“If I hear ‘supply chain crisis’ one more time, I’m going to scream.”

This is what my mom said to me during my family’s Thanksgiving visit to Boise, Idaho. 

One of her windows shattered. A contractor had come in, quoted her, and accepted a 50% deposit. It’s been nearly six months: the contractor can’t find a supplier with the glass or frame in stock.

That window is still shattered, and Boise winters are cold.

My business partner went online to order printer ink. This is what she saw when she tried:

Shipping delays, logistics breakdowns, higher prices and delays – many folks in the U.S. have been experiencing the supply chain crisis in one way or another.

The supply chain is the sequence of processes involved in the production and distribution of, well, stuff. 

The “chain” is the connection between suppliers, manufacturers, distributors, retailers, and end consumers, and each “link” in this chain has been affected by disruptions.

Here’s a description of the crisis by the Daily Mail:

Stores across America have empty shelves thanks to a series in supply chain problems that are prolonging inflation and could stretch into the new year, with some retailers like Costco and Walmart limiting the amount of toilet paper in some stores.

More than 60 cargo ships are waiting to dock in California, carrying hundreds of thousands of containers, and may be stuck for months in a traffic jam after arriving from China and Asia. Millions of dollars of American goods are still sitting in warehouses in China, awaiting shipment.

There are similar problems with homegrown goods that can't be transported quickly enough by truckers or on freight trains.

Now, this description is just a touch histrionic. 

Shelves aren’t empty across America, per se. 

The U.S. isn’t in a state of foodless anarchy (yet).

But the ongoing concern about strain to the supply chain have the media in a tizzy and investors spooked…

Especially since many analysts are looking at shopping results this holiday season to see evidence of the economic rebound we are supposedly in, according to the media.

Basically: expect what happens over the next month economically to set the tone for investors in 2022. 

So what’s causing this problem? And how will it affect investment portfolios?

Well, if you’re an evil maniac hell bent on recreating these problems in the future…

Here’s How to Disrupt the Global Supply Chain, an Evil Plan in 3 Easy Steps

Step 1: Prevent Consumers From Shopping so they Build Up A Ton of Demand That Gets Unleashed All at Once 

Even though U.S. retail sales have been growing since 2009, the actual ratio between goods sold in the U.S. compared to the inventory of goods available has stayed extremely consistent…

There is typically about 50% more “stuff” available in inventory than sales, due to ongoing resupply and growth in manufacturing and importing.

However, at the beginning of the government lockdowns due to the pandemic, Americans stopped buying stuff. 

Why?

Because they COULDN’T buy stuff.

So goods and commodities just stacked up, and there was a spike in inventory.

Companies began to cut supply, reducing production capabilities, firing employees, shutting down factories, and so on.

But as the government stimulated the economy and lockdowns ended, consumer demand rebounded and returned to a higher rate than it was before. You can see this in the rate of personal spending in the U.S.:

Turns out, if you mail everyone in the U.S. a check with a little note that says:

Dear American: 

Have fun with this! 

Love, 

The Government

And then do it three times…

Well, people will spend that money. 

But this spending has outpaced how quickly companies can resupply the U.S. economy. 

You can actually see this on a chart showing the ratio of inventory to sales, which has plummeted to the point where there is little if any supply “buffer”:

With a retail trade inventory to sales ratio of 1.09, that means there is only 9% more inventory available than what’s being sold. 

THIS is why everyone is talking about empty shelves and product shortages.

Logically, when confronted with higher consumer demand, companies want to increase their supply to profit from that demand. To do that, they need to make more things to resupply that depleted inventory.

That takes us to the next phase of our evil plan...

Step 2: Overwhelm Suppliers With Too Many Orders

Let’s take a step back to think, philosophically, about what it means to be a human with desires. 

Say, for the sake of argument, that you desire a widget. And widgets are a complicated electronic device, made in China, that you can only order in stores. 

In order for your desire to be fulfilled, you need to use a vehicle, perhaps a unicycle, to travel to the store – a whole, like, building! – to order a widget. 

In order for the store to have a widget, it needs to get them from a wholesaler. 

The wholesaler needs to get them from a distributor.

Distributors need to work with manufacturers to make and logistics companies to ship things.

The logistics companies need to work with shipping companies, permitting companies and importers, trucking companies, longshoremen unions, loaders, unloaders, etc.

Manufacturers need to work with equipment makers, staffing companies, suppliers, etc. 

Suppliers need to work with mining companies, materials companies, industrial companies, chip fabricators, and on and on.

By the time your order travels up the supply chain along with millions or billions of others to help companies determine how many mountains they need to blow up to mine the raw materials required for your stupid widget…

You don’t even want it anymore!

All of that’s to say: there needs to be a steady flow of demand and supply, or the entire system breaks down. 

Changes in consumer demand can shift faster than producers can adjust their manufacturing capabilities. Sudden surges can send ripples up the chain.

This is one of the reasons why there’s always excess inventory compared to the actual sales made.

To rapidly ramp up production to meet the resurgence of demand in recent months, manufacturers had to put in enormous orders to producers of commodities like lumber, copper, even dairy products.

Since these producers have to spend money to blow up more mountains to procure these commodities, they’re saying: “Uh. Pay us more.”

And so this increase in demand has also caused a rapid increase in commodity prices, which is reflected in the rapid growth of the Producer Price Index. As you can see in the chart below, the cost manufacturers have to pay for raw materials has shot up rapidly since early 2020:

And it’s not just prices…

This communication of information from consumer to supplier takes time… and it takes time for companies to respond to this information and, like, make and ship stuff.

This lag is called “lead time.”

Lead time, basically, is the amount of time it takes between when a producer receives a purchase order for something (like a component or device) and how long it takes before it’s ready to ship out.

 There’s an indicator that measures this, calculated by the Richmond Federal Reserve bank (the U.S. central bank is actually a collection of 12 regional banks), called the Manufacturing Lead Time Index.

And as you can see in the chart below, it’s taking longer now than any time in the last ten years for manufacturers to make and ship materials, products, and more.

But charts are abstractions. They don’t tell us the full story. 

To get a sense of how this problem is affecting small businesses, I spoke to my friend Mike Hadid, who owns an clothing, toy, and sports apparel import company called East 68th Street. 

Here’s what he said:

As of right now I have over a quarter of a million dollars of product/inventory sitting on cargo ships in the Pacific Ocean for weeks and some for months now.

I do not blame my suppliers and vendors as it's not their fault as they are getting everything out here as soon as possible, but it's the fault of the harbor/ports. 

Obviously this is not just affecting my business, but hundreds and thousands of companies and businesses across the United States. I feel like if the government really wanted to fix the supply chain issue, they would have by now, as they clearly could have. 

Now, this might seem like an obvious problem to fix.

Lots of people were fired from their jobs in 2020 and unemployment skyrocketed.

To fix this slowdown in manufacturing and the breakdowns at the ports, businesses simply need to hire more people, right?

Well, they’re trying, but that’s where we’re seeing another problem.

Step 3: Demoralize and Crush the Spirit of the Laborforce

It’s being called by media commentators the “Great Resignation.”

Basically, record numbers of Americans are quitting their jobs right now, and have remained abnormally high for months.

Astonishingly, this isn’t a result of older workers retiring from the workforce. The largest number of resignations are coming from workers aged 30 to 45 — prime earning years.

Some analysts blame stagnated wages, which have only risen on average about 11.4% in the last 15 years while consumer price inflation is up 37.4%. Basically, people want more money and refuse to work for what they were earning before the pandemic.

Others are blaming the fact that, during the pandemic, many mid-career professionals became accustomed to and enjoyed working from home. A report by Infosys, based upon surveys of employees and managers of large U.S.-based companies, found that 80% of respondents are very or somewhat satisfied with remote work.

Now that many businesses are trying to return to the office, many workers are opting to quit instead.

Regardless of the reason, the number of unfilled jobs in America has risen to extraordinary levels, as you can see in the chart below. Businesses simply cannot find workers to work, and many workers simply are not looking for work or participating in the workforce.

If manufacturing businesses can’t get people to make things, and shipping companies can’t find people to unload things from boats onto trucks, and retail outlets can’t find people to sell things…

The end result is what we’re seeing: a shortage of everything, and rising prices (inflation) that’s only indirectly related to the Fed printing money.

How the Supply Crisis Will Impact Markets

And even if someone manages to thwart this evil plan (yes, we’re sticking with the evil plan motif)...

The supply chain crisis has had worldwide impact, from longer production times and material shortages to higher consumer prices and delayed shipments. 

Only when we start to see equilibrium returns to the supply chain will we start to see improvements. This could take months or years, and the problem could get worse before it gets better. 

Case in point: I also asked my friend Mike, the e-commerce retailer I introduced above, if these disruptions were causing additional difficulties during the holidays. His response: 

All of the stuff should've been here months ago so I can sell it during the holidays. Unfortunately now I'm going to have to wait until next year probably to sell it.

That means I'm going to have a lot more product on hand throughout the year, which is going to take up a lot more space in my warehouse. 

There is no way to plan around it. For businesses like mine it just means we won't be investing more next year in new inventory or products because we’ll be sitting on a lot of it that was supposed to go out months before.

Which in essence means that our suppliers and vendors are going to be getting fewer orders and purchases.

And it’s in here that we find the main takeaways of all this, spoken from someone directly impacted by this crisis.

The U.S. doesn’t need to have bare shelves and starving citizens for supply chain disruptions to be a significant problem. 

Like a double pendulum, very small perturbations result in chaotic and unpredictable effects.

Right now, everyone is talking about inflation inflation inflation as prices are going up.

But what happens next year, when suppliers and vendors are going to be getting fewer orders and purchases?

They might constrict supply. Again. 

Everyone lowers prices to try to clear their stock. 

And because the Fed is about to taper support of the markets and raise interest rates, stock values will be under a lot of pressure. 

If all that comes to pass, by this time next year everyone will be worried about deflation deflation deflation.

Yet again, this is why, for months, I’ve been saying to go into stocks slowly, if at all. 

The dynamics of the market that have sent asset values skyrocketing over the last 11 years are in the midst of changing…

And it’s better to have a good chunk of money on the sidelines, ready to deploy, when things finally do change.