We all are well aware of supply chain issues. Probably the greatest attention getter is semiconductors. It is likely that everyone who is outside a comatose state heard there is a chip shortage. This is well documented. It is affecting everything from cell phones to automobiles.
Due to the lockdowns relating to COVID, supply chains were obliterated. This is not news to anyone. The result is the worst disruption in the global supply chain, ever.
Now we are compounding it with the situation concerning Russia. Due to the invasion of Ukraine, the reaction is the near total banning of Russian products. The challenge here is the fact that Russia is a major commodity and food producer. Removing this from the market is something that cannot easily be replaced.
All of this led to a record level of inflation. We are at 40 year highs in that area. Therefore, many are convinced that it will keep mooning.
However, what if there is the other side to this equation that is telling a different story.
This is a topic that few discuss but it is evident that it was taking place from the earliest days of the lockdowns. Remember the run on toilet paper? What was the cause of this? The fact that people did not want to be caught without (for obvious reasons) caused them to "stock up". People filled their closets and garages with this essential product.
Of course, a shortage of toilet paper never came since this was one of the products that was easier to navigate. Unlike other products, the production of this was unaffected by much that went on globally, at least for the U.S.
The same of not true for many other products. Even after things reopened, there were shortages. Fast forward another year and a half, before the situation in Ukraine, and there were still major issues.
This sent a major wave across the psyche of anyone tied to the supply chain. Basically, when products came in, people started to load up. Just like with toilet paper, both individuals and companies were stocking up. If they need 1, 4 were purchased. This meant that retailers quickly ran out. So what did they do? Ordered more.
Here we see the next level affected. The wholesalers see this coming in and believe demand is strong. As their customers complain about the shortage (and slow delivery times), they order more from the factory. Their message to the manufacturers is to kick more out.
Unfortunately, we are coming to a cross road. It seems that inventories are starting to rise. By the end of last year, we saw the largest year over year inventory build up ever. This happened two months in a row.
So what is the cause of this? How can this be the case when we are told that the economy is so strong?
Panic buying.
It is easy to see how the markets are distorted based upon a perceived demand that doesnt truly exist. A while back I made a video stating that a good time to buy a car would be around June of this year. Looking at the latest CPI report, the one category that saw a decline was used cars. The prices were actually down.
This is an industry that was crushed due to the lack of chips. Thousands of cars are produced, sitting in fields just waiting on chips. Once they arrive, those vehicles will be shipped to dealerships. Many believe these cars will fly off the lot. After all, the demand is enormous.
What if that is not exactly the case? Many purchased vehicles during the lockdown, one of the causes of the chip shortage. Couple that with the fact we are starting to enter some economic headwinds and we are seeing a situation where the demand might not be as expected.
The consumer is just one piece of this. Another major component is companies. When it comes to panic buying, these are the leaders. The worst thing for a company is to be caught without a particular item that is needed. For this reason, they will stock up after an event like we had in 2020. This is exactly what companies did.
Now we might be getting to the point where things could soften. What if business drops off even 5%? All that inventory is going to just sit. We are going to see a rippling throughout the supply chain again, this time in a reverse direction.
If this continues, there is no other choice as inventories rise.
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