it, because in his speech to the NABE Conference three days ago:

Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.

SOFR replaced Libor (London InterBank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get iInterbank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get it) for overnight loans collateralized by Treasury Bills) on overnight loans collateralized by Treasury Bill ("Secured"). So these loans carry no credit risk. They are compared to the IOR rate, which is the interest rate the Federal Reserve pays banks on their reserve balances. This means that the spread between SOFR and IOR is purely driven by supply and demand. SOFR comprises three components.

* General Collateral repo Loans
* Tri-party repo (biggest part)
* Fixed Income Clearing Corporation (FICC) cleared bilateral repo

As the bottom panel shows, the SOFR market is now $3 trillion of overnight loans a day. It has doubled in the last two years.

The SOFR market has never been bigger (strong demand), and spreads are moving higher (insufficient supply).Image
3/6

In a normal SOFR market, when the balance between supply/demand is maintained, SOFR loans should trade at a slight discount to IOR rates (see the average and standard deviation range in the bottom panel of the spread chart in the first post). This is because IOR should act as a ceiling on money rates. Banks will not lend out below the IOR rate. Why should they when parking money (reserves) at the Fed offers a better rate?

In a normal market, non-bank (broker/dealers, money market funds, and Government-Sponsored Enterprises, or GSEs, etc.) with money to lend, who cannot park it at the Fed to get IOR rates, will offer it at slightly lower than the IOR rate to anyone that needs cash (to settle trades, needs to put up margin on derivatives, or money for other transactions). They will offer a better deal than IOR, so they do not have to compete with banks for interest on their cash.

Typically, eight basis points below IOR will do it (as the bottom panel shows in the first post), which is the same spread Dallas Fed President Lorie Logan noted in Timiroas' tweet above. Note that before the Dallas Fed, Logan ran the NY Fed Open Market Desk.)

In other words, a negative spread indicates that funding markets are "liquid" and functioning normally. Conversely, an uptrend in the SOFR/IOR spread, which tips to a positive spread, indicates that the supply of cash (aka liquidity) is falling behind the demand for money. So the price (rate) is rising relative to the IOR benchmark.

Restated, liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

Remember, financial institutions are highly leveraged; these seemingly little moves can have a significant impact on the P&L and capital ratios.

Why Now?

Why is this happening now? And why should we believe the uptrend in SOFR/IOR will not stop its two-month uptrend?

The answer to the first question is Quantitative Tightening (QT). This is the Fed pulling out liquidity since 2022 by reducing its balance sheet.Image
Read 6 tweets
Oct 6
1/4

JP Morgan has identified 41 "AI-Related" stocks.

As this chart shows, they are now 45% of the S&P 500. Image
2/4

A list of the stocks Image
3/4

ChatGPT was released on November 29, 2022.

Since this date, these 41 stocks have accounted for 70% of the increase in the S&P 500's value (blue). The other 30% came from the remaining 359 stocks (orange) Image
Read 5 tweets
Sep 1
1/6

Recessions and financial crises can have a profound and lasting impact on an economy for years to come.

We had both in 2020. This changed the economy.

Change does not mean worse or dystopian. It means different. This economy differs from 2019 (pre-COVID).
🧵
2/6

Following every recession, the tenor of inflation shifts.

The current post-COVID recovery, as shown in blue, indicates inflation has reached a significantly higher level, with more volatility (wider standard deviation) than during the post-financial crisis period. Image
3/6

Something more may be at play, as larger trends in inflation seem to have shifted with the COVID pandemic. Image
Read 6 tweets
Aug 31
1/8

In this post about rising inflation, some replies suggest that housing prices are falling, which will help hold down inflation.

The problem is that most metrics are saying home prices are booming to all-time highs. This is why we have an "affordability" crisis.

🧵
2/8

Case-Shiller National Home Price Index.

All-time high. Image
3/8

Median home price

Seasonally adjusted, all-time high Image
Read 8 tweets
Aug 17
Home prices have been 🚀 for years.

The problem is not mortgage rates, it's inventory (not enough).

Cut rates and home sellers raise prices, and monthly payments remain unchanged. The affordability problem remains. Greedy boomer homeowners get richer.

How to fix affordability?

Reduce zoning and building regulations to increase inventory. The problem is that selfish boomer homeowners wield these laws to restrict supply and drive up the price of their homes.Image
The Atlanta Federal Reserve calculates a Housing Affordability Monitor.

The median income in the United States (blue) and the income needed to qualify for a mortgage (detailed below the chart). The bottom panel shows the difference.

At 58%, this means one needs 58% more than the median income ($ 83k) to qualify for a median mortgage ($ 130k).

This is a new record, even greater than the peak before the housing crash from 2007 to 2009.

Home prices are too high. Cutting mortgage rates will only incentivize home sellers to increase their asking prices, and the problem persists.

We need more supply, that is what the record "unaffordability" is saying..Image
A home is considered “affordable” if it costs less than 30% of a household’s income.

The following chart indicates that the average home in the United States now costs 47% of the median household’s monthly income.

An all-time record, surpassing the bubble peak in 2006 before the housing crash.Image
Read 4 tweets

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