Friday, December 6, 2019

Trains, Planes, Ships, and Trucks

When commerce retracts, shipping retracts.

One thing I forgot to mention as a "tell" of a future recession in my posting about Signs of Recession, was how the shipping business - by truck, rail, ship, and airplane - has retracted over the last year.

I met a nice retired trucker at a gay campground in Alabama (yes, they exist - several of them, stereotypes about the South are, for the most part, wrong).   He told me last year his old company called him up and begged him to come back to work, and he made a list of demands that they met willingly - new truck, new trailer, higher pay, and so on and so forth.

This year, they would have laughed at him and hung up the phone - the trucking business is in the toilet.   What happened between 2018 and 2019 that changed things so dramatically?  You can blame Trump and his trade wars, or you can view it as a part of the business cycle.  People are buying less stuff, so less stuff is being shipped.   So less need for truckers.

And it isn't limited to trucks.  The train business is officially in recession as well.   Same deal, different mode of transportation.   Depending on who you talk to, container shipping (by ship) is either slowing down or retracting, again due to the trade war and decreased consumer demand.

Even shipping by air is down, as FedEx is showing signs of slowing down.  Part of this may be Amazon's decision to "go it alone" with their own shipping system (although this was a tiny fraction of FedEx's business, and not a very profitable one).   Another explanation is that people are buying less stuff.

You put this all together and you see an economy that is not growing at a healthy pace, and in fact may be retracting.

"But Bob!" you say, "Stock prices are at an all-time high!  Profits are up!  Everyone is making money!"    And that may be true, or it may be another sign.   A starving man may have a full stomach after he cuts off his foot, cooks it, and eats it.  But that does not mean he is healthy or that such a lifestyle is sustainable - for very long.

We see in a lot of industries, feet being cut off.  "Activist investors" are pressuring the big car companies to cut less-profitable or unprofitable car lines, close factories and abandon markets, in order to concentrate on the most profitable products.   GM sold off its European subsidiary, shut down car plants, and is entirely dependent now on truck and SUV sales.  In the short-term, GM is showing profits, as trucks are well over $50,000 these days, and SUVs approach $100,000 or more.   So long as people are buying, it is a good strategy.   But, if they run out of money (to borrow) then what happens?   What happens if Iran sinks a tanker in the straits of Hormuz and world oil prices go to $100 a barrel in a panic?  Suppose gas doesn't just go to $5 a gallon, but to $8?

Stranger things have happened - at least three times in my lifetime, so far.

Companies are making profits - sometimes setting records - but in many instances, these are not sustainable profits, but one-time deals.   You can show a quick profit by cutting expenses to the bone, laying everyone off, and cutting all but the most profitable product lines.   But long-term, your company may be at a strategic disadvantage if the market moves in other directions.

And in the short-term, something is going on in our country that no one wants to talk about.   I drove back from Jacksonville today, seeing empty flatbed trucks "dead-heading" going under 60 mph.   They have nowhere to go, and there is no point in going fast to "get another load" as there are no loads to be gotten.   Driving by the truck stop, I see the parking lot full in the middle of the afternoon.  Too late for lunch, too early for dinner - I suspect these are drivers simply waiting for a load.

There have been warning signs before other major market drops - and often these signs are not of retraction or losses, but utter prosperity.   Low unemployment, high rates of return - these all sound like good things, but then it all goes bad in a hurry, as chaos theory predicts (as well as history):
Hindsight is always 20/20 but in the Roaring Twenties, optimism and affluence had risen like never before. The economy grew by 42% (real GDP went from $688 billion in 1920 to $977 billion in 1929), average income rose by about $1,500 and unemployment stayed below 4%. In the wake of World War I, the U.S. was producing nearly half of global output and mass production made consumer goods like refrigerators, washing machines, radios and vacuums accessible to the average household. Investing in stocks became like baseball – a national pastime. As newspaper headlines trumpeted stories about teachers, chauffeurs and maids making millions in the stock market, concerns about risk evaporated.
Does any of that sound familiar?  It sounds like the market in the last decade.   Things are going so well, unless you were a farmer in 1927 or in 2017.   For them, things sucked.   And even as other signs of recession tick up, people shout them down and keep the party going:
Other warning signs began to appear but were largely ignored. Steel production, car sales and homebuilding all slowed. Several banks failed. Nevertheless, most economists shared Irving Fisher’s optimism about the market outlook, although a few outliers did warn of a downturn. Yet as stocks hit new highs in the summer months, investors ignored pessimistic predictions entirely and appeared justified in doing so when the Dow Jones Industrial Average hit a record high of 381.17 on September 3, 1929, up 27% from the previous year. After the crash, the Dow Jones would not return to its peak until 1954.
Ouch.   My take on it is this:  If the economy was left alone, it would have continued to grow in the last four years, albeit at a slower pace.   When the recession came - a year ago - it would have been a fairly mild affair.   But as in years' past, people have tried to "goose" the economy further, with tax cuts and various incentives, including artificially low interest rates (which encourages people to borrow and gamble on investments).   And the reason for this "goosing" isn't hard to fathom - the President wants to get re-elected, and if he can keep the party going until after November 2020, he might just do that.

The big problem, as I see it, is that by using these artificial stimulants, the resulting recession will be much worse than it should have been.  We are living in a dream world driven by share prices and promises of get-rich-quick through IPOs and "tech" innovations like renting offices and scooters.  The piper will eventually have to be paid, methinks.   And it only remains to be seen as to when.