Why US Ports Are Not The Problem

Americans are typically experiencing the "actually, it's not very transitory after all" inflation in two ways:

  1. More expensive every day goods, especially gasoline and some groceries and basic consumer items.

  2. Panicky news headlines around shipping and logistics delays leading to a scarcity of goods, especially those from Asia.

We have touched on this theme twice. Once in July to warn about delays in securing back to school supplies and again in early September to suggest that Halloween decorations and costumes could be harder to find - or arrive on time!

Now, the Biden administration has come to the rescue and announced a deal to keep the key US West Coast American ports open 24/7 in a bid to help alleviate much of the congestion and get ships unloaded and goods flowing.

So, are the holidays saved? Can we safely rely on our usual last minute approach to gift giving and the wonders of US online retailing and logistics to deliver the goods?!

A lot of happy holiday smiles may rely on this answer.

And? So, what is the likely outcome? Will this deal help things improve quickly?

The candid and not very inspiring answer is: probably not.

Well, that is disappointing, why?

The short summary is that the ports are also just the most conspicuous symbol of a far deeper problem.

The ports are not the tip of a larger iceberg. The ports are really the first in a whole pack of icebergs that are snarling the smooth functioning of the American (and global economy).

To be clear, the ports ARE backed up. The headlines are not wrong.

When we last wrote about the problem there were 73 ships at anchor waiting for Long Beach or Los Angeles and now there are 65 at the time of writing.

So an improvement but still really high, see here:

There are two remaining issues however:

  1. The ports are busy because of so many goods arriving, not because they are not functioning well.

  2. For a smooth functioning port in LA (or Long Beach) you need a well functioning global supply chain.

One underappreciated fact is that the ports have been setting records already.

In June, the Los Angeles port became the first in the west to process 10m container units in a 12‑month period. The Long Beach port will likely process more than 9m units this year, exceeding last year’s record of 8.1m units, the most in the port’s 110-year history.

This isn't too surprising when you look under the hood:

Despite the much publicized "24/7" headline the Long Beach port was already running 24/7 and the Los Angeles port was running 18 hours a day. So, this "deal" has been a marginal improvement at best.

Here is their already record setting pace of containers unloaded:

The other problem is that, when it comes to global shipping, it takes two to tango.

The vast majority of those ships waiting to enter the Port of Los Angeles have come from China. And as we covered last time we wrote on this topic, there are delays there as well. According to project44 - a very cool data firm specialising in supply chain data that we have referenced before - as of October 7 there were around 386 ships anchored and moored off Shanghai and Ningbo, of which 228 were cargo and 45 container vessels.

These are hundreds more than is typical for this time of year.

The lead times — or the time to go from China to the West Coast — are up more than 50% versus pre-pandemic.

See here:

Reversing this trend will not be simple.

The real underlying issue is the broader supply chain. Especially the labor market around that portion of the US economy.

You can unload (and reload) the boats but then what? The containers of goods need trucks and trains and there is a shortage of truck drivers to say nothing of warehouse staff and so the goods stay stuck in a huge stack of 40 foot "boxes" at Long Beach or Los Angeles (or wherever).

The average waiting time for ships to dock at either LA or Long Beach is about 10 days. And once they are unloaded, many of the containers will will simply sit there for a week or more before moving on.

It isn't much good having the port open at 3am if you cannot get any truckers to come and load their rigs at that hour.

Here are the rises in trucking rates showing that it is proving difficult to reverse the shortage. A rising trucking rate means there is not enough supply chasing too much demand.

Trucking profits will follow......

And here is the stagnant rate of loading railcars. So the ports are unloading as fast as they can but the containers are not going anywhere.

There is a severe labor shortage - including at the ports - but also all the way up the transportation and logistics supply chain. Fixing one portion of that chain helps but does not really resolve the other jams.

And this is why, from the outset of the inflation is/is not transitory debate we remained very skeptical of the consensus around the brusque "it will get smoothed out" from the beginning.

The reason was simple. The issue was never a single issue like the ports of Los Angeles or Long Beach.

The problem was a tremendous volume of goods being moved through the whole complex, massively interconnected supply chain that is struggling to function smoothly during a pandemic.

So, takeaways:

  • Move quickly on the holiday season shopping. Right now may be the wrong time to put up the bunting and tinsel but it could be the right time to check items off your list.

  • Buckle up and expect shortages of basic goods to continue to occur until these logistics can iron out the many kinks and adjust to the new realities of Covid, rising labor costs, and higher demand.

  • Expect higher prices. These will respond under demand begins to fall.

What about what to own in this environment?

We have spoken about energy and commodities in previous editions which are a different side of this same theme: surging demand and tight supply.

But what about transportation stocks? There are inexpensive and liquid transportation ETFs that continue to rise as the shipping prices adjust higher to cope with insatiable demand.

$XTN and $IYT are two pretty popular ones but there are others. As always, do your research but if you agree that these issues can continue into the new year you might want to explore exposure to this theme.

For now, the supply chain disruptions are not over and are starting to show up in some pretty surprising places....

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.

    Previous
    Previous

    WallStreetBets Nuclear Update: Are Nuclear Stocks Poised For Liftoff After COP26?

    Next
    Next

    The Perils of ESG Investing