Railroads Crossing

Seven, that's the time we leave, at seven
I'll be waiting up for heaven
Counting every mile of railroad track
That takes me back
--Doris Day 

Nice map of US railroads. Time stamped 2020 so slightly out of date.

Mergers have left the industry with six major players. US operators include BNSF Railway (owned by Berkshire Hathaway), CSX (CSX), and Norfolk Southern (NSC), and Union Pacific (UNP). Two Canadian operators, Canadian National (CNI) and Canadian Pacific (CP), also have substantial presence.

Although their tracks overlap, you can see where each operator's home turf is.

As might be expected, the majors are now in the process of gobbling up smaller regional and local operators.

position in CSX

Remote Work and Lower Productivity

I was standing
You were there
Two worlds collided
And they could never tear us apart
--INXS

For more than a year, I've been wondering when the negative productivity effects of remote workplaces encouraged by pandemic regulations would show up. Coase's seminal work told us that organizations exist to reduce the transaction costs inherent to individual contractors trading on the market. 

Stated differently, productivity tends to increase when people work together.

CV19 pulled workers apart. Consequently, transaction costs should go up and productivity should go down.

It appears that the data are finally starting to reflect this reality. For Q1 and Q2 of 2022, non-farm business labor productivity has printed in negative territory (FRED graph here). Parenthetically, the FRED graph seems to paint a more positive picture than the actual BLS data series, which currently indicates 4 negative prints in the last 8 quarters, including huge -7.4 and -4.6% YOY declines thus far this year. Not sure why the difference.

Some commentators are attributing lower productivity to increased 'sloth' associated with employees being able to get away with goofing off when working remotely. There is certainly some truth to this, as one way to cope with agency problems is increased monitoring. Monitoring is a type of transaction cost, one that certainly increases when distance between employee and supervisor increases.

But the larger point is that costs of trade among workers endeavoring toward the same end go up when they are not working in close proximity.

We're witnessing a large-scale example of this currently.

Hardship by Force

So glad we almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

How often have you read something to the effect that the virus, or the pandemic, caused current supply chain woes.

No.

It was not the pandemic. It was government response to the pandemic. Shutdowns, lockdowns, rules about testing, rules about isolating in the event of a positive test, attendance restrictions, et al.

CV19 did not impose economic hardship on billions. Governments did.

Hardship by force.

Manufactured Chaos

"I want this country to know that we stand on the edge of oblivion! I want every man, woman, and child to understand how close we are to chaos! I want everyone to remember why they need us!
--Sutler (V for Vendetta)

Article questions whether Russia is truly the target of recent sanctions. The thought has crossed my mind as well.

If the West truly wanted to hurt Russia, then it would increase production of oil and flood the world with supply. Not only would this crush prices and cripple the Russian economy, but it would provide relief for consumers struggling with inflationary concerns.

But Western countries have not done so. In fact, they have acted in manners that squeeze oil prices higher.

Sanctions that restrict Russian food exports also make little sense. Because Russia is a net food exporter, restrictions on trade mean Russia has more food and its trading partners have less.

Consequently, the sweeping sanctions ostensibly meant to cripple the Russian economy are driving up prices in the West and increasing risk of shortages in economies already facing inflationary pressures not seen in generations.

On the other hand, higher prices and economic disruptions play into the hands of proponents of the Great Reset. The thinking is that higher oil prices will motivate more investment in green energy. And that economic turbulence will increase dependence on 'enlightened' one world government--while trimming some population deemed to be 'excess' in the process.

Because the Great Resetters believe that they assimilate power in times of crisis, they are endeavoring to create them. Elections, Covid, Ukraine. 

Manufactured chaos.

Stock to Flow Ratio

I don't know why
You treat me so bad
Think of all the things
We could have had
--Talking Heads

Nice point about stock to flow ratio differences between gold and other commodities. Stock to flow ratio is measured here by taking above ground inventory and dividing it by annual production.

Unlike most commodities, gold's stock to flow ratio is high. Nearly all gold mined over thousands of years still exists in its stand alone, elemental form. Because physical gold is durable and inert, it remains with us. On the other hand, annual gold production is relatively low, constituting only 1.5% or so of above ground stock. Consequently, gold's current stock to flow ratio is above 50.

Compare this to wheat. Above ground wheat stocks are rapidly consumed. Wheat put in storage is subject to decay. In order to meet demand, about 3x the amount of wheat inventory must be produced annually. Inventory turnover is high, resulting in wheat's low stock to flow ratio below 0.5.

Of course, the properties of gold that elevate its stock to flow ratio, e.g., durability, scarcity, etc, make it attractive from a monetary perspective. In fact, it seems to follow that commodities with high stock to flow ratios would constitute a nice short list of plausible monies.

The article stresses that stock to flow ratio helps explain pricing differences between gold and other commodities. Whereas the price of wheat is driven largely by supply/demand dynamics of its stock to flow ratio components, the price of gold is less subject to short term volatility. Above ground inventories are high compared to new supply and consumer demand.

Instead, gold price should be driven more by changes in institutional demand. The more institutions demand gold, the higher the price--regardless of inventory levels or annual production.

While institutions are often regarded as large financial entities such as money center or central banks, in a broader sense institutions represent societal rules and norms.

Stated another way, when it becomes more 'societally correct' to own gold, then price will go up.

Stated another way again, changes in institutional rules are likely to coincide with changes in price of high stock to flow ratio commodities such as gold.

Sanctions

"You arrogant ass. You've killed us!"
--Andrei Bonovia (The Hunt for Red October)

Over the past couple of weeks, Western governments have levied countless sanctions on Russia. In this context, sanctions are trade restrictions against a foreign country meant to punish that state for behavior deemed undesirable or bad. Russia's invasion of Ukraine sparked a deluge of sanctions ranging from curtailing or banning trade of particular commodities to freezing Russian bank accounts.

Sanctions aim at achieving various political objectives. One is to make the sanctioned country's population hurt to the point where it demands that its ruling regime cease enacting policies that outsiders find objectionable. Another objective is to weaken a country economically and financially so that it depletes resources for conducting belligerent activities. A third objective might be to weaken a state to the point where it can be overthrown by direct attack.

Despite their popularity, sanctions have marginal track records of success. One reason for this is that sanctions require solidarity among outside states in order to be effective. If only a few countries honor the restrictions, then the targeted state can reconfigure its supply chains toward other countries open to trade. The economic strain of sanctions can therefore be mitigated by developing alternative trade channels.

Sanctions also fail because they commonly strengthen resolve in sanctioned states. When freedom to trade with outsiders is forcibly restrained, then nationalistic tendencies increase among a country's population. Rather than creating animosity toward a domestic regime, sanctions often unify nations behind that regime.

It also seems lost on politicians that the economic penalties imposed by sanctions work both ways. When trade is restricted, the productivity benefits of specialization decline as countries diversify to become more self-sufficient. Less output is produced, and standard of living falls--not just for the sanctioned target, but for all countries--even for those who decline to honor the sanctions. In this manner, sanctions behave like tariffs. 

Who is hurt the worst? The world's poor. Because those at the bottom of the economic pyramid have the most to gain from specialization and trade, they become 'collateral damage' when prosperous countries impose trade sanctions. 

Consequently, sanctions themselves may be seen as acts of war. Although they are often levied in response to violence, sanctions are also violent in nature. They forcibly restrict trade--often in manners aimed at hurting others--particularly civilians. In this sense, trade sanctions bear similarity to wartime policies such as the Allied bombing of German and Japanese cities during WWII. 

While sanctions seem to satisfy popular urges to 'do something,' they possess capacity to do more damage than the bad behavior that those restrictions purportedly aim to punish.

Risky Hedges

Past the church and the steeple, the laundry on the hill
The billboards and the buildings, memories of it still
Keep calling and calling, but forget it all, I know I will
--Squeeze

We're seeing some eye-popping moves in commodities with chatter that many commodity producers are getting margin calls on their hedges. 

Why should producers face problems with commodity prices going thru the roof? Commodity producers sometimes short futures to lock in prices. In fact, futures markets came about mainly for this purpose years ago.

The problem is that producers' 'long' positions are usually physical ones that have yet to be sold, meaning that producers lack liquidity (cash) to cover margin calls when their short hedges move higher.

Nickel is up over 80% today as producers feel the squeeze.

Peabody Energy (BTU), a major coal producer, announced today that they had secured a facility from Goldman Sachs to cover temporary cash requirements for their hedges. After hitting a 52 week high yesterday, the stock was off more than 10% on the announcement. 

Although hedging is generally considered a risk management tool, the current situation demonstrates that this is not always the case. 

no positions

Stuck on Stupid

"You're beginning to believe the illusions we're spinning here. You're beginning to believe that the tube is reality and your own lives are unreal. You do. Why, whatever the tube tells you. You dress like the tube. You eat like the tube. You raise your children like the tube. You even think like the tube. This is mass madness, you maniacs. In God's name, you people are the real thing. WE are the illusion."
--Howard Beale (Network)

The answer to Herschel Walker's question is, of course, "yes." The mainstream media firmly believes that you are that stupid.

The media serve as conduits for the distract and deflect tactics of their political allies. They believe that you will buy it hook, line, and sinker.

Indeed, they bet their business models on it.

Distract and Deflect

Guy de Lusignan: Give me a war.
Reynald de Chatillon: That is what I do.
--Kingdom of Heaven

When politicians need to wiggle out of jams, they often seek to distract and deflect. 

Distraction diverts public attention away from political problems. For example, when an investigation reveals evidence of a domestic political scandal, begin squawking about growing geopolitical conflict in far flung lands. Or perhaps create a war to veer public hounds off the scent.

Deflection means shifting blame for a political problem somewhere else. For instance, when foreign conflict jeopardizes flows of economic resources due to battle damage or trade sanctions, blame that conflict for rising domestic prices or shortages.

The current administration is clumsily employing both tactics currently.

Freedom Convoys

Sometimes the light's all shining on me
Other times I can barely see
Lately, it occurs to me
What a long, strange trip it's been
--Grateful Dead

Truckers around the world are joining Freedom Convoys. Originating in Canada, the conveys involve lines of semis driving slowly or stopped on highways in protest to COVID-related mandates. Some of the convoys stretch 20+ miles long.

As Rand Paul observes, Freedom Convoys reflect the time-honored American tradition of civil disobedience. "Peaceful protest, clog things up, make people think about the mandates."

Honk to show your support. 

Backwardation

Don't look back
A new day is breaking
It's been too long
Since I felt this way
--Boston

Backwardation is an unusual situation in futures markets where front month contract prices exceed those of out-month contracts. Usually futures curves slope in the other direction, with out-month prices higher than front month prices (due to carrying costs, etc). This condition is known as 'contango.'

Commonly, backwardation occurs when demand exceeds supply in the near term, leading to shortages. Shortages cause traders to bid up prices of front month contracts but leave farther out futures contracts relatively unaffected. This lends an atypical downward sloping shape to forward futures contract curves, and positive price spreads (i.e., the difference between front month contract prices and out month prices).

As this article reports, backwardation is happening in spades across commodities. While energy-related commodities have been the big headline grabbers, the phenomenon is occurring among other commodity groups. For example, most industrial metals have been in backwardation since late last year.

The glass half full interpretation is that backwardation-causing events are often acute situations that resolve themselves relatively quickly.

The glass half empty interpretation is that backwardation juices prices higher on the upstream ends of supply chains. If they remain persistent, then those pressures tend to work their way downstream to consumers.

Say it, Fed heads: backwardation rhymes with _____.

Fire and Ice

It's not so pretty 
When it fades away
'Cause it's just an illusion
In this passion play
--Pat Benatar

Morgan Stanley (MS) equity strategist Michael Wilson discusses his 'fire and ice' thesis. The 'fire' part relates to inflation. Inflation has surprised to the upside, causing the Fed to pivot and become committed to taming the inflationary flame (like ZH, these pages disagree with idea that the Fed is now committed to hawkish policy).

The 'ice' part is slowing growth, as the pandemic winds down and extraordinary fiscal and monetary stimulus is retracted. Wilson believes that stocks are sniffing that out.

Nice supporting graphic of the 'ice' part showing the YOY % change in monthly Purchasing Manager's Index (PMI) correlated and leading the SPX in this regard. 

Incidently, the commonly held 'line in the sand' w.r.t. the PMI is 50. Lower than 50 suggests contraction of the manufacturing sector. The chart above show where 50ish would fall with continued monthly declines. 

Straightforward to do the math estimating what that means for the SPX.

Empty Shelves

Gotta do what you can

Just to keep your love alive

Trying not to confuse it

With what you do to survive

--Jackson Browne

Chronically empty store shelves are frequently associated with socialist regimes and hyperinflation (e.g. Venezuela).

Now that empty shelves are becoming an increasingly common occurrence here, the intuitive inference is ____?

Great Reset

V: To whom, might I ask, am I speaking?
Eve Hammond: I'm Evey.
V: Evey? E-V. Of course you are.
Eve Hammond: What does that mean?
V: It means that I, like God, do not play with dice and do not believe in coincidence.
--V for Vendetta

Last summer we discussed the 'Great Reset' as a grand motivator behind the pandemic madness. Since then, the Build Back Better motto associated with the Great Reset concept has become mainstream terminology and a label for the current administration's spending proposals.

This piece provides a nice chronology of the Great Reset's conceptual development. The centrality of Klaus Schwab and his World Economic Forum (WEF) in advancing the concept is unmistakable.

The article also offers further support for the hypothesis that the WEF played a central, premeditated role in engineering Great Reset-oriented policy responses to the CV19 pandemic. In 2018 and 2019, the WEF co-sponsored two simulations of pandemic policy responses. The 2018 CLADE X exercise simulated a breakout of a novel parainfluenza virus in the US. The 2019 Event 201 exercise, conducted two months before the CV19 pandemic began, considered a worldwide outbreak of a novel coronavirus.

Supreme coincidence? Doubtful.

Both simulations anticipated nearly all policy responses and consequences that we have unfortunately become all-too-familiar with. Large-scale lockdowns. Widespread business collapse. Adoption of biometric surveillance technologies. Emphasis on social media censorship to combat 'misinformation.' Mass unemployment.

All of this works toward achievement of Great Reset goals. Reduction of fragmented markets and free enterprise and increase in concentrated, corporatist-state dyads (read fascism). Fear-based compliance with government mandates. Supply chain disruptions and shortages. Reduction of production activities in the name of climate control. Reduced localized government in favor of global rule. Et al.

Further reduces doubt that what is going has been orchestrated from the beginning.

Traction History

Seven, that's the time we leave, at seven
I'll be waiting up for heaven
Counting every mile of railroad track
That takes me back
--Doris Day

Great repository here on the history of railroads in Cincinnati. Info and pictures document large railroads, medium interurban rails, as well as streetcars. Fabulous map too.

Amazing how long these rails were in existence and growing before change, and then how quickly most of them disappeared with the advent of highways/cars.

Lots of the infrastructure is still there, although sometimes you have to squint to see it.

Provides perspective on just how far we've come, and all of the people that advanced progress along the way.

Bass Fishing

The trees are drawing me near
I need to find out why
Those gentle voices I hear
Explain it all with a sigh
--Moody Blues

Always interesting to hear what Kyle Bass has to say. Some points from this recent interview.

Fed monetization of debt will result in inflation. 

The 'official' numbers grossly understate the extent to which purchasing power is declining. He provides an example of the average car 30 yrs ago which cost $13,000 then marked at less than $15,000 in the inflation basket today--even though the average price of a new car is about $40,000. How can this be? The trick of hedonic adjustments. Even though a new car buyer's bank account goes down by $40K, the CPI number account for only a fraction of the actual price.

The Fed will be unable to taper much. Short rates higher than 1% would break the system. This means more monetization (inflation) pending in attempts to keep the wheels on the wagon.

The field position of government and central banks makes it unlikely that they will be able to intervene as Paul Volcker did in the late 70s/early 80s to 'break the back' of big inflation. Radically raising interest rates (and therefore borrowing costs) to curb inflation today would bankrupt the federal government (debt payments skyrocket) in addition to rendering leveraged entities across the globe insolvent.

He's not a Bitcoin/crypto fan.

Instead, he especially likes the prospects of rural real estate, particularly as populations migrate to states such as Texas, Tennessee, and Florida that are positioning themselves as business and consumer friendly with less regulatory burden. He likes land as a 'hard asset' play better than gold due to real estate's functionality.

Lots of discussion about China. Bass has been outspoken on what he feels is China's irresponsible, aggressive agenda. He believes that the country's move toward a national digital currency bodes poorly for global trading partners. He thinks the US should outlaw trading in it. He also believes that Taiwan faces imminent threat, and that markets have not seriously discounted the possible of Taiwan asset appropriation by the Chinese (e.g., TSM). Suggests strategic supply chain risk as well.

He thinks that the Chinese real estate problem will remain largely contained to the mainland, and that the PBOC will print yuan to keep the local economy afloat. He did NOT discuss what that money printing might mean to the global system.

Bass believes that fiduciaries should be fired if they buy Chinese stocks for their clients--due to their unaudited, manipulated nature.

Although he admits that he is a 'tree hugger' and believes in global warming, Bass thinks that under-investment in hydrocarbons over the past few years (due to widespread virtue signaling behavior) may take oil and gas prices to levels that we've never seen--particularly if we have a cold winter. The transition to cleaner energy will take decades and requires a far more measured approach than climate change zealots have been pushing. 

Stock may be the best tool for average investors trying to weather inflationary periods. Bass's work suggest stocks keep up with about 85% of general price increases. Investors will still lose, but stocks mitigate the losses.

position in gold

Defending Shortages

Arthur Castus: What is his punishment for? Answer me!
Ganis: He defied our master, Marius. Most of the food we grow is sent out by sea to be sold. He asked that we keep a little more for ourselves, that's all. My ass has been snappin' at the grass, I'm so hungry!
--King Arthur

Transportation secretary defends widespread shortages, claiming that they are a product of a strong economy. Textbook central planner rationalization. 

The truth is that prolonged shortages occur only when markets are not permitted to freely function. In unhampered markets, increased demand motivates producers to increase prices. Higher prices signal opportunity to producers, who subsequently increase production rates and, in some cases, add capacity so that higher demand is met with more supply. 

Shortages persist if this process is impaired. If prices are not permitted to rise, or if producers are restrained from increasing supply (through, for example, regulations that slow supply chain activities), then demand continues to outstrip supply and shelves go bare. 

Those who defend shortages are typically the people who create them.

Sick Out Shutdowns

All my bags are packed
It's time to go
I'm standing here
Outside your door
--John Denver

Reports growing of 'sick outs' in protest of vaccine mandates. Hospitals, education, transportation companies.

This matters most in organizations that provide services. In contrast to the manufacture of tangible goods where production is commonly paced by machinery, the primary factor of production in service operations is generally people. Generally, the more workers in a service operation, the greater the amount of output that can be produced.

We noted this more than a month ago when hospital workers began hitting the silk. Less people mean lower capacity. Lower capacity means less output.

Less output means disruptions and shortages.

Lower Hospital Capacity

It's been such a long time
I think I should be going
And time doesn't wait for me
It keeps on rolling
--Boston

One difference between manufacturing and service operations involves their composition of productive resources. In manufacturing processes, equipment serves as the primary factor of production. Equipment leverages the amount of output that workers can produce. Capacity, defined as the maximum amount of output possible from a production process, is generally determined by how much equipment has been installed to support labor.

In service-based operations, people are usually the primary factor of production. Although facilitating equipment may be employed, people generally control the pace and composition of output in service operations. Obtaining more output in service sector settings commonly requires hiring more workers.

With vaccine mandates now being imposed in many organizations, workers are being fired for non-compliance or leaving in advance of compliance deadlines. Several recent headlines have highlighted the situation in hospitals, where large groups of nurses and other workers are resigning or or threatening to resign in defiance of vaccine directives in their organizations.

Hospitals are prime examples of service sector operations that depend on people to produce output. The fewer doctors, nurses, and other staff personnel, the smaller the number of patients that hospitals can treat. By imposing vaccine mandates that cause workers to hit the silk, hospitals are essentially reducing their productive capacity.

When you hear that hospitals are being 'overrun' with patients, recognize that this may be due to self-imposed capacity limitations. Vaccine mandates may lead to fewer workers. Fewer workers mean fewer patients can be treated. Therefore, hospitals may reach capacity limitations when far fewer patients seek treatment than in the past. 

In-Kind Censoring

All my instincts
They return
And the grand façade
So soon will burn
--Peter Gabriel

A conceptual framework that guides yesterday's post is resource dependence theory. When organizations depend on outside entities for important resources, they are prone to create 'negotiated environments' with those entities to facilitate resource acquisition. 

The more dependent an organization is on an outside entity for resources, the more beholden that organization is to the entity. In markets for economic goods, this asymmetric influence is sometimes called bargaining power. Walmart, for example, wields sizeable bargaining power in negotiations with suppliers due to the resources that can be obtained via the Walmart channel.

In markets for political favor, the resources that organizations desire rest in control of government. Government contracts, tax breaks, monopolistic grants, favorable regulatory treatment, etc. In negotiations to obtain those resources, organizations might offer several politically valuable items in trade, including campaign contributions, out-of-office 'grants' (e.g, cushy jobs for the relatives of politicians or even for the politicians themselves once they leave office), and access to large voter blocs.

Organizations might also offer 'in-kind' political resources in trade. In-kind resources include housing, transportation, labor, and equipment that politicians can use to their advantage. An attractive feature of in-kind contributions is that they are difficult to account for and often fly under the radar of political contribution limit watchdogs.

Media companies offer particularly attractive in-kind resources for politicians. They can publish political endorsements, provide editorial space for politicians and their cronies, and slant content in favor of candidates/parties that offer prospects of resource gains. They can also slant content away from political opponents.

This is where Trump's lawsuit of social media companies comes in. Social media companies have been pushing content that favors leftist agendas, while censoring content that opposes those agendas. In fact, the federal government recently signaled that it wants to work closer with social media outlets to advance its 'messaging' further.

Must the Trump side prove that Twitter et al and the government have explicitly negotiated a trade that involves in-kind media gifts for political favor? 

In a just legal system, no.

What Trump should need to show is that these media companies are, or have been, subject to favorable government treatment. If they can do so, then these companies should be deemed extensions of government and thus subject to the same rules that limit the power of any government agency--including limitations on restricting speech.

Whether our legal system is in fact just is, of course, questionable.