Separating Myth From Reality When It Comes to Supply Chain-Driven Shortages

The issue of supply chain disruptions continues to get amplified in the media... As the press reports pile up along with the one-off anecdotes of consumers not immediately finding what they need, this issue, much like everything these days, is getting politicized with finger-pointing galore. Panicky statements about Christmas getting canceled and Santa not showing […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Separating Myth From Reality When It Comes to Supply Chain-Driven Shortages By Berna Barshay The issue of supply chain disruptions continues to get amplified in the media... As the press reports pile up along with the one-off anecdotes of consumers not immediately finding what they need, this issue, much like everything these days, is getting politicized with finger-pointing galore. Panicky statements about Christmas getting canceled and Santa not showing up abound as well. Just take a look at this cartoon making the rounds...  Source: marketoonist.com [I wrote extensively last week about supply chain issues]( but just as a quick refresher – the explanation for empty store shelves is multifold... Yes, the ports are backed up, and there is a shortage of container space on the ships that haul goods from Asia to the West Coast of the U.S. And when goods arrive here, worker shortages are affecting how fast goods from the containers that do get unpacked are taken away on trucks. The retail and warehousing sectors are also grappling with worker shortages that make it take longer for goods to work their way onto shelves. On top of that, there are component shortages – from semiconductors to plastics – as well as rolling factory shutdowns in parts of Asia still battling COVID-19 surges. Even those willing to pay up to put goods on planes are also fighting for space at higher-than-normal air freight rates since a good chunk of air cargo typically travels in the belly of passenger planes... and the airlines have cut back their flight schedules due to reduced demand from businesses and tourists in the face of a lingering pandemic and complicated rules around crossing borders. Forgive me for using two cliches in one sentence... but it is truly the perfect storm and death by a thousand cuts when it comes to the supply chain issues and the resultant shortages. No one entity – whether public or private sector – is in a position to fix it... but there is no lack of institutional effort trying to address these problems. Given that these supply chain issues will likely persist for several months into 2022, I thought it would make sense to look at where consumers feel the impact most acutely. Market research firm Morning Consult looked at how supply chain interruptions impact consumers, how they respond, and who they blame... The survey took place from September 17 to 21 and measured where the shortages were most acute. While press reports would lead you to believe that the shelves are bare at retailers across America, it was just over a third of respondents who were having trouble locating an item they wanted to buy. Notably, the shortages were apparent in both durable, high-ticket items and lower-priced, consumable items...  Source: Morning Consult I was somewhat surprised to see "a house or apartment" at the top of the list. The chatter around the housing sector has been that it is incrementally cooling off while still very robust within a historical context. This seems to be one more data point indicating demand remains very strong for homes... but the supply side is slowing down the market. This is consistent with what we have been hearing from the builders... Last week, builder NVR (NVR) reported revenues that beat expectations, but it still missed its earnings as closings slowed down. Building material shortages have eaten into the ability of builders to complete and deliver homes, which is a big reason the stocks have gone sideways of late despite a robust pricing environment leading to record gross margins, despite substantial inflation. But it doesn't matter how well you can price your product if you can't finish and sell it. Housing sitting on the top of this "tough to procure" list is a reason for bullishness in the housing market (and the homebuilders by proxy). Pent-up demand like this means the housing market should have legs, at least until interest rates meaningfully move up. --------------------------------------------------------------- Recommended Links: [Wall Street legend warns: 'A strange day is coming']( A massive and surprising new transition could soon impact the wealth of thousands, while leaving everyone else worse off than before. [Details here](. --------------------------------------------------------------- [Legendary Stock-Picker Reveals New No. 1 Recommendation]( Over the past 14 years, he's pinpointed over 200 stocks that soared 100%. Plus over forty recommendations that went up 1,000% or more. And he just announced the name and ticker of what he says will be his NEXT big winner, live on camera. [Watch here](. --------------------------------------------------------------- Shortages were also reported in consumable categories like grocery and paper goods and durables like furniture, appliances, and exercise equipment... These shortages were visible both when shopping in stores as well as online. Consumers generally reacted to shortages by buying a substitute product – this was the most common response when a consumer was faced with an out-of-stock situation. But 57% of consumers note an instance of giving up and not substituting or searching for an unavailable item...  Source: Morning Consult That high abandon rate in the face of scarcity is interesting... Consumer spending and retail sales have been strong – so how much stronger would these economic measures be if people could readily find everything they are looking for? Also notable here is the willingness of more than one-third of buyers to purchase used items. I've talked about [the increased willingness of millennials and Gen Z to buy gently used]( when it comes to clothes and other fashion items... It seems as many as 34% of people will turn to the used market in the face of new-good scarcity. In conjunction with the rapid proliferation of "Buy Nothing" groups on Facebook (FB) and elsewhere during the pandemic, this development indicates the resale movement is gaining steam not only in fashion but in durable items for the home, like furniture, exercise equipment, and decorative goods. One interesting quirk in the survey... when it comes to turning to a substitute product for a desired out-of-stock item, all age cohorts behaved similarly. When it came to hunting in-store when something wasn't available online, Gen Z, millennials, and Gen X turned to brick and mortar with similar frequency... Baby Boomers lagged, but that seems pretty explainable by the heightened risk of COVID-19 to older adults. But when it comes to just giving up in the face of shortages... there was a surprising generational divide...  Source: Morning Consult Gen Zers and millennials are far more likely than Gen Xers and Baby Boomers to just walk away and not purchase anything. The explanation here looks to be related to price sensitivity. The younger the cohort, the more price sensitive. It's a reminder that most scarce products are almost always available somewhere if you look around enough... but at a premium. Older cohorts with higher income can better afford that premium. Adults were least likely to abandon the hunt for a difficult-to-obtain product if it was for a consumable like toilet paper or basic groceries...  Source: Morning Consult They were most likely to abandon the quest for highly discretionary items, like exercise equipment... It feels like I should be inserting a joke about skipping the gym here! Whether they deserve it or not, certain groups are getting blamed the most by consumers for product shortages... At the top of the list when attributing fault for shortages sit the "hoarders," with 55% of respondents saying they deserve "a lot" or "some" of the blame. Behind hoarders sit "manufacturers who create goods" (54%), "logistics companies that ship goods" (54%), and the federal government (47%). State and local governments are mostly off the hook, at 40% and 36%, respectively. The younger cohorts were more inclined to blame the government, whereas the older cohorts were more inclined to hold manufacturers, hoarders, and shipping companies at fault. Knowing what I know about supply chains, I find it interesting that people in general – and younger ones in particular – think the government can control what happens in private enterprises. While government policies regarding tariffs, minimum wage, or immigration can, in the long run, ensure the availability of goods by influencing how much is produced domestically or by increasing labor availability... In the short term, there is only so much the government can do. It's clearly beyond the scope of the government's power to regulate how many container ships get built, when Vietnam ends its pandemic lockdown, or how much retailers like Amazon (AMZN) or Walmart (WMT) or logistics companies like UPS (UPS) decide to pay their workers. And despite tens of billions in federal aid to the airlines, they can't make United Airlines (UAL) or American Airlines (AAL) fly planes with few passengers from China to the U.S. Perhaps technically they could force more flights by executive order... but forcing American companies, even ones that wouldn't have made it without taxpayer aid, to lose money operating, so stores don't go out of stock on yoga pants or gaming consoles? That's just not how American capitalism works. The government seems to be doing what it can to provide relief to the supply chain as we head into the holiday season... things like sending excess reserves of COVID-19 vaccines to Vietnam and ordering the ports of Los Angeles and Long Beach to stay open and operate 24 hours. But the government can't turn back time to three years ago and force private investors to slap down cash to build more container vessels... That ship has sailed, and the government was never in charge of that process anyway. One thing I hear a lot of complaints about is the emission rules applying to trucks in California and elsewhere. This probably influences trucking capacity at the margin but is hardly the sole cause of trucking capacity shortfalls. Altogether, it seems like money is being left on the table by retailers and manufacturers who just can't deliver the goods... Consumers facing a shortage of what they want are most frequently turning to a substitute product... but there is no doubt that purchases are also being abandoned. Except for groceries and home paper goods, many consumers are willing to wait the extra weeks or months that it takes a product to arrive these days. Generally, the more durable and high-priced the good, the higher the inclination to wait... Just look at me, [I waited eight and a half months for a non-custom couch]( But patience with logistical delays will undoubtedly wear thin as the holidays approach, making this the worst of all possible times for these supply chain glitches. Christmas most definitely won't be canceled for the vast majority of companies, but many will make considerably less money than they would have if the supply chains were operating normally. For consumers, Christmas won't be canceled either... but hopefully, Santa will bring us all a little flexibility, patience, and advanced planning skills. Shop early or be open-minded about the items on your list, or you will be sad... Lots of stocks have gone down more than they should have over this one-time issue... Some great companies have gotten clobbered because of the supply chain difficulties that make forecasting their fourth-quarter profits like staring into a black hole. But companies aren't worth 10% to 20% less because of one suboptimal holiday season... Join me next Tuesday, November 2, at noon at the [MoneyShow's virtual conference]( when I will talk about some of the companies that have gotten too beaten down over supply chain worries... I'll present my early Black Friday shopping list for stocks. You can reserve your free spot [here](. In the mailbag, more reactions to the instances of tax avoidance – and at times, tax evasion – unearthed by the Pandora Papers... When you can't easily find something that you are looking to buy, is your reaction to try a different place (i.e., go online or to a different store) or just buy a substitute product... or abandon the hunt entirely? If something is scarce or hard to find, how much of a price increase do you think is acceptable... 10%? 20%? More? Which products will you pay up for in the face of scarcity? And which will you walk away from? Do you think an IOU for a product that will be delivered in January or February is an acceptable thing for holiday gifts for most people on your shopping list... or must you have the item in hand? Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "We should continue to be outraged at the abuses the rich can perpetuate, and we need to push for real reforms. But who are the politicians willing to do that? The ones who get a degree of campaign donations from the wealthy? That is a matter that is only going to get worse." – Anonymous "Hi Berna, Since you solicited comments to this article, I am going to do it, but not from the angle you are considering. "What I consider infuriating is the invasion of privacy inherent in this study. Why do 600 journalists in 117 countries get access to 6 million documents, private and confidential for thousands or tens of thousands of people? Why does not anybody complain about it, and even why is not anybody prosecuted over it? "I understand that most of the transactions are legal, and they are also private, or that they are supposed to be. It is bad enough to have the state on our back all the time and to have Yellen demanding to see every time when we move $600 in a bank account. Now do we have to worry not only about state and big technology firms spying on us, but the members of the press join the free lunch too. Does this aspect not bother you at all? "What is the reasoning? If you don't do anything wrong, why do you care at all, and why are not all of your finances public? Is this your point of view? Regards," – Andrei C. Berna comment: Andrei, I agree there may be some issues of privacy violation here... but the need to stamp down on illegal tax evasion and corruption by elected officials is more important. Society can't afford tons of free riders... and elected officials who enrich themselves while in office need to be checked, lest they do so at the expense of their constituents. Regards, Berna Barshay October 25, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. 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