The Breakdown - Supply Chain Says No Christmas Presents or Trees This Year

Episode Date: October 9, 2021

On this edition of “The Breakdown Weekly Recap,” NLW looks at supply chain disruptions, including: Natural gas shortages across Europe and the U.K. that could impact electricity prices and even the global food supply Numerous dislocations that are increasing the price of Christmas trees and reducing the availability of presents  Shipping port issues outside of Los Angeles  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Joe Raedle/Getty Images News, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, October 9th, and that means it's time for the weekly recap. Imagine it's the holidays this year, and you're eating too expensive turkey in a dark house next to a too expensive. tree, without half the presence under it. Sound far-fetched? Let's talk about how that might come to pass. As you guys know, each week with the weekly recap, it's either something that is a true recap where there's lots of topics that I hadn't got to over the week or I need to bring everything

together, or it's just some topic that I think is really important but I didn't have a chance to hit. This week is definitely the latter. And so today we're talking about supply chain issues and what they might mean for the coming months. This week had a ton of chatter about these issues if you looked at more mainstream or macro sources, and one of the biggest had to do with natural gas. The Wall Street Journal writes, Natural gas shortage sets off scramble ahead of winter,

and this is an immensely complex story that I'm going to do my best to give a true TLDR. Here's the shorthand. There is a natural gas shortage across the Eurozone, but it is particularly acute in the United Kingdom. If this shortage doesn't break, it's forecast to come to the U.S. during the winter. It's showing up first directly in natural gas prices. The price of gas in the UK went up 40% in a day this week, which is just absolutely wild.

After showing up directly in natural gas prices, it shows up in the price of electricity, and, by the way, the supply of electricity. Liquefied natural gas is used during peak electricity periods to supplement the electrical supply, and there are already some that are forecasting brownouts and blackouts in the U.S. during the winter. But there are also more effects. If we continue to see gas and by extension electricity shortages, we could be in for factory or industrial closures that are due to the increased cost of electricity, making it not economical to operate anymore.

The first shoot-a-drop on that front is a concern. one, and it's in fertilizer. U.K. fertilizer plants are already shutting down, and while that may not seem like it affects you day-to-day, guess what fertilizer is really important for? You got it. Food production. A natural gas shortage today turns into an electricity shortage tomorrow, turns into it not being economic to run fertilizer factories, turns into a global food shortage, and you see how this goes. Glenn Wyden, who's an Australian board member for numerous resource companies tweets, A cargo ship of liquefied natural gas cost 281 million.

It was just 10 million in 2020. Soaring international gas prices have triggered a near 30-fold spike in the value of a single-spot cargo ship of LNG to more than 205 million in a price surge that delivers a windfall to gas producers. So what is going on with natural gas? Well, part of it is political issues with Russia. Russia and the EU are in a regulatory fight over a pipeline between Russia and Germany, called the Nord Stream pipeline. Anhele Merkel was under pressure last year to sanction Russia around the regulatory approval of that pipeline

in response to the poisoning of Russian opposition leader Alexei Navalny in 2020. Navalny wrote a thread on Big Tech's complicity in Russia that I read a couple weeks ago on Long Read Sunday. Meanwhile, Russia is being criticized for limiting the supply of liquefied natural, gas, although they deny this, but still, it's pretty clear that Russia is in the conversation. From Bloomberg yesterday, Russia ready to help stabilize global energy markets, Putin says. Quote, on a chaotic day that saw European benchmark gas surge 40% in a few minutes, Putin eased prices by offering to help stabilize the situation. Russia could potentially export record volumes of the vital fuel to the continent this year, he said. Quick certification of the controversial Nord Stream 2

natural gas pipeline would be one way to achieve this, according to Deputy Prime Minister Alexander Novak. Let's move over to the United Kingdom because that's where a lot of this pressure is already starting to be felt. As I said, gas prices surged 40% in one day this week. A couple of headlines for context in the UK. Quote, up to 1.5 million more could struggle to pay energy bills next year. End quote. UK's unavoidable loss gas prices push smaller utilities to ruin. And then There's this piece from The Guardian, which writes, in the midst of a global energy crisis, Europe is preparing to enter the winter with its lowest reserves of gas in at least 10 years. For the UK, which has some of the continent's lowest gas storage capacity, the drawing in of

colder months has left households even more vulnerable to the risk of shortages. The UK's stores hold enough gas to meet the demand of four to five winter days or just 1% of Europe's total available storage. The Netherlands has capacity more than nine times the UK's, while Germany's is 16 times the size. John Underhill, professor of geology at Herit Wyatt University in Edinburgh, says, short of the lights going out, cookers failing to light and radiators going cold, this may be as close as we get to the Black Swan moment where people realize where our energy comes from and our need to ensure there is sufficient homegrown supply, reliable import sources,

and backup to avoid shutdowns and other unintended consequences for food supply chains and the like. The Financial Times, meanwhile, is focused on the fertilizer aspect, writing storing gas prices have forced the closure of two large UK fertilizer plants, sparking warnings of a looming shortage of ammonium nitrate that could hit food supplies as record energy prices start to reverberate throughout the global economy. NIDIG sponsors this podcast, and they also put out a really good newsletter, focused purely on Bitcoin. If you want insights into what's driving market moves, regulatory changes, and the metrics that

deserve your attention, sign up at nidig.com slash NLW. That's NYDIG forward slash NLW. There is a market structure dynamic to this whole situation as well, and this deserves a full explanation, but again, let's just do a little TLDR. The Intercontinental Exchange, which owns, for example, the New York Stock Exchange, has been standardizing and liberalizing the global liquefied natural gas or LNG markets for some time now. When times are good, this is great.

It means additional liquidity, price discovery, and theoretically because of that, cheaper end prices to consumers. However, when markets aren't working as well, it can add a new source of stress, which is financial institutions piling into the market, adding pressures that create short squeezes and massively driving the price of this incredibly important commodity higher. That sort of short squeeze is lovely when it's GME or some crypto asset, but less so when it is a key global commodity that on the other side of being too expensive

means people could starve. Javier Blas, the chief energy correspondent for Bloomberg, writes, a reminder that during a supply crunch, natural gas prices go parabolic, reaching whatever prices needed to curtail demand. In Oklahoma last winter, that price was 999 per million BTU. So some could say that actually current UK prices are cheap. I said the UK government mostly as I call London home, but Brussels and every other European capital should be worried too. Continental European gas prices are the same, inflicting a massive inflationary shock on the economies. Industrial production will be curtailed.

The natural gas story has definitely been the supply chain issue that people are most focused on this week, but here are a sample of headlines showing that there is another story that people are getting nervous about. Recode writes, supply chain havoc is getting worse just in time for holiday shopping. CBS writes, the shop now for the holidays course grows louder amid supply chain bottlenecks. And Fox Business says Costco, other retailers impacted by fewer Christmas trees this year, because of drought and supply chain shortage. Reco does a nice summary saying, retailers don't anticipate that supply chain issues, including the global semiconductor chip shortage, are going away anytime soon. In fact, it looks like they're getting

worse. A supply crunch for petrochemicals, which are used in everything from paint to plastics, has raised the prices on all kinds of products. Meanwhile, an emerging energy crunch in China has led to power cuts that have closed factories and disrupted daily life there. These recent developments are compounding the existing problems with the global supply chain and making logistical bottlenecks worse. Combine that with an ongoing shortage of shipping containers and truck drivers, and the end result is a huge slowdown in the delivery of goods. One interesting measure that I've found is the retail inventory to sales ratio, so this is the amount of supply versus how much is being purchased. For a decade, it hovered between 1.4 and 1.6, so there was 40 to 60% more stuff than was being sold.

That ratio is now perilously close to 1. There is obviously a ton of, to unpack around these sort of supply chain issues and why they're happening. Part of it is that logistics was already an aging area of the economy. Automation meant that young people weren't being encouraged to come in, and right now we're seeing at best a three to six month training gap with new hires, and many of the training and accreditation providers for the logistics industry went under because of the pandemic. Another part of this is issues with ports. Fox Business writes record backlog of container ships hitting the U.S.

Shipping delays have been mounting and cargo has been piling up at Caldiv. California ports as Nike deals with not having enough sneakers to sell for the holidays. Costco reimposed limits on paper towel purchases and prices for artificial Christmas trees have jumped 25% this season. Tens of thousands of containers are stuck at the ports of Los Angeles in Long Beach in California, which moved more than a quarter of all-American imports. In fact, the ports in Southern California recently broke several records for the number of ships they had at shore, as well as for the number of ships waiting to dock.

To give some numbers to this, at peak of crisis, 500,000 containers were stuck on more than 70 ships backlogged outside of Long Beach. The main China-to-L-A route shipping rates got to $20,000 per container, which was 10 times the $2,000 per container that was the case before the pandemic. Futures currently price them coming down to about $5,000 by the middle of next year, but that's still a 250% increase. There is, of course, a ton of chatter about this on Twitter. Lance Roberts, the chief strategist at RIA Advisors, writes the supply chain malfunction will eventually lead to deflation. Manufacturers are now starting to build excess inventories to deal with disruption. When fixed, the excesses will become gluts. So basically, Lance is describing a period of rapid and short-term

inflation, followed by deflation as all of that excess supply goes nowhere. A.G. Trader writes, let's see, 70 ships, about 12,000 40-foot container equivalence on each ship, each container costs about 20,000 more than usual. That's how much inflation we're importing, or profits being taken off the top, you choose. This will continue for the rest of this year. and well into next. Now, I'm never sure how deep to go on this sort of macro, but if this is interesting, let me know so I can bring people in who are much better suited to talk to you about it.

I also think that, as you can tell, these things are immensely more complex than the sound bites, but the soundbite is that if people discover this holiday season, that they're paying twice as much for a turkey and their Christmas tree, only to be able to not buy half the presents they want at any price, and then have to open them in the dark, The collective psychology and perception of inflation is going to be something to behold. Let's hope we don't get there.

Until tomorrow, guys, be safe and take care of each other. Peace.