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You’ve likely heard the term ‘supply chain’ moreover the last few weeks than over the last year. And most of us are wondering what it means for our investments (and holiday shopping lists).

If you don’t understand the parts of a supply chain, you won’t know how it works together. And when one piece has a problem, the rest fails to operate. 

And supply chain can’t switch on and off like a light – as much as we want it to.

In this episode, I reveal how to protect your portfolio and shop with ease through a supply chain crisis.  

Show Highlights Include:

  • How to avoid the post-pandemic ‘supply chain strain’ on your portfolio. (2:05)
  • Why looking at a pencil best explains the inflation, backed up ports, and empty shelves today. (7:25) 
  • The death of the Dollar Tree and what it means for the things you buy today. (10:02) 
  • Using Nike contracts to avoid stuffing your portfolio with ‘coal’ this holiday season. (13:30)
  • How to make smart investments and protect your shopping lists this holiday season. (19:49)

To schedule your complimentary retirement track review, head to https://onecapitalmanagement.com. You can also call us at 805-410-5454 or text the word ‘TRACK’ and we’ll reach out to you.

Read Full Transcript

Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.

Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [00:26.1]

Brad: Welcome to Make your Money Matter, the show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett, and it's my goal to help you distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple to help our clients and you listeners take control of your finances and build the life you deserve. Friends, today the challenge is no longer the access to information, but rather it's finding the right information, and more importantly, how that information applies to you. And that's my commitment to you here today on the Make your Money Matter podcast, because after all your money matters and knowing how to plan your financial future is vital to your financial success. [01:13.1]. And before we get started, if you haven't already done so you can go to our website at onecapitalmanagement.com. You can click on the media tab and there you can download and subscribe the, Make your Money Matter podcast. You can also download the podcast on any platform where you would otherwise download a podcast, whether that's Spotify, SoundCloud, the apple app on your phone or Google podcast. Leave us a review, let us know how we're doing, it's always good to get feedback. And as you heard me say each and every week, if you like the podcast, share it with someone you like, if you don't like the podcast, I guess share it with someone you don't like. But this week's a good one. I want to talk about supply chain.

Look, we've all used those two words, probably more in the past couple months than we ever have before. It's widely talked about specially around the summer’s inflation conversations. And I thought it'd be good to really go through it and use examples of what it actually means both now, as we are seeing it, as news is coming to us, but also as we here at One Capital Management, look at it from a perspective of portfolios that we're managing and also how we look at it in the future.

Now, if you go on investopedia.com or anywhere where you'd look up, what supply chain is, their definition is this a supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer. Now what I just described there probably doesn't shock anybody, but what I really want to go back, and note is that it's multiple things. It's not just one product starting from point A and ending up in point C. It has a lot to do with the network and they use that word appropriately and why I want to talk about it today because we're talking about activities, the people involved the entities, multiple supply chains, distribution companies, distributors themselves the information as well as pass along the communication between those and the overall resources used.

Now, if you're like many of us here at One Capital Management, Christmas shopping as an example, isn't probably currently on the forefront of your mind here in October. But this might be the year having said all of this about supply chain and we're going to talk about today. This might be the year all of us to get it done early. And that includes Santa. So, over the next couple months, St. Nick beloved Saint Nick will be inundated with orders largely in the form of children's letters. Now, given the advancements in technology, one can logically assume Santa's elves, no longer manufactured toys, but let's be honest, constantly training and retraining, such a massive workforce of elves that's estimated to toil year-round and work 18 hours a day, it would probably put too big of a strain on the operation. More likely Santa has built an enormous north pole fulfillment center, let's call it where the elves receive and stock finished product, not too dissimilar to a supply chain.

Now look, Santa is magical, but he's not as far as we know a mind reader now, until he receives the children's wishlist, he's unable to place orders. Under normal circumstances with overnight shipping and smooth-running supply chains, this isn't a problem, but this year, however, it's probably best that like us Santa predicts trends and starts placing orders now. Because prior to this, given the fact that he's “capable” of delivering 500 million toys in one night, the product really only needed to be there on December 24th. So why is this year different? You might be asking. Well, like our supply chain conversation, we're going to go through today many of the world's biggest toy companies have already announced that the global shipping crisis and labor shortages, again, this is a great example of product and people, labor shortages, and shipping environments. They're all going to handcuff their ability to meet massive demand. That's really been increased by the pandemic in this holiday season.

Isaac Larian, CEO of MGA entertainment said, and I quote, “this is going to be a major shortage of toy products this year.” Now, by the way he owns and distributes last year's top toy. So, there's no surprise in that statement, but he's not alone. There's many others that have told CNN and other outlets that the demand is going to be there, what is not going to be there is the product to fill the demand. Now toys are not by a long shot. The only consumer good being subject to delays and shortages just everything from apparel to paint, to electronics, to lumber all the way to sneakers. And we're going to come back to that in a second. Well last March, when the government was considering whether to lock down the economy, there was a good argument to be made that the longer we stayed locked down, the more permanent the damage we would do to the underlying economy. It's pretty much now clear that the cost of lockdowns is immense. We aren't just talking about the $5 trillion in government borrowing from really future generations, but the clear damage done to small businesses, and ultimately what we're talking about today, supply chains.

The U.S economy cannot be just switched off and on like a light, it doesn't work that way. Every day, countless decisions are made in order to get the simplest of things on store shelves. You and I, we take it for granted sometimes we walk into a Vaughn's or a Safeway or any grocery store, right? And we have everything we need on the shelves. Now, one of my favorite economic essays, I learned this in college when I was getting my undergrad in economics is titled ‘I, Pencil’ by guy named Leonard Read in which he writes and I quote, “Not a single person on the face of this earth knows how to make me.”And he's talking about the pencil and quote, think about it. Just think about that as an example for a second. And I thought about this going into today's episode around supply chain, because it's kind of fascinating. So, I dug it up and started reading through it again, just like I did 20 years ago. And it's still fascinating to me because really think about it. We all know the simple components of a pencil it's wood, graphite, paint, etc, but it's a complex chain of people and events that put it together.

Loggers need equipment, food, and clothing. So, do all the other suppliers, each part of the process depends on those before and if just one part is so out of whack, making a pencil, as simple as that may be, gets harder. So, locking down the economy through complicated supply chains, look really into chaos and restarting them is not as easy as many seem to think. We just recently saw that not too long ago. Markets are robust and sturdy, but government decisions really made by bureaucrats who at most can handle a dozen pieces of information. They destroyed the information flow necessary for smooth functioning. Remember the conversation we were having about what supply chain is defined as? Such as the products or the suppliers, but also the information. Now add into this, the mix that government locked down the supply side of the economy. Notice why we're having a supply chain issue. They locked down the supply side of the economy while simultaneously providing really rocket fuel through the printing and borrowing of money and essentially the increase in M2 two spending to the demand side.

So, a massive spike in consumer spending by people who weren't producing is a recipe for unbalanced markets. It's like causing a car accident and saying that morphine is the cure. Once the morphine wears off the injuries remain and the pain we resurfaces. Here, inflation, as we've talked about a couple episodes ago and we've been discussing with our clients is one clear result. Look, we've all heard the reports the past few weeks and seeing the ports in Los Angeles and New York thrown into chaos as ships basically are waiting weeks to be unloaded. And the cost of these ship containers has soared by nearly 500% Dollar tree, the wonderful story you can go to where everything's a dollar. Dollar tree, which sells items, which by the way, are really mostly imported for a dollar. Now says they can't do it anymore. And we'll sell more items for above a dollar. I mean, that's like a marketed news brief of, Hey, we're having inflation. We're now going to be no longer the dollar store. We're going to be the $1.50 store. I mean, they can't just change their name, but that's what's happening.

And we've seen the reports. It doesn't just stop there. Oil, gasoline, and natural gas prices ss an example, all those presses are rising. Europe, which also lockdown is heading into the winter with basically a shortage of fuel. The government there at attempts to alter a well-established industry by forcing it to create more green energy. That's all failing, let's be honest. I must say, it's not a good thing to do. When's the last time you asked someone said, Hey, do you want a better environment? And they said, nah, I'm good. Like that's what a lot of these people really think about when you are on the other side of the green new deal. It's like, there is no side to it. Everyone wants a healthier and better economy. Everyone's a healthier and better atmosphere or air to breathe. No, one's arguing that.

I mean, take this for example, the United States postal service is slowing down deliveries to save money as financial losses go even higher. Automobile manufacturers cannot get semiconductors as we've all seen as well and they're seeing production levels in the face of strong demand all fall behind. All of this, again, this is an opinion. All of this was predictable. I think we all can look back and say, Hey, look, you're gonna lock down the economy. This seems like a pretty predictable outcome. A market economy only works when information through the price system is allowed to flow freely. Turning it off or trying to manage it to fix some politicians Utopian vision of the future creates chaos in the economy. There is what I'll call the “seen,” and then the “unseen.”

The scene is the fact that you can't buy toilet paper as an example, or food prices are going to go up. The unseen is the market system. What good old Adam Smith called the invisible hand. The market provides because people work together as a team, even though they don't know each other. They do it to earn a paycheck or make a profit that's supply chain working in a functional way. To call this system greedy, I think really misunderstands the role of profit and ultimately how resources are allocated by the marketplace. Free markets require unimpeded information, locking down the economy and attempting to manage it from Washington, DC is guaranteed to create more problems. And again, as I mentioned before, one of those is inflation. It isn't necessarily transitory, it's a natural outcome of decisions that have been made in the past year. Lockdowns will cause problems. We can kind of look at that as a predictable notion.

And as I mentioned before, this isn't just happening in some of the areas that I mentioned, it's happening all over the place. Like I said, apparel to electronics lumber and I mentioned sneakers to understand this. Let's look at a staple of many Christmas buying and let's talk about Nike. Phil Knight, Phil Knight created Nike. His book by the way, Shoe Dog is actually pretty incredible. Phil Knight's outfit was one of the first multinational companies to contract a 100% of its manufacturing to independent suppliers in roughly a dozen countries around the world. Think about that for a second. Now, by doing so, Nike saved millions of dollars on materials and labor, and they mitigated the risk of unpredictable occurrences like extreme weather or labor strikes say at any given factory. What the ahead of its time supply chain that he was creating, and all supply chains was not protected from is a global pandemic.

To wit Vietnam where a lot of company’s production is done, they recently enforced strict COVID lockdowns, costing Nike months of production. But production here in the U S and abroad. Isn't just one part of the problem. There's also major transportation and shipping container issues. I mean, last month, the Chinese government temporary closed part of the world. Third busiest container pouring in Ningbo for two weeks after a single dock worker, a single dock worker was found to have contracted the Cova Delta variant. Flying in Lex, not far from our OCM headquarters here, by the way, right now passengers can look down at long beach and LA harbors and spot dozens of anchored containerships as I mentioned, just waiting to drop off cargo in unmanned ports and or undermanned ports and warehouses. This is the norm in nearly every major port in the world. Shipping containers are the backbone of global trade. You want to talk about one of the main areas of supply chain to help define the definition of supply chain? That's a big one.

Yes. The lack of communication or halting the communication flow is a big deal. Resources, the people running it, but talking about the actual track that it runs on shipping containers are the backbone of global trade. And there's massive unavailability right now. What I think is really neat right now, and especially as I was discussing this issue today, or this topic of supply chain is we sometimes take for granted. I'm not saying it's a bad thing. But we are on the freeway, let's say, and we see a semi-truck, you know, with a Maersk shipping container on its back, it's interesting to know if we start talking about supply chain more, and if you listen to this and kind of start saying, yeah, this is interesting. You start really looking at that truck and going a wonder where that containers been.

About two years ago, when my son was about four years old, we would drive on the freeway, he loved semi-trucks. He loved big trucks. And one time out of the blue, we were driving along on the freeway, and he looked at the truck and said, daddy, look, there's a truck. And we were as normal kind of looking at it saying how big it is. And I asked him, I said, Hey, you see that big rectangle box on the back of it. He goes, yes. I said, where do you think that came from? He goes, I don't know. So, we went home, and we looked at a map and that's how we started discussing the United States locations, geography, and really a globe and the world. It was kind of a fascinating inlet into a conversation that ultimately, I would have had with my son, but it was really cool. And now every time we see a truck, he looks at the bins, where do you think that's been daddy? And I said, it's pretty cool to think about, right. It came from one country across an ocean, into another country to give us items that we need here and it went back most likely. It's pretty interesting when you think about something so innocuous as a shipping container on the back of a truck, when you really track it, it's kind of incredible. And these huge steel boxes, as we know that they move products from manufacturers back to the definition of supply chain, right. They move products from the manufacturers to their destination hubs.

Now, early in the pandemic, they were used to actually move medical supplies, such as masks around the world. It was really incredible. And they're still sitting in ports in places like South America and Africa waiting to be picked up. Isn't that ironic in a way, I mean, it's sad. But shipping and shippers have really little incentive at a time when demand for their services and the prices they can charge are so high. So, they, they have little incentive to send ships, to collect empty containers. This, by the way, along with those full containers, waiting in ports around the world, they've all caused massive shortages roughly by the way, 350,000 sat idle for weeks in that third busiest port in China, Ningbo for weeks. Now in a twisted irony, these containers, by the way, which carry 90% of the world's traded goods, according to the Atlantic are overwhelmingly produced in guess what China. So, all of this has caused the cost of shipping a single container from Asia to the West Coast of North America to increase by nine to 13 times and forced really many companies to charter airplanes, which is a much more costly option in attempt to meet demand.

If flying sleigh pulled by eight fit reindeer makes Santa is ability to get finished products to end users unmatched, see where I was going with that Norad adjusted satellite to track the team on Christmas Eve and allows kids to watch the journey online. I mean, that's efficient, that is not locked down. If Santa needed to use truckers, like the majority of companies he'd have an even bigger problem, a huge lack of people to drive the rigs. The Minnesota trucking association estimates that the us has a shortage of about 60,000 drivers due to recruitment issues, early retirement, and COVID canceled driving school classes. Crazy! You’ll be surprised to know the additional costs incurred by companies in order to get their products on shelves will actually be passed along to guests who us, the consumers. Financially speaking COVID and the Delta variant in particular is stuffing our stockings with a bit of coal, if I'm being honest. The good news is it's fleeting.

As noted in past folios, that One Capitol Management has written to our clients and as I discussed here on the Pension Attention podcast, we've been expecting inflation to be higher and last longer than most of the forecast. It's why we've continued to be cautious with our fixed income, our bonds, the investments there we've been cautious there keeping them short and focused on high quality and invested more in higher yielding instruments like direct lending and bank loans. We've also, by the way, reduced our exposure to Chinese investments. We basically sold Alibaba outright, knowing these supply chain issues and in particular can be exasperated with the government's increased regulations and restrictions. All that to say, we're prepared. We feel here, One Capital Management for our clients, we're prepared. If you're listening to this right now, and you're not a client and you haven't spoken with your advisor about these subject matters, it's important to go and say, Hey, I heard about supply chain or, Hey, I was listening to this podcast by this guy, Brad Barrett at Penson Attention. What does it all mean? How does it affect my portfolio? What does that mean to me?

Because we feel like we're prepared and looking ahead in our diversification or active management or rebalancing, and you should be to when the overzealous start decorating their homes and retailers start advertising Christmas sales in late October, take that as a cue to get your shopping done early and avoid having the slip IOUs in Christmas cards. So, supply chain is a big issue. It runs the economy in a lot of ways from start to finish. I thought it'd be good to go through and dissect what it actually is defined as, and what are the actual components of it? It's not just a shipping container. It's the communication around that shipping container. It's the resources use to get that information and actually the labor force and people involved with that. It is encompassing. So yes, it's an issue we have to deal with and it's something that was really brought upon because of lockdowns. So, I do hope this helped a little bit of clarity with regards to supply chains.

I guess what I want to charge everyone with today is taking a look at how this has affected you. And if you have that counsel, that advisor, you're talking to, talk to them, go through it, figure out what works for you. But if you haven't had that counselor, you hadn't had that first meeting with an advisor and you'd like to call us, give us a call. You can call us at (805) 409-8150. You can also go on our website at onecapitalmanagement.com. You can find out more about our firm. You can actually set a meeting with myself or any one of our advisors to find that specialty that works for you.

Thank you for listening to make your money matter before acting on anything discussed today. Remember to speak with a financial advisor near you. If you're not sure where to turn and you'd like our help visit us at onecapitalmanagement.com for a complimentary retirement track review, or give us a call (805) 409-8150. And until next week always remember to make your money matter.

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [23:12.7]

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