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Chip Shortages, Crude Boiling, Fed Explosion And…No Inflation

Summary:
An integrated circuit (IC) is a set of electronic circuits put together on one small, flat semiconductor medium. We call this thing a chip, and it is essential for so much of what we do in the modern computerized, digital world. Manufacturers can’t even produce cars without them.It stands to reason, then, that any shortfall or hitch in the availability of IC’s could be a huge economic problem with systemic implications. Thus, when some trade magazine which is closely following the physical fundamentals of this one technology component warns how supplier times for more than one type of IC have doubled – that is, it is taking twice as long to receive chips after they’re ordered – it sets off alarm bells.These kind of inflation alarms were positively deafening in September: The supply

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An integrated circuit (IC) is a set of electronic circuits put together on one small, flat semiconductor medium. We call this thing a chip, and it is essential for so much of what we do in the modern computerized, digital world. Manufacturers can’t even produce cars without them.

It stands to reason, then, that any shortfall or hitch in the availability of IC’s could be a huge economic problem with systemic implications. Thus, when some trade magazine which is closely following the physical fundamentals of this one technology component warns how supplier times for more than one type of IC have doubled – that is, it is taking twice as long to receive chips after they’re ordered – it sets off alarm bells.

These kind of inflation alarms were positively deafening in September:

The supply situation is even more critical for standard logic ICs and power-management discretes such as low-voltage MOSFETs and tantalum capacitors, which are now experiencing shortages and are effectively on allocation status, meaning suppliers are unable to respond to unforecasted demand. For standard logic ICs, allocation is continuing for the fourth month and is likely to persist until the end of the third quarter.

The situation so stretched, it spills over into other forms of indispensable tech like for LED makers who “didn’t recognize the limited capacities of key material suppliers before fixing their LED TV panel shipment targets.” In other words, they got way ahead of themselves seeing huge profits from what they were told would be always rising demand apparently without stopping first to consider whether or not the commodity space would be able to provide the necessary materials inputs.

In particular, PMMA and PET materials are in significant shortage. PMMA and PET suppliers are slowly expanding capacity since they need time to add new plants and face financial limitations.

Put these alongside rapidly rebounding crude oil, the Fed’s QE money printing, and the public understandably braces itself while conditioning its anger for only Great Inflation 2.0. What chance massive money printing coupled to a serious supply shock goes any other way?

This year has been all sorts of trouble for chip shortages and tech problems, for sure, but those quotes above are not contained within some article written in September 2021, rather September 2010.

What took place back more than a decade ago really does sound weirdly familiar even though we’re being led to believe what’s going on this year has never happened before in human history. Suppliers then, too, were gutted by a huge global recession, so that when demand began to rebound from the lows it did so much faster than supply could. This quite naturally pushed up prices for producers and consumers alike, small “e” organic economics.

And it wasn’t just tech stuff in 2010. Here’s the BLS in February 2011 warning about agricultural “inflation”, too:

While this rise was part of a broad commodities rally throughout the year, fears of a shortage of supply and strong global demand underpinned the surge in price.

During these kinds of periods, rebounds from low troughs, the demand part of the price/commodity/inflation equation is always assumed to be constant – it’ll be awesome for a very long time, as in full recovery. No need to worry about it especially given so much government “stimulus.”

Instead, all focus is trained exclusively on supply which only feeds inflation fears because from clickbait to entrenched ideology we are all conditioned to fear only rising prices. Yet, it is deflationary conditions which are, by far, the greatest of monetary evils (see: labor market). Restrained supply – as in 2010 and 2011 – is extrapolated far, far into the future but always along with surefire recovery in demand.

February 2011, as it turned out, this would prove to be the pivotal month if for very different reasons. All of sudden, demand began to wane well short of any sort of full recovery. False dawn, on the contrary. No inflation.

Chip Shortages, Crude Boiling, Fed Explosion And…No Inflation

Where commodity prices, in particular, had been shooting up through the roof, especially those for metals and minerals, thereafter from February 2011 they went an entirely different way – even as shouts of inflation and supply shortages would continue long after this inflection had been passed.

One reason why was the difference between more “basic” commodities like metals and the typical star of the commodity markets, oil. Where the former group peaked around mid-February of 2011, while the energy segment kept up, at least, its “inflation” anecdote all the way into March 2012 (aside from a minor dip).

Chip Shortages, Crude Boiling, Fed Explosion And…No Inflation

This is good part of what makes these deflationary turns so difficult for the public to identify and more importantly comprehend. Led to believe a rising dollar is somehow related to strong economic fundamentals (in the US), and then high oil prices which go along with that misconception as well as continue to create the impression of imminent, perhaps out-of-control inflation, we are lulled into looking at the world in the wrong way.

The same way, surprise, which intends to make central bankers and Economists appear successful and effective.

As I always write/say, it’s what not what you see (or told to focus on) that often matters most. Mostly this advice applies to bank reserves and the Fed’s balance sheet vs. shadow eurodollar money conditions. Expanding on that, however, it does, too, in this case of commodities where oil is intentionally placed right upon center stage even though at best it is a lagging indicator (see also: Summer 2008).

To really drive home this difference, we need only fast forward to the next inflation hysteria period which had been deliberately set up late in 2017 and then kept up nearly all the way through 2018 – even though, from practically the outset of 2018, what you “couldn’t” see was tearing the inflationary narrative to shreds pretty much the entire way.
Chip Shortages, Crude Boiling, Fed Explosion And…No Inflation

Metals and energy prices had peaked at the start, general non-energy commodities followed very quickly (as the dollar rose more substantially) and all the while the media highlighted only WTI and Brent. This mainstream view got its usual black-colored support drowning out the vast yet-unknown, unappreciated, and misidentified market and data evidence which had already turned dead against it.

Oil prices again lagged the rollover by quite a few months; it wasn’t until October and really November 2018 when energy finally succumbed to the growing and serious dollar shortage worldwide, trailing everything else except witless Jay Powell’s Fed which embarrassingly conducted one final rate hike that December still convinced, and trying to convince the public, of the already-dead inflation story.

As noted yesterday, some commodities even before this summer have gone soft despite supply shortages that are, admittedly, much deeper and more problematic than they had been in 2009 and 2010. While that may be the case, what’s the same this time compared to that time is such little appreciation for the very real potential demand comes up well short (for the fifth time) regardless of supply factors.

Also like those prior periods, especially 2018, energy prices are going in the opposite direction to further obscure the economic picture (especially outside the US). Oil is still the one commodity being thrown around as presumptively representative of everything only starting with “inflation” even as these others yet again take another direction.

Chip Shortages, Crude Boiling, Fed Explosion And…No InflationChip Shortages, Crude Boiling, Fed Explosion And…No Inflation

Rather than just presuming robust demand, it has repeatedly disappointed well short of even diminished expectations and no one ever offers a compelling explanation for why; and why all those past inflation promises weren’t worth the oil they were written with. They just point to crude and the Fed and claim, well, this time will definitely, positively, 100% guaranteed be different.

Chip shortages. The crucial nature of surging oil. Fed balance sheet overdose. Each declared a certainty in what seems to lead to only inflationary possibilities. We’ve seen a lot of those things before, and even more of them right now. But, again, it’s what you don’t that ultimately determines our economic fate. In that blindness once again right in front of you.

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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