Week of Nov 13: Macro Analysis
Opportunistic times for businesses!
1. This time period may last for “some time” however this is when companies improve & differentiate, grow market share, expand into new industries, acquire, & new leaders emerge.
Cost Reduction is top focus. Since Q1.
Reducing spending & minimizing discretionary expenses (ones we can control) “cutting excess & fat”
Restructuring – streamlining supply chain & possible vertical integration to reduce costs further – either in the beginning at raw material or in the delivery/fulfillment.
Increasing efficiency is esp important as productivity is compressed and reduced.
Productivity – output/$ is down. It costs more to produce a single unit.
Challenge that needs solution!
Our industry news. Research demonstrates Autonomous equipment for heavy equip, robots, systems & software appears to be a solution to increase productivity, safety, reduce costs & efficiency in operations!
We are in a new world. Challenges lead to innovation and birth new leading industries. Necessity is the mother of invention
Rise in cost of capital & debt, production, labor (Not only nominal wages, employment fees – IAS surcharge, etc)
Dilution of Value.
Supply chain delays still present so bal between maintaining higher inventories to avoid delays for order completion & keeping accounts payable down. Plus there is uncertainty about future orders.
There are Compressed margins – costs may have come down from peak but still elevated.
Many Revenues held up by incr prices & inflation rather than higher output/vol.
Earnings are under pressure – margins squeezed with diminished future valuations & slowed growth
Global slowdown – manuf indexes (forward indic for earnings) are lower – New Orders down, lower business outlook.
As REAL Demand comes down, less output is required, less need for workers.
Real incomes & spending are weaker so business sales are also weaker.
Excess production is finding its way into inventory build. And without sales growth it is unsustainable. Lower demand with rising inventory levels is unsustainable.
Survival of the most adaptable!
2. Monetary and cost push inflation
Money infused into personal incomes and economy with production and labor
Productivity down – less output/dollar
Rise in costs of capital, debt, production, labor
Margins compressed with dilution of value
3. PMI, ISM and Manufacturing Reports
Manufacturing forward indicator for earnings
Real demand coming down
Consumption declined
Excess production and inventory build
4. Tightening liquidity
Returns on assets relative to cash is negative
Pressures on production and employment increasing
Lower output and less need for employment
Stagflationary Nominal Growth to Stagflation
Real incomes and spending weaker so business sales also weaker
5. GDP Nowcast
Weakening in real growth relative to previous year
Real GDP could go negative near term
6. Returns not a feature of asset class but a feature of sample selection
The 60/40 Portfolio isn’t working. There are alternatives as we are in a different economic world since the early 80s to recent past.
We were in Deflationary Real Growth and now in a Stagflationary Nominal Growth.
Velocity of Money = GDP Growth/Money Supply
It is now increasing as Money Supply has slowed down and GDP Nominal Growth has increased. Therefore GDP needs to come down and/or money supply increase.
High velocity is correlated with high inflation. We are currently in a very high inflationary period. Therefore, it seems that by bringing down the velocity could help bring down inflation.
