Round 1 consisted of the US and China each attaching “Buy Domestic” requirements to their stimulus packages and both screaming that they were unfair.  Today, in Round 2, the International Trade Commission ruled that China had been unfairly dumping tires in the US.  The tidal wave of low cost Chinese tires had disrupted the US tire market and forced tire plant closings by Goodyear, Continental Tire, and Bridgestone/Firestone.  However, none of these companies were the complainant.  The group that was crying foul was the United Steelworker union.

As a consumer, I like having the Chinese tires as an option.  Even if I don’t buy their tires, the low cost option makes the higher quality tires become more price competitive.  That’s a good thing for me.  I can then take the money I saved and buy more groceries, or maybe a movie night for the family.  Either way, my disposable income works its way into the US monetary system.  You’d be hard pressed to make a case that a low cost (as long as it is safe) option is a bad thing for the consumer.

This begs the question of who is harmed then.  Clearly, the Steelworkers feel that they have been harmed.  However, last I checked this was somewhat of a free market economy.  If they can make a tire that performs as well and is cost competitive, then what is the problem?  I guess the problem is that they can’t compete.  That is a problem – on many levels.

I can remember paying $750 for a DVD player.  Not a really nice one, mind you.  This was when they first came out and it was an average player.  Today, thanks to low cost producers, you can get a DVD player for about $35 – maybe less if you look hard enough.  Is that bad for the economy?

What, exactly, did the US expect to happen.  As we all know, an integral part of the American Recovery and Reinvestment Act of 2009 was the “Buy American” provision.  This clause stated that, where doing so did not increase the cost by over 25%, any projects that utilized ARRA funds were to be constructed of American made materials.  While the outrage from China drew the most press, other countries were also voicing their disgust at the protectionist efforts.  Others discounted the Buy American clause as nothing more than a nuisance.  However, we have already seen some very real consequences of this “nuisance”.  There is one example of a project where the sewer pipes were American made, but he joint pieces were Canadian.  Every bit of pipe that had been laid had to be ripped up and redone at the governments expense.

Now, China comes out today and says that all of their projects completed under their $585 billion stimulus plan must utilize Chinese raw goods, where possible.  This has again sparked shouts of anger.  But this time it is the US that’s angry.  Although they have enacted the very same regulations domestically, several US groups are demanding that China remove these isolationist requirements.

Well, I’m not sure exactly what the US groups expected.  When we take the lead and implement it here, we can’t be too upset when it is implemented elsewhere.  I think we are seeing the beginnings of a significant trade war with China.  (Keep in mind we are already fighting the beginning stages of one with Mexico).  We may end up on-shoring our manufacturing not out of choice, but because we have no other options.

If that title doesn’t scare you then you might need to check your pulse…  Reuters ran an article this morning talking about how the US Federal Reserve couldn’t understand why the yield curve reached its steepest level in history last week.  Some of the theories it puts forth include, “the economy is recovering so well so there is less need for secure government backed investments”, “China may be repositioning its portfolio of treasuries”, and “the US economy is worsening and there might be a collapse of the US dollar”.  Some of these theories are in diametric opposition to each other, providing further indication that the Federal Reserve really isn’t sure of much.

I know I only have a college degree in economics, but let me give this a try…  We know the US Government is going to have to issue roughly $2 trillion of Treasuries to fund next year’s deficit.  That will push the Supply curve for treasuries out to the right.  We also know that the US economy continues to struggle, signs of improvement are few and far between and there is a very real prospect of inflation on the horizon.  That will shift the Demand curve in to the left.  What you are left with is reduced quantity demanded for Treasuries and a reduced price for Treasuries.  A general believe that this economic condition won’t last forever, and some change will be coming amplifies the effect the further out the yield curve you go.  A lower price means a higher yield and, voila, your yield curve is steepening.  I know this is a gross oversimplification of the Treasury market, but it at least gets you heading in the right direction.

Over the weekend I watched a very interesting Science Channel program on network theory (yes, I know I need to get out more…).  Basically, a group of mathematicians had been able to write a mathematical equation that represents the game Six Degrees of Kevin Bacon.  For those that aren’t familiar with the game, someone proposes an actor or actress and you trace them back to Kevin Bacon by the movies they have appeared in.  The hypothesis is that every actor/actress can be linked back to Kevin in six or fewer movies.  According to the program I watched, the Kevin Bacon game ends up being a very good proxy for other naturally occurring “networks” including the World Wide Web, intra-cellular communications, pandemics, and the US power grid .  Each node within these networks is linked to each other node in a surprisingly few connections.

One trend that emerged out of their research was that in randomly created networks there emerge major “hubs” that shrink the relationships between nodes and enable fewer degrees of separation.  In any given network, you can remove many of the less influential nodes and the network continues to operate well.  If you remove one of the hubs, the network begins to break down.

What I found especially interesting about this is that the hubs occur in multiple, randomly created networks.  It doesn’t matter if the network is microscopic (cellular), operated by viruses (pandemics), or man made (power grid).  The hub and spoke structure ends up being the absolute most efficient way to distribute information.  Now if we jump to the real estate world, will the same hub and spoke structure emerge in supply chain strategies?  Does the world only need a few key, hub warehousing cities and then a vast network of spokes?  What are the qualities that will help a location emerge as a supply chain hub?  Are their locations we consider hubs today that are evolving out of “hub” status?  

And consider the East Coast port situation.  There are a number of ports trying to emerge as the “hub” of the east coast. What are the qualities that will make a Jacksonville emerge over a Charleston?  How vast is the networked web of nodes and how many hubs are needed?

Science, math and nature have told us that hub and spoke is the most efficient way to set up networks.  How effective has the US been at following their lead when we set up our supply chains?  Thoughts?  Anyone care to share a good example of a hub and spoke supply chain that they think works particularly well?

The Virginia Commonwealth Transportation Board (CTB) recently approved a contract that will move Hampton Boulevard under the rail line that now crosses it.  The $20 million contract is small relative to some others in the state, but is one that the Port Authority has been pushing for for over 15 years.  

Once completed, the improved traffic pattern will allow the port to build longer trains carrying imported cargo containers without disrupting traffic on Hampton Blvd.  The port estimates that this could allow them to utilize rail for an additional 20% of the product that comes through the port.  Currently, that 20% leaves the port via truck and contributes to pollution, congestion and disgruntled neighbors.  The more product that can leave via rail, the better for Hampton Roads.

Now that Hampton Boulevard is being addressed, the State is considering an additional $17.8 million investment to double the on-dock rail capacity at Norfolk International Terminals.  These are all great projects for the port and will further enhance its competitive position over other East Coast ports.

The US Government’s Legacy Loans Program may soon be put on hold.  The program that is part of the $1 Trillion Public-Private Investment Program was designed to encourage banks to sell off loans and securities that were caustic to their balance sheets.  However, there has been both a lack of demand and supply in the marketplace.  Willing investors have turned un-willing over concerns that the government will later decide to change the terms of the agreement and impose salary caps or other onerous provisions.  On the supply side, many of the banks have already written down the assets and believe they can weather the economic storm without the program.  All talk, no action seems to be a recurring theme in the Geithner era.

In a further sign of the distress apparent in the bonds markets, the yield curve for US Treasuries moved to its steepest level in recorded history yesterday.  The spread between 2-year and 10-year notes breached 275 basis points.  The sharp increase in yields seems to be a result of concerns over the levels of debt the US government is incurring and how they will fund the spending.  According to a CNBC article,

With $2 trillion or more in issuance seen coming to market this year alone, some dealers were looking for a sharp readjustment in bond rates—which effectively reflect the cost to government of financing its borrowing.

The treasury did experience good demand for yesterday’s auction of $35 billion of 5-year notes.  However, strong demand for shorter term notes indicates a lack of demand for longer term issuance’s.  These are the ones that typically finance many of the municipal projects that provides the local services we, as taxpayers, demand.  In addition, the increase in longer term rates has a profound effect on mortgage rates, driving them up further.  This could serve to slow the improvements in the housing market, a sector which the US badly needs to improve in order to pull it from this recession.

While the debt markets may not be the most exciting thing to watch, they are extremely important to health and well being of our economy.

Citing a reduction in container volume, and increased competition from APM Terminals, Fitch recently downgraded their rating on the Virginia Port Authority’s $217.4 million of outstanding revenue bonds to “A”.  Fitch maintained a Stable outlook for VPA.  

The US Department of Education is changing its position on whether Stimulus Funds can, and should be used to fund new school construction.  In April, the DOE had indicated that new construction was an allowable use for the funds.  Last week, however, the DOE changed their position in an update to their previous guidance.  Now, the department is strongly discouraging the use of Stimulus Funds for new construction.  They have even gone as far as to indicate that anyone who does use the funds for new construction will be penalized in consideration for the “Race to the Top” money.  

Apparently, the funding of new school construction continues to be a hotly debated topic.  Keep in mind that $14-$16 billion of funds for new construction were stricken from the final Stimulus Bill.  There’s clearly a need, but no one is quite sure how to fund that need.

The Panama Canal Authority announced yesterday (LINK) that they intended to keep in place rate hikes which are scheduled to go into effect on May 1, 2009.  They also announced that they were implementing some temporary cost savings measures, effective June 1, 2009, to help shippers during these uncertain times.  The two primary components of their cost savings efforts are the redefinition of ballast for full container vessels transiting the canal and modifications to their reservations program to increase flexibility and reduce fees.  

While helpful, the early indications are that shippers are continuing to pursue other alternatives to both the Panama and Suez canals.  We’ll have to wait and see whether these cost savings offset the higher fees and whether shippers continue to structure routes to avoid any fees at all.