Author: Philip J Palin

Optimism about omicron

Posted on by Philip J Palin

We are increasingly confident that omicron is highly contagious. From South Africa to Denmark the velocity of transmission has been a bit stunning. As early as today we may have the results of initial virological studies of omicron virulence (aka severity). As widely reported, so far the epidemiological outcomes of omicron are characterized by modest morbidity. It will take another week or more to reasonably estimate the efficacy of current vaccines vis-a-vis this new variant.

While we wait to learn more it can be worthwhile thinking self-critically about scenarios and options.

Today, let me be optimistic and assume that omicron is no-more (and maybe even less) virulent than the the Delta variant. Call me Pollyanna, but I will also assume that vaccines approved for use in the United States continue to be effective in significantly reducing the risk of serious disease and death (related). In other words, most Americans — even vaccinated Americans — may eventually be infected by omicron, but when vaccinated most of us (let’s say 80 percent of those vaccinated and boosted) will not experience health consequences requiring hospitalization.

If these very optimistic scenario elements were confirmed in the next two or three weeks, it would be one of the best Christmas presents possible.

And… roughly forty percent of 330 million Americans are not vaccinated. Less than 15 percent of US residents have received booster shots. But, continuing to be optimistic (and to make the math easier), for this scenario I will project a potential demand pool for US covid-related health care of only about 100 million. So far, of those infected with prior versions of covid, only about two-percent require hospitalization…

Hmmm… suddenly our scenario is less optimistic.

And… when I consider there are roughly four billion people on the planet who have not been vaccinated, the ongoing potential for transmission, reinfection, mutation, and further reinfection seriously challenges my optimism. Especially while we remain uncertain of omicron’s virulence and related vaccine efficacy, I can continue to generate various Panglossian justifications (“the best of all possible worlds”) (more). But more troublesome projections are equally or more credible.

If you can, please read today’s helpful analysis in the Financial Times: Omicron’s less severe cases prompt cautious optimism in South Africa. The chart below is extracted from this story. Given my preceding efforts to be optimistic, I view the outcomes below with considerable concern.

Wire-diagramming supply chain disruption

Posted on by Philip J Palin

On Sunday, December 5, the New York Times published online: How the Supply Chain Crisis Unfolded. Lazaro Gamio and Peter S. Goodman heroically provide a cause-and-effect overview. It is a helpful and constructive contribution. Anything written (other than λόγος (logos)?) is reductionist. I would have added a bit more related to congestion in China and friction in various freight functions after imports are discharged from ports. But given their achievement, this is a narcissism of small differences.

The New York Times has self-critically confessed that before 2021 it did not give much attention to supply chains. It has done a good job playing catch-up. Competitors at the Wall Street Journal, Bloomberg, Financial Times, and Reuters (among others) have a better bench and more depth of perspective. I have noticed, though, that the NYT often gives attention to fundamentals and key relationships that others (myself included) can take for granted, but are new to many general readers.

To see supply chains given sustained and serious editorial attention by all the business journals, Times, Post, Politico, The Hill, and even the New York Review of Books has — appropriately — altered expectations of the network’s performance and the supply chain profession.

Too early to decide

Posted on by Philip J Palin

So far the rate of increased hospitalization related to omicron in South Africa is negligible. This is certainly a better outcome than the opposite. This is also consistent with the original version of the virus and for Delta and for every other variant I have been able to track. In the vast majority of human infections, so far, covid is an inconvenience not a crisis. But — big but — the more contagious the version of the virus, eventually the more disease requiring medical care, and then (a few weeks later) the higher number of deaths. It is basically a numbers game and it has always taken some time — typically four to six weeks — for a highly contagious virus to begin finding those most vulnerable. Given these prior patterns, we should not assume a different outcome with omicron until more time has passed and more data are available.

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December 7 meta notation: Perception of reality is (I perceive) always partial. We are both constrained and empowered by experience, expectations, angle of observation, self-correction and much more. My angle on the pandemic is that of one who spends most of his time, activity, and thinking on the behavior of demand and supply networks. This is not always the most relevant and helpful angle for engaging pandemic problems. But this angle may help those with other perspectives more fully recognize the health care consequences of high volume, high velocity flow behavior. Large scale dynamic, non-linear flows are innately chaotic, but offer a kind of chaos in which relationships and feedback are reliable sources of adaptation and creativity. Upstream and downstream are not just connected but interdependent, especially (it seems to this supply chain guy) on the pull of demand. Given my experience, I perceive that many problems associated with local supply of covid-required healthcare will only be effectively resolved by managing global flows of covid-driven demand.

Port congestion update

Posted on by Philip J Palin

During the second half of November port congestion softened in East Asia. Given China’s pandemic protocols and the emergence of the new variant, this could be a brief pre-omicron pause. (more)

But US east coast ports — including sometimes struggling Savannah — are also seeing significantly improved flow. (More and more)

The situation at the Ports of Los Angeles and Long Beach continues to be very tight. While some measures of flow capacity have not gotten worse or slightly improved (more and more), velocity has not increased and volumes to unload continue to build.

Almost every major port has seen increased volumes (and shipping rates). As previously outlined, this reflects very strong and sustained US consumer demand that is apparently continuing. On December 3 the National Retail Federation’s chief economist reported:

… the ever-important Thanksgiving holiday weekend now helps to mark the holiday season rather than serving as the kickoff it once was. Consumers and retailers have both revised their playbooks and broken with previous traditions. With the momentum we’ve seen so far likely to continue, it seems probable that we will exceed our initial projection, which was made when the late-summer growth in COVID-19 was still a key factor. Rather than the growth of 8.5 percent to 10.5 percent over 2020 we expected in October, we now believe holiday retail sales could grow as much as 11.5 percent.

To further emphasize: The NRF projections for near-term demand are entirely consistent with demonstrated patterns of demand fulfilled. For several months through the end of October US retail sales have been one-fifth better or even higher than pre-pandemic, as demonstrated by the chart below.

Where all-time volume records are being broken to support this demand, increased friction has emerged. The problems at LA/LB are amplified by the preexisting proportion of total flows that depend on the neck of this hourglass. It is regularly reported that about 40 percent of total US imports are discharged at these neighboring ports. About 90 percent of East Asian imports flow through Southern California. Given the time and expense of alternatives (e.g., Ningbo to Los Angeles: 6548 miles versus Ningbo to Savannah 16,438 via Suez) — and the lack of any other Pacific port with close to comparable freight forwarding capacity — LA/LB remains the best choice even with the persistent pile-up.

The push of inbound flow will not decline until after the pull of demand subsides.

US demand for hospital care

Posted on by Philip J Palin

Below is an updated chart suggesting the “demand curve” for covid-19 hospitalizations in the United States, United Kingdom, and Israel.

So far, none of these outcomes reflect the spread of omicron. Instead, the stubborn levels of demand in the US and UK demonstrate the ability of the Delta variant to find and infect those who are not vaccinated or are otherwise vulnerable.

The difference between Israel’s demand curve for hospitalization and the other two is the result of multiple factors. Israel benefits from a younger average age, more consistent community-wide vaccination, wider practice of non-pharmaceutical mitigation measures, and earlier more successful deployment of vaccines and boosters. Israel has focused intently on network-wide demand suppression for hospitalization.

While omicron seems to be highly contagious, there is not yet sufficient evidence to reach conclusions about the variant’s virulence or the efficacy of current vaccines. Given continuing high levels of demand related to Delta, as shown below, it would be reassuring to find that omicron does not prompt a significant surge in hospitalizations. But, again, right now, evidence is insufficient either way. [Here’s a very helpful December 3 overview from the Financial Times that I did not notice until December 5.]

We do know that in prior waves: the more infections, the larger the number of eventual hospitalizations until, too often, demand overwhelms local and regional health care systems — exceeding the capacity of health care professionals, medical goods, and available beds.

Omicron update

Posted on by Philip J Palin

We still don’t know much about the omicron variant. Based on outcomes in South Africa, it does seem to be highly contagious. Omicron is clearly the culprit behind rapidly increasing case counts across that nation. Please see chart below. The European CDC is saying, “The evidence from the initial cases of this new variant that has been collated from around the world is limited, but suggests that the Omicron VOC [variant of concern] may be associated with higher transmissibility than the Delta VOC…”

It is too early to discern the virulence of the variant or the ability of the variant to elude current vaccines.

The variant seems to have initially emerged among clusters of unvaccinated people in their late teens and twenties (with more robust immune systems) who have mostly presented with “mild symptoms.” There are examples of breakthrough cases involving vaccinated persons, but this is also true of previous variants. It will still be awhile until we have indisputable virologic and/or epidemiologic evidence of a substantive deterioration in current and prospective vaccine defenses. The CEO’s of Moderna and Pfizer seem to take different angles on this known unknown.

In a late-breaking analysis, South African researchers have found, “Population-level evidence suggests that the Omicron variant is associated with substantial ability to evade immunity from prior infection.” This is unlike outcomes for prior variants. Immunity resulting from prior infection is different than immunity facilitated by vaccination. The researchers note, “The vaccination status of individuals with suspected reinfections identified in this study was unknown.”

We may have an early data-driven sense of virulence by next week. Given vaccination levels in South Africa, it is likely to take more time to accurately assess vaccine efficacy related to omicron using epidemiological methods. We may have virological results by mid-month.

The WHO has stipulated, “Persons who are unwell, or who have not been fully vaccinated or do not have proof of previous SARS-CoV-2 infection and are at increased risk of developing severe disease and dying, including people 60 years of age or older or those with comorbidities that present increased risk of severe COVID-19 (e.g. heart disease, cancer and diabetes) should be advised to postpone travel to areas with community transmission.”

I am an apparently healthy person over sixty years of age. This afternoon I will receive my third-jab booster. The WHO’s advice is a bit convoluted, but in any case I have concluded that given current uncertainties I can reduce the risk to myself and the risk I can present to others by minimizing my circulation. Easy enough for me. Not so easy for others. When discretionary circulation is avoided, the risk of non-discretionary circulation is systemically reduced. When circulation is necessary then being vaccinated, avoiding crowds, and minimizing nose-and-mouth proximity are helpful ways to mitigate individual risk while reducing the chance of unsustainable demand for local healthcare services.

Omicron is an additional uncertainty in a risk context already plenty treacherous, especially for those with preexisting vulnerabilities. So, we each do what we can to reduce the circulation of viral disease and preserve flows of food, pharmaceuticals — and even fun — while we wait for clear evidence of omicron’s threat profile.

Source: National Institute for Communicable Diseases (South Africa), accurate as of December 1, 2021.

Goldilocks and the Three Supply Chains

Posted on by Philip J Palin

On Monday President Biden attempted to engage very present uncertainty with prospective clarity. In prepared remarks for a White House news conference, the President said:

… on Thursday, I’ll be putting forward a detailed strategy outlining how we’re going to fight COVID this winter — not with shutdowns or lockdowns but with more widespread vaccinations, boosters, testing, and more. 

Only moments later a reporter asked and the President answered:

QUESTION:    Are lockdowns off the table — 

THE PRESIDENT:  Yes, for now.  Yes.

QUESTION:    — in dealing with this?  Fau- — Dr. Fauci, why is that?

THE PRESIDENT:  Well, because we’re able to — if people are vaccinated and wear their masks, there’s no need for the lockdowns. 

In late winter and spring 2020 shutdowns and lockdowns were crude prophylactic measures for a poorly understood threat for which we had no proven defenses. We now understand the virus much better. Even this early, we understand the omicron variant better than we understood the original version back then… thanks to the openness and initiative of South African physicians and scientists.

We will know much more in the next few weeks. But we already know that this virus thrives in crowded, unventilated, interior spaces where breathing can become increasingly risky over time. We already know that air movement, distance between humans, reducing the potential viral load of exhaling or inhaling, and vaccination reduces risk.

We also understand now — in a way that most did not understand in 2020 — that flows of demand and supply are not similar to household tap water. The better analogy is a wide, wild watershed. A sudden significant shift in either demand or supply, drought or flood, prompts cascades of consequences that reverberate over time and space. It is much better to preserve, facilitate, and gently shape flows than crassly interrupt flows.

The noon news conference in the Roosevelt Room was a late addition to the President’s Monday schedule. A 2PM event in the Executive Office Building next door had been planned before omicron so rudely crashed our Thanksgiving. The notion was to gather various CEOs around the President to reassure consumers that supply chains are delivering. The President told his guests:

I want to hear from each of you about what you’re seeing this holiday season; how well prepared are you to and — to have products you need on your shelves; and, you know, how you’ve innovated and hired to overcome the supply chain challenges you have; and kept workers safe from COVID-19 so that the American people can have a holiday season that they’ve been long hoping for.

To which each of the CEO’s present responded with mostly positive news.

The CyberMonday event was both a substantive process of engaging key private sector stakeholders and a symbolic process to claim credit. Elinor Ostrom and others long ago (and ever since) have demonstrated that “Cheap Talk” (2568 more) is an inevitable and potentially important aspect of effectively managing complex adaptive systems (such as demand and supply networks). But Cheap Talk is not a magic formula. Cheap Talk can be cheapened to the point of negative returns. The conflation of noble and ignoble motivations is not unusual, yesterday afternoon’s session involved both. I’m not sure which was more prominent.

Even as this happy talk unfolded within the Executive Office Building, the Federal Trade Commission, Bureau of Competition ordered nine large food supply chain players to respond within 45 days (even Bob Cratchit got off Christmas Day) as follows:

The orders require the companies to detail the primary factors disrupting their ability to obtain, transport and distribute their products; the impact these disruptions are having in terms of delayed and canceled orders, increased costs and prices; the products, suppliers and inputs most affected; and the steps the companies are taking to alleviate disruptions; and how they allocate products among their stores when they are in short supply. The FTC also is requiring the companies to provide internal documents regarding the supply chain disruptions, including strategies related to supply chains; pricing; marketing and promotions; costs, profit margins and sales volumes; selection of suppliers and brands; and market shares.

This is not happy or cheap talk. This has all the markers of a fishing expedition into deep and rough waters. This could get very expensive.

At least yesterday’s FTC order is justified as only a study to “shed light on the causes behind ongoing supply chain disruptions.” In contrast, on November 17 President Biden sent a letter to the FTC chair asking for an investigation of Exxon, Chevron, and their competitors noting, “mounting evidence of anti-consumer behavior by oil and gas companies.” 

Food and fuel are, of course, the most dramatic contributors to US inflation. Cheap talk, happy talk, and saber-rattling? All techniques of jaw-boning? Again, I perceive both symbol and substance.

All of this fits the policy framework set out in the July Executive Order on Promoting Competition in the American Economy. This White House is especially concerned with the longer-term economic and network effects of consolidation and concentration (me too). According to the EO:

A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers…. This order recognizes that a whole-of-government approach is necessary to address overconcentration, monopolization, and unfair competition in the American economy. (More)

So, while wandering through the forest we find a supply chain responding heroically (if erratically) to unprecedented demand gyrations. This includes a stressed supply chain that feeds us well, but has recently been less predictable and is charging us (sometimes, much) more. Then there’s a third supply chain that seems to be built on a roller coaster. We have not enjoyed the recent angle of ascent (before the sharp decline of the last four days). What do we do with these hot, cold, and in-between options?

While the original Goldilocks ate her porridge and got her sleep, it is worth remembering that in the end she suffered quite a scare or worse. It would have been better if she had communicated and collaborated much more than she did. Or as one version of the fable tells us, “If she had been a well-brought-up little girl she would have waited till the Bears came home, and then, perhaps, they would have asked her to breakfast; for they were good Bears—a little rough or so, as the manner of Bears is, but for all that very good-natured and hospitable. But she was an impudent, rude little girl, and so she set about helping herself.”

Early and uncertain

Posted on by Philip J Palin

Here are the official statistics as of Sunday, November 28 from the South Africa National Institute for Communicable Diseases.

Here is how a leading local newspaper communicates the same statistics: Coronavirus SA.

Here is how the Wall Street Journal tries to put the same statistics into context for its readers: Omicron Variant Drives Rise in Covid-19 Hospitalizations in South Africa.

Here is an initial WHO effort to frame the risk: Enhancing Readiness for Omicron.

The WHO release includes this:

There are still considerable uncertainties. The main uncertainties are (1) how transmissible the variant is and whether any increases are  related to immune escape, intrinsic increased transmissibility, or both; (2) how well vaccines protect against infection, transmission, clinical disease of different degrees of severity and death; and (3) does the variant present with a different severity profile. 

In other words, my words, we know next-to-nothing actionable about omicron. In the next two weeks we will know much more. We should accept this uncertainty, watch, and wait. We can and should reinforce what we know mitigates transmission of prior and existing variants: avoid sharing crowded interior spaces, mask-up when inside with many others, ventilate as possible, keep our distance, and get vaccinated and boosted as possible. Some of these measures can have a marginal impact on supply chain velocity. None of these measures are major impediments to continued flow of demand and supply.

Omicron’s pull signals

Posted on by Philip J Palin

As a supposed-to-be supply chain guy, I view the pandemic in terms of demand-pull and supply-push. I look at each covid case as a potential pull signal on health care services. Given this angle on reality, I want to see health care supply exceed covid’s demands. I want covid patients to have enough health care supply to credibly support potential recovery. I don’t want covid cases to crowd out health care for non-covid conditions. I want to reduce demand by consistent and widespread practice of non-pharmaceutical mitigation behaviors and maximum vaccination.

While many look at data focused on confirmed cases or deaths, I am much more focused on hospitalizations. Confirmed cases, even when reasonably accurate representations of population trends, are only indirectly related to demand for health care. So far, the vast majority of those infected with the growing family of SARS-CoV-2 viruses do not require medical care. Those who die no longer need medical care. From a network perspective — a supply chain utilitarian perspective — the most serious problems emerge when demand/need/pull for medical care exceeds the push capacity of the health care system. I regret sounding so Hobbesian.

In terms of Omicron (B.1.1.529) there are suddenly surging case counts in parts of South Africa, with more than 3800 new cases being confirmed per day. This is an increase of 827 percent over last week. Wastewater surveillance has found significant increases in proportional presence of viral fragments, in some sample locations increasing by a multiple of 100 over the last two weeks.

According to South African researchers:

There is no evidence for any clinical differences yet. What is known is that cases of B.1.1.529 infection have increased rapidly in Gauteng, where the country’s fourth pandemic wave seems to be commencing. This suggests easy transmissibility, albeit on a background of much relaxed non-pharmaceutical interventions and low number of cases. So we cannot really tell yet whether B.1.1.529 is transmitted more efficiently than the previously prevailing variant of concern, delta. (More and more.)

Given the quick-onset there has not yet been an increase in hospitalizations (see chart below). There will almost certainly be an increase in hospitalizations. Barely 20 percent of the South Africa population is vaccinated. But the virulence of this variant is not yet clear. The effectiveness of current vaccines is just now being examined.

I will monitor data updates from South Africa’s National Institute for Communicable Diseases. I will watch the chart-action generated by NextStrain, Reuters, and others. I will scan the Sunday Times online (Johannesburg). I will also pay attention as we see how, when, and where the variant moves around. As noted above, I will especially look at hospitalization counts.

Giving Thanks

Posted on by Philip J Palin

On the eve of Thanksgiving we were told that during the month of October US personal income increased 0.5 percent and the number of new unemployment claims had fallen to the lowest level since November 1969. Total unemployment is estimated at well under five percent (about 7.4 million people) with over 10 million jobs available.

Productivity is obviously a key related factor and recent results are not encouraging, but I am very tentative about drawing conclusions while being in the middle of the current great churn.

In October Americans spent 1.3 percent more than in September. During the third quarter of 2021 the annual rate of spending was $5.5 trillion on goods and $10.5 trillion on services. This is a fast recovery from the doldrums of 2020’s second quarter ($4.35 trillion on goods and only $8.64 trillion on services). Pandemic proportions continue to lean towards goods compared to services. For example, during 2019 Americans spent about $4.5 trillion on goods and almost $10 trillion on services. That 2.2-to-1.0 ratio of services to goods has characterized much of the 21st Century. Our current ratio is 1.9 to 1.0.

Since Spring 2021 Americans have mostly been spending what we did not spend on services during 2020 (plus those US Treasury checks most of us got). In September the Personal Saving Rate was 7.3 percent, well within the typical range since 2010 (down dramatically from 26.6 percent in March 2021 or over 33 percent in April 2020).

Our increased demand for goods — especially durable goods for which purchases are up nearly one-quarter since 2019 — has pushed prices higher. Since April spending on durable goods had been softening, but bounced again in October. Some suggest this increase reflects improved availability as some durable goods supply chains have recently enhanced capacity and flow.

Supply chains still strain to deliver substantially more than ever before. But in the last three weeks there have been early signs of progress at the ports. Despite extraordinary demand, business inventories have improved. Walmart and Target each claim they have plenty of stock-on-hand to answer Christmas demand.

There are still not enough trucks or truckers to fulfill current volumes and, especially, velocity of demand (more). But this intensity of demand will not long persist, so there should be some reduction in freight market friction by March/April. For demographic and structural reasons (many pre-existing the pandemic) truckload capacity utilization is likely to remain high, but more often very hot rather than explosive.

As previously outlined, the United States is struggling with the burdens of abundance. These are very real problems with treacherous personal and global implications. And… there are millions of Americans (and others) who would be delighted to trade their problems for these problems. I pause to give thanks for the burdens of abundance.

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Black Friday Late Afternoon Postscript

In pre-dawn post-Thanksgiving as I tried to finish what’s above, I was aware that European headlines and the US futures market were signaling considerable concern regarding a coronavirus variant known as B.1.1.529 Omicron.

Earlier this week I was sent the cut-and-paste of a credible twitter comment that described a, “very small cluster of variant associated with Southern Africa with very long branch length and really awful Spike mutation profile.”

While that sounds like a pull quote from the first page of a science fiction novel, our last several years have been so cinematic that I now have considerable rhetorical immunity. I checked NextStrain and decided to watch but not worry.

I am still watching.

My synthesis above is an effort to discern future possibilities based on retrospective data. Even with the best data, there are no guarantees. You know that. You would not, should not, make major financial trades on the basis of my eight paragraphs. So far, the Omicron findings strike me as a blip that has revealed more about investor anxiety — and prospective panic — than about the variant itself. [And as a result, for better and worse, gasoline prices have fallen over 12 percent.]

We should not be surprised by another variant. But investor (and some political) reaction suggests many are surprised. This and other viruses will continue to mutate. Future outbreaks — especially where vaccination is anemic (such as South Africa or West Virginia) — will hurt and kill. The more transmission, the more mutation, the more likely a variant will emerge that effectively resists current vaccines. This is not new. This is our shared experience — reinforced by about three-thousand years of written history (more).

We don’t yet know what Omicron will deliver. But we do know that modest behavioral adjustments can significantly reduce our shared risk. We now have much better diagnostic and therapeutic resources than one year ago. We have a sophisticated arsenal of several vaccines. (I am still mystified by the paucity of at-home testing in the United States).

Rather than descend (ascend?) into a meditation on Aristotelian prudence, I will point-out that the stock market crash that began on 02/20/2020 was a scream that distorted a wide range of business decisions that are still afflicting us today. Many of these choices were stupidly self-subverting, especially in terms of decisions that unnecessarily disrupted fundamental flows of demand and supply.

Today’s scream — Bloomberg headlined “surging fear” — ought not do the same. We have (potentially) learned a great deal since February 2020. We should not be surprised. We need not make the same mistakes again. While watching and listening for what may be ahead is always appropriate, this remains a better moment to pause and give thanks than to rush lemming-like over a self-created cliff.