The Monstrous Flow of Free Money and the Shortages

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Free money destroyed the pricing mechanism, and demand has soared despite much higher prices.

The shortages are not at Costco or Safeway, though they too might run out of a few weird items here and there. But other retailers are complaining about them, including apparel retailers and shoe retailers – yup, it took five weeks for my running shoes to arrive after I ordered them online, when normally I’d get them in a day or two.

There are shortages cropping up in different types of equipment and appliances and electronics. There are reports of shortages of certain types of fasteners and all kinds of doodads that you’d normally take for granted.

The shortages are all over the auto industry, driven by the global semiconductor shortages that keep getting dragged out and are now expected to abate maybe, hopefully, possibly in 2022.

It isn’t that there aren’t any new vehicles out there, but there are not enough of them. Inventories have been depleted in a historic manner. And customers are buying vehicles as soon as they come off the car carrier, or they order them and wait patiently till they arrive.

There are now huge storage areas around auto manufacturing plants were automakers store vehicles that are essentially ready to go but are still missing a component or two because some chips couldn’t be made, and when those components arrive, they’ll be installed and the vehicles will then be sent to dealers.

These semiconductor and component shortages have shut down auto assembly plants in the US and around the world for weeks at a time, all year long.

So everyone in the auto industry is prioritizing their high-end most profitable units and their most profitable channel, which is retail. The huge rental fleets that together would normally buy close to 3 million new vehicles a year in the US alone, but usually lower-end models, with large discounts, well, they’re being de-prioritized because no one is making money on selling to rental fleets.

Rental car companies have been complaining since the first quarter this year that they cannot get enough vehicles from automakers because automakers are prioritizing the most profitable high-end vehicles that they then sell through their highly profitable retail channels.

Automakers have slashed their incentives, and so effectively, prices of these vehicles have jumped, and dealers are selling hot models over sticker. Dealers and automakers are making out like bandits.

In normal times, demand for new and used vehicles would have collapsed after these kinds of price spikes as most consumers don’t have to buy a vehicle today. They can just drive what they have for a while longer.

But not this time. Now, Americans, after they’ve gotten this free money, don’t mind paying out of their nose for new vehicles, instead of haggling over them as they used to do.

And rental car companies are not getting enough vehicles built, and so there are rental car shortages in some areas. Rental car companies have responded by not selling their older rental units, as they would have normally done, but instead they keep them longer, and the mileage with which they’re now running them through the auction has nearly doubled over the past year. And they’re running fewer cars through the auction.

Rental car companies supply the used-vehicle market with close to 3 million used vehicles a year. And that number has plunged because rental car companies have trouble getting new vehicles to replace their current units. So this triggered the used vehicle shortage.

Then there is the infamous container shortage. It isn’t that there aren’t enough containers out there. It’s that containers are hung up on huge ships that each carry many thousands of containers, and those ships are waiting in large numbers to get into ports.

Yesterday, just outside the ports of Los Angeles and Long Beach, a record 44 container ships were anchored, waiting. And there are hundreds of these ships hung up somewhere globally, trying to get into a port, or they’re being rerouted to different ports. And all this takes time.

And containers are stuck in ports because railroads are backlogged, trucking companies are troubled by driver shortages, and containers are hung up in railyards and clog them up to where some railroads have stopped routing trains to those particular railyards until the backlog is cleared, thereby further contributing to the pileup of containers at ports.

And each extra day that a loaded container doesn’t get to its destination is a day that it cannot be unloaded and returned to the flow of containers, and cannot be sent to a manufacturer that has goods ready to ship but cannot ship them because they cannot get empty containers.

This chaos in the container industry caused the rates of shipping containers from Asia to the US to spike four-fold and five-fold from before the pandemic.

Last week, it cost on average $11,300 to ship a 40-foot container from Shanghai to Los Angeles, over five times the typical rate before the pandemic of around $2,000, according to Drewry.

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Continue reading this article, published September 2, 2021 at Wolf Street.

 

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