Chips: From Scarcity To Overproduction

Have you heard about the chip shortage? This is a major excuse cited by many CEOs on their earnings call in regards to poor performance. Of course sales are down there is a chip shortage.

Or so we are led to believe.

The reality is that we are seeing the supply chain start to shift. In many areas, there is no longer a chip shortage. In fact, it is to the point where companies are announcing cuts in production (chip makers that is). If there is such a shortage, why would companies like Micron do this?

The answer is they would not.

Hence, we have another problem with the Fed looking at PCE and unemployment numbers as the metrics for monetary policy. The sad reality is we have another example of a forward looking indicator, showing us deflation, not inflation, is the major concern.

Source

Too Many Chips

Here is a headline detailing the situation:

Supply-side Inventory Proves Difficult to Dump as Demand Weakens Rapidly, Memory Manufacturers Initiate Rare Production Reduction, Says TrendForce

This is something that you are not going to hear about on the earnings calls from different companies. We can bet the ranch that CEOs are going to milk the supply chain excuse as long as they can. While they do that, expectations keep prices up when, in fact, those in the different industries are about to reverse course.

Notice how different the situation is compared to how it is being portrayed.

According to a TrendForce investigations, memory pricing began to decline from 4Q21 due to weakening demand for certain consumer electronics.

So we are now about 10 months in the reduction in pricing for chips? This makes sense since the demand for laptops, televisions, smartphones, and other electronic devices too a hit.

Coupled with the impact of rising inflation, the Russian-Ukrainian war, and pandemic policies, demand in peak season was weak, resulting in inventory pressure that has extended from the buyer side to manufacturers.

You dont say? It does appear the answer for higher prices is, well, higher prices. As consumers start to see their incoming money squeezed, they make adjustment. This means forgoing the non-essentials. It appears the chip manufacturers are waking up to this reality as inventories rise and the quest to unload them by price cutting takes hold.

Guess what is next:

In response to the aforementioned situation, Micron announced last week that it would cut production of DRAM and NAND Flash, becoming the first major memory manufacturer to officially reduce its capacity utilization plan.

Source

No surprise here. This is Business 101.

When inventories increase, production starts to slow down. We see this is all the manufacturing surveys put out by the different Federal Reserve Banks each month. They all tell the same story: new orders are down and hiring is not taking place.

It Was Always The Supply Chain

Throughout this entire ordeal, in article after article, it was aluded to that this run in price had nothing to do with QE, money printing or "too much money chasing too few items". The reality is that 2020 and 2021 saw a major supply chain shock. This was coupled with stimulus from governments which pushed more money into the hands of people who actually spend it. These people were basically prohibited from spending on services so what did they do? They bought stuff.

After a short period of time, the situation became dire. Supply chains tightening with reduction of inventories meant that prices were going to shoot up. There simply was not enough product to go around.

Of course, after the handouts ended, the demand started to dry up. We saw this starting in the second half of 2021. This caused the White House to deny the recession in the first half of the year since it claims it was simply a slowing of a overheated economy.

Wrong.

Things suck. Even the IMF is seeing this. Jerome Powell might be off trying to appease those screaming about high prices yet the IMF is fully aware of things getting dire.

This from CNBC:

The International Monetary Fund predicts global growth will slow to 2.7% next year, 0.2 percentage point lower than its July forecast, and anticipates 2023 will feel like a recession for millions around the world.

It is a situation that you do not like to see. In a mere 3 months, the IMF cut its global forecast to 2.7%.

Aside from the global financial crisis and the peak of the Covid-19 pandemic, this is “the weakest growth profile since 2001,” the IMF said in its World Economic Outlook published Tuesday. Its GDP estimate for this year remained steady at 3.2%, which was down from the 6% seen in 2021.

This is going to be tough to reach. We have the largest economy that was down the first half of 2022. How is the global economy going to grow 6% when the US, EU, and Japan are all sucking wind? Even China is in jeopardy of seeing a growth rate below 4%, especially if they do another shutdown in Q4.

Do not be surprised if entities such as the IMF keep lowering their estimates as time goes forward.

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