A Trifecta of Inflation Forces

On today’s show we are taking a closer look at the macro economy. A trifecta of forces are amplifying the trade deficit which will ultimately cause price inflation in the West.

A critical shortage of containers is driving up shipping costs and delays for goods purchased from China.

The pandemic and uneven global economic recovery has led to this problem cropping up in Asia, although other parts of the world have also been hit. Many desperate companies wait weeks for containers and pay premium rates to get them, causing shipping costs to skyrocket.

This affects everyone who needs to ship goods from China, but particularly e-commerce companies and consumers, who may bear the brunt of higher costs.

Containers from Asia would normally be returned full with exports from the US or Canada or Europe.

But there is such a shortage of containers that the owners of these containers are not willing to keep them in the west for even a few days. These containers are being turned around empty. We already are facing a massive trade deficit with China that is now being amplified by the container shortage.

But it begs the question, if the world had enough containers in the past, why is there a shortage now? Where did all the containers go? Many of the containers are stranded in the west. Oddly enough, I’ve seen prices for used shipping containers in Canada drop to about $1,400. They still exist, but they are in the wrong place and somehow they don’t know how to get them back to Asia. Manufacturing of new containers slowed during the pandemic, which has further amplified the problem.

So shipping costs have tripled in a very short time.

We have oil prices now up at nearly $60 per barrel. US oil production is down by 1/3 compared with this time last year, making the US far more dependent on imports of expensive foreign oil. This will widen the already large trade deficit even further.

I predict that oil prices are heading even higher this year. $80 is easily within sight and $90-$100 a barrel is not out of the question.

The rising price of oil will widen the trade deficit once again.

There can only be one outcome from such a large trade deficit, and that is a fall in the value of the US dollar against the other currencies including the Canadian dollar, the Euro and the Japanese Yen.

When that happens, the direct impact to consumers is an increase in price for all these imported goods. I’m not talking about one or two percentage points. I’m expecting a 10-15% drop in the value of the dollar compared with the major trading currencies of the US.

Eventually the supply chain returns to normal and the extra inventory is going to be reduced. When it’s time to reduce inventory, the orders drop to zero for a period of time. This is the natural cyclical nature of many supply chains.

In the meantime, the government is busy claiming victory on the economic recovery that has been artificially created through the printing of Monopoly money.

As soon as the stimulus stops, so too does the illusion. The economy is like a hardcore drug addict, completely dependent on the next hit.

Expect higher prices for just about everything this year.

What a mess.