China freight rates are rising like GameStop’s stock price
Assets Covered: USD, CNY
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If you’ve had a pulse this week, you’ve seen the meteoric rise of stocks like GameStop, Koss, AMC and others. Tips originating on Reddit’s r/wallstreetbets have toppled hedge funds and had retail investors leaning into markets.
While you weren’t looking, the cost of getting freight out of China has more than doubled. We spotted the start of this rise in Q1 of 2020 and interviewed a global logistics expert to understand what was happening around supply chains as Covid came on the scene. But prices accelerated dramatically in the last quarter of 2020 and continue to rise.
There are several factors underlying the price rise, but much of it is due to vessel backups in the US and Europe stemming from ongoing Covid lockdowns. Vessels arrive from China at full capacity, then park in port for weeks. Rather unglamorously, ports are like big parking lots where vessels just wait and anchor until a berth is available to unload their cargo. Once they’re unloaded, vessels return to China mostly empty.
It’s a good thing US retail sales have been pretty moderate over the last several months. A recent conversation on our Complete Intelligence Telegram channel discussed the rapid growth of deposits in US banks. In 2020, we saw US consumers and companies funnel money into savings rather than spending, pushing bank deposits up by ~20%. That has clobbered the velocity of the Dollar (the rate at which money moves around the economy), easing demand for US Dollars, which – along with several other factors – has weakened the currency. Consumers just haven’t jumped back into spending (yet).
As sluggish spending has taken hold, we’ve seen a sharp rise in the Chinese Yuan (CNY) versus the Dollar, appreciating from 7.1 in May to 6.4 this month. We expect a turnaround for the CNY this quarter. China’s credit demand growth slowed in Q3 of 2020, which is an indication that manufacturers are seeing less of a need for loans to accommodate growing demand for PPE and other goods.
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We believe this quarter will be a pivotal one for the global economy. Mixed messages and uncertainties around Covid, post-Covid growth, trade, the impact of Brexit, and geopolitical tensions remain. But if the Fed takes a pause, the economic recovery could take a turn for the worse.
One final item: We’ve just released Part 1 of our geopolitical risk discussion titled “Will China Invade Taiwan?” It’s a terrible topic to consider, but one that we must in the current environment. You can find a link to Part 1 here (Part 2 will be released next week):