Disturbing similarities between supply chain and securitization

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Supply chain update

The author is a part-time lecturer at the College of William and Mary

The US housing crisis in 2008 exposed the shortcomings of securitization. The opaque, highly complex, and interdependent process of transferring part of a Kentucky home loan to buyers such as Norwegian municipalities is inherently fragile.

The extreme confidence in its existence at the beginning naturally prepares for failure. When one conveyor belt in the system fails, the entire chain collapses.

The pandemic era is now also raising similar concerns timely Supply chain model.Taiwan’s semiconductor shortage, the huge Ever Given on the Suez Canal ran aground, and now there’s a 40-foot shortage Metal container Has sent a tsunami-like wave through global production. Due to the lack of chips, the highly complex and interdependent systems of American automobile production have been severely damaged.

The common history of securitization and real-time supply chain management is ignored in today’s discussion. Both originated in the 1980s and focused on maximizing shareholder value.

Over 40 years ago, minimizing capital and using one’s own balance sheet (while maximizing efficiency and using other people’s funds) became the requirements of banks and companies.

With the advancement of technology and the broader movement of globalization, securitization and instant supply chain models have flourished. Goldman Sachs is as busy as FedEx because money and goods are moved from one place to another at the same time overnight.

In a parallel system of highly specialized initiators, aggregators, underwriters, insurance companies, and brokers, loans fly from one fast-moving conveyor belt to another like car parts. Just as asset-backed securities pooled personal car loans, huge ships pooled metal containers. In both models, the components are brought together as quickly as possible, and then scattered around the world.

Today, in response to shortages, companies and even governments are turning to what I call the “just in case” business model. They are stocking key supplies, transferring previously outsourced production to the country, and increasing inventories where possible. Just like banks after the 2008 financial crisis, they are reversing-cost, capital efficiency, and the use of other people’s balance sheets damn it.

Businesses are not alone. Consumers are also responding. For example, home buyers now need oversized pantry. Many people lacked basic needs at the beginning of the pandemic, and now they have more on hand just in case.

It is not surprising that everyone is addressing the vulnerability they have just experienced. This is our natural response to traumatic events.

But today’s global production system is different from our financial system. No central bank can flood the market with semiconductors as quickly as monetary policymakers used cash after the collapse of Lehman Brothers. Chips cannot be fabricated out of thin air. There is no systematic way to increase supply to quell fears and control cost increases.

Compared with ten years ago, there are other important differences. Today’s government is acting in a more self-interested way. For example, as we have witnessed in the Covid-19 vaccine, everyone is becoming more and more self-serving.

Moreover, the mood of the crowd itself has also changed. Having suffered the adverse consequences of the banking crisis, Dajie is not in the mood to once again become a victim of a system that they believe has unfairly enriched shareholders at the expense of shareholders. Shortages and sharp price increases have become unwelcome.

If production pressure starts to fade and input supplies normalize, current concerns should fade. Nevertheless, the restoration of a more just-in-case supply chain will be a headwind for future inflation. Companies will have no choice but to try to pass on the higher costs of inefficiency to consumers.

It is wise for policymakers to keep this in mind. As recent history has shown, finance and industry have developed together. They are two aspects of the same sentiment coin. The future of supply chain management will almost certainly be reflected by a more cautious financial system. If we are not careful, a vicious circle of rising consumer costs and declining credit supply can easily occur, leading to further concerns about shortages and even more hoarding.

As we saw in the securitization-driven mortgage market in 2008, the once surplus world will soon become an extremely scarce world.

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Robert Armstrong analyzed the most important market trends and discussed how the best people on Wall Street respond to these trends.register here Send the newsletter directly to your inbox every business day

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