Wednesday Briefs – 31 March 2021

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THIS WEEK: Suez – Container Shipping; VolTswagen; New York Coronavirus; Triumphing on the Venom of a Snake.

Suez – Container Shipping

To say that the Suez Canal is critical for global trade is an understatement. When the Compagnie Universelle du Canal Maritime de Suez constructed it in 1859-69, it cut the sea journey from France to the Indian Ocean by 5,000 miles (and 7 to 10 days on today’s speeds). The fact that the Sinai Peninsula offered this opportunity on its Western side was one of the lucky gifts of geography to mankind, as was the case with the Panama isthmus that turned into the Panama Canal, though of course a better gift would have been if both places had been natural straits instead.

The ship has now been dislodged, but there could be some consequences on trade anyway if the Canal hereafter limits the sizes of ships traveling its waters. Bloomberg’s Joe Weisenthal relates in his newsletter a recent (pre-Suez accident) conversation that he had with Marc Levinson, author of The Box (a book about the shipping container) in which Levinson talks about the diseconomies of scale of larger ships:

“Ship lines were aggressively pursuing economies of scale [by building bigger ships]. What they didn’t count on was that at some point the vessels would get so big that diseconomies of scale would set it. And that’s what’s happened in shipping. The point at which ships got built beyond perhaps 17 or 18,000 TEUs (twenty-foot equivalent units) is the point at which they just got too big. And that’s when you started to have this confusion in the ports. That’s when you start to have these delays in shipping. That’s when you start to have the entire industry become less reliable.”

Or as Captain Andrew Kinsey, a marine risk manager at Allianz, puts it in this interview: “The economies of scale for the shippers did not necessarily equate to economies of scale for the entire supply chain.”

The Suez incident revealed another disadvantage of big-ness. Now shipping companies could gradually gravitate back to smaller ships. They might re-route their bigger ships away from the Suez Canal. They may incur higher insurance costs. Added to the shortage in containers, these items could raise shipping costs for some time.

VolTswagen

The Germans are coming, and they are in a funny mood.

On approach of April Fools’ Day, Volkswagen circulated a news item that it would accompany its expansion into electric vehicles (EVs) with an official name change to Voltswagen. That’s right. The automaker founded in 1937 as the “people’s car” (literally Volkswagen in German) was going to rechristen itself the volt’s car, the electric car. More than a few people fell for it before Wolfsburg headquarters mercifully revealed that it was only a prank.

As a PR stunt on the eve of Volkswagen’s EV rollout on US soil, you could do worse. It showed that fun and whimsy are not the monopoly of a certain American EV company and of its charismatic CEO. The brave new world calls for this kind of communication.

Two things are clear here: 1) the German automakers have some catching up to do in the EV market, and 2) they are sparing no expense in effecting this catching up. According to analyst Gordon Johnson, “over the 2015-2019 timeframe, BMW+Daimler+VW spent a combined €120bn on R&D for EVs vs. just $6.5bn for Tesla.”

Of course, success is measured by output, not by input. If Tesla’s $6.5 billion produce breakthroughs and the Germans’ $140 billion produce little, then Tesla still comes out ahead. The main battlefields of competition are batteries (and their peripheral hardware) and software. Tesla’s advantage in batteries will either erode or become less relevant as all automakers achieve longer ranges on single charges.

As to software, it has not historically been a great strength of the German manufacturers. But it is increasingly likely that software will be done by software companies like Apple or Google. This latest from Google and Fiat may be the template going forward, with each company doing what it does best. Needless to say, an alliance of Volkswagen (and/or BMW and Mercedes) and Apple would be formidable.

New York Coronavirus

Covid-19 numbers are climbing once again in New York State, albeit at a rate that is not yet alarming. This kind of rise was sometimes due to more testing but in this case, the positivity rate itself has been inching upward. The causes are not entirely clear but are probably a combination of more travel, more lax behavior as the weather warms, and the spread of new variants. It is estimated that over 30% of new cases in New York are now caused by variants. Last year, the crisis peaked in early April and numbers collapsed thereafter. This is the most likely scenario in the weeks ahead.

Triumphing on the Venom of a Snake

Stock shorting is seen as objectionable by some people ostensibly because optimism is contagious and can under the proper circumstances enrich a very great number of people. Funds who engage in shorting are seen in some parts as spoilers of the stock market and as standing in the way of this optimism and prosperity.

In his novel Midnight’s Children, the author Salman Rushdie is not writing about investing, much less about shorting, but the following does apply to investing:

“All games have morals; and the game of Snakes and Ladders captures, as no other activity can hope to do, the eternal truth that for every ladder you climb, a snake is waiting just around the corner; and for every snake, a ladder will compensate.”

In other words, every portfolio includes winners and losers. And performance results from two steps forward for each step back. And then about shorting:

“But I found, very early in my life, that the game lacked one crucial dimension, that of ambiguity – because… it is also possible to slither down a ladder and climb to triumph on the venom of a snake.”

Critics may now refer to shorting as “climbing to triumph on the venom of a snake”. Further, it is said that Rushdie’s work combines “magical realism” with “historical fiction”. The work of an investor sometimes feels the same.

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