A quick look at the title would suggest we are going to discuss lending, which we do often (it is our day job…). Instead…we are going to step into the same future that George Jetson will. According to the cartoon, he is due to be born three months on July 31st. His “future” starts this summer.
Some of it is already here: smart watches you can see TV on, video chats, capsules you can swallow to see what’s going inside your body, machines that make food, robots, flying cars (though not widely available), jet packs, holograms, drones, smart shoes, treadmills for dogs, smart houses and more.
Let’s lay out the framework he and his family will inherit.
To start, we are going to discuss synchronicity, a term “first introduced by psychologist Carl Jung to describe circumstances which appear related, yet lack a causal connection” (Wikipedia). A “causal connection” here would refer to the points we are making, that these are not tightly connected/related in their origin. Yet, they require a single coordinated response by companies and individuals.
Sometimes Cycles Converge By Chance
We are writing this piece for the CFO and CEO’s of companies to remind them that sometimes cycles converge for atypical or highly infrequent reasons. The synchronicities don’t last long, but they are highly disruptive. Few employees, managers or owners have experience managing a company during one. Look around your company. How many there were managing or even working during the last international conflict? I bet few at the company go back farther than the Kuwait conflict.
We are watching not just the end of the “COVID Economy” as a growth driver. We are also experiencing a transfer of political, financial and military power from the Boomer generation to the Millennials globally. We are watching the (so far) incomplete transition to solar and wind as the primary sources for daily living. We are watching the transition to an electric car. We are watching new power in labor negotiations by workers, including a demand to work outside the office.
The Business Cycle is Synchronicity
Imagine dozens of separate battle between the forces of demand (buyers) and the forces of supply (sellers). Combine all these battles and you get a bunch of different industry cycles. Some are 2 years long, others up to 20 years long.
Combine all of them, and you get the business cycle. It looks random, as a squiggly line on a graph, but it is anything but random.
Part of the reason for the synchronicity discussion is that occasionally industry cycles converge, along with other cycles such as demographics, and the combination creates really high economic activity (or the opposite). The “highs” become higher, or the “lows” become lower.
Let’s use the steel and auto industry as an example. It takes months to stop or start an auto factory, depending on what time in history you use. Cars use a lot of steel, and car demand is an important part of a steel company’s ecosystem. However, the inputs which go into steel, such as coking coal, iron and other materials can take decades to get out of the ground after the decision to dig a mine is made. Thus, the auto industry is more “elastic” than the steel industry (using a single source for the example/point); it can adapt faster as it cycles more quickly.
Over the last two years, auto and steel companies had to make huge pivots. There were also many disruptions in the inputs around the world them. All entities are dependent on a reliable system of shipping called the supply chain.
Today, elasticity (or adaptability) of a company and industry is set by the smallest critical pieces of a product. No sparkle for your paint, then no Toyota cars to be sold with it. The causality or timing has changed. The inability to acquire small parts can interrupt the current cycle, quite often abruptly. A few computer ships almost stopped car production recently. We have become too accustomed to a fast and reliable global delivery system.
The situation has eased some in the last month (i.e. become more elastic). The Ports of LA/Long Beach have cleared up the backlog of ships and empty containers have been reduced. A huge help came mostly because the Chinese government has closed areas important to shipping. The ships have simply clogged up there and not gone here. If our estimates are correct, those Chinese port areas will re-open just in time for ships to appear here in the US in time for the typical August rush of Christmas deliveries. Last year’s supply chain problems have a good chance of repeating.
It’s not just the West Coast with the congestion problem. Companies have spread their imports/exports of goods more broadly in response to last year’s problems. A contact in Florida just ordered a brand new Porsche. They were told yesterday to expect delivery in early September.
We see a 12 month window of synchronicity demonstrated by falling collateral prices, higher borrowing costs and greater employment pressures. We suggest company executives look beyond this twelve month window as the US “rewires” itself to new delivery and production patterns and speeds.
Are Borrowing Costs Important?
Borrowing costs have risen in percentage terms, but not up that much in absolute levels. There is still time to borrow and introduce even greater levels of automation within your company. Why now? Because unions and other human-centered organizations will realize their leverage to disrupt is already slipping. Trucking has slowed. Shipping has slowed. Netflix released this week, news of a horrible quarter for subscriber performance. Amazon’s earnings report was were terrible.
Rollert’s Definition of Money is that it’s both a time machine and option machine; it allows you to do something sooner, and it gives you options you wouldn’t have without it.
A slower economy will allow executives the time to focus better.
Now, we suggest, is the time for companies to automate even more extensively, for those who have that option. The companies which automate more and earlier will handle the expected disruptions better. Take the option to adapt faster that a loan gives you now.
How about labor’s operating costs?
The economy has already slowed, yet this point is historically active for major strike disruptions.
We do not expect to avoid disruptions, but they can be managed by greater automation and perhaps the acquisition of a weak competitor. And manage you will, as there are going to be a lot of disruptions.
Acquiring weak competitors can add more vertical heft to a company, and shield the P&L better. Fewer external relationships need to be maintained, as more work is done in-house by the combined company. As more computer science/ STEM-trained people have entered the workforce, and fewer ones entered physical manufacturing, the excess capacity/weaker pricing power is shifting towards manufacturers.
We encourage executives to have a list of competitors that they would be interested in acquiring now, along with arranging financing. They will get more workers. The can retain the most efficient, helping to mitigate costs increases.
Be the early bird that catches the worm first.
The Good News: A Regenerative Moment
We believe that the US is going through a regenerative moment now. For decades, we have relied on shipping which became more reliable and efficient every year. Now, we can see the gossamer threads within supply chains that can easily break. Every industry will be different combing out of their own set of conflicts. War has helped to converge and amplify the industry cycles.
The world now demands a higher percentage of locally-produced content, goods or services. Greater automation is the path of the next global expansion. Automation answers the question of how to produce at a high fixed cost location. As employees are harder to find, machines become more interesting replacements. As the world becomes more uncertain or unpredictable, new monitoring systems will be put in place by executives. Networks are being hardened for war-related enemy attacks (which appear to have already started at food companies). All of these shocks will bring greater efficiencies to companies after they adapt.
Falling Collateral…but not everywhere
When the railroad industry began to consolidate in the 1800’s, it reduced the number of rail links to small towns. Small town shrank in size or closed without the access. When this regenerative cycle starts in earnest, there will be losers just as there were in the railroads.
Companies will continue to prefer nearby warehouses with rail and adequate trucking access, nearby healthcare systems, and reasonable proximity to container ports. Industrial spaces will continue to be in demand. Los Angeles, Orange County and San Diego Counties all have this. But the towns which grew quickly with COVID refugees are likely be hit hard, as their real estate prices drop with they change in preferences.
George Jetson’s environment is being created, at the same time his soon-to-be-parents are sharing a romantic glass of wine.
The acceleration of automation will change the business cycles for all industries, as we move into George’s world. The Fast Fashion model, where high levels of coordination are used to move a dress from design to department store floor in a few weeks, will apply to all products and services.
Personalization will become possible at the single product level (companies such as Google, Facebook and Amazon already have much of the necessary data). It’s happened in fashion, mattresses and other consumer goods. Marketing departments are already salivating over the possibilities.
Speed, monitoring and personalization will make for a better customer experience. The price to pay will be a major systems or network upgrade for many companies.
We Expect Manufacturers To Start Acquiring Design Firms
The critical link between design and manufacturing is the personalization-creation. Automated design will become the norm, and with plans delivered to the manufacturer who makes it and overnight ships it to the estimated 7 million square foot automated warehouse site that Amazon is building in Ontario, CA.
Small custom shops will be the losers of business as the small towns are too. They are unlikely to be unable to keep up with the required automation purchases, due to their inability to support the payments needed for acquisition.
Study the semiconductor industry, as they have already gone through this transformation.
The cycles which are converging here are the largest opportunity to make enormous money that we have ever seen. Many, many companies are trying to figure out how to manage the generational transfer, just as a reinvestment boom is about to start. As the new equipment and software are installed, price pressures will begin to subside (including in labor). Loan terms and rates should ease. Collateral prices, such as real estate, should stabilize.
In most games, you pivot more than once. COVID was the first business pivot. More are coming from additional automation and/or acquisitions.
Oh…and get prepared to wish the future we see for George a “Happy Birthday!”
Diamant Carré Newsletter
P.S. – if you find these comments helpful, sign up here to get our notes immediately by email. Additionally, you’ll get our upcoming “Square Deals” webinar schedule, where we interview interesting business leaders.
Diamant Carré has the depth of market knowledge, insights, and a hand on the “pulse” of financial information you need now. Start us cutting through the clutter of your competition and get you timely funding.