Santa's Revenge: Everyone Front-Running My Rally, You Get Nothing

October 29, 2021

Santa is generally a jolly fellow, but that doesn't mean he doesn't take pleasure in meting out well-deserved punishment to the greedy.

Nothing is more predictable than a stock market rally starting in early November and running into mid-January--Santa's rally. And since it's so predictable, why not front-run the rally by loading up on stocks in October?

Here's the problem: Santa doesn't take kindly to punters front-running his rally. It's like opening your presents in October, and that's the equivalent of sucker-punching Santa. Santa's revenge will be served cold: no rally for you, front-runners. And nothing in your stocking or under your tree, either.

Rather than give front-runners a lump of coal (that's been bought up by China), Santa will deliver trillions of dollars in losses, much to the surprise of the front-runners counting on glorious gains galore.

A funny thing happened on the way to Santa's 2021 rally: a disintegrator beam swept through the entire global supply chain. Everything is now scarce except euphoric confidence in more stock market gains and more central bank stimulus, NFTs, quadrillions in cryptos, and users who hate Meta, which I'm guessing is an acronym for me eat the addicts.

What's absolutely out of stock are 1) stability and 2) the means to restore global supply chains to their previous working order. Unbeknownst to the vast herds consuming the goodies stuffed in those 8,000 containers per ship, the entire supply chain has been optimized to function within a very narrow band. Once it veers out of than band, it unravels very quickly and cannot be restored to its previous optimization.

There are a number of reasons for this inability to put Humpty-Dumpty back together again.

1. Everything that's needed to restore stability has been stripped out by optimizing profits. Redundancy, excess capacity, stockpiles, multiple sources, domestic sources--all those cost money and are therefore the mortal enemies of increasing profits, so they've all been stripped out of the system long ago.

2. There is just enough of everything to function in the optimized band, and adding more capacity quickly is impossible. There are just enough gasoline/diesel tankers to make the optimal deliveries, and no surplus tankers to add to the network. And even if there were super-costly tanker-trucks gathering dust in a lot, there wouldn't be any surplus drivers with the credentials and experience to drive them.

When a solvent runs out because one of the only two producers goes down for any reason, everything that depends on that solvent shuts down. As for adding capacity to produce more solvent, forget it: the machinery is specialized and has to be ordered with lead times measured in months, the means to transport more petrochemical feedstocks to the plant don't exist and cannot be conjured out of thin air, workers who know how to operate the plant are scarce, and so on.

These multitudes of intermediaries generate long dependency chains which break if even one link goes down. Every intermediary is a potential disruptor, and the more intermediaries there are, the more opportunities for one link in the chain to snap. With excess capacity kept near-zero to maximize profits, there's no slack, no pool of expertise to tap, no production capacity that can be turned on with a flick of a switch.

3. The instinctive human response to scarcity is to stockpile what's scarce or even threatening to become scarce. For wholesalers and enterprises, this means over-ordering to insure enough inventory to maintain production / sales. This quickly exacerbates shortages as the fortunate few grab far more of the dwindling supply than they need, starving everyone else down the chain.

Consumers also buy more and stuff it safely in closets, pantries, garages, etc. Stockpiling is not only rational when faced with scarcities, it's also rational when price increases are guaranteed: better to buy more now before the price goes up.

But since the global system is optimized for narrow ranges of supply and demand, this panic-buying strips the system of what little wiggle-room it had. Consider gasoline and diesel supply systems. They're optimized for average drivers to maintain less than half a tank of fuel. So when everyone starts topping off their tank every time they see an open gas station, the modest excess supply is quickly drained and shortages start cascading through a system with near-zero excess capacity, storage, personnel, tanker-trucks, etc.

Count the intermediaries between the source of the stuff you need and your house and you'll have a decent grasp of your vulnerability to global supply chain breakdowns. Very few of us know enough to count the intermediaries, and we might reckon there's a few dozen at most. In many cases, the true number is in the hundreds once we count the components, specialty materials, glues, solvents, packaging, delivery, etc. in every part of the production and shipping chain.

If you make your own Christmas presents with materials you have on hand, there are no intermediaries between the giver and the recipient. That's a secure system. Depending on hundreds of intermediaries to all function perfectly as the entire chain disintegrates, that's considerably less secure.

Santa is generally a jolly fellow, but that doesn't mean he doesn't take pleasure in meting out well-deserved punishment to the greedy. All gains are guaranteed by the Federal Reserve until the magical belief in the Fed's hocus-pocus encounters the disintegration beam. Oops, sorry about your Santa rally. You got greedy with the wrong guy.




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