We Obsess With Precision When Trends Are What Matter

September 21st, 2020

I had my annual physical last week. Because of family history of heart issues, I take my blood pressure on a regular basis.  I reported my home readings to my doctor. 

Of course, the first test when I walked in the room was taking my blood pressure.  It was high.  The doctor and nurse said they would retake it at the end of the exam.  After my exam ended, they put me in “time out” for 10 minutes.  I had to sit and relax by myself.  I kept my phone in another room.  Ten minutes later, my blood pressure was “excellent.”  My doctor explained that the 120/80 blood pressure that is now considered normal was taken from a study where people sat for 10 to 20 minutes prior to the blood pressure being taken.  I wonder if the companies that sell blood pressure medication talk about that part of the study’s protocol. 

From an early age, we are bombarded with the importance of precision.  There is one correct answer on a test.  Questions we are asked require yes or no answers. We applaud scientists and pseudo-scientists (economists) for giving us precise numbers on topics that are difficult to understand like climate change and economic growth.  We stand in awe of their confidence when they report numbers that have decimal points to us. 

Trends can get lost in our quest for specific, precise answers.  Isn’t it more important for my health to measure my blood pressure over time than once a year at a physical?  Isn’t it more important to focus on the trend for the economy than a quarterly number that is reported out 3 decimal points?  Can anyone, let alone the government, provide a real GDP growth number that is that precise?   

Over these next several weeks, we are going to be inundated with facts and figures about the economy and about coronavirus.  You will be better served focusing on trends rather than specific numbers.  Anyone who reports a specific number with confidence to you has an agenda.

The US Fiscal Stimulus Response to Covid is Staggering and Growing

September 14th, 2020

I recently read a commentary from Gary Shilling, an economist.  Shilling wrote:

Fiscal stimuli alone equal 12.3% of U.S. GDP, the largest of any major country, according to the International Monetary Fund.

Wages and salaries are down 5% this year, but with all the government supports, total personal income is up 5%.

Not that I doubted Gary (He is excellent and worth reading.), I provided source links below.

https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#U

https://www.bea.gov/data/income-saving/personal-income

https://www.bea.gov/news/2020/personal-income-and-outlays-june-2020-and-annual-update

Keep in mind a few things:

  1. The fiscal stimuli referenced above is above and beyond “normal” government spending.  This doesn’t include social security, Medicare, Medicaid, defense spending or any other regular government spending.  That adds another 21% or so, meaning the government is now accounting for over one-third of our economy. 
  2. By all accounts, another stimulus bill is in the works.  This one is expected to be at least $1 trillion more.  Remember when “a billion here and a billion there and soon we’re talking about real money” was the saying about government spending?  Now we throw trillions around like dollar bills.  Honestly, I don’t think most people (including me and I’m a borderline economics nerd.) can comprehend these numbers.
  3. When has a government program ever been cut?

The best way to get out of this mess is growth.  For growth to occur, we need population growth and an environment that encourages risk taking.  We have neither.  We also have two political parties willing to spend right now.  There is no traditional conservative voice with any clout talking about reigning in spending.  Ugh.

The spigots in Washington DC are open.  I don’t see them being shut off anytime in the foreseeable future.  We won’t know when the well runs dry until it is too late.  That is a scary thought. 

The Energy Inside Schools is Contagious

September 8th, 2020

Our son recently started high school.  He’s going half days with half the school.  Despite the limitations, the experience is energizing him.  While I am sure there will be days he dreads going to school, right now he is excited to go. His excitement energizes us. 

I have always been amazed at the energy within schools.  I have volunteered in schools.  Every time I leave a school, I feel better than when I walked in.  Kids are inquisitive.  Kids know how to have fun.  Kids want to get better.

So how did we lose that spirit?  Why do adults dread going to work?  How do we create work environments that replicate the energy in schools?  If work environments were more welcoming, productivity would increase.

As I (and many others) have written, the biggest positive of coronavirus is it gives us a chance to do things differently.  Let’s take a lesson from schools and make work environments more positive. 

There’s No Inflation? Really?

August 31st, 2020

For years, I have been confused by the government continually telling us there is no inflation.  Last week, the Federal Reserve committed to low interest rates, with some members even saying they will keep rates low even if they start to see signs of inflation.  My question to them:  what data do you look at that shows no inflation?  Have you looked at lumber prices? 

Rising demand has pushed up the cost of the lumber needed to build new homes, and framing lumber prices have increased more than 110% since mid-April, according to a new report from the National Association of Home Builders. Lumber prices dipped in the earliest days of the pandemic, but quickly recovered and then some.

“[The association] estimates that these recent gains have boosted typical new single-family home prices and apartment prices by approximately $14,000 and $5,000, respectively,” according to the report. “Without increased domestic production and reductions in Canadian tariffs on softwood lumber, these higher input prices will slow the market.”

https://www.globest.com/2020/08/24/high-demand-for-new-homes-fuels-surge-in-lumber-prices/?slreturn=20200730091133#:~:text=Rising%20demand%20has%20pushed%20up,quickly%20recovered%20and%20then%20some.

This is but one example of inflation I see every day.  Health insurance continues to rise.  Food prices have gone up.  Heck, even gas prices are up significantly over the last few months.

Solving our government debt problem only has a few possible solutions: raise taxes significantly, cut spending significantly, default, or inflate the debt.  It is becoming very clear which option our government is choosing.  Dust off the inflation playbook.  You’re going to need it soon. 

The Law of Unintended Consequences Strikes Again

August 24th, 2020

The federal government responded to the coronavirus pandemic with fiscal stimulus (loans to businesses, cash grants to citizens, delaying tax payments, etc.) and monetary stimulus (cutting interest rates, buying bonds, etc.).  While it appears the government’s unprecedented actions have stopped a full-blown depression, at least for now, I fear the lasting effects of its actions.

Prior to the pandemic, entrepreneurship was already in decline in the US as measured by the creation of start up companies and the size of companies most Americans work for.  

The pandemic will further exacerbate this trend.  Would you quit a job and start a business today?  Even if you are willing to do so, would a bank lend you money?  In good times, banks like to lend to people that don’t need money.  In bad times, this statement is even more true.  Banks are bracing for huge defaults later this year.  They are not going to lend to startup businesses.  That means the capital necessary to start a business becomes more expensive.  More expensive capital means lower returns.  That makes starting a business less attractive.  

The fiscal stimulus provided by Uncle Sam is being done with borrowed money.  At some point, that money needs to be paid back.  That means higher taxes or dramatic spending cuts.  I don’t see our politicians of either ilk having it in them to cut spending.  That leads us to higher taxes.  Who is better equipped to pay higher taxes and has the pricing power to pass on higher prices, large companies or small companies?  Advantage: large companies.  

Interest rates are at record low levels.  That favors companies (and people) who have good credit.  That does not help companies or people who have poor credit.  Current SBA 7-A loan rates, a popular government loan program for small businesses, range from 6 to 8%.  https://www.fundera.com/business-loans/guides/sba-loan-rates

Alphabet, the parent of Google, just sold $10 billion in bonds yielding 0.8% (yes, 0.8%) for seven year maturities and 2.25% for thirty year maturities.

https://www.washingtonpost.com/business/on-small-business/alphabet-sells-largest-corporate-esg-bond-at-record-low-yields/2020/08/03/f483a1de-d595-11ea-a788-2ce86ce81129_story.html

Guess who has the advantage again?  

Dynamism is what separated the US economy from the rest of the world over the last 75 years.  Creative destruction allowed startups to thrive and become large companies.  With less startups, we will have less creative destruction.  The government needs to create programs that encourage startups and reward risk taking.  If that does not happen, the US economy will stagnate.  

The Politicization of the Pandemic. Just the Facts, Please.

August 17th, 2020

Last week, the Mid-American Conference (not a major conference), the Pac 12 (major), and the Big Ten Conference (major) canceled fall sports, specifically football.  When the Ivy League canceled fall sports a month ago, I thought it was only a matter of time before others followed.  If the affluent Ivy League students are at risk for covid, how can we let the major colleges play with teams that are generally less well off financially and more African American than Ivy League teams?

Trevor Lawrence, a star player for Clemson, wrote a passionate plea asking for the season to take place.  You can read excerpts of it here.  Good for you, Mr. Lawrence.  https://www.al.com/sports/2020/08/trevor-lawrence-pleads-to-play-amidst-reports-college-football-to-be-canceled-wewanttoplay-trends.html

To state the obvious, we live in a very politicized world.  It is ridiculous that we have allowed our politicians to politicize a pandemic. 

First Trust, an investment firm headquartered in Chicago, puts out a weekly covid tracker.  (Full disclosure:  First Trust’s economic team, led by Brian Wesbury, leans to the right politically.)  I encourage you to read it and subscribe.  Use the data to make up your own mind as to the risks of covid to different population segments.  We need to stop letting politicians and the media dictate the narrative.  We, the people, matter.  https://www.ftportfolios.com/common/contentfileloader.aspx?contentguid=43588edf-b720-4a29-94a0-9c00883975e8

Never Forget the Basics

August 10th, 2020

I was recently involved in a complex business negotiation.  There were multiple parties involved, including multiple advisors.  Ultimately, the negotiations ended with me having to make a choice between two competing offers.

Fortunately, I had good advisors on my side.  Even before we made our decision, they outlined a plan for how we would inform the parties of our choice.  Telling the “winning” party was quite easy – everyone likes good news.  Telling the other party, with whom we still have a relationship, was not quite as easy.  In addition to phone calls, we decided to send handwritten notes to everyone involved. 

It did not take much longer to write a note than it would have to compose an email.  The act of writing a note – finding stationary, finding stamps, addressing the envelope, and putting the letter in a mailbox – is a lot more involved than hitting send in your email program.  Those actions demonstrate a level of thoughtfulness that hitting send does not. 

We all learned these lessons in kindergarten.  Say please.  Say thank you.  When possible, express your gratitude in person.  If you cannot do so, remember the message a handwritten note sends.  People like knowing you care. 

Will Our Elected Officials Please Do Their Jobs?

August 3rd, 2020

The time leading up to an election always brings opportunities for political grandstanding.  Taking advantage of the current anti-success environment in the United States, large tech company CEOs testified to Congress last week.  Not wanting to miss the opportunity to show how much they care for the “little guy,” congressmen from both political parties attacked these business leaders.  Never one to miss an opportunity even President Trump weighed in, tweeting, “If Congress doesn’t bring fairness to Big Tech, which they should have done years ago, I will do it myself with Executive Orders.”  https://www.wsj.com/articles/tech-ceos-defend-operations-ahead-of-congressional-hearing-11596027626?mod=hp_lead_pos7

Congress seems to have forgotten it is their job to write the laws that govern corporations.  If they fear the monopolistic power of technology companies, change the rules!  El Presidente seems to have forgotten (or never knew) the job of the executive branch is to enforce the laws.  If the technology companies and/or their executives have broken laws, charge them with crimes.  Do not condemn them for building great businesses that comply with the current statutes.  That is un-American.  That both political parties find it advantageous to criticize success scares me. 

My personal views: Tech companies have complied with our current laws but the nature of their businesses, primarily the network effects online businesses have that are not as strong in the physical world, create opportunities that our current laws do not account for.  The laws need to change.

The tech titans have much more self-control than I do.  One of my goals in life is to make enough money that I am forced to testify in front of congress.  When one of them tries to insult me, my response will be, “With all due respect, congressman, companies I am invested in, employees I pay, and my family paid $X in taxes last year.  I believe you work for me and the other taxpayers and citizens of this country.  Please treat me respectfully.  Thank you.”  My lawyer friends have told me that response would likely get me charged with contempt of congress and a jail term.  It might be worth it. 

Is the Bloom Falling Off the Work from Home Flower?

July 27th, 2020

I have been involved in several discussions both internally and externally about bringing people back to the office.  Our essential employees in manufacturing and shipping have been working the entire time.  It is estimated that 37% of jobs can be done from home.  (https://bfi.uchicago.edu/wp-content/uploads/BFI_White-Paper_Dingel_Neiman_3.2020.pdf) That means 63% cannot.  My personal belief is society, let alone a company, cannot function if we have a dramatic bifurcation in how people work.  (I do recognize there are advantages to having people work from home and as a company, we have done this since I bought the business.  But that’s topic for another day.)

Anecdotally, here are summaries of a few conversations I have had over the last few weeks.

  1. A good friend is a partner at a major law firm.  He loves working from home.  He is concerned about the development of the younger staff.  “How do they bounce ideas off of someone else?” was his question.
  2. My sister works at a major bank.  She is tired of being at home and wants to get back in the office at least a few days a week.  Her team is struggling to meet productivity levels it had in the office.
  3. A long-time service provider just got promoted.  She told our HR team she is “sick of looking at people on screens.”  Taking on a new role without being around your boss or your team is challenging. 

Humans are social creatures.  Work is more than work. It is a social network.  It is a social outlet.  It is connection to something bigger than you are.  While some occupations and individuals can thrive working from home, I believe the vast majority of people (and companies) do better in a collaborative environment.  The lockdowns forced us to use tools (Zoom, Teams, Slack, etc.) that help collaboration.  But in person collaboration still wins.  We might not go back to 5 days in the office, but we won’t stay at zero either. 

Fortune Favors the Bold

July 20th, 2020

Imagine you fell asleep in early March and woke up today.  You had no idea what happened between then and now.  If you happened to have a stock portfolio that was heavy in big technology stocks, generally considered risky, you would wake up, look at your portfolio and feel pretty good.  If you happened to have a portfolio full of real estate investment trusts (REITs), generally considered less risky than technology stocks, you would wake up, look at your portfolio, and pass out.  The “risky” assets outperformed the “safer” assets.

We continue to get news about the second wave of coronavirus and employers in the travel industry announcing major furloughs and/or layoffs.  We also are getting news about potential vaccines and treatments for covid-19.  Indeed, depending on your news source, you either think the world is ending or the economy is on the mend.  My advice: average them out.  Progress is being made but the road to economic (and societal) recovery is not going to be a straight line. 

Turning back to my high school Latin days:   audentes Fortuna iuvat: Fortune favors the bold. (https://en.wikipedia.org/wiki/Fortune_favours_the_bold) To my incredible Latin teachers: I apologize if the words are out of sequence.  I have not touched Latin since high school.  (I do have a life goal of re-translating Ovid’s Metamorphosos but I have to be honest:  If I didn’t do it during the lockdown, I’ll probably never do it.)

If coronavirus has knocked you down, reinvent yourself.  If you have just stumbled, consider yourself lucky and start running.  Yes, it is scary to take risks in a time like this.  But isn’t it even scarier to let things out of your control dictate your life?