One of the world’s largest container ships, greater in length than the height of the Eiffel Tower, is stuck in a narrow canal. It is stuck because the ship ran aground on the sides of the canal.
High winds blew the ship off course, causing it to drift sideways until its ends were firmly lodged in the sides of the canal. As a result of this, the canal waterway has been blocked.
The blockage means that, until the ship is dug out — a process which could take days or even weeks — other ships cannot pass through.
That problem, in turn, has created a kind of traffic jam for seaborne global trade. Because ships can’t get through, the cargo of the ships can’t get to ports.
This seaborne traffic jam is so bad, it is costing the world an estimated $9.6 billion per day in lost trade revenues, which translates to $400 million per hour. All because a single ship got stuck. The canal in question is the Suez Canal, a man-made waterway in Egypt.
The Suez Canal connects the Mediterranean Sea with the Gulf of Suez on the Red Sea, and serves as a kind of transport shortcut for goods flowing from Europe and Russia to Africa or Asia.
When the Suez Canal is closed or blocked, the alternative route for shipping goods from, say, Italy to China or vice versa requires sailing all the way around the southern tip of the African continent.
Having to loop around Africa is a wildly expensive journey in comparison to the Suez shortcut — which is why the Suez Canal was commissioned in the 1850s. It required an estimated 1.5 million workers, mostly digging by hand, over the course of ten-plus years to complete.
The Suez Canal has long been considered a major “choke point” for international trade flows. In 2020, nearly 19,000 ships passed through, carrying 12% of global trade volume and 10% of oil volume.
As a result of this importance, geopolitical wargame scenarios have long included impact estimates of what might happen if the Suez Canal were sabotaged or otherwise shut down. But in the various scenarios that have been gamed out, we doubt any of them included Mother Nature playing a prank via blowing a ship sideways with high winds.
As a result of the blockage, transport rates are skyrocketing. The Africa route takes longer and uses a lot more fuel, which simultaneously reduces the availability of ships and increases the price of the journey.
Importers and exporters are thus now scrambling for alternatives to seaborne routes, which means looking at shipments over land (by truck or train) and shipments by air. But those routes are more expensive, too — compared to the bulk rate of giant container ships — and now demand is spiking.
“You’re starting to get some people in panic mode,” logistics executive Michael Piza told Bloomberg this week. “We’ll really feel the full impact here in the next seven to 10 days.”
Many assume the impact of the Suez Canal blockage will be inflationary. We’re not so sure. On an overall basis, it could actually have a net deflationary impact on the global recovery. If so, that would make the U.S. recovery stand out even more.
To understand why price spikes in the midst of a global trade jam-up can be deflationary, consider the fact that higher prices can act like a tax.
When the price of gasoline and groceries shoots up, for example, those costs take a larger share of the money in consumer wallets. If consumers have no choice but to pay more for necessities, they will then have less discretionary income to spend in other areas.
The same calculus applies to businesses. If a business can pass on the cost of higher transport costs, it will. But if the business can’t pass on the costs — or if revenue is simply lost because shipments were weeks late — that makes revenues and profits go down.
Liquidity is a key variable in determining whether a price spike is inflationary or not. If liquidity is plentiful and there is plenty of spending cash available, businesses can raise their prices and borrow more from capital markets, while consumers can simply decide to pay more.
But if liquidity is constrained, higher prices can lead to belt-tightening as a ripple effect. When that happens, businesses see profits go down as costs go up, and consumers purchase less.
Unfortunately, too, a new currency crisis is unfolding in Turkey even as the Suez Canal jam-up plays out (we’ll explain more of what’s going on there next week).
This is an important factor because currency meltdowns in emerging markets have a tendency to be contagious; a severe episode of liquidity withdrawal in Turkey is already showing signs of contagion, with liquidity withdrawal and tightening conditions in other E.M. countries.
The behavior of the crude oil price could be useful in getting a sense of how the Suez Canal impacts play out. On news of the Suez Canal blockage, crude oil prices initially shot higher by 6% (a very large single-day move for crude). But the very next day, crude gave back most of that gain.
Our sense of the Suez Canal impact, on balance, is that it is just more fuel for the fire in terms of the strong-dollar environment we are seeing — and it is also bad news for tech stocks.
Why is this the case? Remember the connection between liquidity and inflationary impacts.
The one country that is still awash in liquidity right now is the United States. This means that, if prices go up at the margins because of the Suez incident, U.S. consumers will have little trouble paying.
It also means that inflation at the margins will not stop the U.S. growth boom now unfolding, because there is plenty of cash on hand to absorb initial headwinds.
A consumer price index reading of, say, 3% won’t stop U.S. consumers from spending, given they are more cash-flush today than at any time in decades. We’ll have to get a fair bit higher (as will 10-year and 30-year yields) before the growth party slows down.
That, in turn, means near-term inflation pressures are likely to increase in the United States, which translates to more downward pressure on treasury bonds and upward momentum for long-term interest rates. And the more that the 10-year and 30-year yield rise, the more that speculative tech stocks get hammered.
Then, too, because the Suez Canal impact is deflationary for the rest of the world (ROW) — their consumers don’t have the liquidity to pay up, which means spiking prices act like a belt-tightener — the transmission effects of rising U.S. long-end rates will hit ROW all the harder, creating a sell-off in emerging-market assets (this is already happening), which further translates to selling in the tech space.
All of this then loops around to an uber-bullish environment for the U.S. dollar because — even more so than before — other countries are seeing their growth outlooks weaken, and their debt loads looking increasingly problematic, as the U.S. continues to embrace vaccine-powered and consumer-spending-fueled growth, further increasing the relative attractiveness of the USD.
There are other views of what’s happening in terms of macro impacts — we are partial to ours, of course — but what really matters is the price action, which is the best substitute we have for an overall market verdict.
And right now the price action is telling us our strong-dollar views are dead on, and that differentials favoring the U.S. over ROW are only getting stronger — with the Suez jam-up adding to that dynamic.