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? 

Will Some Good Come out of Coronavirus?

July 13th, 2020

Ever the optimist, I have been thinking about long-term positive changes that might come about from the challenges coronavirus has brought us.  Focusing on practicality, I will disregard the opportunities it gave people to think about work-life balance and other potential benefits that are hard to measure.  Here are a few comments/predictions/wishes of things that I hope change due to coronavirus.

  1. Our healthcare system.  It should be known as our “sick care system.”  Do you remember when we were told the shutdowns were going to cause untold numbers of deaths because people stopped going to their doctors and stopped “elective” procedures?  That has yet to happen and I certainly hope it doesn’t happen.  Maybe it will but I am skeptical. We spend way too much money on sick care.  Let’s change the system.  Let’s stop building the palaces we call hospitals.  Let’s focus on keeping people healthy rather than treating ailments.
  2. State and local governments realize there is not an endless pot of money.  They have been largely immune from the competitive forces the private sector faces.  I don’t like it when anyone takes a pay cut or loses a job, but it has been happening in the private sector for years.  A company must adapt or die.  It is about time that our government entities start to feel revenue pressure and cannot respond by increasing taxes or fees.  While the data below represents federal government workers vs. private sector workers, the trend is similar for state and municipal workers.  Private sector wages have stagnated while government workers have enjoyed significant increases in overall compensation.  That is not sustainable. 

https://www.cbo.gov/publication/52637#:~:text=Federal%20civilian%20workers%20with%20no,than%20their%20private%2Dsector%20counterparts.

3. The dignity of “real work” returns.  Our society looks down upon people who work with their hands.  Without those people processing food, stocking shelves, and delivering food (also making labels!), where would we be?  Let’s start treating them with the respect they deserve.

Out of every crisis comes opportunities for change.  I hope we take advantage. 

The Delivery Economy: Delivery isn’t Free

July 6th, 2020

Last week, Federal Express reported earnings that handily beat Wall Street expectations.  Revenue was also significantly above analysts’ forecasts.  Admittedly, expectations had come down because of shutdowns but it was still a solid quarter and a sign of things to come.

Traditionally in package delivery, business to business deliveries were more profitable than business to consumer deliveries.  Route density lowered costs and the importance of being on time for business deliveries allowed Fed Ex and UPS to earn higher margins on business deliveries versus consumer deliveries.  As e-commerce exploded and Amazon started its own delivery fleet, analysts were concerned about Fed Ex and UPS’ future profitability.  Then came the covid shutdowns.

Fed Ex and UPS both implemented “temporary” surcharges on deliveries.  Being part of what is essentially a duopoly has its privileges.  Below is a quotation from Brie Carere, Fed Ex’s EVP, Chief Marketing and Chief Communications Officer, from last week’s earnings’ call:

We see a very rational market and we really see a great partnership with our largest customers. So, we are working with them absolutely to find a win-win solution, but part of that is that we will, as I mentioned, implement peak surcharges. This is part of the new normal. It will not be just for this fiscal year, but I anticipate customers to pay more for pricing in November and December moving forward. And I do think that, that will be a structural shift in the market.  (emphasis added)

We all got spoiled by subsidized home delivery of merchandise.  In addition to b to b shipments essentially subsidizing home deliveries, many retailers subsidized home delivery by using their physical locations and their employees there for fulfillment.  With retail stores closing, that subsidy goes away.  It was a good ride while it lasted but it is over.  When the government tells us there is no inflation, I encourage you to look at the prices you pay to have items delivered to your house.  Do not forget how much your Amazon Prime subscription increases every year in your calculation. 

We’re Halfway There and Truly Livin’ on a Prayer!

June 29th, 2020

We are halfway through 2020.  Isn’t that hard to believe?  Hasn’t everyday seemed the same since mid-March?  It’s not just me, is it?

As I’ve told our team numerous times, I believe the next few months will be even more challenging than the first few months of coronavirus.  And that was before the additional challenges the protests have brought.  With 20 million people unemployed and coronavirus hotspots occurring, there will be no “V” shaped recovery.  The economy is going to continue to putter along with good data one day and bad data the next. 

And then there’s the political arena.  When I think about our choices for president, I don’t know if I should laugh, cry, or close my eyes and pretend this is all a bad dream.  But we have to live in reality.  My hope for our economy is we have a divided government.  My hope for our country is someone stops Tweeting.  My hope for all of you is you are singing the #1 song of the 1980s as voted on by VH1 viewers in 2006.  If you need a reminder, I copied part of the lyrics below.  If you want to procrastinate, read the Wikipedia entry.  Jon Bon Jovi didn’t like the song.  Sure.  And Homer Simpson didn’t like beer.  Keep your head up, think positive thoughts and a little prayer every now and then to whatever Being you believe in won’t hurt.  (PS – PO I fulfilled my promise.  I worked in Bon Jovi.)

Have a safe and wonderful 4th of July.  God Bless America.

We’ve got to hold on to what we’ve got
It doesn’t make a difference if we make it or not
We’ve got each other and that’s a lot for love
We’ll give it a shot

Woah, we’re half way there
Woah, livin’ on a prayer
Take my hand, we’ll make it I swear
Woah, livin’ on a prayer
Livin’ on a prayer

Oh, we’ve got to hold on, ready or not
You live for the fight when it’s all that you’ve got
Woah, we’re half way there
Woah, livin’ on a prayer
Take my hand, we’ll make it I swear
Woah, livin’ on a prayer

https://en.wikipedia.org/wiki/Livin%27_on_a_Prayer

https://www.google.com/search?q=livin+on+a+prayer+lyrics&rlz=1C1GGRV_enUS753US753&oq=livin&aqs=chrome.4.69i59j46j69i57j0l5.3291j0j8&sourceid=chrome&ie=UTF-8