Geopolitics, Supply Chain, Demand and USD Thoughts – 7.29.2020

Last year I wrote this post on the changing structure of technology companies and return to vertically integrated corporate structures as well as the return to on-shore supply chains.  I wrote that post in the pre-Covid-19 world, but this trend has been accelerated by Covid-19.  It will have broad ramifications.  The global power structures, chains of commerce and confrontation points are shifting.  To understand this post, I think it will be helpful to understand how we got here and how it is being altered, which was the subject of that post from June 2019.  We are transitioning way from 30 years of issue-based coalitions to moving back to a world of bi-polar coalitions.  Game on.

Supply Chain…Yesterday KODK announced a $765M loan from the US Government under the Defense Production Act.  The WSJ had nice write up here.  The purpose of the loan is help KODK scale up US based production of drugs to fight C-19 and ventilators.  This is not a one off, unusual event with no correlation to an ongoing narrative.  This should be an indicator to anyone looking at mile posts.  An excellent read on this subject is Freedom’s Forge, by Arthur Herman.  The United States began the transformation of what would become the Arsenal of Democracy well before August 1939.  It took a good 30 years to off-shore the global supply chain from the 1985 to 2015 and now the contraction has begun.  Global forces are shifting and there are mile posts along the way such as Hong Kong and old brands retooling for new needs such as KODK.

Demand…last night the STX CEO said “…deteriorating demand environment across several key end markets…” and “…economic uncertainty and the extension of restrictive measures began playing out in other markets as the quarter progressed, causing smaller and midsized enterprise customers to scale back their IT budgets, municipalities to delay certain projects and consumers to spend more selectively. These macroeconomic factors ultimately impacted sales of our video and image applications and led to a steeper than seasonal decline for our legacy products.”

The STX CFO added “…We continue to see strength and demand from cloud data center customers as they address the transition to a remote economy, and a migration to cloud services. But we saw weaker than expected demand in our other key end market, driven by economic uncertainties and business disruptions brought on by COVID-19” and “We currently expect enterprise IT spending to remain low over the next couple of quarters, which is also impacting demand recovery for our systems solution.”  I know this is a one stock, but they own a lot of market share.  There will no V recovery, but it is the best time to move supply chains when demand is low as they are now.  That is what is happening as people and companies are preparing for a world that will be structured differently in terms of political, financial and military power.

FX/USD…Had a twitter DM chat with a PM who has thousands of followers with regard to the USD and where is it going.  I for one do not see the USD losing the reserve status.  Too many risky places to keep money in the world and funds will flow on shore to the US in times of trouble.  The Fed will also make USD swap lines available and debt denominated is USD is effectively a short.  Hard for me to see a situation developing where there is a short squeeze on the USD.  What other options exist for a global reserve currency?  If you stopped at none, well done.

As always, my thoughts on these matters might be completely wrong.