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“The only function of economic forecasting is to make astrology look respectable.” — John Kenneth Galbraith
There is such a thirst to have someone just simply tell me what the market will do and an entire industry of expert pundits are born! Just remember the caution by Norman Ralph Augustine: “If stock market experts were so expert, they would be buying stock, not selling advice.” Economics is anything but a dismal science, as many contend. The ha-ha joke was always that economists are people that also like numbers but didn’t have the personality to be an accountant. Ouch! Then again, you may be an economist if you refuse to sell your children only because you think they might be worth more later . In economic forecasting, with statistics at its core, we teach graduate students the difference between causation and correlation. We then couple the degree of significance to the correlation. Subsequently, we fold in covariance, slope, R-squared, probability, range, and standard deviation. After that, we deploy lambda to measure relationships between nominal variables. Of course, after all that pretentious showing off, our bets are then hedged with the all too popular margin of error. That’s the safety net to say “never mind” when you are wrong. Suggesting in the end that everything just might be a guess. Like they say, never confuse opinion for intellect. Let me give you some not so profound, but very true insight. If you’ve been doing this PVF thing for a while…you know staffing, managing receivables, positioning inventories, strategically positioning your company for relevancy, then simply follow your own intuition. Seriously, your own gut check will often prove as good, if not better, than the pundits. Really…just think that what they research and pontificate upon you actually do for a living. Math is a funny thing as it’s at the core of our business. If one doesn’t know the difference between margin and mark up, fire them quickly. I remember as a kid going to my dad and proudly announcing that as I didn’t take the bus and I walked home from school, he owed me a quarter. His reply was, “Hey dummy, why didn’t you just not take the cab, then I would owe you 5 bucks.”
My PVF brethren, in the end it is important to follow the economy and even more so for our industry. The takeaway is, how goes the economy so goes the PVF sector as we are highly correlated to the GDP. Applying macro-economic attribution suggests: 50 percent of your company’s results in any year is determined by the economy, 30 percent by your sector, and barring any significant outlier decisions good or bad, only 20 percent by your company’s actions. Therefore, simply follow the GDP because we in the PVF sector are along for the ride.
As a foundation, if you recall, at the beginning of 2020 we were sailing along in a typical PVF market. You know we live in a cyclical industry whereby every 10 years, for two of those years you are knocking the cover off the ball, two of those years you are convinced that you are going out of business, and the other six non-descript years you yawn just making a living, supporting payroll, and planning for better days ahead. COVID-19 arrives and world hits pause. Q2-2020 wiped out 113 consecutive months of job growth, GDP dropped 32.9 percent and in America alone 22,000,000 jobs were eliminated (some temporary, others permanent). It was the worst economic implosion since the Great Depression and by some measures even more so. In response the government printed and released trillions of dollars in support. Some of which was justified and went to those in need, but too much was simply political pork added along the way with no relevance to the original bill. As is said, “Give a politician a hammer and everything looks like a nail.” Former U.S. Sen. Everett Dirksen once said of government spending: “A billion here and a billion there, and pretty soon you’re talking real money.” However, today we no longer navigate in billions but rather trillions. Oh, by the way, a trillion is a million-millions.
The supplemental unemployment, ironically funded with our own PVF tax dollars, rendered PVF salaries noncompetitive to the unemployment enhancements. As you may recall from my previous columns, for a family with two nonworking adults and two children, maximizing the full benefits available, brought in $82,000 per year, nontaxed. Grossing such up is the equivalent of $135,000 in household income. My fear is that one unexpected consequence is that it may have caused many to simply tap out. The danger is that the government largess and its protraction have destroyed, for many, the spirit of work. That is the very same spirit of: A day’s pay for a day’s work that built our great nation. While the administration is featuring the drop in the unemployment rate, just look at the more important metric of the labor participation rate at only 51 percent. Fewer people want to work…welcome to socialism…the anti-Christ of capitalism. Literally, as I sit this evening, at this very moment, the House passed the infrastructure bill formally known as Build Back Better Bill, which has cleared the House and is headed for the Senate. However, this so-called “infrastructure” bill includes funding for childcare, free tuition, social programs, environmental activism, and the like. When challenged as to why this is included, the administration’s answer is “it’s social infrastructure as well.” When do the masses in a democracy reach the “enough is enough” point?
Coping with the next iteration of COVID-19, supply chain challenges, floods, and droughts, and “Oh my, what have we in store for 2022?” If you print $5 trillion in new money, with no underlying asset base, you pay for such with inflation! Say no more…just look at your own household budget. I need not list the numerous inflationary examples unless you have been in a coma for the last 12 months, you are living it. Gas alone up $1.09 from a year earlier, tripled in just 18 months. In California, the current average is $4.42 per gallon and in Mono County we just passed the $6 mark. (Wall Street Journal – 11/21/2021)
So as to not appear naïve, I acknowledge all the aforementioned realities, but…now let me tell you why PVF will have a good year ahead. You see, while most of us assumed that 2021 was simply a year lost, it appears, perhaps, not so fast. The significant increase in demand for goods, services, and construction speaks to a year not lost, but more accurately a year of pent-up demand. While inflation will continue to increase, so will GDP. As the year unfolds, supply chain challenges will mitigate with improving availability as we level set. This in turn should lower and is already lowering material cost. The challenge for you is protecting your single largest asset, which is inventory. While yes, you can’t sell from an empty wagon, you must now know when ordering material with protracted lead times that the risk is: your cost will be noncompetitive to current market pricing when material arrives. Paradoxically comforting is the fact that all of your competitors are in the same boat. I suppose a punctuation of “misery loves company.” Success goes to the PVF organizations that manage inventories the best and couples such with a strong discipline for replacement cost selling.
There will be challenges; however, 2022 will be a year of improved opportunity such as, infrastructure investment, material availability improving as the year unfolds, and cash to spend. And, the all-important GDP as of this writing is expected to grow 4.6% with a current gross domestic product at $21 trillion. This suggests $966 billion in new economic activity! The energy sector will continue with challenges due to the administration’s agenda to shut you down. I suspect the emerging refrain in the energy sector is: “Who is John Gault?” The intent is to replace fossil fuel with renewables. It is admirable to care about the environment, however, such carries the expectation that includes certain science or capacity not yet invented or discovered. While I contend that renewables work on paper, they will never entirely replace fossil fuel. However, the appetite for renewables is here to stay, thus it is the wise “PVFer” that has it on their horizon and is seeking a place at the table. B.T.W. a caution to the policy makers: one of every 10 jobs in America is in the energy sector.
While there is much commercial vacancy, the existing buildings are not configured for the workplace of the future. While buildouts would be the logical recalibration, the existing commercial footprint has too much square footage, in all the wrong locations, with the wrong technical infrastructure for the smart office of the future. The good news is we don’t own commercial office space and plenty of money is available for construction of rethought, reconfigured, and redesigned commercial offices of the future all of which requires PVF. Residential housing has demand exceeding supply and thus there are bidding wars. Mortgage rate increases have occurred, but wage increases will enable buyers to afford. Existing industrial plants have overdue maintenance and expansion needs, which will also bode well for the PVF community.
The Wholesaler’s own Steve Letko, along with our mutual friend Morris Beschloss, do a great job of keeping us abreast of PVF industry developments on a sector-by-sector basis. In this dynamic and fluid market ahead, tune in to these monthly updates and pivot accordingly. I respect their perspectives and they are on my routine “must read” list.
In the end, while I fear for the direction of our nation under the current purported leadership and ever-escalating divisiveness, I remain proud of our country. The greatest show on earth! This is confirmed by our decreasing popularity throughout the world. It’s the classic, “tall poppy syndrome.” I mean after all, who cheers for Goliath. And yes, while David may occasionally win, the smart money is always on Goliath. See, I told you those classroom statistics courses would pay off.
The year ahead will provide ample PVF opportunity. The victory will go to the PVFers with the best leadership. Is it not true visionary leadership is in the greatest of demand with the shortest of supply? My strategy is to prepare for and maximize the opportunity of the coming year. I draw my theme from Taryn, Keira, and Brecken’s (my granddaughters) favorite play, Hamilton: “I want to be in the room where it happens.”
“Prediction is very difficult, especially if it’s about the future.” — Niels Bohr, Nobel Laureate, Physics