This episode is sponsored by NYDIG.
First, on the Brief:
- Bitcoin hash power coming back online
- A new millionaire testing out crypto
- An emerging music tokenization platform
Bitcoin saw a significant drop in hashrate after China’s mining bans. The network accordingly implemented its largest difficulty adjustment, a parameter to adjust incentives for mining, to date. Has this adjustment worked?
In investments, Simon Nixon, one of the winners of the dot-com bubble, has emerged as the newest millionaire to delve into crypto. Last on the Brief, Royal announced a $16 million raise for its music tokenization platform, the aim of which is to give more power to the artists when it comes to royalty rights.
In the main discussion: With inflation on the minds of many economists and consumers, the Federal Reserve pushed a “transitory” narrative while pinning the blame on supply chain issues. Looking back at the history of supply chains reveals why COVID-19 broke the global goods network. Are the supply chain issues going to be as transitory as the Fed hopes?
“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: MR.Cole_Photographer/Moment/Getty Images, modified by CoinDesk.
What’s going on guys? It is Thursday, August 26 and today we are talking about why the world’s transitory supply chain issues are not seeming so transitory after all. First up, however, let’s do the Brief. First on the Brief today, Bitcoin mining is back. When China’s Bitcoin mining ban went to effect, we saw a massive drop in hash power being deployed to secure the network. This is of course due to all those China based miners scrambling to pick up and get out. Over the next few weeks, we saw the biggest reduction in mining difficulty in history. Now remember, the difficulty adjustment is a roughly every two week process, by which the Bitcoin protocol automatically makes it easier or harder to win blocks based on how much competition there is among miners. When an exogamous shock takes out a lot of hash power, the difficulty adjusts down to incentivize more miners to come online, because it becomes more economical for them to do so, even if they have a higher cost basis of electricity that makes it difficult to be profitable at higher difficulties. As all that hash power redistributes, the mining difficulty is headed back up. Difficulty just adjusted up for the third time in a row with this most recent adjustment being an increase of 13.2%. Overall, in just a couple months, the hashrate has rebounded about 25% from its low point. And the takeaway is that damn is this network just absolutely designed for resilience.
Next up, another billionaire gets in the game. Simon Nixon was one of the winners of the first dot-com boom, he founded Moneysupermarket.com, a mortgage listing company, all the way back in 1993. He now manages over $1 billion of personal assets in the tech sector, according to his family office, Seek Capital. The managing director of that firm, Adam Proctor, who recently joined from Citigroup’s private bank, is now planning on increasing their “allocation to crypto as we feel it is an important area for the future.” The firm is also looking to hire an analyst focused on the sector.
Third, and finally on this Brief today, can a DJ shift power in music? DeFi and NFT early adopter, not to mention DJ, Justin Blau has just announced a $16 million raise for his new company Royal. It’s a music tokenization platform that uses crypto tokens to apportion out song royalty rights. The basic idea is to make a market out of the key asset of a musician, the son. Theoretically, if enough people wanted to buy a portion of the future value of a song or record, this could totally transform the power that labels have to extract value and concessions from artists. There’s a ton more to get into here. But I want to do that at a later date when I can give it proper context. So for now, congrats to Justin and excited to see people taking on power in the music industry.
But with that, let’s shift to our main discussion. One of the subtle but important legacies of the COVID-19 pandemic will be the way that it awakens so many people to the challenges of supply chains in the global economy. Supply chains are something that most view, if they view them at all, as some abstract, wonky, deep economics thing. Most Western consumers are now simply used to everything working the way that it’s worked for decades. But of course, the way the world works in general and the way that supply chains work in specific, is in fact the product of innumerable but specific decisions over the preceding years that got it there. Before we talk about what’s happening in supply chains today, let’s talk about how we got here. There’s a classic business story about the formation of our modern economy. In the 1950s, Eiji Toyota, the CEO of Toyota, visited American car manufacturers and found them incredibly wasteful. Despite that being a peak of American car manufacturing, in his idea all that waste would be cut out and they would build a new model of lean manufacturing or “just in time” manufacturing that would propel companies like theirs into prominence.
As with all origin stories, the true origins are a lot less about a single moment of epiphany and a lot more about constraints breeding creativity that comes to life through trial and error over time. Toyota was already experimenting with lean manufacturing methods in the 1930s but, it was the post World War two years that really created context and need for it. There was a lack of cash, making it difficult to sustain the capital expenditures necessary for having supplies just sitting around that weren’t being used. What’s more, this is Japan, so space and in particular, factory space for keeping unused long term inventory was more difficult. Speaking of geographic constraints, Japan is an island nation with comparatively few natural resources.
The result was a new process. Here’s how Gerhard Plenert put it in his article “Reinventing Lean: Introducing Lean Management into the Supply Chain:” “They built smaller factories, in which the only materials housed in the factory were those on which work was currently being done. In this way, inventory levels were kept low, investment in in-process inventories was at a minimum, and the investment in purchasing natural resources was quickly turned around so that additional materials were purchased.”
Thus was born “just in time” manufacturing. Over the next few decades, the method evolved and more and more people from outside Japan got interested. Still, it was really in the 1980s when the global business scene really started to take notice. Case studies, articles, magazine features, conferences got the manufacturing world thinking more and more about “just in time” and the Toyota production system. It also came to be referred to as lean manufacturing, which just sounds good from a branding perspective in the 1990s brought more books on the topic and more companies moving in that direction. But the 1990s also brought something else, the end of the Cold War. The world all of a sudden found itself organized around the economic system of a single global superpower. And what does that have to do with “just in time” manufacturing? Well, “just in time” manufacturing inherently involves a supply chain that can accommodate the process. All those components that you’re not storing on site have to be available, just in time, from someone else. The shipping and transportation that gets them to you has to be available, just in time, for you to use them to keep your processes humming. In the wake of the Cold War, America’s unipolar military might was able to guarantee the backing of supply chains everywhere. The impact of that was that as someone like Peter Zeihan would put it, “geography ceased to matter.” All the shipping lines, all the transportation lines, from anywhere to anywhere, were open and guaranteed and backed by American military might. In that context, the only thing that mattered was specialization and efficiency.
In this new paradigm, new players were brought into the global economic fold, most notably, of course, China who more than any other country was beneficiary and enabler of this recent phase of globalization. Here in the U.S., there have been many debates about what’s good and what’s bad about globalization. On the bad side, the hollowing out of the American manufacturing and middle class and the attendant set of social problems that has come with it. On the good side, the reduced costs associated with the things that we buy, the significant increases in what’s available to us and how fast it gets to us. In other words, a lot of consumption based things. But few people tended to think about the bad side of globalization in terms of the inherent trade offs of “just in time” supply chains, that trade off at core was trading resilience for efficiency. When you’re based on a system of “just in time” supply chains, if one thing gets disrupted, it can disrupt the rest of the entire system. What’s more, there’s also a political risk. The world had been sufficiently organized around America for long enough that the idea of an entire big chunk of the global supply chain going offline because of a geopolitical reason, seemed largely impossible. But what if it wasn’t a geopolitical reason?
What if instead, it was, say, a virus? Last year, the first domino to fall on the virus was, of course, China, and that meant almost immediately significant disruptions to trade in manufacturing. By the time the virus got to the U.S., we were seeing supply chains, though, in a whole different light. Remember, those harrowing pictures of frontline medical staff using hockey masks and the like as protective equipment? That reality was caused by the fact that basically no personal protective equipment for medical professionals is made in America any longer. The supply chain issues, then all of a sudden, weren’t just an economic consideration, but also a health consideration, a public policy consideration, and even a national security consideration. They set the stage for the elections last year where one of the few things Biden and Trump could get together on was that China sucked and we needed to be less reliant on them.
Fast forward to this year. So much of the macro conversation has been focused on creeping inflation and what’s going into it. The overarching framework that officials have tried to sell is the idea of inflation being transitory and a lot of that has been blamed on supply chain issues. Here’s one op-ed in Forbes put it in June: “Months of laid off workers, idle factories and order cancellations affected the production of many inputs such as computer chips used everywhere from appliances to cars, which in the face of resurgent demand is causing widespread problems, bottlenecks and industries that were ill prepared to increase capacity quickly, like packaging materials, are laid bare.”
Another piece from Bloomberg earlier this year: “As prices rise across supply chains, will inflation come for you too?” quote, “there’s an underappreciated side effect of all the disruptions across global supply chains. The cost of producing and distributing everything from furniture and foam to cars and machinery is rising. It isn’t hard to see how we got here, manufacturers’ cutbacks in the start of the global pandemic led to forecasts of a massive economic slump. But the reverse happened, consumers continued spending, demand stayed put or even got stronger for some things. Countries everywhere embarked on fiscal stimulus. That was good news, but producers weren’t prepared if the demand-supply equation was thrown into imbalance. All we hear about now are shortages, logistical problems have contributed to the scarcity of goods. The shipping industry didn’t have enough containers which resulted in transport rates and costs going through the roof. The supply chain issues are now so severe that delays and delivery times are at their highest in decades, in many places. One delay leads to another and those delays perpetuate production issues, prices and delivery times keep inching up.”
So, you get the picture. It’s a pretty clear one. Still, they assured us that this, just like inflation, was transitory, except now it increasingly seems that may not be the case. Bloomberg published another piece yesterday titled “The World Economy Supply Chain Problem Keeps Getting Worse. A supply chain crunch that was meant to be temporary now looks like it will last well into next year as the surging Delta variant appends factory production in Asia and disrupts shipping, posing more shocks to the world economy.” So, what’s going on? Well, the simple truth of the matter is that it’s every part of the supply chain that’s affected. Components, for one, are more expensive. Like we talked about a second ago, there have been chip shortages for well over a year now. In the Wall Street Journal this morning a piece about Taiwan Semiconductor Manufacturing, TSMC, the world’s largest chip maker, is raising prices on its most advanced chips by 10% and unless advanced chips by 20%/ People who use these components include small companies you might have heard of like Apple. The price increase is explicitly designed to push down demand from customers who can forgo the chips in order to help TSMC service those who don’t have any other choice. It also will theoretically help them invest in increased capacity. But chip manufacturing isn’t an easy flip of a switch to get more capacity up and running.
So, that’s the component side. There’s also the container side, i.e. shipping containers. Shipping and transportation are particularly impacted by lockdowns and restrictions from COVID. This month for example, China shut down the world’s third biggest container port for two weeks after a single dock worker was found to have the Delta variant. The world’s seventh biggest container liner, Evergreen Marine Corp, told investors a few days ago that quote, Port congestion and a shortage of container shipping capacity may last into the fourth quarter, or even mid 2022. If the pandemic cannot be effectively contained, port congestion may become a new normal.
Here’s a remarkable stat from the Drewry world container index. The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020. While the cost from Shanghai to Los Angeles has grown more than six fold. And speaking how this is shifting the modality of just in time, a Hong Kong based coffee machine maker called Town Ray Holding said: “We’re storing up critical components for one year of usage because if we miss one component, we cannot manufacture the products.” Even the original progenitor of “just in time,” Toyota, is itself affected. Its suspending output at 14 plants and slashing production by 40% due to supply chain disruptions such as chip shortages. Here’s how that Bloomberg piece ends. “As factories come to lockdowns, manufacturers are forced into a game of whack a mole, switching raw materials from one country to another. Some have resorted to air frating materials such as leather to factories to keep production lines rolling. Meanwhile, Luen Thai’s Sunny Tan, who is also deputy chairman of the Federation of Hong Kong Industries, is trying to figure out how he’ll fill festive display windows in time for Christmas: “I wish when shoppers see our product, they give it a kiss when they realize how difficult it was just to get it to the shelf.”
And on that sad note, I’ll close this podcast with a tweet from Anne Helen Petersen: “Apropos of nothing and everything, a friend of mine works in supply chains and suggests....ordering your Christmas presents now.” What’s the takeaway? This podcast isn’t meant to be some Bitcoiner scoring points on the dominant inflation conversation although yeah, does seem like one of the big things driving inflation is pretty well unresolved. Instead, it’s to point out that the disruptions and dislocations of the last 18 months are not only not solved, they’re metastasizing and creating their own set of new problems. In the short-term people in industries will clamor to make do and figure out solutions that involve the minimum cost possible disruptions. In the long-term, however, the implications could be a much bigger rethinking of how the economic world is organized. For now, guys, I appreciate you listening and until tomorrow, be safe and take care of each other. Peace!