Bull…Whip! Trade War’s Impact on the Global Supply Chain


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Rabbie Gill

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Bull…Whip! Trade War’s Impact on the Global Supply Chain

So far, the trade war has done nothing.  That is correct, NOTHING! Trade and business investment are halting to a stop, nothing is happening! This is a big problem!  The global supply chain as we knew it is suffering from paralysis as world trade is de-globalizing.  This is having a negative effect on asset prices across the board.

The trifecta of 1. tariffs, 2. renegotiations of trade deals, and 3. the naturally occurring down phase of the business cycle has consumers and business halting consumption and investment because of uncertainty and rising costs. Uncertainty of interest rates, prices, tariffs, regulations and perhaps most importantly credit availability.  This in turn is negatively impacting revenue, income, cashflow and ultimately valuation levels across all asset classes.

However, it is not all doom and gloom.  Even though the global economy needs to go through a period of painful adjustments and restructuring, as noted above, once we complete the down phase of the business cycle, consumption and investment will re-ignite.  Hopefully, by that time governments will also provide a clearer policy path and align incentives for consumers and business restart investing.

Bullwhip Effect in the Supply Chain

The supply chain, just like the markets are human institutions in that they are a function of our assumptions, natural biases and sentiment; all subject to errors and linear thinking. In business school we were introduced to the concept of the bullwhip effect in the supply chain. The key concept is that assumptions and oscillations become bigger and more incorrect the farther you get away from the consumer. The supplier orders way too much or way too little of what actual demand is because incomplete (or overly optimistic) information which is passed from one part of supply chain to the next. The result is excess or shortage of goods, meaning companies don’t maximize profit or have to write-off excess inventory. None of which is optimal.

Source: Google

TRI can’t help but think, the trade wars and tariffs are having a reverse bullwhip effect on the economy. The uncertainty and lack of information is not healthy or constructive for making business decisions. Thus limiting economic growth and leading to lower valuation multiples.

For example, companies that use China as there manufacturing source, are now subject to tariffs and rising prices which they are trying to pass onto the end consumer. Will they be able to?  Does a company front load their manufacturing to get in front of tariffs or do they wait and see? If they wait and see will they have the capacity, or will their logistics company still be around to deliver the goods? The easiest decision is to do NOTHING…and that is what is happening in spades across the globe.  It takes time for this impact to move through to the supply chain and to the equity markets.  TRI believes we are now there.

So, Where is the Proof?

We know Global PMI is sitting just above the 50 as shown below.  In the next 6 months are there positive catalysts to drive PMI’s higher or does the trend continue down as the latest US tariffs dont kick in until Dec 1?

Source: tradingeconomics.com

Freight shipments are negative …  has all inventory been worked off enough to ignite a new inventory cycle leading to higher freight shipments imminently?


Chinese air freight tonnage is contracting.  Are more companies moving manufacturing and investment t0 China or …?

S&P 500 is Getting the Message

The S&P 500 is on a daily and weekly bearish trend.  If the S&P fails to make a new high in August, as TRI expects, then the S&P 500 will also complete a monthly swing high.  Our Cycle Turn Indicator will turn down, resulting in a monthly bearish trend as well.  Reminder, markets don’t move in a straight line so expect lots of ups and downs in this overall downtrend.

The next daily cycle low is expected between Aug 27 and Sep 27. TRI expect next weekly cycle to bottom in the Oct and Nov 2019 time frame.

Source: Tradingview.com

Emerging Markets ETF is now below the bear flag set up and appears to have triggered. Let’s be patient and let the downside resolve itself…

Source: Tradingview.com


TSX is sitting at the bottom of its 2-year topping pattern, having made zero progress since early 2017.

Source: Tradingview.com

Can Financials Save Canada?

Canadian Financials, as represented by the XFN ETF just broke down… the financial sector makes up over 30% of the TSX Index…

Source: Tradingview.com

What About Commodities?

Commodities are failing.  Commodities are also a large component of the Canadian economy.  If consumers where strong, global investment increasing with an active global supply chain wouldn’t commodity prices be rising?  Instead, continuous patter of lower highs and lower lows. CRB Index prices have failed in retesting the 2019 highs and are now on daily, weekly and monthly bearish trends.

Source: Tradingview.com

17 Trillion Reasons…

$17 trillion of global debt with negative yields… In Nov 2018 TRI, published our expectations of negative yields… but wow!

Source: Bloomberg

Canada is Almost There

Canada is blessed with the best the world has to offer… education, healthcare, climate… list goes on … but the Canadian 10-year yields hit 1.08% this week.  Canada faces major cyclical and structural issues. We Canadian’s just can’t seem to get out of our own way, eh?

Only 1% to go and we join the negative yield party…

Source: Tradingview.com

Closing Thoughts…

TRI provides objective and unbiased view of business cycle and market action. We are neither bullish nor bearish in our bias. However, TRI is in favor of capital preservation and wealth creation when the opportunities present themselves. TRI just follows the Cycles & Trends.

The powers that be (Central banks, Trump, etc) might be able to jawbone the equity markets higher in the short-term and TRI will be watching for those signs to manage risk appropriately. Ultimately, the business cycle will provide a better entry point for risk assets in 2020. Until then, protect capital and stay liquid!

Thoughts, comments and critique is always welcome. Please don’t hesitate to reach out in confidence to rabbie.gill@fieldhousecap.com

TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on Aug 16, 2019.  Please see the TRI Overview document for further information.

 Source: Fieldhouse Capital Management



* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.

Disclaimer: This material has been provided solely for information purposes for the use of the recipient and Fieldhouse Capital Management Inc. (FCMI). This material does not constitute an offer or an invitation by or on behalf of FCMI to any person to buy or sell any security. It should not be assumed that the methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses.  Any reference to past performance is not necessarily a guide to the future and the value of investments may fall as well as rise.  FCMI accepts no liability for any direct or consequential loss arising from investments made in accordance with the attached material. The research and analysis contained in the attached material has been procured from sources which are believed to be reliable and accurate.

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