Thoughts From The Divide – Supply Chains and Falling Dominos
“Perilously close to the edge”
Knock on effects of coronavirus infections, school closures, and business restrictions, which we discussed last week in the context of hourly worker data from Homebase are starting to appear in other parts of the economy. Some of the problems may seem relatively remote from an economic perspective, i.e. Freeport McMoran closed its Chino copper mine in New Mexico last week after a number of employees tested positive for CV-19. However, likely more relevant to the average American are the problems rippling through the food supply chain. Meat processors around the US are halting or modifying their operations. As covered by NPR in two separate articles (here and here) over the last few weeks, losses of workers to both infection and absenteeism have lead major meat processors, such as Tyson Foods and Smithfield, to suspend activities. These shutdowns are rippling backward through the supply chain. As Bloomberg writes in a note on the closures, with processors not running, they are no longer taking deliveries, leading some farmers to euthanize their animals, “a last-resort practice”. Supply chain mismatch is also taking a toll as businesses try “to shift their production lines to supply supermarkets instead of restaurants”. Farmers across a variety of industries are struggling to make this shift, and farmers from Iowa to India are having problems bringing crops to market. As an aside, supply chain mismatches are partly to blame for toilet paper shortages.
The Next Domino
One of components of the Fed’s Alphabet Soup of facilities went into effect today. The Commercial Paper Funding Facility and its Acronym-based friends have helped to soothe markets. However, though the waters appear becalmed, there are a number of commentators looking for the next domino to fall. Danielle DiMartino Booth is wary of the housing market. In a Linkedin note, DiMartino Booth warns that a “crisis is coming” and argues that several factors of the last decade “will now work against housing” as stocks wobble, retirees look to monetize their homes, and tax rules change.
Meanwhile, Axios is warning that states, cities, and towns will be next to feel the economic crisis. Axios argues that the pain will come on both sides of the balance sheet as states experience greater draws on increased “unemployment and medical obligations” while sales tax and other revenues decline. This dynamic is exaggerated in places like Nevada, which has no state income tax and relies on gambling and tourism for revenue. Some states have “rainy day funds” to turn to but may be forced to issue debt as they attempt to navigate a variety of rules, including obligations to bail out cities or mandatory balanced budgets. There is hope that the CARES Act may provide some help in conjunction with Fed facilities, but Axios warns that while “individuals and companies were first to feel the economic pain… they may be just the tip of the spear”. For those who would consider investing in these issuances, Harley Bassman opines on munis in his recent commentary “Sending in the Snakes”, arguing that “The safer trade, for those willing to do a bit of homework is to buy single name Municipal bonds in States that are not fiscal basket cases” and says he has “little interest” in bonds from states “with Pension concerns, with New Jersey, Illinois, and Connecticut ranked within the bottom decile”.
