It is widely suggested today’s bout of inflation is the result of the lack of supplies. There is a lack of workers, trucks and energy. In many regards it is self-induced. What happens if the logistic issues morph into production issues, an environment the country has not faced in about 85 years?

Commenting about the inability to bring product to market, as widely known there are over 65 container ships anchored off of California, ports that handle almost 40% of the country’s imports. Typically, there are only one or two cargo ships.

Industry sources cite legislation enacted in October 2020 as a major issue. On October 16, 2020, the EPA reached a settlement agreement with California Air Resource Board (CARB) to shut down semi-tractor rigs that were non-compliant with new California emission standards which effectively banned almost 50% of trucks. Simply speaking if a truck is older than 3 years old, the odds of being non-emission compliant is significant.

The backlog in California became noticeable in March and in May deep discounter Dollar General stated its earnings will be adversely affected by increased shipping expenses. In its June earning’s announcement, the deep discounter stated that shipping is now more expensive than manufacturing costs.

As written several times, Green pledges are popular; green policies drive public revolt as prices rise because of lack of supplies.

Speaking of lack of supplies, oil and natural gas prices are surging. Yesterday’s WSJ wrote the current short falls in energy are primarily self-induced. The technology is not yet available too store renewable energy and is unlikely to be developed for the for seeable future.

Fossil fuel capital expenditures is down almost 50% from levels of seven years ago, primarily the result of legislative fiat that includes banks estimating the climate cost of all loans amplified by SEC threats not to under estimate these costs.

It is widely accepted that even if the political environment radically changes, it will take almost 18-24 months to develop large oil fields.

Yesterday Russia announced starting in mid-November it will curtail natural gas shipments to Europe. Previously the country stated it would increase shipments to ease shortages. Is Russia curtailing shipments for economic or political reasons? Is Russia too facing supply issues or is the reason more sinister? I do not know.

And there is labor. Why is the labor supply not increasing as the Fed has adamantly stated such an increase will occur? Will the labor participation rate (LPR) suddenly surge?

As noted above, the current shortages are about logistics. Will it morph into production, the result of the lack of stable energy supplies and labor?

US factory fell last month, the result of supply chain warnings reflected in a sharp pullback in auto manufacturing as well as broader backlogged supply chains and materials shortages.

The short end of the Treasury—defined as two years or less—has been selling off dramatically. The two-year Treasury or the instrument most sensitive to monetary policy has increased in yield to 0.41% from 0.22% three weeks ago.

Bloomberg writes for the first time in history there is a 100% net short hedge fund interest in this key benchmark. It is also one the sharpest sell off for this key benchmark in history.

To write it differently, hedge funds are expecting an increase in the overnight rate within the next six months, the result of inflationary pressures.

The Federal Reserve has adamantly stated it intends to keep the overnight rate at current levels until mid-2023.  Will the Fed maintain its widely telegraphed stance for it is still defining the current environment as “transitory,” believing inflation will be back to 2.0% “next year?”

Moreover, the Fed has stated it will permit above average growth and inflation for a prolonged period of time but it has yet to offer any parameters as too how long or as too how high.

Who is correct? The Central Bank has the ability to manipulate the short end of the Treasury market via monetary policy. Hypothetically it has no control over the longer-term Treasuries. Will next week be the inverse…longer dated Treasuries sell off on the view inflation is not transitory but shorter duration rally on conviction of Fed policy?


Last night the foreign markets were up. London was up 0.06%, Paris up 0.09% and Frankfurt up 0.14%. China was up 0.70%, Japan up 0.65% and Hang Seng up 1.49%.

The Dow should open nominally higher on solid earnings that is helping to counter inflation concerns. The 10-year is up 1/32 to yield 1.60%. Oil is up another 1.5% to over $83.50/barrel.


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