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24 May: Evaluating Fallen Dominoes

The domino effect is a simple concept: a change to any one element of a system ricochets around the system and causes changes to other elements. Some changes are benign, some harmful, and still others helpful. The Coronavirus lockdowns represented a shock to global supply chains and have led many leaders to rethink where, when, and how they purchase inputs. A system that was designed to be hyper-efficient may not have had the resilience needed to absorb the shock that COVID represented. I looked at two industries: shipping and housing. In shipping, the dominos fell rapidly, with sharp increases in expected shipping times; in June of 2020, everyone was waiting for a wave of evictions and foreclosures to roil the housing market.

What did I think would happen? Early on, experts in the shipping industry forecast that COVID related effects would impact shipping throughout 2020. On the housing front, we saw governments regulate evictions and help people pay rent. We expected landlords and lenders to become more flexible and forgiving around rent and mortgage payments. Initially, I thought supply chain disruptions would invite executives to rethink the tradeoff between a hyper-efficient global supply chain and a more resilient, local one for the long run.

What happened? Focusing on the port of Los Angeles, shipping was down 30% in May of 2020. Statistics for April 2021 show that imports rose 113% from last April, but more importantly, those imports rose 35% from 2019. The number of empty containers coming into port fell 75% over the two-year period. It seems like global shipping is clearly emerging from its backlog of orders and goods. All good news for the US economy and a global recovery.

Evictions and foreclosures tell a different story, however. As of yet, the wave of evictions and foreclosures hasn’t happened. Beginning with the first Federal legislation last spring, and through the latest $1.9 trillion support package passed in March, rent money for people facing evictions has kept people in their homes. The latest bill contains $50 billion to help people meet rent payments, and a moratorium on evictions remains in place until September 2021 to keep people safe. The Federal Reserve and Congress pumped money into households, kept interest rates low, and encouraged banks to create forbearance programs. The St. Louis Fed estimates that 500,000 homes stayed out of foreclosure in the fourth quarter alone.

The dominos fell in both sectors. In the shipping industry, shipments collapsed in 2020, but they’ve recovered nicely, and LA dock workers are busier than ever. Conditions in shipping should return to normal growth rates over the next quarter or two, and the market will resume normal operation. In housing, the government stepped in. So far, so good. We must wait and see what happens in September, when eviction and foreclosure moratoriums all end to determine if the market can right itself.

So What? What’s the bottom line? Markets work. COVID 19 caused severe pain in the shipping industry, and we’ve seen (or continue to see) difficulties in global supply chains throughout 2021. The dominoes fell, pain happened, and recovery is underway. In housing, we’re all still waiting. I expect we’ll see more evictions and foreclosures come fall, and the financial pain will last until these markets are allowed to work again.

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