How a 40-Foot Steel Box Can Disrupt the World Economy

When the hero of the supply chain becomes the villain... A shipping-container shortage... The foot soldiers of global trade... How a 40-foot steel box can disrupt the world economy... The shortages are leading to inflation... It's a great system until it's not... Revealing a scary reliance on China...

My dining-room table is somewhere in the Atlantic Ocean...

My family and I (Kim Iskyan) moved to a house in suburban Washington, D.C., from Dublin, Ireland, in late June. At that time, our household goods were packed up by a team of burly movers, headed up by a guy named Paddy who enjoys his pints of Guinness.

All of my family's worldly (and unworldly) possessions – furniture, third-grade soccer medals, couches and rugs, the Calphalon pots and pans, and, yes, the dining-room set – were wrapped in enough boxes, packing paper, and bubble wrap to occupy an entire county of kindergarteners for months. Then, they were skillfully loaded into a 40-foot container.

The movers took the container to Dublin Port and craned it onto a giant ship for the trans-Atlantic journey...

Normally, the trip across the Atlantic Ocean takes three weeks. But now, more than two months later, I'm living in a house with a loud echo and hardly a stick of furniture – because our things still have not arrived.

Of course, it's not just my household goods that are taking longer than usual to get from point A to point B... It's everything.

You know what I'm talking about if you've tried to buy a fridge, a computer, a car, or pretty much anything lately. You can't get the object of your consumerist desire for weeks (if you're lucky) or months (which is more likely). It frustrates our yearning for instant gratification – we're accustomed to getting whatever we want, delivered within days at the latest.

Of course, it's a lot bigger than that...

While my family and I can rough it for a few additional weeks in our suburban home (the purchase of which, as I wrote in the August 10 Digest, was no easy process either), delays like this impart a huge stress on the global supply chain... and therefore the economy.

Like other basic infrastructure of modern civilization – the Internet, electric grid, and cellular networks, for example – the global supply chain is something that we take for granted... until, that is, it stops working.

In today's Digest, I'll dive deeper into what has been happening and what it means for the global economy... And then, we'll try to figure out when things will get back to normal.

The humble shipping container is the hero – and today, the villain – of the global supply chain...

If the global supply chain is the nervous system of the world's economy... the shipping container is its spine.

Around 90% of total world trade in goods is transported by sea – which amounts to around $14 trillion in 2021, equivalent to about two-thirds of U.S. gross domestic product ("GDP") last year... And of that, 60% is carried in shipping containers.

Those rectangular steel boxes, generally either 20 or 40 feet long, are the foot soldiers of global trade. They carry everything from Hanes T-shirts to computer motherboards – and my household goods – to and from ports all around the world.

A 40-foot container holds 2,390 cubic feet of stuff – large enough to fit the contents of a standard four-bedroom American home. It can store around 160 barrels of oil or more than 12,000 shoeboxes. And four medium-sized cars can fit, end to end, in a 40-foot container.

These containers are transported on massive cargo liners... They're each around 1,000 feet long (three football fields) and rise upward of 150 feet above the water.

Shipping things in big boxes – rather than as breakbulk cargo, which is when items are stowed individually in ships – might seem obvious. But the widespread adoption of containers, which could also be easily loaded onto a truck or rail car, was revolutionary in the 1960s and 1970s. As legendary management consultant Peter Drucker wrote in 2007...

[Without containers], the tremendous expansion of world trade in the last 40 years – the fastest growth in any major economic activity ever recorded – could not possibly have taken place.

More recently, research by the Federal Reserve Bank of St. Louis suggests that containers are a central factor in the 65-fold increase in global exports from 1970 to 2018...

But over the past year, shipping has become the bad guy in the global supply chain...

That growth was partly because shipping goods around the world was relatively inexpensive. But that has been changing this year...

Since the beginning of 2021, the cost of transporting an industry-standard, 40-foot container to the northeast U.S. from northern Europe has more than tripled – from just over $2,000 to nearly $7,000.

From China, the price has quadrupled to $22,000 per container.

Overall, the Freightos Baltic Index (FBX), a container-freight price index that measures global ship freight prices across multiple routes, has risen more than three times since the start of the year. And the share prices of the world's largest publicly traded shipping companies – Denmark's Maersk (AMKBY), Japan's Nippon Yusen Kabushiki Kaisha (NPNYY), and COSCO Shipping in China (CICOF) – are up an average of 310% over the past year.

That means moving TVs, sweaters, and Instant Pots across oceans – from where they're manufactured (mostly Asia) to where they're bought (Europe and the U.S.) – costs a lot more...

And since shipping rates are calculated based on volume – rather than weight – the impact is proportionately greater on bulky items... That "made in China" garden dining set will see a bigger shipping-related price bump than a MacBook Pro. Sending goods by air freight isn't really an option for most things – as it costs anywhere from five to 15 times more than by sea.

And manufacturers and distributors pass those higher costs along to you... As we've written regularly in the Digest, this has been fueling inflation – which is up 5.3% over the past 12 months.

Higher demand is stressing the global supply chain...

After COVID-19 lockdowns – and with pandemic-related stimulus cash magically deposited into their bank accounts – millions of Americans have been in "treat yourself" mode...

Demand for consumer goods – the kind of things shipped in big containers from Asia – has boomed. Overall consumer spending in the U.S. is up 11.9% in the second quarter of this year. And Amazon's (AMZN) revenue, for example, is up 27%.

Additionally, the surge in working remotely – the percentage of Americans working from home nearly doubled due to the pandemic – has driven up demand for computers and other home-related creature comforts...

All that buying – of PlayStations, lumber, and almost anything electronic – has helped drive a sharp economic recovery... In the second quarter of the year, U.S. GDP rose at an annualized rate of 6.5%. And it's on track to post the strongest full-year growth since 1984.

Such strong demand means that even if the global supply chain were operating perfectly – with the neurons of the entire system snapping like normal – it would be stretched to the limit.

But nothing is normal... and the "everything" that people want just hasn't been getting to stores.

A shortage of one thing leads to a shortage of everything...

There aren't enough containers... It's as simple as that.

They might look like simple steel boxes... but three Chinese companies produce 80% of the world's containers, according to the website American Shipper – and they can increase supply only so fast. Prices of containers are up more than 50% over the past year.

And there also aren't enough container ships, which can take three years and upward of $200 million to build. As the Financial Times reported in late August...

The availability of container ships is likely to remain strained in coming years given soaring demand for their services.

It doesn't help that some shippers idled their vessels in the spring of 2020 – anticipating a collapse in world trade as COVID-19 lockdowns were imposed around the world. Instead, demand for goods that are shipped around the world surged...

But these giant ships can't be dusted off and put back to work that easily. And the ships and containers that we do have aren't always in the right place.

Like any other mode of transportation – the Uber taking you downtown, the moving truck eventually hauling my dining table to our house, a charter flight from Chicago to Cancún – containers are often empty after they drop off their cargo at their destination. In the perfect world, there's matching demand at the destination, and the container (or Uber, or truck, or plane) is full on the way back, too.

But America's trade deficit (that is, how much more the U.S. imports than it exports) with much of Asia – and China, in particular – has added to the strain of the global supply chain.

A lopsided trade relationship leads to empty containers headed to China. Over the first seven months of 2021, with the vast majority of trade in containers, the U.S. imported $270 billion worth of goods from China... while it exported less than one-third of that sum to China.

One of the unforeseen consequences of this container shortage is that it's sometimes not even worth it for an Asia-bound container ship to wait to be filled. In normal times, two-thirds of the containers leaving ports in the U.S. are filled with exports to the rest of the world.

But now, depending on the port, they're mostly empty... For example, around 75% of containers leaving the Port of Los Angeles don't have anything in them.

As a result, some relatively low-value exports – like soybeans from the Midwest – don't make it onto near-empty ships. As National Public Radio reported in July...

It's often more lucrative for shipping companies to race back to Asia with empty containers for a quick refill rather than wait for those containers to be loaded with American exports.

The global supply chain has suffered other pressures too...

The many ripples of the pandemic have rocked the shipping industry, and the global supply chain, in other ways as well. For example, in early August, a single COVID-19 case caused a partial shutdown of the Ningbo-Zhoushan port in China, the world's third-busiest container port.

What's more, the economy-wide labor shortage – also related to the post-pandemic (in the U.S., at least) surge in demand – has slowed operations at ports, in the U.S. and elsewhere.

Though not COVID-related, don't forget about the blockage of the Suez Canal – through which around 12% of global trade flows – in March by a huge container ship. Close to 300 vessels were held up... adding another choke point in an already-dazed supply chain.

One result has been that ships – and their piggybacking containers – sometimes take strangely circuitous routes to get to their destinations...

For example, the container with my family's belongings departed from Dublin. But rather than starting west across the Atlantic, it went east to the port in Antwerp, Belgium. After that, our container headed to Norfolk, Virginia...

"This is weird. I've never seen anything like it," the guy at the moving company told me. That drained what little hope I had that I would see my stuff anytime soon.

If a chain is only as strong as its weakest link, the global supply chain is flimsy today...

Once upon a time, companies gathered all the pieces to a product – whether they were making tanks, toasters, or toys – and stored the parts in big warehouses that were usually located physically close to the place where the product was put together.

For example, if automaker Ford Motor (F) had a warehouse full of bumpers waiting to be installed on sparkling new 1972 Torinos... it paid for the land, the storage space, and the personnel to track the inventory.

But upon the development of just-in-time manufacturing by Japanese automaker Toyota Motor (TM) in the early 1970s, companies became more aware of the cost of holding massive inventory. Over time, manufacturers offloaded the task and expense of providing inputs – pistons, tires, rearview mirrors, and other parts – to the main plant at the moment when it was required in the assembly process.

Companies like Ford eventually realized that the money spent on warehouses could be better put to research and development (on, say, making an even sexier Torino)... or it could go to the bottom line.

Just-in-time manufacturing evolved and spread far and wide... Advances in tracking and information technology and systems also allowed for the increasing globalization of supply chains.

Today, as the Economist explains, supply chains are "some of the most sophisticated forms of human endeavor." The iPhone, for example, sources inputs from a network that spans 49 countries. Pharmaceutical giant and vaccine maker Pfizer (PFE) has more than 5,000 suppliers.

And then, of course, there's semiconductor chips... They're the "secret sauce" in everything from mobile phones to refrigerators to gaming hardware – and they're also in short supply.

The pursuit of lower costs and greater efficiency through a sprawling, globally linked supply chain has powered innovation and a surging economy – but when one thing goes wrong, it leads to delays, frustration, and added costs.

It turns out that the global supply chain – to use the terminology of investor and author Nassim Taleb – is fragile. And it's clearly not anti-fragile – a term Taleb coined that refers to a system where stressors like lockdowns, workforce shortages, and container shortages make it stronger, rather than weaker.

Even Toyota – the company that you'd think has supply-chain anti-fragility in its DNA – announced production cutbacks because of chip shortages. Supply-chain bottlenecks will reduce total global car production by around 8%.

The fragmentation of the global supply chain is increasingly a national security – and political – issue...

Earlier this year, President Joe Biden ordered a review of the global supply chains used in a handful of important industries – including semiconductors and pharmaceuticals – with a particular focus on our reliance on China for essential inputs.

Of particular concern is Taiwan, which makes nearly two-thirds of the world's semiconductors. The U.S. has just a 12% market share. China has long had its eye on "reclaiming" independent Taiwan, which it views as a wayward province.

As Chinese President Xi Jinping said most recently in early July...

Solving the Taiwan question and realizing the complete reunification of the motherland are the unswerving historical tasks of the Chinese Communist Party and the common aspiration of all Chinese people.

It doesn't seem like there's any doubt about his intentions.

As I wrote in December, the scope for an escalating conflict between China and the U.S. makes America's reliance on Taiwan an even more dangerous choke point for the American economy.

What's more, ensuring the stability of the global supply chain fits in with President Biden's evolving "foreign policy for the middle class." As Foreign Affairs recently described it...

[It's] a foreign policy supported by or attuned to the interests of the majority of American voters, not just the received wisdoms of U.S. foreign-policy elites.

Ensuring the continued supply of the technologically indispensable microchips – which also power the toys and gadgets that are essential to the American middle class – plays right into the foreign-policy priorities of the White House.

Meanwhile, the U.S. is not alone in examining its reliance on other countries... In March, the European Union said it would aim to double its share of world chipmaking by 2030 (from 10% today).

An added consequence of what's happening with the global supply chain is lower growth...

As I mentioned earlier, the fatigue caused by weak links of the global supply chain – and higher costs for shipping – is fueling inflation.

It's also leading to scarcity... And if consumers can't buy what they want, it's going to stunt economic growth to some degree – consumer spending accounts for around 70% of total economic output.

In fact, analysts at Goldman Sachs recently cut their forecast for GDP growth in the U.S. in the third quarter, in part citing supply-chain disruptions. And as Bloomberg warned last month...

The supply constraints plaguing the U.S. recovery show few signs of dissipating any time soon, weighing on growth and stoking inflation.

And it could get worse...

Lower growth – simply because the global supply chain can't do what it's supposed to do (that is, supply things) – might be the only way to fix what's broken... whether intended or not.

"Consumer demand must ease to end supply chain crisis," the Financial Times said earlier this month, citing a shipping executive. Ports and the entire shipping industry might need a slowdown – just to catch up.

But with the holiday season approaching – when companies ramp up in anticipation of strong demand (and don't scale back) – there won't be much time to take a breather...

That's a big reason why it's difficult to see a resolution anytime soon...

Home Depot (HD) and Walmart (WMT) are contracting their own ships to transport goods, rather than relying on middleman shippers.

But their ships will still be subject to the same supply-chain constraints as everyone else... Just because the boss can yell at the internal shipping team, rather than the external shipping team, won't put portable drills or soccer balls on the shelves any more quickly.

Meanwhile, there's a bull market for logistics experts. As Bloomberg reported earlier this month...

Forget finance. Supply-chain management is the pandemic era's must-have MBA degree.

Shipbuilders and container makers are ramping up production to try to address shortages and take advantage of surging demand. But once all that new capacity hits the market a few years down the road, it'll possibly create a glut... and bring about a collapse in prices for ships, shipping rates, and containers.

That will be bad news for the shipping industry... but a welcomed development for the health of the global supply chain.

Over the long term, companies may increasingly focus on reducing the fragility of their supply chains... Getting inputs from someplace closer (or using fewer suppliers, and holding bigger inventories of parts, in a partial reversal of just-in-time manufacturing) might be more expensive – but it would be worth it if that cuts the risk of not being able to get inputs at all from far-flung suppliers during a supply-chain crisis.

In the meantime, my house still echoes... Our empty rooms await the furniture packed inside the shipping container, traveling somewhere on the Atlantic.

New 52-week highs (as of 9/21/21): OptimizeRx (OPRX), PLDT (PHI), and Thermo Fisher Scientific (TMO).

In today's mailbag, a thought on a potential U.S. government debt default… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Your description about what could happen with a Federal default sounds wonderful.

"Zombie corporations bankrupt. Interest rates up where they belong. Stock prices down where they belong.

"And things you forgot to mention: government budgets down where they belong, tax revisions and tax enforcement to balance budgets, inflation short-circuited, fewer imports and more made in America. All that bookkeeping debt 'owned' by the Fed... poof!

"What's there not to like?" – Paid-up subscriber Kendrick M.

All the best,

Kim Iskyan
Ashton, Maryland
September 22, 2021