Over the last week, the UK has gone through a strange experience: no fuel at petrol stations. In an affluent society accustomed to abundance, the shock is real. Mad Max is in the air, with scents of the famous guzzolene tanker attack scene in the first movie sequel.
Far from being limited to Great Britain, supply chain issues have emerged as a global phenomenon. Cascading problems have led to this sorry state, starting with an over-optimized supply chain shaken by the Sino-American trade war (see ‘A Crisis Within The Crisis’).
Then came: the disorderly collapse of aggregate demand and supply due to COVID-19 (early ‘20); an episode of compulsive buying disorder from the West under lockdown, with a focus on housing improvement and electronics (mid ‘20); Clogged up ports leading to a global shortage of containers (late ‘20); an economic recovery adding to the bottlenecks, with many services (including trucking) to be brought back from the dead (early ’21); a Suez Canal incident worsening just about everything (early ‘21); a new COVID wave leading to ports closures in China (mid ’21); and factories in Vietnam shutting down due to the pandemic (just now).
At present, IHS Markit is expecting the supply chain woes to continue well into 2022 and perhaps even 2023.
In ‘Scarcity and Hoarding’ (1975), the authors analyze the collective hoarding behavior of the US population in 1974 on the back of the OPEC oil embargo. They observe that the sheer perception of scarcity is sufficient to lead to hoarding, which drives scarcity and further hoarding. Furthermore, it is challenging to fight hoarding hordes since shortages are amplified by the media, with repeated reassurances from authorities only deepening concerns.
Hoarding is highly damaging to the economy. First, it drives up prices for selected goods and commodities to central bankers’ dismay. But instead of bringing supply and demand in a new equilibrium, price increases tend to compound the issue by signalling to buyers that the supply constraints are expected to last. Second, customer loyalty goes to the basement during shortages, making vast market share swings possible, thereby destabilizing industry structures.
Finally, and perhaps most damagingly from a macroeconomic perspective, scarcity and hoarding create a psychological pre-condition for widespread hoarding across products and their respective value chain. In 1975, a gas shortage led to toilet paper, tennis balls, and tomato paste shortages.
Based on these observations from another time, the global economy might be entering a phase during which shortages may occur in unexpected industry segments, out of the blue. This unstable environment has a direct impact on valuation levels, including in an M&A context. Forming a view on normative pricing increases, normative input costs, and normative working capital levels would become a serious challenge.
While the supply chain issues will be eventually fixed, the economic blur they generate seems to be underestimated. Compounded with a plateauing macro momentum, potential central bank policy mistakes at a delicate time, and Washington acrimony, they will contribute to macro- and microeconomic uncertainty in the coming months. The third quarter results may only be the first to be impacted by surprises.
Hopefully the route ahead will not be as treacherous as Mad Max’s ‘Fury Road.’
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