Interview Summary
In this recent interview from Wealthion with Jim Rickards, Jim discusses the state of the global economy and looming supply chain challenges. Wealthion and Rickards speak on what risks to be aware of and what investors and consumers should be doing right now to prepare themselves.
See Jim Rickards Most Recent Warning and Investing Advice
Transcript
Jim:
I looked for a severe recession in the U.S um really Global because you know your
question was how’s the global Outlook is pretty bad um maybe something closer to you know
social unrest and riots in Europe um and then on top of that possibly Global Financial liquidity crisis worse than 2008.
Adam:
Welcome to Wealthion.
I’m Wealthion Founder Adam Taggart.
The global economy is stumbling and not just for financial reasons like the increasing cost of debt. Supply chains remain compromised we’re still having material challenges in both producing and distributing real physical Goods across our oceans and continents
this is such a serious threat to Global Prosperity that best-selling author James Rickards has made it the focus of
his new book sold out. How broken supply chains surging inflation and political instability will sink the global economy.
What are the biggest looming risks we need to be aware of, and what steps should we as both consumers and investors take. For answers we sit down now with James records himself.
Jim thanks so much for joining us today.
Jim:
Thanks Adam it’s great to be with you
Adam:
Thanks, look Jim I got a ton of questions about this great new book of yours real quick though let me just toss out the normal starting question.
I like to begin these discussions with what’s your current assessment of the global economy and financial markets?
Jim:
Sure, the global economy is weakening very quickly.
um.. that’s backed up by a lot of metrics, uh.. Most recent data out of China indicates they’re on the brink of a recession if not in a recession which is kind of shocking considering this was an economy that Grew at a 10% compound rate for about 30 years.
uh.. then that’s sort of you know..
7% became the new 10%
And then 5% became the new 7%
But now they’re close to 0.
uh…
They lie about their numbers
They’re not reliable but you know you can get something out of it, there are other private sources of information that show the same thing so their growth is placed close to 0.
A lot of reasons for it you know the real estate meltdown the covered lockdowns which are you know probably as much political as they are medical there’s no medical sense to them whatsoever you should just you know let people get hurt immunity that’s how Europe and the United States got past the pandemic but China has not.
Uh… but they’re continuing to do that. I’m, you know, decoupling from the United States demographic composition.
China’s mess Europe’s not much better they’re again right on the border of a recession right now uh according to a lot of data but they’re going to take a deep plunge almost uh immediately as the, uh.. I guess they’ve had a little bit of a mild spell in Europe but the cold weather won’t be far behind. I actually watched the, uh, the jet stream. uh you know often the jet stream is kind of straight with a little bit of a wave but every now and then it goes.
Uh, Meridian Arnold which means it’s really wobbly, uh.. that means that’s how these cold Arctic blasts come down into, you know, it could be the United States, North America or Europe.
It looks like that’s how they just stream shaping up so you look for a bitterly cold winter in Europe uh their energy is depleted, you know, you hear the happy talk from the EU leadership and others you know well “Germany’s reserves are almost 100 full”, yeah but what then I’ll tell
you is that the reserves are only 20 of what they need so you got 100 of 20 which is 20 at least where I went to
school no new Supply coming.
In latest information I had always pointed to the U.S as being behind the sabotage of the north stream pipeline but when I say U.S I kind of put UK in the same breadth because they they work together the latest information is that it was actually a UK operation obviously with the blessing the support of the United States just gave us a little bit of plausible deniability but not much.
Because, the UK as I said they would, they wouldn’t have done it without clearing it with us um so. uh, but what that does is take away Germany’s options.
You know if Germany decided they wanted to make amends with Putin or at least talk to Putin to get the natural gas flowing in exchange for easing up on armed shipments to Ukraine etc
Tthat door was open but not anymore because they took away Putin’s leverage because even said “yeah, I’ll give you more gifts”. He can’t do it at least in the short run because the pipeline’s blown up.
So that was almost like the U.S declaring war on Germany I mean something we’ve done before a couple times but, uh that’s that’s just sinking It. But, you know.. people talk about liquid natural gas as a big thing. uh.. uh.. a big story oh a few weeks ago well that
The European Union had signed a major liquid natural gas deal with gutter, you know which is a major producer so I looked into it and I was like yeah uh it’ll come online in 2026.
Basically, the guitarists who are ones who are getting the Europeans to fund the build out of the infrastructure in a new gas
field in the northern part of Qatar which is the Peninsula.
um.. yeah,
So 2026 well good luck getting from here to there.
That sounds like four years away, uh..
They’re not, they’re not going to make it through four months and that’s the point.
um.. you know they got some floating barges to uptake LNG but the capacity is not there the LNG is not available
And by the way,
What happens to, uh..
New England?
What happens to New England natural gas prices?
If we buy and start shipping our natural gas to Europe?.
Um..
Nothing good I can tell you.
So, uh..
So Europe is more than just a Slowdown more than just an economic headwind this is you’re looking at something more like a catastrophe
I mean Germany is the fourth largest economy in the world. It might actually be the third largest right now.
Let’s show some recent data that they might have passed Japan. but, they’re.. they have the highest ratio of NET exports to GDP.
You know, GDP is a number of components.
The US is very consumption driven, China is very investment driven.
uh.. Germany’s very export driven so what do they make you know uh watches cars uh Precision Machinery uh you know air crafter all sorts of high-tech things.
Siemens, Volkswagen.. look at BASF
The big companies.
They are already starting to shut down manufacturing lines but this is going to get a lot worse!
The energy is going to be racing people.
The thermostats are going to be set at you know 50 degrees Fahrenheit.
I mean I’m not sure what the equivalent is in centigrade about 15 or something but, um.. they’re going to be the Germans are out chopping down trees to get wood to stay warm this winter.
But there is no firewood for sale.
uh.. This isn’t medieval, this is Neolithic.
um..
And then you know the polls are lined up to get coal Depots to get some coal in the trunks of their cars or the flatbeds of the pickup trucks for the same reason. So this is a disaster.
Over to the United States
Our economy you know so we had negative growth in the first quarter and the second quarter of 2022. two back-to-back quarters of declining GDP meets the kind of rule of thumb definition of a recession.
Nobody wants to use the “R” word. They’re all hiding behind the National Bureau of economic research which is the “unofficial” official Arbiter of recessions and recoveries. we’ll see what they say, typically the National Bureau of economic research declares a “recession”, the beginning of recession after it’s already over, it’s like “thanks we’ve been through it” ; “thanks for letting us know” we just had a recession.
They’ll probably come out and say something next year, who knows?.
But, um.. but if it was a recession it kind of looks like one it was very mild Granite growth in the third quarter was a much stronger 2.6 percent but when you dissect that what you see is that um that was almost 100% driven by NET exports!!
When was the last time the United States had positive GDP driven by net exports? probably 1959!!.. I mean that’s we’re we’re that’s typically a drag on growth and we wanted we’re running trade deficits forever
uh..
but there it was, um.. that meant that people were still buying U.S Goods. but, the US, we were not buying as much from other people. That’s indicative of a Slow down consumption was weak, private investment was weak, inventories were weak. Those are the real drivers of the economy and they were all week!. so okay net exports, that’s not sustainable so I would look for a recession, a more severe recession to begin in the fourth quarter. That’s one you know, combined with fed tightening, interest rate hikes, balance sheet reductions, etc.
That’s one whole vector and I wouldn’t put any weight on a low unemployment rate, it ignores the labor force participation rate which is awful.
You know, it’s down around 62 percent versus 70 percent in the year 2000.
But, um.. but beyond that unemployment is a lagging indicator unemployment goes up after a recession begins.
employers are very reluctant to lay off employees, you got to pay severance.
Um..
It’s expensive to recruit and hire them back and train them.
So you pretty much wait until the recession is already started thinking oh gee all right I gotta license people off so it’s not a leading indicator it’s a lagging indicator so the FED is behind the curve um and then.
And then beyond all that Adam..
The biggest, you know.. is the real 500 pound gorilla in the room.
If you want to call that, there’s a brewing Global liquidity crisis, a global financial crisis.
That’s different from a recession.
it’s, uh..
Financial panics and recessions are two different things that can come separately.
In 1998 we had a financial panic, but there was no recession.
In 1990 we had a recession but there was no Financial panic.
In 2008 we had both!!.
They can come together and it looks like they might be coming together again.
This is revealed in inverted yield curves, um uh.. major dealers are bidding at auction for treasury bills.
The FED will give you treasury bills for the phone call, you just call the fed and do a reverse repo with the FED.
They’ll give you some treasury bills.
But, the banks are bidding at auction for treasury bills that yields maturity lower than what the FED will give you for a phone call.
Why would you do that?
The answer is the Fed bills cannot be rehypothecated; they cannot be used as collateral. but, the auction bills can!. So what that tells you is,
there’s a collateral shortage.
That means deleveraging balance sheets, it means financial distress, and, we also see it not just in the treasury Yorker which is inverted from uh.. right now, um.. six months to 10 years.
but also the euro dollar futures curve which is even more troubling.
It’s not unprecedented. but, it is rare and it’s not a good sign.
But the fact continues. you know raising rates in the teeth of this really bad data, so I look for a severe recession in the U.S.
Uh.. Really Global, because you know your question was how’s the global Outlook? is pretty bad, um.. maybe something closer to you know
social unrest and riots in Europe, um.. and then on top of that possibly Global Financial liquidity crisis worse than 2008.
Adam:
okay so uh you just gave an interview’s worth of answers in that first question.
Jim, that was wonderful, um.. my challenge is there’s so many threads I want to pull on there
But, I want to, I want to you know go towards the very sort of at least initially supply side uh Viewpoint of the book you just came out with.
um.. I want to put in a pin and a couple of things there um real quick. I just want to ask one question based on what you said because
I really love your your feedback on it, um.. when you were talking about the US you talked about the low labor force
participation rate that we have here. and, um.. I think he says like around 62%. and I’m just curious like what really is driving that?
um.. We seem to have a huge chunk of our working age population that is not working!! and you probably
study this more than most people like what’s what’s truly going on there?, um.. do we have a? uuuh.. is it just an aging
population that truly can’t work?,
um.. I know that disability has been..
it’s seen massive growth over the past like 15 years.
um you know are there a bunch of people that are opting out or gaming the system? or whatever but what’s responsible for us only having 62% of our working age population actually engaged in working?
Jim:
Well there are two answers to that!! and.. but, they’re consistent I’ll give you both.
The short answer is it doesn’t matter, you know you, you listen to the number of factors, I’ll go back over those factors, aaand.. you’re right!!, but, it
doesn’t matter, it’s low is low.
In other words the thing about Labor Force participation is a very simple calculation. you you say:
How many people are working?
That’s the numerator
How big is the labor force?
That’s the denominator.
That’s all it is now?
it’s never 100% right, because there are: students, homemakers, retirees and others.
There are good reasons for some people not to be in the workforce at any given time. But as recently as 2000’s that number was 70%.
What drove it?
Between 19 about approximately 1975 and 2000 is basically women entering the workforce
Women who had been home, um.. those Homemakers or you know performing other roles entered the workforce and then that number went up!.
So, I guess it was never 100% but was very strong.
62% is down a lot I mean that’s, um.. about a 14% decline.
look you know GDP the standard definition is, uh.. you know it’s consumption, plus investment, plus net exports, plus you
know government expenditure like a four-part thing.
yeah but there’s a simpler way to do it which is:
How many people are working?
How productive are they?
Just who’s working and how productive they are that equals nominal GDP. um.. and if you have fewer people working there the economy is going to shrink, unless productivity is going up which it’s not.
uh.. and so this is one of the major headwinds now you’re right there are some early retirees.
um.. there were a lot of people who stayed home obviously during COVID and just it’s very well studied and clear that, um..
Working is a habit. you know, I have a good habit I think for the most part. But, it’s like any habit once you break it
it’s hard to go back so once you get used to not working or working from home or you know
we’re just staying home, um.. the government was handing out checks.
you know, beginning with Trump and I believe it was June 2020 everybody got a, uh.. that one was a $1400 ( fourteen hundred
dollar) check
Then in December 2020 at the end of the Trump Administration everybody got a $600 check.
And Biden comes in February 2021 not to be outdone he hands out, uh.. I think a $1600 (sixteen hundred dollar) check.
um.. so everybody got a check like two or three of them and a lot of younger people, uh.. opened accounts on Robin Hood
and started trading Bitcoin that didn’t work out too well, but um but a lot of people saved the money. But, but, it was a
very definite spikes in retail sales coming within 30 days of the checks.
Well that’s not surprising, give people free money they’ll go buy stuff and that kind of kept the economy
going, it wasn’t a real boom. But, yeah! It um.. it looked good.
but we’re not doing that anymore.
There’s no more checks, uh.. and so.. yeah,
A lot of people lost the Habit.
A lot of people staying home, watching, you know?.. maybe uh.. the World Series or whatever eating Doritos. But, they’re not working, uh.. and.. um uh.. you know a lot of people out of habit. but, they just got used to government handouts. not everybody!. but, some and,
The other problem is, uh.. people say: “wait a second” how can you have low labor force participation when every way you look there helps with bonus signs.
which there are!!
I mean, you know McDonald’s is paying, uh.. $35 000 for an entry level like cashier or hamburger. um.. you know maker, uh.. with Benefits training and advancement. well, that’s pretty good, for you know.. uh.. entry-level hamburger person
um.. so there are late and people call this the labor shorts
There isn’t actually a labor shortage because, we just talked about how you’ve got perhaps as many as 10 million you know people between the ages of 25 and 54 who are sitting home.
But the problem from the employer’s point of view is there’s a shortage of willing workers, yeah not workers but willing workers.
Well, what makes you willing to work? Well a raise, a good pay is one.
you know as employers can’t afford to pay the clearing wage to get people off the couch, because they’ll go bankrupt themselves. They’re working on very small margins, you know.. sales are declining etc, so I’ll pay as much as I can to get the workers. but, it’s not enough to get these persons off the couch so to speak and so you’ve got this really weird situation.
I use “weird” in the technical sense, we have a huge pool of able-bodied, you know.. potential workers but a shortage of willing workers because you can’t pay a clearing wage. but, that’s more reflection of, uh… how stressed businesses and how low margins are.
Then you look at the big names, I mean um I guess Twitter is the most recent, but, uh.. you know.. Amazon, FedEx, Target they’re all looking at Big layoffs in their big layoffs.
Adam:
Big layoffs
Jim:
Big layoffs announcements coming every day so, um.. not, but none of which is good for the US economy.
but, um..
As you know, the FED looks at unemployment.
I mean, I look at it because you’re supposed to know what it is.
I mean I always say if you’re trying to forecast the fed you got to look at the world the way they do.
Even if it’s messed up, like even if they look at the wrong things.
Which they are!
as an analyst you have to look at them to figure out what they’re doing.
That’s how you do intelligence work, think like the other guy.
But, then once I take my fed hat off and say well what do I think?.
um..
The unemployment rate is almost irrelevant.
That’s a lagging indicator.
Secondly it ignores what we talked about with labor force participation there is no Phillips curve.
I mean you can draw one last time I saw Phillips curve was flat
Where I went to school curves weren’t flat but that’s.
uh..
But they’re just looking at the wrong indicators.
Adam:
Okay..
All right, well thanks for going through that with me because I do worry that um you know there’s something not good, um.. about such a low participation labor force participation rate.
um..
From an economic standpoint.
right like we’re not being as productive as we could be as a society and there’s something not good societally about it
where you get a smaller and smaller group that is doing all the caring all the water caring for society and you begin to get, you know.. animosity growing there.
um, so anyways..
I’m curious, do you think we’re in this weird time do you think?
is basically a painful recession going to be what sort of cures it?
which evaporates the excess job openings. The people on the couch finally just run out of means as long as there’s still no government checks going to them and eventually they have to say “hey, if I want to afford Doritos I have to go get a job.
Jim:
I’m not I’m not sure, I mean because, uh.. I don’t know if the recession is the cure for it.
it’s coming!!, I mean the recession is coming but Jay pal said this.
I mean Jay Pal gave two speeches. August 26th at Jackson Hole and September 21st after a
press conference after the FOMC meeting that day.
Uh..
The September 21st speech was almost like well just in case you weren’t listening to me in Jackson Hole let me tell you again what’s happening and he was in Jackson Hole, he was like I suppose he tore up a speech and wrote a new one like literally the day before it was 3 or 4 pages it
Was really short, um.. he used the word pain 3 times in one paragraph.
I’ve been following FED news for 45 years. I’ve never seen the word pain ever.
right that was pretty many times but he said but he basically said the same thing
But, on September 21st he was even more blunt he said there’s going to be a recession and it’s going to be bad.
Unemployment is going to go up, get it you know get it straight these things are going to happen and that’s what it’s going to take to get inflation under control but he went on and on about how inflation was job one.
uh..
Because the FED has this dual mandate which never made sense but it’s the law.
I’m in Humphrey Hawkins so, um.. the Dual mandate is price stability and low unemployment.
Okay..
Those two things don’t always go together and sometimes you gotta make trade-offs between the two.
but right now the trade-off is very easy.
which is unemployment really low now. I don’t put much weight on it but the FED does, again put your fed hat on unemployment’s really low if unemployment went from three point I think it’s a 3.5 3.6 at the moment um if it went to four and a half uh 4.9 is that the end of the world well that was considered pretty low in 2013 when they were doing QE4 or whatever QE3, so.. um.. so they’re willing to do that, um.. and they also think the recession if it comes will be mild, uh.. and uh.. but those two things together will get inflation under control.
Adam:
by the way they think the mild because they think they’re going to engineer a soft Landing which I’m guessing you think the probability of a soft Landing is pretty low
Jim:
Close to zero.. um, the uh.. the thing about I mean.. what Powell said he didn’t say that I mean their target is core pce you know personal consumption expenditure price index core meaning excluding food and energy and everyone’s like why would you exclude food and energy?
Again, I’m not here to debate it, that’s what they do so, if you want to think like a FED head that’s what they do.
okay,
They want to get core PCE over year to 2%.
it just came in at 5.2% which was up from August.
September was 5.2%
August was about 4.7% give or take.
it just went up!!
it’s not going down
so, um..
So, they’re trying to get it down
now he now Powell did not say we’re going to raise rates until core PCE is 2%
He didn’t say that.
What he said was we’re going to raise rates until it’s acting in a restrictive way on inflation and inflation will come
down on its own because rates will be higher.
High enough to cause that at which point we will.
We the FED will pause.
and he says: well when are you going to cut the race?
He was like the pause could be a year.
Adam:
Right!
Jim:
so you’re talking 20..
forget this fed pivot nonsense to me.
You’re talking 2024 if then, before they cut race but in the meantime, um.. so they’ve got to get rates high enough so they’re going to go you know well 75 basis points in November.
December who knows we’ll we’ll know closer to the days it’ll either be 50 or 75 you know some talk about 50 but it doesn’t matter.
I mean it’s going up.
Probably going to go up, you know I have the calendar for 2023.
There’s a meeting on February 1st and another one in late March.
I think March 22nd they’ll probably raise up both of those they’re going to get rates up to five, five-ish um at that point they probably will have
achieve the goal of bringing core PCE down but they will also have destroyed
the economy in the process.
It’s like I remember in Vietnam Neil saying “we have to destroy the village to save it”.
yeah, um..
We have to destroy the economy to save it.
This is, uh.. the latest and long string of uh fed blunders since 1913.
seems to be their specialty but that’s what they’re doing.
Adam:
yeah and you know what uh and I do want to get to your book here.
um.. but, uh..
Right now is there really much difference the FED could be doing?
Jim:
yeah!!, they could at least pause now or maybe even cut race.
If everything I said is correct!!, and obviously I think it is or it wouldn’t be saying it but if we’re on the verge of global liquidity crisis as revealed by the euro dollar, futures curve, the treasury yield curb, and, you know negative swap spreads, uh.. treasury bill auctions with yield of maturity below what the FED will give you for a phone call.
If all those things are happening that’s hard data, uh.. and it’s a very very troubling sign last seen in 2008. by the way, before the two before the Lehman Brothers meltdown.
If all that’s happening and the fundamental signs are also weak which we just saw in third
quarter GDP which is based on net exports which won’t last how how are you going to drive a trade surplus with with the strongest Dollar in 20 years.
Good luck with that!!
I mean nobody can afford our stuff but we’re not buying anybody else’s stuff
Adam:
right
Jim:
um..
So with the economy going into a recession on its own.
With a global liquidity crisis Brewing
Why on Earth is the Fed raising rates at all
Adam:
Okay
And so does that imply then if we just sort of let the system take care of itself that CPI would get pulled down anyways by this recession?
Jim:
Right! and that’s that’s a big part of my book, um.. you know when I talked to my editor about this you know go back a year ago so in November, uh..
Probably November, uh..
2021 yeah every headline you looked at website a commentator
supply chain!!
supply chain punching is breaking down!!
there’s no, uh.. you know uh uh they couldn’t get cream cheese to make uh
make cheesecakes
Juniors you know the world’s world’s most famous cheesecake place, um.. you know and on and on and on like a long list.
And then last spring was the baby formula shortage which is actually was serious I mean mothers couldn’t feed their children it was very bad and I talked to my editor about the book we said okay let’s do it, um.. and of course and so I’ve got three chapters uh to start one on, uh.. you know just anecdotal stuff kind of thing I just mentioned how bad is it.
Chapter two is why what caused it when did it start and right how we get it yeah I found some but I found some really really interesting research that, uh..
because everyone says:
“well yeah, COVID had messed” it up and “the war in Ukraine messed it up”
well that’s true but it didn’t start there this started in 2018 with Trump’s tariffs.
I’m not here to debate the tariffs.
I actually think the tariffs were a good idea but, that was the start of the supply chain breakdown
Because when Trump put tariffs on started with, uh.. appliances you know washing machines refrigerators and stuff and solar panels and then you know
technology then they just kept piling up.
Adam:
Sorry to interrupt, but, did that mostly impact goods from China?
Those tariffs?
Jim:
Yes!, um.. but, but you have to look at what China did in response.
The U.S and Brazil are the two largest exporters to soybeans
China is the world’s largest importer of soybeans
China was buying all their soybeans from the United States just as a way to kind of make it make it up a little bit like well we don’t want we got to buy the soybeans anyway why not buy them from the US to keep the U.S China trade deficit under
control so it doesn’t become too politically toxic.
um,
Well as soon as we jumped through on the tariffs, China retaliated by moving their soybean uh orders to Brazil.
Stopped by U.S soybeans.
Well that’s not a phone call I mean you’re talking about vessels, Port facilities, uh.. agriculture, you know trucks how do you get the
soybeans to the ports?
How many do you grow, where’s the fertilizer coming from?, you know etc..
And all those parties you know the shippers, the cargo, the insurance companies, and so many people involved.
Banks, letters of credit
It’s just a lot involved
They don’t like short-term relationships, they say okay I’ll do it I want a five-year contract and China said okay.
So they reconfigured all those Transportation Lanes to get the soybeans from Brazil, all of a sudden you’re a U.S soybean grower you said what I do well we started selling them to the Netherlands.
Because the Netherlands need soybeans too.
But now instead of shipping them from the port of LA to Ningbo and near Shanghai.
We’re shipping them from the Port of Houston to, I don’t know, uh.. France and Marseille or someplace uh or Roger Dam.
So the point being, um.. you completely scrambled all these uh supply chain relationships and they
break down.
that it’s not just the end of the supply chain I actually start the book I have an introduction uh where I talk about a Bronze Age vessel, a wreck in a place called Uluburun which is off the southern coast of Turkey that was discovered by a sponge diver in the 1980s and then it was excavated.
It was the most perfectly preserved Bronze Age cargo they’ve ever discovered.
But what was in it
And I have the inventory list and a lot of research on it there was Amber from the vicinity of the Baltic Sea
There was gold which at the time came from Sudan.
There were swords which at the time came from, you know.. Damascus or you know present-day Israel and Lebanon.
There was oil from, uh.. from olive oil from Italy etc.
And there was a carving for Queen Nefertiti which was bound for her in Alexandria Egypt.
The point being, uh.. this vessel had a was doing a counterclockwise circuit of the Mediterranean Sea you know based on the winds picking up and dropping off cargo all along the way. But, that supply chain if you go from you know like Sweden to Sudan it’s almost the Arctic Circle to the equator and from present-day Iran to Spain that’s 5 million square miles.
So there’s nothing new about Supply chains we can document to the bronze age.
What was New Beginning around 1989 was supply chain science.
The combination of beastly improved computing power artificial intelligence new algorithms and more sources of data that
could be put together and used by AI experts to to optimize and make the supply chains more efficient that was new.
And it kind of began with the father Berlin wall and the collapse of the Soviet Union and you know Berlin Wall fell in 1989, Soviet Union uh dissolved in 1991.
I talked to the guy who you know like this is a worldwide Endeavor but he was probably the single most responsible individual for all the significant
developments in the supply chain in the last 30 years.
And he said to me, Jim, you have to understand it took us 30 years to build it.
We blew it up in three years.
It’s not going to come back overnight, it’s going to take 10 years or more to rebuild it.
And what I talked about in the book is supply chain 1.0 which is 1989 to 2019. and then supply chain 2.0 which kind of starts now but
it’s going to go indefinitely because it’s going to take a long time to put this together.
It’s, uh.. you know.. it’s like dropping a buzz and breaking up a thousand pieces.
You can’t put it back together, you gotta go buy a new box.
And that’s what’s going on with the supply chain there will be a supply chain there always is but the new supply chain will look very different from what we’ve just gone through because the whole the whole 30 years of period I’m describing was built on efficiency you know like lower
cost lower cost lower cost so it’s kind of the Walmart model. so, yeah just in time inventory everyone knows about that but there’s something called cross docking that’s where a truck pulls up at a warehouse and you unload it instead of putting the stuff in the warehouse you move it to another truck that then goes to a destination the stuff never goes in the warehouse.
Inventories are very expensive they’re they’re they’re costly to finance you got to move this stuff around it’s called picking.
You know, pick the stuff off the shelf here. I used to drive a forklift so I know a little bit about it uh you know and put it on a truck used to unlock trucks too, um.. but, um.. so you know hey I’ve got seven suppliers why don’t I cut it down to three and do bigger contracts with each one and get lower unit costs I’ve got five Transportation Lanes why don’t I cut that down to two, get everything to you know Los Angeles and Seattle as the case maybe you know etc.
And they did it for three and they got cost slower you know and Walmart and Amazon were the champions of this, but, everyone else was doing it but they missed something.
what they missed was that, while they were getting those unit costs lower for consumers they there were hidden costs
And the main hidden cost was you were creating greater frailty this whole system was subject to a massive massive breakdown.
so, uh..
You know what happens if you have two suppliers and they both go on strike?
What happens if you have one port of entry and it’s backlogged
What happens if, um.. uh.. you know you’ve got, uh.. Quest docking and warehouses there aren’t enough trucks?
There’s 80 or 80 000 we need 80,000 drivers.
80,000 drivers!! I wish they’d hire them instead of these IRS agents but, the point being, um.. it is breaking down all across the board
Now, will it be put back together?
Yes, but the biggest difference between 2.0 and 1.0, um.. this goes by different names uh you know Johnny Allen called it Friend Shoring and Macron called it a Constellation of Nations, uh.. I use the term a college of Nations.
You know know collegial Club if you will, so you’ll still have trading partners, you’ll still have Outsourcing, you’ll still have
transportation Lanes, but it’ll be members only it’ll be basically Democratic kind of liberal republics
Western Europe uh you know the EU of course U.S Canada Australia New Zealand Japan uh you know and some others India I would expect to be included friendly nations.
But China’s out we’re decoupling from them, they’re decoupling from us this isn’t U.S driven the US is participating but this is what China wants too both sides are decoupling as fast as they can China can develop its own network you know maybe Central Asian Republic some Southeast Asian um you know suppliers and so forth.
But they’re going to lose customers.
Well most of their customers actually.
In the United States we won’t buy their stuff and we won’t sell them our stuff, particularly high-tech stuff. so you the world’s going to break and and these new clubs are going to be formed and there will be trade there will be Transportation Lanes but it’ll be much more restrictive.
Now, will prices be a little higher, yes!!, but it’ll be more secure.
So the way I describe that is you know if you buy Insurance on your house or I buy insurance on my house you don’t want your house to burn down, you hope it doesn’t but if it does you don’t think your insurance payments are a waste of money. Like when you write that check you’re like that’s money well spent.
When you pay higher prices for consumer goods, the Delta between the old price.
The new prices your insurance premium for a more reliable system and also, there’s a big National Security component to this and I talk about Russia and Ukraine and China in the book.
so that’s all how the supply you know what the supply chain breakdown means.
Chapter one chapter two what caused it we talked to about that and three where is it going uh what are the constraints.
We talked about that, but then my editor, who’s loved working with us she said: “well Jim gotta be a job on inflation”
I said of course we do you know the supply chain breakdown is causing a lot of the inflation we see and we agreed on that and then I said I’m going to write
another chapter on deflation.
And everyone’s like wait a second why are you talking about deflation that’s coming next.
People are not ready for it.
I know the inflation’s here .
I buy gasoline.
I just drop in the grocery store.
I get it I’m not it it’s and it’s persistent it’s not transitory I understand all that but inflation has two major sources
one is the supply side which is called cost push inflation so that’s energy price shocks you know suffer saying coming out of Ukraine fertilizer shortages
strategic metal shortages um you know component suppliers who can’t deliver stuff to factories in Germany and they’re shutting down etc.
The other causes from the demand side and that’s called demand pull inflation basically psychological consumers pull demand forward they’re “like hey I was thinking about a refrigerator I better buy it today because the price is going to go up in 6 months” and the 70s we had both that started with cost push with the Arab Oil Embargo but it ended up demand pull.
I was starting my career at the time they your boss would just give you a raise you didn’t even have to ask you know a place you must come up so fast like I better get this guy raised it here’s another you know $30,000 bucks or whatever because people would quit you know and uh and that and that sort of spun out of control until volkers squashed it all.
Right now we do not have, uh.. demand pull inflation we don’t, this is not what’s going on.
We do have cost push inflation the difference is is hugely important because cost push inflation from the supply side which is again we’re going to talk about the book it’s real prices go up but, uh.. it’s self-negating you know the old saying that “you know the cure for higher oil prices is higher oil prices” because when they get too high people stop driving, they shut down um various activities, by the way, if you’re unemployed you’re not buying any gasoline because you’re not going anywhere.
I mean that’s kind of a nasty way of putting it, but that’s how costs push inflation tips into a recession and then prices come down.
We saw that in 1974 you knew you had Jerry Ford and Alan Greenspan walking around with their these win buttons. W.I.N was super whip inflation now except we had a recession and prices collapsed uh now it came back uh by 77 with uh for a lot of reasons.
But right now we don’t have demand pull we have cost push it will go away when this economy goes into recession and then we’re going to be talking about, um.. disinflation and deflation which are, you know.. kind of close cousins and the fed’s going to be out on a limb as usual, raising rates in the face of a recession and a price collapse.
Adam:
ah! and Jim, that’s such a great point it’s one I’ve actually been engaged in conversation with on the recent past videos we’ve had on this channel which is, um.. uh I’ll go back to the conversation I had with Lace Huntblast.
Where Lacey Hunt’s been a big deflationist for a long time as you know well in my last conversation with him at wealthians,
uh.. recent, um..
It’s September conference, um.. Lacey Beska said hey look fed’s doing what it has to do it’s got to actually prioritize killing inflation now that inflation’s here um and, uh.. you know talked about the Primacy of that being priority number one two and three right now for the Fed.
And then I asked him I said well Lacey you have been talking to you for years and you’ve been telling us that we have this massive deflationary Dragon display and you don’t really see how we’re gonna do that well and that’s why you’re raising these warning Bells it’s a big big issue but you’re now saying there’s this inflation Dragon that’s shown up and so we got to focus all our attention on killing it hopefully we will sounds like you’re pretty sanguine in the sense that like, hey! recession and other factors are probably going to bring inflation down organically here at some point.
But even if we manage to do that successfully, we then still have this massive big inflation Dragon to deal with it, and it sounds like you’re saying.
Hey!
Even though we’re all focused on inflation right now, the bigger bad in the story is the deflation.
Jim:
well I yeah good officially I I agree with uh Lacey’s analysis.
Adam:
Our interview with Jim will continue over in part two which will be released on this channel tomorrow as
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