Things Are Starting to Hit The Fan

Things are starting to hit the fan. The delay between normal commerce that transpired before the war with Iran and the squeezed off supply of goods resulting from the closing of the Strait of Hormuz now appears to be manifesting itself. At least that's what those who speak of and know of these things are saying.

And it makes sense, doesn't it? The vessels that flow through the Strait in normal times don't carry only oil. (Yes, there are some who still think it's only the transport of oil that's being squeezed.) Many other goods needed for manufacturing of consumer products also have been squeezed. And these goods have now begun to enter that state of scarcity that will cause consumer goods to rise in price. Remember: Supply and demand.

Now such is not the only stuff that causes the inflation of prices (which for most of us is the most immediate instance of inflation in our lives). The massive creation of money by our banking system - far beyond any conceivable utility - dumps mountains of cash - really credit - into our financial system. And this serves as fodder for the pushing up of asset prices.

So, for example, when Wall Street masters of the universe get access to gobs of cheap credit  - at rates none of us can access - the borrow like crazy and invest the proceeds. This drives up asset prices. But such demand for assets does not spring from any, we'll call it, "natural" source. The obvious example of natural would be that the asset's price has dipped below whatever metric of value that we deem its logically correct price. But with gobs of essentially free money (credit) waiting to be plucked, the Wall Street  Masters of the Universe simply can't help themselves from buying up whatever they see as easy pickins. And so they buy and so prices rise - until they eventually fall. (Of course, by that time, those Masters have likely bailed out of such assets and sold them to the suckers - us.)

But for the rest of us, it's the stuff we need to live that hits us hardest when prices rise. And it's not just gasoline.

We all have seen food prices rise. And many if not most of us have managed to survive despite the rise of such prices. In a recent conversation, my counter party spoke of price of a certain cut of beef (beef being hit hardest with price increases) she preferred for a delicious dinner recipe. With that rise, she found another cut of beef, albeit not ideal, but cheaper. Thus an example of holding the line on our food budget. She also mentioned curtailing eating out.

In any case, we find ways to cope. But we may now find such coping to be more challenging when it comes to food - which brings us to perhaps the most daunting fact of this choking of the Strait of Hormuz: the cost of fertilizer.

The components of fertilizer are shipped through the Strait. And with their curtailment, the cost of fertilizer has increase 85%. That 8 as in eight and 5 as in five. Farmers now face a dilemma. They can't really afford to pay such prices unless they get more for the crops they grow. 

But wait.

It seems 60% of so of our country - the greatest producer of food in the world - is under severe drought. So the dilemma now becomes: Should I plant and hope to get the price I need to justify paying "$X" for my fertilizer? I've done this "take a flyer" approach in the past and sometimes things work out. But what if there's no rain and...no crop? Does it make sense to plant at all now?

And indeed, some farmers have publicly expressed this. 

Now, these anecdotes don't necessarily add up to a dearth of food in the fall when harvest time arrives. But they very well might. And even if rain miraculously falls and things do indeed work out, that price of fertilizer will result in a demand for higher prices by the farmer, higher prices by those who transport the good (the cost of their fuel having risen) and...well, you get the point.

So the impact of the fan being hit which has been felt already, will be more stern in the coming months.

We focus on food because it's essential. And if nothing else, we can count our blessings if we're not on the margin - those who have no reserves to pay higher prices. 

But this same cascade of price increases will hit many other consumer goods and services that, some of which are essential some not so much. Utilities may be the most immediate of these for most of us. Depending on where you live, electricity has and continues to be more and more expensive. And fuel for heat, the same.

There's much more to this story, but let's leave it there for now with the suggestion that we think this through and perhaps stock up on some items that may becomes almost or in some cases totally out of reach in the coming days, weeks, months. You don't have to be a survivalist of a "prepper" to see the logic here. And with the logic comes, perhaps, some sense of urgency.

Make sense?