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The Non-Charitable economics of (Not) Inflation

Summary:
Are giant French freightliners really so generous? Big companies can be known for their philanthropy, of course, but such efforts aren’t usually folded into their own business activities. Generally speaking, the beneficiaries of corporate charity tend to be strangers. If determined giving is actually being applied within the narrower confines of the corporation, that’s not altruïsm but economics (small “e”). Interesting, therefore, that CMA CGM yesterday announced what might otherwise appear as sympathetic benevolence. A conglomeration of two older French businesses, Compagnie Maritime d’Affrètement and Compagnie Générale Maritime, the firm’s reach is mammoth. We aren’t talking about some niche company trying to stand out or make its name during trying times. Operating/owning 566

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Are giant French freightliners really so generous? Big companies can be known for their philanthropy, of course, but such efforts aren’t usually folded into their own business activities. Generally speaking, the beneficiaries of corporate charity tend to be strangers.

If determined giving is actually being applied within the narrower confines of the corporation, that’s not altruïsm but economics (small “e”). Interesting, therefore, that CMA CGM yesterday announced what might otherwise appear as sympathetic benevolence.

A conglomeration of two older French businesses, Compagnie Maritime d’Affrètement and Compagnie Générale Maritime, the firm’s reach is mammoth. We aren’t talking about some niche company trying to stand out or make its name during trying times.

Operating/owning 566 vessels, CMA CGM has 755 offices spread throughout 160 countries managing 750 warehouses in addition to those ships serving 420 of the world’s 521 major ports along an advertised 285 shipping lines (all data according to the company itself).

They might seem to know a thing or two about what since 2008 had been an unfortunately quiet part of the global economy.

The Non-Charitable economics of (Not) Inflation

Trade had been, prior to Euro$ #1, because of the eurodollar’s pre-crisis rise and mania, a key part of genuine growth and real prosperity worldwide. In and after GFC1, however, no dollars/no trade (or less dollars/less trade). Shipping tailed off and the only attention paid by the world’s media was the occasional reference to structurally sinking shipping rates.

Then came COVID and all of a sudden port traffic chokepoints and basic logistics were cited everywhere as key inflationary contributors. Bottlenecks and supply disasters, many blamed on the inability of shipping firms to better address the unique imbalances foisted on them especially at US destinations.

Quite simply, shipping rates skyrocketed in what was presumed a dependable piece of our presumably highly inflationary future. Not good for the consuming public, but if you were a shipping giant what an incredible stroke of favorable developments and luck following more than a decade of suffering.

Given this, what CMA CGM announced yesterday might seem a bit puzzling:

French container shipping group CMA CGM said on Thursday it was stopping all increases in its spot freight rates until Feb. 1, 2022 following a rise in prices this year.

The massive company is bowing out of any further advantages coming its way because…? Perhaps managers in France really are getting into the spirit of Christmas early, taking pity on the world’s poor little guys, lending a huge helping hand in these trying times to Walmart, Costco, and VP Harris.

Yes, actually, but that’s not the same as charity. It is, instead, almost surely economics (again, of the small “e” variety). You could make the claim that it is keeping costs down to the benefit of its customers as well as an attempt to lure others who aren’t (or aren’t as often or as much). But that’s just natural competition and commercial market forces rather than full-on philanthropy.

This is what happens when supply constraints are no longer binding and primary. At some point, temporary bottlenecks recede and prices eventually adjust based on the “natural” fundamentals including demand. During this fine-tuning, you’d absolutely expect market players to adapt just as CMA CGM intends – rebid their services.

Uncle Sam’s forty trillion nickels, thereabouts, created a temporary imbalance that, along with real logistical problems (availability of truck chassis, for one), caused prices to move given such supply inelasticity. Now with a bit more elasticity on that side, there’s rightly more attention paid to the other side in terms of demand.

Maybe this side isn’t being viewed (and priced) in the same way as it had been during Treasury’s induced US goods frenzy earlier in the year.

The result, in terms of economy-wide prices (especially since we’re really talking about global economy-wide) is a serious but transitory bout of price deviation that is more and more looking to be in the past tense. If so, this would not be inflation.

The Non-Charitable economics of (Not) Inflation The Non-Charitable economics of (Not) Inflation

Today, the BLS reported estimates for producer prices (PPI) during August 2021; consumer prices (CPI) will follow on Tuesday (14th). The various indices continue to show huge annual changes, none more so than the commodities component. Where the headline PPI increased 8.3% year-over-year, and the core PPI 6.7%, the commodity index was up 19.87%.

This was another month at the highest rate since the middle seventies; a comparison only to the Great Inflation.

But even here there are recent and obvious signs the price fury is slowing and already has slowed down considerably. Its peak, whether commodities or other producer prices, was around April and May. These are the same months not just as we see all around the rest of the world (again, global inflation potential) but more so coincident to the actual flow of those trillions upon trillions of government nickels.

Even though the PPI for commodities isn’t seasonally-adjusted, it needn’t be (smooths on its own, especially since last year) to see the transitory action in something like rolling three-month rates of change:

The Non-Charitable economics of (Not) Inflation

Prices are, according to the BLS, still rising but no longer to the same degree and in the same way as earlier in the year. This seems to be something of a surprise, as if price behavior is all or nothing; it has to be continuous inflation, many are claiming, unless the PPI or CPI just stops rising altogether all at once.

That’s not how economics works; these things are complex processes which take time to sort out (and months used to be properly considered the short run). CMA CGM’s notice for its part in the economy is a pretty good example of this. “Inflation” may take some months before it rolls over more completely. In just shipping, what happens when (not if) competitors end up matching this price freeze?

With data now up to August 2021, including US producer prices, the evidence continues to pile up showing exactly this. And it was entirely predictable given the set of circumstances. Inflation wouldn’t just continue onward because prices were squeezed over a few months, rather there has to be the monetary factor behind it to maintain the trend beyond the temporary reach of artificial imbalance.

Despite being reported as fact, the Federal Reserve’s “flood” of “money printing” belongs as fiction. Even the market’s reflationary trend earlier in the year never really reached very far into reflation at any point. Since February, more and more markets have blatantly, confidently priced this rolling over, the more probable potential for demand to disappoint (or worse) – as supply factors diminish – than any single element of continued inflating prices.

The big French freight firm isn’t a charity. Its announcement is another serious sign of predictable reversion. Reversion to what? Well, look around the rest of the world and even something like the US labor force and it may just well be that CMA CGM will end up wishing it could go back to 2009-19.

The Non-Charitable economics of (Not) InflationThe Non-Charitable economics of (Not) InflationThe Non-Charitable economics of (Not) Inflation


Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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