Transitory is the Groupthink Word of the Day

May 17th, 2021

Not surprising to those of us in the real world, the Producer Price Increase (PPI) rose significantly in April.  From CNBC.com: 

The Producer Price Index rose 0.6% from March, according to the U.S. Bureau of Labor Statistics. Year over year, the PPI spiked 6.2%, the largest increase since the agency started tracking the data in 2010.

Economists polled by FactSet were expecting a 0.3% monthly increase in April and 3.8% year over year. (Emphasis added.)

https://www.cnbc.com/2021/05/13/producer-prices-april-2021.html

I do not know if I should laugh or cry that economists got this so wrong.  Do they not leave their ivory towers?  Do they talk to anyone that is actually in the real world and buying raw materials?  Have they gotten a freight quote recently?  Heck, do they eat chicken wings? 

More importantly, we treat economists as if they are experts able to see the future.  The hubristic economists that lead the Federal Reserve are confident they will know when to cut back on monetary stimulus in order to contain inflation.  Based on this data, the inflation cat is out of the bag.  Why do we think their long-range forecasts will be any better than their short-term forecasts? 

We are already hearing the pontificators talking about inflation being “transitory” and saying it will abide as the spikes due to one-time events end.  Yes, some of the inflation we are experiencing now is transitory.  Storms will not always damage plastic plants.  Pipelines will not be hacked (although that is not in this data).  But, as I wrote a while ago, we place too much emphasis on exact data (precision) and not enough emphasis on trends.  https://briansblog.idimages.com/we-obsess-with-precision-when-trends-are-what-matter/

We have labor shortages due to demographics.  Free trade is decreasing.  Regulations are increasing.  Shipping small packages directly to consumers costs more than shipping large packages to retailers.  These trends will lead to an inflationary environment that we have not seen since the 1970s.  Don’t count on the Federal Reserve or any government entity to provide any help in navigating these trends. 

The Great Inventory Reset

May 10th, 2021

From The Wall Street Journal May 3, 2021:

From The Wall Street Journal May 3, 2021:
Automotive supply chains are swinging to scarcity mode. After decades of keeping inventories low to maximize efficiency and cut costs, auto makers like Volkswagen and General Motors are stockpiling parts and even building their own factories to ensure access to batteries and other components, the WSJ’s Sean McLain reports. Supply-chain disruptions have been battering car makers. The volatility includes spikes in demand for passenger vehicles, semiconductor shortages that halted Ford pickup production lines and a February freeze that shut down a key U.S. resin refinery. That closure crimped output of seat foam, bumpers and steering wheels, shutting production at several Toyota plants and prompting some suppliers to take the costly step of flying resin in from Europe. The repercussions highlight the fragility of the global supply chain as businesses reevaluate long-held assumptions about just-in-time manufacturing and whether they can always get parts when they need them.

The word of the year for supply chain professionals is fragile.  I lost count of how many times I have heard a talking head tell us how covid has illuminated the fragility of our supply chains.  Umm, when you stop making stuff for a few months and have major issues with shipping, yes, the supply chain will break down.  Thanks for the insights.

Imagine the impact on the world economy if the automotive industry decides to carry more inventory.  It will be a one-time adjustment, but it will be major, especially now when commodities and labor are already in short supply.  You cannot sell what you do not have (unless you are Elon Musk).  Companies do not want to lose sales.  Inventories will be built to prevent lost sales.  Prices will go up.  And the government will continue to tell us there is no inflation.  Some things never change…

Other pundits have talked about how we no longer have boom and bust cycles due to the effectiveness of monetary policy.  This has all the makings of a boom that will bust at some point.  Eventually cheap capital will lead to too much building and the bust will come.  As in past cycles, we won’t know the bust has come until it happens.  Enjoy the ride while you can.  If you know when the bust is coming, let me know.  I promise to do the same.  I think we’ve got at least a couple years of higher prices and higher output ahead. 

Are You an “And” or a “But” Person?

May 3rd, 2021

Most of the coverage surrounding the NFL draft is nauseating.  “Experts” and non-experts alike get an opportunity to talk about college prospects and what each team needs as if the future of the world depends on each draft pick.  Even for football fans like me, it can be a little much.  

I came across a great article featuring the legendary coach, Nick Saban.  Saban tells his players at Alabama, almost all of whom have NFL aspirations and NFL talent, that teams are looking for reasons NOT to draft them.  He uses the words “and” and “but” to explain his point:  

They read the player [draft report]. I’ll take a defensive back,” Saban said. “He’s got quick feet, change of direction, got good long speed, can play man-to-man, he’s a good tackler, he’s got toughness, got really good ball judgement and really good ball skills – and, he’s a really good person, he was a leader on the team, he graduated from school, coaches loved him.”

Saban then described the same player with a “but.”

But – he had a positive drug test, he had a domestic violence incident with his girlfriend, got in a fight at a bar when he was a freshman, strength coach said he wouldn’t p— on him if he was on fire.

“Who do you want on your team: ‘and’ or ‘but’?”

Saban said he constantly tells players not to give teams a reason to say “but.”

“What I tell players is, you don’t realize that as soon as you apply for a job, as soon as you put your name into the draft, people are looking for reasons not to pick you. They’re looking for reasons not to hire you,” Saban said. “So don’t give anybody a reason to say ‘but.’ It’s the only way that you can create value for yourself.”

Wow.  What a great message.  Think about a generic example in the business world:

“He’s a go getter that gets things done and he mentors our young employees.  He’s a great role model.”

“He’s a go getter that gets things done but every interaction is a battle.  People avoid him.”

Which person do you want to work with?  Be the person that creates value for yourself and your organization.  Be an and person!

https://news.yahoo.com/nick-saban-explained-why-tells-150758336.html

Where Have You Gone, Foxconn?

April 26th, 2021

It was only four years ago that Foxconn, a major electronics manufacturer, announced it was building a $10 billion factory in Wisconsin and creating at least 13,000 jobs.  President Tariff, oops, Trump, touted it as evidence that his tariff and America First strategies were working.  Your humble blogger opined his concerns on the economics of the deal on September 17, 2017.  A link is below. 

Flash forward to today: the investment is now $672 million and the number of new jobs created is estimated to be less than 1,500. In the immortal words of Maxwell Smart, “Missed it by that MUCH.” 

Here is a key line in the article explaining Foxconn’s decision:

But industry executives, including some at Foxconn, were highly skeptical of the plan from the start, pointing out that none of the crucial suppliers needed for flat-panel display production were located anywhere near Wisconsin. (Emphasis added.)

https://www.cnbc.com/2021/04/21/foxconn-mostly-abandons-10-billion-wisconsin-project-touted-by-trump.html

We continue to hear politicians talk about bringing manufacturing jobs back to the US.  Part of that strategy must include bringing back basic manufacturing capabilities.  Many of our current supply chain issues are related to chemicals and other components used to make other products.  Most of our basic chemicals and basic components come from Asia.  Unless we bring those industries back, the dreams of increasing manufacturing jobs in the US will remain just that: dreams. 

https://briansblog.idimages.com/page/19/?_ga=2.137844784.1458870672.1619010022-1339230267.1603216726

Are We Destroying the Dignity of Work?

April 19th, 2021

I had a conversation with a friend last week.  He is the classic American success story.  He came to the United States in 1997 from eastern Europe.  He had virtually nothing.  He worked hard and eventually started his own landscaping business.  He did what countless immigrants have done: he made sure his daughter did well in school.  He told me how she came to work with him one day as a teenager and she could not fathom how hard he worked.  He said, “I told her I do this so you do not have to.  Make me proud.”  She has.  His eyes lit up when he told me she just graduated with a master’s degree and secured a very high paying job.

He then told me that he is concerned about his business.  He is down from 7 to 3 full-time employees.  One former employee is collecting disability based on a claim my friend called “dubious.”  The other 3 are collecting unemployment because “it is easier than coming to work.”  His business has more work than ever but he is unable to get it all done.  He told me in a voice of someone who learned English as a second language, “Brian, I do not understand how the system can survive.  You cannot have three people working to support the other four.  The math does not work.  I do not understand how someone does not want to work.  One of the happiest days of my life was cashing my first paycheck.  What are we doing?”

As rumors of another stimulus plan are coming out of Washington D.C., I think he raises a great question: what are we doing?  An advanced society should have a safety net but people respond to incentives.  If that safety net encourages people who are capable of working to not work, that is what they will do.  Twenty five years ago, President Bill Clinton said, “Simply put, welfare reform worked because we all worked together.”  It is amazing and scary that no politician from either party today talks about getting people back to work; they talk about sending checks to people, even those that are working.  Our labor force participation rate is low again. This will not end well. 

Pay Attention to Washington D.C.

April 12th, 2021

While the country starts to open up and the population focuses on vaccine, Janet Yellen, the US Treasury Secretary gave a VERY important speech.  She is calling for a global corporate minimum tax rate.  Essentially, the US will agree to similar corporate tax rates as the rest of the world.  I don’t recall voting for any Europeans in the last election, do you?

Yellen said, “It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods.”  Why do I want to worry about (and indirectly pay for) European social programs?  This global tax initiative is yet another example of government entities taking more control.  We will be told this initiative is about “fairness.”  I wish we could ban the word fair from the English language.  It sounds good but is a meaningless word.   Will a government official ever talk about our spending problem? 

https://apnews.com/article/janet-yellen-minimum-global-corporate-income-tax-0a839a4705566a8b9f8bd5411bfe62d5

As if on cue, that great socialist, Amazon founder Jeff Bezos, said he supported higher taxes.  What a great guy.  If I were worth over $150 billion, I would want you to pay higher taxes too.  Higher taxes create barriers to entry.  Even when Amazon made no money, investors projected after tax income as part of their analysis.  Higher tax rates = lower future returns.  Amazon’s start up competitors will face a higher cost of capital.  Brilliant business and public relations move yet again, Mr. Bezos.  Well played.  PS, feel free to donate to the government if you so desire.  You can always pay more than what your taxes are.

It is somewhat ironic that a democrat, Tip O’Neill, is credited with saying, “All politics is local.”  Today’s democrats seem to have forgotten that messages.  Globalism sounds good in an ivory tower.  Remember how good China entering the World Trade Organization was going to be for the US?  Consumers benefited but the US worker got decimated.  Wall Street has done well in China too.   Did NAFTA help the US worker?  Any time a politician says something is good for us, I get nervous.    

Life Lessons and the Future of Office Work

April 5th, 2021

Our teenage son is playing high school lacrosse.  His team had a very intense game.  At a crucial moment, his team got called for a sideline penalty.  After the game (they won by one with a great comeback), we asked him what happened.  Verbatim, he said, “A kid swore on the sidelines.  It was a bull-$*&#* call.”

Without missing a beat, my wife quipped, “That was a good call.  We aren’t sending you to school to learn to swear.  If we wanted you to swear, we’d keep you home and #&(@&@ teach you to swear ourselves.  And we do it better than any kid or school could teach you!”  (Fortunately, she does not suffer the George Costanza-esque affliction as me. I think of what to say a few minutes too late.)  We had a good discussion about keeping your composure during tense situations.  It was a good life lesson for a fifteen-year-old that knows everything. 

As the debates rage on about what the future of office work will look like, I more and more side with the position that most people will be back in the office.  There are a lot of business behaviors that cannot be learned holed up in your basement by yourself and getting on zoom calls.  Just as kids need to be put in situations in order to learn how to act, so too do adults, especially those just entering the workforce.  For example, a young account executive cannot overhear a seasoned professional handling a difficult customer if she is not in the office.  There is a lot of learning by observing that takes place in professional environments.

Do certain jobs allow more work from home flexibility than others?  Of course.  But business is still a contact sport.  To advance your career, you need to be in the arena.  A flexible work schedule does not mean staying at home every day.  It’s time to get back in the $#&&#) office.

Dress For Success

March 29th, 2021

During Covid, I have had numerous conversations with a close industry friend.  We have laughed together, cried together, yelled a lot, and shared ideas about dealing with the challenges of the last year.  I think I can speak for him and say we have helped each other keep our sanity or what is left of it.

We had a discussion last week.  I will provide a sanitized version:

Me: “I have a real meeting tomorrow.  We will sit safely apart with masks on.”

Him: “I’m sick of zoom.  Wait – you have a real meeting?  What are you going to wear?  It’s been so long since I wore real clothes, I don’t think I’d know what to wear for a real meeting.”

Me:  “I’ve actually been dressing somewhat professionally when I go into the office now.  No suit and tie, but I’m not dressing like I’m working in the yard like I did for most of covid.  Remember what Gap and Blockbuster employees used to wear?  Button down or polo and khakis?  I’m dressing like that.  I think it helps me feel a little more professional.  Hopefully, I act that way too.”

Him:  “That’s a great idea!  Dress for success!  Change your dress, change your attitude.”

The next day, he texted me a picture of himself in khakis and a button down with the caption, “Pants are a little snug.”    Let’s stop feeling sorry for ourselves and embrace the present.  We cannot change the last year but we can change what we do starting today.  Don’t wait. 

Hello Inflation!

March 22nd, 2021

These headlines were on the front page of The Wall Street Journal on March 17th:

Housing Boom Boosts Prices for Wood, Copper and Bricks

Toyota, Honda to Halt Some U.S. Production Over Supply Shortages

Texas Freeze Triggers Global Plastics Shortage

Anecdotally, I talked to a friend that day who does a lot of business in the beer industry.  Lead times on cans are 8 weeks versus less than 2 weeks normally and the price of beer cans is up 30% this year.  It is one thing to have to wait to get a new car but God help us if there are canned beer shortages.  The outdoor drinking season officially kicked off on St. Patrick’s Day for those of us in the north.  Canned beer is the beverage of choice for safety reasons. 

I recently went to Costco.  A sign above the paper towels said, “Due to cost increases, we have changed the amount of paper towels on a roll from 160 to 140.  The number of rolls in the package and the price remain the same.  Thank you for your understanding.”  Let’s do a little math:  160 – 140 = 20.  20/160 = 12.5%.  For those of us keeping score, that is effectively a 12.5% price increase.  But the price of the package remains the same!  Costco is apparently taking lessons from ice cream manufacturers.  They started reducing the amount of ice cream in a package years ago.

Across the globe, there is too much money chasing too few goods.  Paying more for things is a challenge but the bigger challenge is going to be actually getting things.  We are used to having things in abundance.  Remember, we essentially shut down industrial production for several months last year.  We are feeling the effects of last year’s shut down in today’s supply chain.

It seems like decades ago but just about this time last year, there was a run-on toilet paper.  Stores put in purchase restrictions, comedians made jokes about it, and we moved on with our lives.  I hope things go that smoothly this time.  Hold on to your hats.  It is going to be a wild ride for the next few months. 

A Little Effort Goes A Long Way

March 15th, 2021

We recently moved and wanted to find a dentist closer to our house.  Unfortunately, I put it off until I had an emergency.  I cracked a tooth last weekend.  I woke up Monday morning in considerable pain.  I went down the list of dentist offices near our house and started calling around 7:30 am.  The first few offices I called were closed.  I dialed another dentist’s office and someone picked up the phone and got me in for an appointment that day.  Guess who became my dentist?

The dentist performed my root canal later in the week.  That night, the dentist’s office manager called to see how I was doing.  I do not recall ever getting a follow up call after a visit to the dentist.  I joked with her and said I just opened a beer to numb the pain.  She told me, “You should probably drink more than one.”  Guess who now has a patient recommending her dental practice?

Getting to work a little early and taking the time to follow up is not really that hard.  Yet most of us do not do those things.  Show your customers you care.  Put in a little more effort and you will be rewarded.