Category: Uncategorized

The power of reticence?

Posted on by Philip J Palin

Since mid-July the number of new confirmed cases of covid in the United Kingdom has fallen from above 50,000 per day to about 20,000 per day.

According to The Financial Times:

In the week before the government lifted most remaining coronavirus restrictions in England on July 19, the average person was in close contact with 3.7 individuals a day, according to the CoMix survey of more than 5,000 people in England carried out by the London School of Hygiene and Tropical Medicine.

The CoMix Survey does not inspire enormous confidence as a data source. But even if the precise person-count is off, if the trend is correct this clearly would contribute to mitigating circulation of covid.

I would have even less confidence in a similar survey of US residents. The roughly analogous indicator that I watch is cell phone mobility. According to the Institute for Health Metrics and Evaluation at the University of Washington, in late July overall US mobility was only six percent below pre-pandemic “typical” mobility. Below is the mobility trend generated by Cuebiq’s data analysis methodology. Gregarious behavior opens all sorts of opportunities — and risks.

宁波 no longer serene

Posted on by Philip J Palin

My favorite headline from earlier this seek is “Oh no, not Ningbo!” (thank you Freightwaves). Dark humor can be helpful, especially given recent — recurring — events.

Early Sunday, August 8, operations were suspended at the Meishan Island International Container Terminal (MSICT) at the Port of Ningbo-Zhoushan. The Meishan Terminal usually handles about one-quarter of Ningbo’s annual volume of 27 million plus TEUs. So, global container flows suddenly lost the equivalent of the Port of New York-New Jersey.

Early hopes that the shut-down would be a precautionary pause had faded by Friday, August 13. A dockworker with symptoms initially tested negative, but on August 11 a covid diagnosis was confirmed. He shared tight quarters with many other workers in a port-side dormitory. Any reopening date is speculative. There is also speculation of the virus spreading to other terminals and other China ports.

While miniscule compared to other larger nations, since July 1 China has reported a troublesome bump in confirmed covid cases, which the authorities seem intent on suppressing with the most rigorous measures.

According to some maritime sources, to avoid being stuck in this bottleneck, seventy percent of carriers are self-diverting to other (already crowded) ports. The viscosity of global flows just thickened again. Velocity just slowed and wobbled again. Supply and price volatility further fluctuates. Implications for US and European ports (and economies) should be clear enough.

宁 means serene. 波 means wave.  紊 means confused or disordered.

Below is a screen capture of maritime flows (non-flows… knots… bottlenecks) at Ningbo on August 14 via MarineTraffic.

Delta’s demand curve?

Posted on by Philip J Palin

The Delta variant of the coronavirus is ferociously contagious. In India more than 2.4 million deaths have been credibly attributed to Delta’s rapid spread in the subcontinent’s so-called “second wave”, extending from April to June 2021.

Delta was also the principal culprit in the United Kingdom’s — well, England’s — pandemic surge between early June and late July. On June 1, 2021, ninety residents of England were hospitalized with covid-related disease. On July 27 this surge apparently peaked with 793 covid-cases in hospital. As of August 10 the number of related deaths was continuing to climb.

Delta has been spreading rapidly in the United States since May. But through most of June Delta was not causing an observable — confirmable — increase in disease. That began to change in late June. Initial disease outbreaks were localized. But since at least June 27, we have seen increasing hospitalizations over wide areas, especially among the Gulf Coast states plus Arkansas, Missouri, and Georgia.

England is roughly the size of Alabama, but has a population double that of Texas (England has about 56 million residents). England has close to a 90 percent vaccination rate for residents 18 and over, compared to about 56 percent of Texans over age 18 or almost 44 percent of residents 18 and older in Alabama. (More.) Comparing the US experience with Delta to that of England is imprecise.

But because inquiring minds want to know, if the US demand curve for Delta is anything like that of England’s, the US won’t achieve nation-wide peak hospitalizations until early September. Given the much larger geography and lower vaccination rates in the United States, I would not be surprised to see an extended rise. And — England’s fairly high plateau for hospitalizations is interesting too (see first chart above).

Delta is much more optimized to humans than earlier variants. What about Lambda? The covid demand curve in Peru, where Lambda has dominated, may suggest what a post-Delta wave could look like.

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August 13 Addition:

Israel is one of the most vaccinated (and healthcare data sophisticated) nations on the planet. Much smaller than England and with less than 10 million residents, Israel and its residents have been early and effective at mitigating covid’s evolving threat. But even Israel is finding Delta a significant challenge. It is now in the seventh week of increased hospitalizations with no signs of softening case counts. The second chart below shows US, UK, and Israel covid hospitalizations on a comparative logarithmic scale. This helps to reveal potential patterns between such dramatically different population samples.

Recovering Flow

Posted on by Philip J Palin

In February 2020 we could have preserved flow. Pre-pandemic global demand had been strong. Processing, manufacturing, and transportation slightly lagged demand, but just enough to keep everyone busy.

By late February last year, flows inside China were recovering from a drastic, but brief hiatus. If North American, East Asian, and European demand had kept pulling, the push of supplies — both global and local — would have soon resumed typical seasonal patterns. First quarter global flows are usually comparatively slow.

But demand suddenly and deeply contracted. Existing orders were canceled. Deliveries were left unclaimed. Empty containers were not returned. Orders for future deliveries were not sent. Planes were parked. Ocean crossings were canceled. Assembly lines were slowed or stopped.

In an earnest effort to minimize circulation of a deadly virus, circulation of people was discouraged. This caused a sudden shift in circulation of money too. Well-established pull channels dried up. Other channels flooded. What was being pulled from where and how it was being pushed, changed in an economic blink-of-the-eye.

Unemployment soared, especially among the most consumer-facing service sectors. To preserve lives and livelihoods, more money was pushed out. Given radically altered options for expressing demand, this mostly resulted in an increased savings rate and increased consumption of a few narrow categories of durable goods. Many of my neighbors now have new guns, recreational vehicles, home improvements, and electronic gadgets. They are not alone. See Deloitte’s analysis of Personal Consumption Expenditures immediately below.

Responding to these unpredicted — unpredictable — sharp shifts in demand has been complicated. A persistent shortage of upstream containers has constrained flow recovery. Disease and self-quarantines among stevedores and drayage drivers has slowed movement through many ports. Container ships are waiting longer to embark and disembark. Retiring truck drivers and closed driving schools have reduced capacity available for almost every component of flow. In many cases, demand has been volatile, suddenly surging in one category and as suddenly shifting to another category. Each incremental pinch narrows overall push. Sudden pulls for one product tend to skew adjacent flows too.

So, it is not surprising that the inventory to sales ratio remains so depressed. Joseph Lupton at JPMorgan recently wrote, “While non-manufacturing activity is now tracking a strong and steady recovery, the goods-producing sector has been buffeted by supply constraints alongside continued boomy gains in final demand… The result has been a slump in inventories that, over the past two decades at least, looks to be unprecedented outside of a recession.”

Reflecting that “boomy” unevenness of demand, it also makes sense that there is accumulating evidence of selective stockpiling. How much of this might be Stermanesque (Doganic?) “phantom ordering”? And if so, how badly and widely might this unwind? In late July, John Dizard worried aloud in the Financial Times, “The inventory en route around the world defies the imagination, not to mention the antique information systems in the shipping business. All of that fitfully tracked and delayed stuff, when it finally lands where it is supposed to, looks as though it will create a big enough pile to trigger a bad inventory recession, where demand for goods drops while accumulated stockpiles are run down.”

Short of Dizard’s worst case, the current disequilibrium of supply and demand is likely to generate chop in many channels well into March 2022. And even this projection depends on Delta’s surge peaking as previously experienced in the UK and India. If Delta persists or post-Delta is worse, stand by for storm surge and drought and absence of anything that looks or feels like flow.

A fragment attributed to the ancient Greek philosopher Heraclitus reads πάντα ῥεῖ (panta rhei) or “everything flows”. Some suggest a better translation is “everything is flux.” Most of us find ourselves very much in flux. Some of us are happy with this, Dizard quotes one supply chain player as saying, “For me, the more chaos, the better.” But many others would prefer to recover flow.

In explaining Heraclitus, Plato points to Rhea, mother of the gods, as the source of what we now hear as flow or flux. In the classic myths Rhea overcomes murderous disorder, personified in her husband/brother Kronos (god of time and more), through a shrewd distraction. Flow transcends Time’s fearful greed by seeming to sacrifice what she carefully saves. Just-in-Time? Just-in-Case? Or flexible enough to strategically benefit from disorder. (More)

Early in the pandemic a local retailer simultaneously advertised a sale price for its private-label toilet paper while restricting purchases of all TP brands to no more than two twelve packs (or the equivalent). This fully satisfied the needs of most consumers and seriously reduced the “fearful greed” of a few. The combination of no more empty shelves plus the supply confidence implied by the sale price transformed recurring deficits into persistent flows.

Whoever deployed that paradoxical demand management tactic is a latter-day Rhea.

Re-balancing?

Posted on by Philip J Palin

Last week Bloomberg interviewed the CEO of Sysco, who claims, “Restaurants are busy. They’re booming. They’re bouncing back in a strong way. They’re not up just over 2020, they’re up versus 2019 as well.” USDA statisticians agree, finding substantial increases in demand for food away from home since March 2021.

Chart showing increase in eating out expenditures

Expanded food away from home (FAFH) options have been long-awaited. If anything, insufficient supply of food service personnel has constrained expression of full demand. A big bump in Spring restaurant sales is not surprising. I am surprised that, so far, grocery sales have also continued elevated.

By August 2020 the initially huge pandemic surge in grocery demand was done. Total grocery sales increased roughly twelve percent nationwide for all of 2020. For example, Kroger reported an 8.4 percent sales increase, while Albertsons saw 11.6 percent plus. According to recent USDA research, during 2021 grocery sales have continued at about 12 percent above 2019 levels even as restaurant and other FAFH sales increase. Can this last?

As shown below, there has been some softening in grocery demand since May’s USDA report, but nothing dramatic. I am mostly impressed at how consistent grocery consumers seem to be. Deli is much stronger year-over-year because last year demand for prepared food plummeted. Seafood sales are down both because of sky-high prices and reduced supply. Otherwise consumers are buying more groceries than in 2019 or 2020 and spending more at restaurants too.

Increase in the inventory to sales ratio

Posted on by Philip J Palin

According to the US Census Bureau, for the first time since February inventories showed a slight improvement compared to sales. The ratio increased to 1.09 in May from 1.07 in April. Moderating May demand helped. But much tighter-than-normal inventories reflect several impediments to upstream capacity achieving pre-pandemic velocity (especially spatial/temporal accuracy). Dwell times and other freight delays have continued to increase. So, is this an ephemeral blip or the start of separating from an all-time bottom?

Chart developed by the Federal Reserve Bank of Saint Louis

Preexisting Pull Patterns

Posted on by Philip J Palin

In most mature networks, especially those with higher volumes and greater velocity, population demand tends to persist. Sharp, sudden deviations are unusual and almost always result from externalities. Even in these atypical circumstances, it is often not so much that demand itself has changed as the ability to express continued demand has somehow been displaced.

There are exceptions, but when in doubt, placing my bets on the persistence of well-established pull usually pays off.

Consistent with this Supply Chain Resilience principle, last summer I joined many others to suggest that preexisting patterns of demand for seasonal flu vaccinations would help target where extra effort would be needed to encourage covid vaccinations. Not much was done last summer — many who might have done more were plenty busy with the sick and dying. I pushed again last November. Once again, there were — I agree — competing priorities. Others more credible than me continued pushing. But serious grass-roots engagement with vaccine reluctance has been rare until recently.

Still, the data are fairly clear: places with persistently low demand for seasonal flu vaccinations are also places with lower covid vaccination rates. In 2019-2020, 51.8 percent of US residents were vaccinated for seasonal flu (a bit better than in most flu seasons). As of July 18, 2021, the United States had fully vaccinated 48.6 percent of its population against covid. The chart below shows those states with the lowest seasonal flu vaccination rates for 2019-2020. The third column reports the population percentage in each of these states fully vaccinated for covid.

There are outliers. Arkansas vaccinated 54.9 percent of it’s population against seasonal flu, but so far only 35.39 percent are vaccinated against covid. Florida’s three point improvement in covid coverage versus the seasonal flu is better than many states (but not as good as Vermont moving from 57 percent for flu to 66.9 percent for covid). I wish I had time to run a Pearson’s R on the correlation between flu and covid vaccinations rates. (I’m sure someone has this, please let me know.)

It would also be interesting to know more about what happened in Arkansas and Vermont that might explain how prior patterns were undone. But the larger pattern is still clear enough.

Current resistance to vaccinations should not be surprising. Given long-established patterns with seasonal flu vaccinations, we should not assume recent causes. We should also avoid being distracted by ad-hoc (even post-hoc) justifications that will obscure deeper sources of resistance (potentially obscure even to the resistant, reluctant, hesitant, and delayed). Especially after losing so much time and opportunity, there is even greater urgency to understand and engage real impediments. It is also worth being realistic regarding the time-and-effort typically involved with demand creation.

The coronavirus called “novel” in late 2019 was not optimized for human infection. The Delta (B.1.617.2) variant of that original virus is much more effective at claiming human hosts. Fortunately, so far, vaccines approved in the US have demonstrated considerable ability to suppress the onset of disease, even by Delta. Unfortunately, the virus will continue to evolve. Over half of the US population and nearly three-quarters of the world population are, right now, essentially high capacity — unvaccinated — mutation factories.

The more who are effectively vaccinated sooner, the less likely a vaccine-vanquishing mutation.

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July 27 UPDATE: Many thanks to a reader who sent along this link to a related BBC report.

Consolidation’s impact on price discovery

Posted on by Philip J Palin

The Fed and some others perceive that over-heated physical friction in supply chains is being gradually worked out. Demand has been seriously disrupted and diverted. As — if? — demand settles — sources, channels, and modes of supply will catch up.

From this angle, recent price hikes help demand determine what is really needed/wanted, when and where. As demand becomes less volatile and supply more elastic, surging prices will soften. Ergo, this argument goes, the current sharp swing toward inflation is transitory.

This will often be true. Push typically knows its limitations. Both time and space are uncompromising task-masters. Fixed costs are almost as clear, if treacherously less rigid. With high-quality customers, push does not want to seem mercenary. In any case, pre-existing contracts often set upper limits. The highest prices now being paid for scarce unclaimed capacity are imposed on smaller players or newbies. This is how suppliers and carriers assess the potential value of otherwise obscure pull-signals. High volume, high velocity networks have a tendency to shed suboptimal demand. But if more space opens up or velocity can be increased, available push will accommodate additional pull, re-optimizing to changing conditions.

The big question: in the next several months will this accommodation reflect prices increasing at a slower rate or more stable pricing or reduced pricing? Pandemic price increases will be more stubborn when and where push is capacity constrained, increasing capacity is expensive and time-consuming, and barriers to entry by new competitors are high. This is the case with ocean and rail shipping (more and more). The US trucking market is much more price pliable. Consolidation of capacity is a crucial differentiator between these three freight modalities.

Three ocean freight alliances carry over 80 percent of maritime container shipments. Four US railways account for over 80 percent of industry revenue. In contrast the top ten long-distance trucking firms carry less than ten percent of long-distance US freight (more and more). At the close of 2020 there were over 150,000 trucking firms of all types operating in the United States.

Big players can and need to be strategic. Smaller players often are (and need to be) opportunistic. A market dominated by strategists seeks predictability. Strategists are reluctant to forsake an advantage once secured. A market where no player or set of players dominate is less predictable, much more inclined to facilitate steady or falling prices.

For the remainder of this year, we will see both behaviors playing out — responding to both economic fundamentals and regulatory threats. Once the current catch-up and Christmas are completed we will have a much clearer sense of core capacity, constraints, and competitive agilities. The most resilient demand and supply networks are diverse. By March 2022 (or before) we should have the results of real-world stress tests highlighting where our networks enjoy diversity dividends and suffer diversity deficits.

Volatility: from Latin volātilis (flying, swift, temporary): volō (I fly)

Posted on by Philip J Palin
Timber prices fall as US consumers swap DIY for going out | Financial Times

Supply of lumber has increased. Even more important, demand has decreased. Increasing prices have, as usual, diminished demand. Alternative spending opportunities displaced lumber.

On June 16 Jerome Powell, Chairman of the Federal Reserve Board of Governors, said, “Inflation has come in above expectations over the last few months. But if you look behind the headline numbers, you’ll see that the incoming data are, are consistent with the view that prices—that prices that are driving that higher inflation are from categories that are being directly affected by the recovery from the pandemic and the reopening of the economy. So, for example, the experience with, with lumber prices is, is illustrative of this. The thought is that prices like that that have moved up really quickly because of the shortages and bottlenecks and the like, they should stop going up, and at some point, they, they, in some cases, should actually go down.”

In the month since, this lumber market pattern has persisted and similar behavior has been seen in other product categories. Will demand spikes continue to be concentrated in specific categories? Will category-specific price increases successfully redistribute demand and restore supply equilibrium? Or will widening lags between demand and supply morph into generalized and stubborn inflationary pressures?

According to the US Department of Labor, “In June, the Consumer Price Index for All Urban Consumers rose 0.9 percent on a seasonally adjusted basis; rising 5.4 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.9 percent in June (SA); up 4.5 percent over the year.” (More)

Food and energy prices are typically footnoted in the CPI due to their volatility. But recently food and energy have not been alone in attracting manic demand — and resulting supply gyrations. More from the CPI:

The index for used cars and trucks rose sharply for the third consecutive month, increasing 10.5 percent in June. This was the largest monthly increase ever reported for the used cars and trucks index, which was first published in January 1953… The lodging away from home index increased 7.0 percent in June. The index for new vehicles rose 2.0 percent in June, that index’s largest 1-month increase since May 1981. The motor vehicle insurance index increased 1.2 percent over the month. The index for airline fares rose 2.7 percent in June after increasing 7.0 percent the previous month.

According to the Bureau of Economic Analysis, Real Disposable Personal Income was just over $15 trillion in January 2020. By May 2021 DPI had increased by about $1 trillion. Household debt is higher than ever, but high-interest credit card debt has been slashed. The US Personal Savings Rate remains remarkably elevated, as shown below.

There is pent-up demand, especially for products and services constrained by pandemic slow-downs and shut-downs. There is plenty of cash available to express “effectual demand“. In some categories, spending has surged and/or returned more quickly than sources of supply had anticipated. In some categories — such as restaurant meals, automobiles, and airline seats — there are structural challenges that continue to constrain supply below seasonal 2019 levels.

Demand is pulling and has the potential to pull harder. Supply is pushing toward demand, but suppliers are keen to avoid long-term capacity-building costs (capacity that is unlikely to be needed by early 2022). As a result, supplies can increase more gradually than demand. This incremental gap can suddenly deepen when demand surges all at once on a narrow target. These gaps and resulting market fluctuations are likely to persist through Christmas this year.

After Christmas? Others have some projections. But I will wait to see what can be seen as of late September… I already have a sense of trying to fly too high.

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Starting at noon today Chairman Powell will give testimony to the House Committee on Financial Services. Both a live webcast and an archive copy should be available. JULY 15 UPDATE: The Fed Chairman is watching carefully, but still perceives most of today’s sharp price increases are the outcome of temporary imbalances between demand and supply. If so, as demand moderates and supply chains optimize , prices should stabilize. Here’s the WSJ report.

Proving the benefits of diversity

Posted on by Philip J Palin

I apply a self-conscious heuristic — let’s go with the Anglo-Saxon and call it a rule-of-thumb — that more diversity breeds more resilience. In most disaster contexts I do NOT have data or really much evidence that this assumption or principle or guess accurately fits the immediate problem-context. But I have seen enough data and evidence from analogous situations that I tend to make decisions that depend on the claim. (Such as here and here and here.)

Rigorous empiricists offer increasing evidence that takes us well-beyond inspired (or delusional) analogies. Late last week Nature, one of the most prestigious peer-reviewed journals, published, “Supply chain diversity buffers cities against food shocks“. The title states the claim. The paper organizes and analyzes data that persuasively demonstrates the claim.

The authors (two of whom I know), write, “For cities in the USA, the probability of an annual food supply shock S being greater than a shock intensity s, P(S > s) (see Methods), declines as the diversity D of a city’s food inflows supply chain increases … Using data for 284 cities and 4 food sectors, the annual probabilities of food supply shocks are calculated by measuring, for each city and food sector, the maximum food supply departure from the annual average during 2012−2015 (Methods). We utilize a total of 4,884 buyer–supplier subgraphs and 1,221 time series to calculate P(S > s) and D. Our results indicate that with greater supply chain diversity D, cities are more likely to avoid or resist shocks of increasing intensity (3%, 5%, 10% and 15%; Fig. 1a).”

It is an academic paper using scholarly language and calculus. The reasoning is, still, clear enough. Absolutely worth reading.