The Finatical
Week of December 21st, 2021 - The Bullwhip Effect & Chinese Trade Remains Strong
FinaticTrends - Financial Trends
1 - The Bullwhip Effect
There are many sources of the higher inflation we are currently seeing in the United States, Europe, and emerging markets. These include fiscal-stimulus-fueled increases in consumer demand, the decision by consumers to shift spending from services to goods during the pandemic, and pandemic-induced disruption of production and transportation capacity. However, according to economists, another important factor has been the so-called “bullwhip” effect.
Economists describe the bullwhip effect as happening when supply chain participants react to perceived shortages by ordering more, ordering earlier and by hoarding inputs. This kind of reaction is prudent and rational when considered in isolation but can lead to aggregate outcomes that are ultimately self-defeating.That is, such behavior exacerbates shortages and contributes to higher prices. However, a deeper analysis of specific ruptures in supply chains reveals that bottlenecks are not simply a uniform squeeze everywhere along the supply chain. Instead, we have seen commodities demand whipsaw as pressures emerged at different points in the supply chain, resulting in large price fluctuations. In other words, prices of some commodities and inputs have soared due to the bullwhip effect, only to collapse afterwards. This finding points to what happened with the prices of iron ore, lumber, and coal as well as the cost of shipping containers. In each case, prices soared and then fell sharply as capacity increased faster than demand. It is believed that the bullwhip effect will exacerbate supply-chain disruption, thereby prolonging inflationary pressures and boosting expectations of future inflation.
2 - Chinese Trade Remains Strong
In November, China’s year-over-year export growth decelerated while imports accelerated. When measured in US dollars, exports were up 22.0% from a year earlier, slower than the 27.1% clocked in October. Still, 22.0% is a strong number. Moreover, exports were up 8.4% from the previous month, having fallen from September to October. The strength of exports comes at a time when the domestic Chinese economy is facing significant headwinds, especially as the property sector falters, electricity rationing remains, and the zero-tolerance policy toward the virus disrupts factories and ports. From a year earlier, exports were up 22.3% to ASEAN, 33.5% to the European Union, but only 5.3% to the United States. The weakness of exports to the United States could reflect the impact of the rising value of the renminbi. Or it could reflect a weakening of US demand.
Meanwhile, imports into China accelerated, growing 31.7% in November versus a year earlier. This was up from growth of 20.6% in the previous month. Imports were especially fueled by a 200.3% year-on-year increase in imports of coal and lignite. Coal and lignite imports were up 769.9% from the previous month. This was due to the need to boost electricity production at a time when rising demand has led to shortages, thereby causing rationing and factory shutdowns. In addition, the rise in imports reflected the sharp increases in the prices of oil, other commodities, and some manufactured inputs. For example, the value of imports of integrated circuits was up 25.3% in November versus a year earlier while the volume was up only 2.8%. The difference in these two numbers was due to the sharp rise in prices. Still, an increase in the volume of integrated circuits suggests a slight easing of supply-chain restrictions.
Financial Guidance
“Rich people believe ‘I create my life.’ Poor people believe ‘Life happens to me.’” — T. Harv Eker, Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
Financial freedom starts with having the right mindset to pursue wealth and all of your audacious goals. This quote reminds us that people who are rich have an active role in designing their dream life. They’re not passive players in the game of life or building wealth.
Money Fact
The largest U.S. currency ever printed was the $100,000 bill in 1934.
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