We Are Already Retreating into the Dark Days of the Pandemic
The stock market has returned to crashing due to dark clouds already thundering all around us because of the Trump Tariffs:
The Nasdaq is almost back to being 20% down again, after the brief but nearly biggest-ever, bull-trap, relief rally, which had burst skyward the moment investors went euphoric over Trump’s rapid reversal of his highest tariffs. Even with most of those extreme tariffs withdrawn in what seemed like a panic, it turns out severe economic damage is already arriving, yet the tariffs are bringing in far less revenue than Trump claimed was coming in. Tariffs are bringing in only an eighth of the $2-billion per day Trump claimed. That is according to Trump’s own Customs agency:
U.S. Customs and Border Protection appears to be contradicting President Donald Trump’s comments on the daily revenue generated by his latest slate of tariffs….
“CBP’s average $250 million/day revenue stream remained uninterrupted,” CBP said in its statement.”
If Trump’s claims were based on his expectations and not on accurate knowledge of the facts, then it could be that the large shortfall in collections is due to an exceptional thing that is happening in shipping right now, which Trump never saw coming, or he wouldn’t have promised so far beyond what his tariffs are achieving.
Another shipping crisis is here
Tariffs are falling far short of Trump’s expectations due to a convoy of shipments being rejected due to tariffs slammed onto each order instantly that raised the price of goods being shipped beyond anything many of the US companies that ordered the shipments are willing to pay:
Trade war fallout: Cancellations of Chinese freight ships begin as bookings plummet
U.S. importers are being notified of an increase in canceled sailings by freight ships out of China as ocean carriers try to balance the pullback in orders resulting from President Trump’s tariffs and the escalation of tensions in the trade war….
A total of 80 blank, or canceled, sailings out of China have been recorded by freight company HLS Group. It wrote in a recent note to clients that with the trade war between China and the U.S. leading to a demand plummet, carriers have started to suspend or adjust transpacific services.
In other words, the problem is amplified more than just the actual cancelled orders because, entire shipments and even regular routes are being cancelled due to the number of containers that are being rejected, making it no longer feasible to ship whatever was left of each load that didn’t get cancelled.
The impact of the diminished freight container traffic to North America will be significant for many links in the economy and supply chain, including the ports and logistics companies moving the freight…. That would equal a decline in freight traffic of between 640,000-800,000 containers, and lead to decreased crane operations at the ports, lower fees that could be collected, and declines in container pick-ups and transports by trucks, rails, and to warehouses for storage.
Welcome back to the formerly unprecedented pandemic lockdowns! Now they have become all too familiar.
“We have no way of knowing how significant this drop in orders will be on vessel schedules,” said Alan Murphy, CEO of Sea-Intelligence. “There are no models to extrapolate this. What I can tell you is the majority of containers on the vessels servicing the Asia to U.S. trade routes is [from] China. We won’t go to zero containers, but we will see a decrease in containers and as a result, in the future, we will see a massive raft of blank sailings announced.”
Ports will go almost vacant of work in some places. Then, whenever the tariff wars are finally ended, it will take months to process the enormous backlog of shipments, just as happened after the Covid lockdowns, which caused the supply-chain interruptions and resulting shortages to continue long past the lockdowns. So, it’s all back now.
In fact, we never fully recovered from the damage created by the brief Pandemic lockdowns:
Retailers have been positioning their businesses conservatively with inventory, especially given “scar tissue” from the recent overstock after the post-Covid supply chain squeeze from 2021-2022. “That uncertainty is beginning to manifest in blanked container ship sailings on core eastbound transpacific lanes, in our view, opening the potential for a double-digit decline in inbound containerized imports as early as next month,” he said….
Booking volumes from the last week of March to first week of April across global and U.S. trade lanes plummeted. There were sharp decreases in bookings across several categories, including apparel & accessories; and wool, fabrics & textiles, both down over 50%….
“During Covid, ocean carriers parked their vessels for maintenance,” Murphy said. “Ocean carriers can also blank (cancel) a sailing, omit vessel strings entirely, use smaller vessels, or slow steam the vessels where they are traveling longer.”
The plunge in shipping from China is already massive, as in pandemic in scale:
These measures will cut the available vessel capacity for containers, according to Murphy, which helps remaining ships to be filled, with uncertain implications for overall pricing in the ocean freight business. While a decline in sailings could lead to a drop in [shipping] prices, during Covid, blank sailings were identified by shippers around the world as a reason for container rates that spiked as high as $30,000. In that case, shippers say the ocean carriers canceled sailings for longer than needed.
If things follow the all-too-familiar Covid pattern—and so far they do—then shipping prices will spike, even though the shipping companies make far less money overall because goods are being carried on smaller ships or ships less than full in order to maintain some coverage of existing routes, requiring more crew time per container and more fuel for the amount of goods shipped (i.e., less efficiency). It is hard to say if it will go as it did during the Covid lockdowns because shippers will also be scrabbling for the remaining business, so they will be sharpening their pencils as finely as they can; but they may not have big enough profit margins to drop their price enough to cover the greater inefficiency.
So far, one example, shows all likelihood of another global price spike in shipping costs per container:
The “mid-low” ocean rates, which represent the costs of shipping goods for a larger-sized shipper on a particular ocean route, have jumped by 43% since March 30 for Vietnam….
“The fact that the lower end of the market has been rising shows the heat is on,” said Peter Sand, chief analyst at Xeneta. He said that is continuing after Trump’s decision to pause what he called “reciprocal” tariffs on countries other than China for 90 days.
A spike in shipping costs, of course, means prices have to rise by more than the amount of the added tariffs, and this is all happening, in spite of the fact that Trump’s enormous “reciprocal” tariffs were largely cancelled by Trump on the same day he enacted them because the damage to the US bond market became so swiftly so severe.
Even so …
There is every possibility the higher tariffs come into effect 90 days from now or even at an earlier stage.
It was only yesterday, I was warning we could find ourselves back to the days of pandemic-level supply-chain crises, shortages and (of course) the rising inflation that comes with such severe shortages. Well, that didn’t take long. We’re back already! The supply shortages have not hit the shelves yet, as retailers still have stock as well as ships arriving that were too near their destination ports to turn back due to orders being refused. However, it won’t take any longer for the shortages to hit the shelves than it did during the pandemic lockdowns.
Yet, barely a hint of manufacturing returning to the US
After paying the price for all of this by getting jettisoned back into the Covid era, we still won’t be seeing a return of manufacturing to the US. A CNBC survey published today polled business CEOs impacted by the tariffs to see if they will be moving to the US, and most of them said, effectively, “Not on your life!” If they do, they won’t be bringing jobs with them:
Trump tariffs won’t lead supply chains back to U.S., companies will go low-tariff globe-hopping
Most companies that responded to a new CNBC Supply Chain Survey said high costs are the biggest headwind in moving manufacturing back to the U.S., and that if they did so, they would favor automation over workers.
Nearly half said reshoring would more than double costs, and a majority indicated that President Donald Trump’s trade war is likely to kick off a global search for low-tariff regimes.
A majority of respondents said that, in the near term, price hikes are coming and consumer demand will decline. Recession is the base case for 63% of respondents.
Instead of returning to the US, businesses that do intend to relocate from China said they will be price-surfing for nations that have the lowest tariffs and the right business environment, resource availability, etc. to engage fully in production, which means some of the lesser tariff nations will become the beneficiaries of the Trump Tariffs, not America. We’re making other nations great again.
Over half of those surveyed (57%) said cost is the biggest headwind in relocating supply chains to the U.S.; 21% said the top challenge is finding skilled labor. The Trump administration has promised tax cuts for companies that bring back manufacturing, but the survey found that only 14% of respondents chose taxes as the biggest challenge in deciding whether to relocate manufacturing to the U.S.
There have been some high-end relocations announced, such as the one by Apple, but Apple’s relocation was already in the works due to Bidenomics’ efforts to attract production back to the US, rather than penalize it elsewhere. Some of the others probably were, too. And, for those companies that are willing to relocate to the US, we’re going to have to wait a very long time for the benefits that will eventually (hopefully) start to amend the economic damage caused by the tariffs:
Among respondents indicating interest in reestablishing a U.S. supply chain, 41% said it would take three to five years, and 33% said it would take longer than five years.
-and-
If manufacturing is coming back to the U.S., automation will be a major component of the economic model, with 81% of respondents saying they would use it more than they would human workers.
The economic wreckage is arriving onshore quickly (well, actually, NOT arriving, but that’s the problem: Things not arriving are already the immediate wreckage.) If anyone told you tariffs would not cause inflation, wait until you are reminded in stores of what happens to prices when shortages and hoarding start to dominate again. Because of the breadth of shortages now being anticipated, people dialing way back on purchases because they are already sick of inflation will not likely be a large enough number to match demand down to supply, so prices will still rise.
Right now, the most widespread reaction to the Trump tariffs is the cancellation of orders, according to 89% of respondents, and an expectation that consumers will pull back on spending, which 75% of respondents said they are forecasting. For products that are coming in under the new tariff rates, 61% of those who participated in the survey said they would raise prices.
Powell will finally see the “stag” and the “flation” he couldn’t see coming
So, prices are going up, regardless of the huge pullback that will deepen our recession. That means a protracted period of stagflation before we ever get to where the recession becomes so deep for so long that it starts forcing deflation … Great-Depression style.
This horrible situation only gets far worse if Trump reimposes his reciprocal tariffs all over the world. The present situation is due to the 10% global tariffs (now with abundant temporary exceptions) and mostly due to the huge China tariffs. The damage you can sense coming to the economy from that shutdown doesn’t even take into account the damage that China’s retaliatory tariffs will be causing to American exporters. Today, we looked at just the import side.
On top of everything that is already being seen, one other factor I warned about (the first domino effect) is also just starting to be felt:
“Supply chains that support millions of U.S. jobs, power U.S. manufacturers, and provide affordable choices for U.S. consumers are now experiencing early signs of damage due to these destructive tariffs,” said Steve Lamar, CEO of the American Apparel & Footwear Association. “Higher prices, job losses, product shortages, and bankruptcies will be only some of the adversity the U.S. economy weathers while the President pursues this ill-advised tariff policy.”
The knock-on effect I warned about was that, it is not just all the lost retail from trade: it is all manufacturing inside the US and services across the nation that get impacted by supply shortages that keep them from producing or providing there services plus all their added costs that get built into their manufacturing or services plus the unemployment that results directly from that, plus the additional unemployment that happens when production lines or services are shorted out because of a single essential ingredient that has run out so they no longer become viable; so, instead of just trimming down to produce fewer goods or services, they become terminated entirely, resulting in even more unemployment.
Then the second wave of dominoes begins to fall—all the businesses that served the unemployed workers their lunches, laundered their uniforms, supplied their transportation or fueled their cars begin to diminish because unemployed people don’t require those services.
And so on … down the doom loop.
Trump 2.0 is starting just like Trump 1.0 ended when his approval of the Covid lockdowns disrupted the entire national economy, sending us into a world of shortages and ultimately high inflation! Don’t shoot the messenger.
Irreversible, compounding damage
As one CEO said to CNBC,
The damage to businesses across the economy may soon be “irreversible.”
You can, if you prefer alternative facts, believe the following:
National Economic Council Director, Kevin Hassett, said Monday that more than 10 countries have made “amazing” trade deal offers to the United States and he “100%” guaranteed there is no recession coming.
But the numbers above about the massive cancelation of shipping contracts is already a fact on the ground and on the waters. And that was just the first convoy getting capsized.
Backing what I have been saying already …
Multiple surveys taking the pulse of CEOs show widespread expectations that a recession may have already started or is soon to come.
Hassett is smoking crack or just baldfaced lying to you.
The Return of the Covidcrisis—all the economic aspects of it—is rushing toward you once again, just without the attending illness. The virus wasn’t needed this time.
On top of all that, this has all happened so quickly and erratically that many merchants haven’t even figured out how to respond yet:
“The constant switchbacking means new tariff costs are not accurately presented or predictable until the goods arrive at the port, and the high rates are generating bills that can’t be paid. That is not a risk or burden small business can sustain.”
Debts will default on shipments. Businesses haven’t even begun to figure out how much to reprice because some are seeing the bill for the tariffs for the first time as the shipment arrives.
With no alternative sourcing on the horizon for many of these companies, particularly small businesses, this sudden lack of orders will immediately translate into lost sales and widespread product shortages. “An extension of the trade war pause to U.S. imports from China is needed now before the damage is irreversible,” Lamar said.
Even if that happened tomorrow …
“… it will take months to sort out the mess, with congestion and freight rate spikes for months to come,” he added.
That is what playing with chaos and announcing erratic surprise decisions get you.
Alan Murphy, founder and CEO of Sea-Intelligence, said,
“The biggest concern here is a complete uncertainty of the actual end-game of the Trump administration…. No one will consider massive investments in U.S. production if tariffs are merely a ploy to negotiate better trade deals. If the administration is actually pursuing a goal of U.S. reindustrialization, then the long-term plan for tariffs has to be clear, and less talk of ‘4D chess’ and ‘Art of the Deal,’” he said. “The Yo-yo tactic of changing tariff rates on a daily basis does nothing but create uncertainty,” he added….
“The current circumstances are unprecedented,” said Karsten Kildahl, chief commercial officer at A.P. Moller-Maersk.
Meanwhile, who is left holding the bill on defaults?
The fate of abandoned ocean and air freight — cargo that isn’t claimed or paid for by the shipping company or the freight forwarder responsible for paying customs on behalf of their client — isn’t clear and rules change port to port, and contract to contract.
So, the Covidcrap is back. This is already a massive mess, even if Trump reverts this month on everything with China, which he won’t.
Legal battles are yet to come over the losses just on shipping charges:
Port officials tell CNBC they are not typically notified of abandoned cargo. The New York Terminal Conference Agreement states that cargo remaining on the terminal in excess of 30 days will be considered as abandoned and sold for collection of demurrage charges due to the NYTC — charges assessed for leaving freight at terminals for an excessive period of time….
“If the BL (Bill of Lading) hasn’t been transferred to the consignee, it is the shipper’s responsibility. The shipper could decide to take the cargo back (i.e. re-export the cargo), destroy or donate it.”
And that was actually just a fraction of the torrid economic news that darkened our skies today because, as I said in my last editorial, I have to stop myself from creating a full Deeper Dive every day just to cover the news of the day and to analyze what it actually means.
So, I’ll close with this summary comment from Bill Bonner today:
In a non-stooge comedy, a leader might want to talk “about things like that” [like all of the above] before threatening billions in trade…thousands of jobs…and millions of family budgets.