Inflation or Deflation, That is the Question?

Inflation or Deflation, That is the Question?

So far, the Federal Government and the Federal Reserve have both pumped lots of money into the economy to slow the downturn and prevent a significant recession or depression. The Federal Reserve is buying all manner of private and public debt, which has increased its balance sheet from $4.1 trillion in late February to over $6.5 trillion by mid-April. Analysts predict that its balance sheet will reach $9 trillion by year-end. This massive injection of money has many people claiming that inflation is coming as they did in 2008. In 2008 inflation didn’t appear, at least for consumer goods, but it did for assets. Today, who knows? There are two camps, inflation or deflation.

Inflation

Many are clamoring, because of the substantial increase in public debt, that inflation is inevitable and coming soon. This camp points to the hyperinflation of the Weimar Republic as the basis of their argument. However, at the end of WWII, most countries had a much larger debt to GDP ratios than they do today, and inflation was modest at best. Before the COVID crisis, Japan’s net debt was 154 percent of GDP and Italy’s 121, yet neither was experiencing inflation. Japan was close to deflation.

Taking the equation of exchange, MV=PQ where:

  • M = money,

  • V = velocity,

  • P = prices, and

  • Q = quantities.

P*Q is equal to GDP. Velocity is the same as turnover. So, money “turns over,” or gets spent multiple times, until it equals GDP. Thus, if V remains constant while M grows, P will rise, and price inflation will happen until Q catches up.

In 2008, QE and its progeny offset the contraction of credit-backed money as banks stopped lending. As broad measures of the money supply have grown slowly since the 2008 crisis, and wages remained stagnant until about two years ago, resulting in MV remaining relatively constant. In 2008, the crisis was a financial crisis; thus, quantities didn’t fall much, resulting in prices not increasing.

Today, U.S. M2 and Divisia M4 have both shown significant increases over the last two months. Rapid increases in monetary growth with constrained output due to workforce and supply chain disruptions forecasts a rise in inflation. This latter argument, rather than historical comparisons, worries me the most.

 

Deflation

Other commentators are arguing that deflation is coming and base their arguments on the following:

  • Money acts as a cushion for unexpected expenses. When facing an uncertain future, people tend to hold onto money balances.

  • Money velocity peaked with the end of the stagflation of the 1970s and has been falling since. When inflation is high, people don’t hold money as it loses value; when inflation is low, they are willing to hold more.

  • Low-interest rates further dampen velocity as the opportunity cost of holding money is low.

  • For 30 years, Japan has experienced near-zero interest rates, massive government borrowing, and growth in the money supply without generating growth or inflation.

  • While oil prices have recovered slightly, they are still down dramatically from pre-crisis levels. Low prices for oil – and commodities more generally –  following the COVID lockdown will likely keep consumer price inflation very low for a while.

  • Producer Price Inflation, the price of goods at the factory gate, is showing a fall. Lower costs for producers will result in lower prices of products.

  • To survive, many companies are heavily discounting prices to sell off inventory and raise cash. As things open up, businesses may continue this trend to lure consumers back into stores.

  • The U.S. has lost 30 million jobs over the last six weeks. With significant unemployment, wage disinflation is now a  concern. There is anecdotal evidence of companies lowering wages to lower costs. Lower wages means lower production prices and ultimately lower retail prices.

  • The Weimar Republic’s hyperinflation of 1923 was the result of a political crisis, as are most cases of hyperinflation. Hyperinflation is not the result of a central bank printing excess money, nor an overly generous level of government spending.

  • The trade war between the U.S. and China, if neither side gives, will lead to an increase in prices, but lower profits and investment by companies. This overall may lead to deflation if the price increases, don’t boost employment and investment sufficiently.

Hamilton Bolton summarized his observations in a 1957 letter as follows:

“In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

  • Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.

  • None was ever quite like the last, so that the public was always fooled thereby.

  • Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

  • Credit is credit, whether non–self-liquidating or self-liquidating.

  • All were set off by a deflation of excess credit. This was the one factor in common.

  • Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

  • Deflation of non-self-liquidating credit usually produces the greater slumps.”

The question that will decide the fact is if COVID has lowered the velocity sufficiently to prevent inflation or take us into deflation. No one knows at present. I am leaning towards deflation; however, in the 1970s, there was an unexpected surge in inflation, which could happen again.

I was taught inflationary accounting at business school, so there are several CFOs who have experience of an inflationary environment. However, deflationary environments have been absent from the Western world for generations, and we have little experience in how to manage in such a world.

Keep watching the data and be prepared either way.

 

Copyright (c) 2020, Marc A. Borrelli

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A Coming Fall in Productivity

A Coming Fall in Productivity

Due to the move to Work from Home, which began in China on January 23, in Italy on March 9, much of Europe by March 15, and the US, with California, on March 16. By the end of March, 77% of work was performed remotely in North America, the most significant amount of any continent.

Aternity, through its Global Remote Work Productivity Tracker, has analyzed data to determine if employees have become more productive Working from Home. Overall North American productivity increased 23%; however that this was due to Canada. The United States experienced a 7.2% decrease in productivity.

However, while productivity has fallen, what I am hearing from clients and colleagues is that they are working harder and longer than ever before. These stories are not just hearsay. According to data from NordVPN, U.S. homebound employees are logging three hours more per day on the job than before the city and state-wide lockdown. As a result, we are working longer and are less productive. That is because we are overworked, stressed.

While companies sent employees home, the companies had not prepared for employees working from home. The employees did not have the tools they needed, e.g., workspace, VPN access, Internet bandwidth, let alone employees having the space, lack of distractions, and stress to perform. Lines of responsibility got confused. Many leaders did not rise to the occasion, and many who were previously not considered leaders, did, further confusing the traditional environment. Many situations did not have solutions that prior experience provided, increasing confusion. Finally, many companies didn’t have an appropriate culture and were not checking in to see how employees were doing personally and what they needed to succeed.

The bosses at the Canadian federal agency Parks Canada put it succinctly in a Tweet. The Tweet had an accompanying set of principles for working remotely under Covid-19, namely:

  1. You are not “working from home,” you are “at your home, during a crisis, trying to work.”
  2. Your personal physical, mental, and emotional health is far more important than anything else right now.
  3. You should not try to compensate for lost productivity by working longer hours.
  4. You will kind to yourself and not judge how you are coping based on how you see others coping.
  5. You will be kind to others and not judge how they are coping based on how you are coping.
  6. Your team’s success will not be measured the same way it was when things were normal.

Enough companies have not articulated these principals.

At the beginning of the crisis, the adrenalin rush energized many. As an HBR article noted, a CEO said that the crisis allowed unusual freedom of movement, both strategically and as a leader. The relief from budget constraints, the suspension of market expectations, and the welcome escape from the conformity of the daily routine all contributed to his unexpected reaction to working during the pandemic. However, the adrenaline-fueled pace of the initial crisis response spluttered. Problems were more complicated and exhausting. The glory faded. Fuses were short.

As Jay Forte recently said to my Vistage Groups, ask yourself about your leadership approach, and your employees about your response that affected engagement and retention:

  • What Worked?

  • What Didn’t Work?

I expect many of us would learn a lot from this that could lead to improved performance.

As we open up and people return to work, I expect we will see a further fall in productivity. Some business leaders are pushing for a return to the office because they believe productivity will increase; it may result in the long term, but not immediately. Many have been working long hours under lots of stress, not just work stress, and the pace is unsustainable. Were are entering a “Regression Phase” where people get tired, lose their sense of purpose, start fighting about the small stuff, and forget to do basic things like eat or drink — or they eat and drink too much. Even with opening up, many of the stresses will not disappear, and the regression phase will continue. Many people are depressed and not even aware of it. Robert Klitzman, at Columbia University, estimates that about 50 percent of the U.S. population is experiencing depressive symptoms. If CEOs and business leaders don’t start paying attention to the condition of their employees, productivity will fall even further.

One client informed me that they are now encouraging employees to be furloughed for a week or two just to turn off and relax. By being furlough, they still get insurance benefits, can claim unemployment, including the federal government’s $600 weekly payment, and have not used up vacation days. Cisco has realized the issue and gave its 75,000 employees the day off on Friday to recharge over a now four day weekend.

Also, when everyone is back, look at:

  • Disrupting the team, change players, reassign roles. I have often reorganized my office and home because a reorganization makes it feel new. Disrupting the team does the same thing and provides new energy.

  • Calibrate your team’s emotions. Understand where they are concerning “safety,” “stress,” and “family pressure.”

  • Aim for the future. Think about where you are going to provide a new purpose more than just surviving.

Therefore, it up to CEOs and business leaders to look at their workforce and determine what is working, what isn’t, and how to recharge them and reduce their stress. Empathy is the greatest tool you have in your toolbox, and use effectively will lead to much much more significant results. As I have said before, how you behave during this period will define your organization for the next decade. That will affect who you can recruit and retain. So remember the moral of the tortoise and hare, “you can be more successful by doing things slowly and steadily than by acting quickly and carelessly.”

Copyright (c) 2020. Marc A. Borrelli

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The Robots are Coming

The Robots are Coming

The cry that “The Robots are Coming” is not new. Robots and AI have been replacing humans for some time; however, COVID has accelerated that trend. As businesses seek to get up and running again, they realize that it will be more difficult with humans and social distancing. Adopting robots and AI allows businesses to keep operating and reduce health risks to human workers. Thus companies are turning to industry giants like Fanuc Corp., Keyence Corp., and Harmonic Drive Systems Inc.

In addition to the industry giants, many companies are providing AI and robotics for specific industries. Brain Corp reports its customers are employing robots about 13% more than they were in the months before the pandemic. The autonomous cleaners can do basic cleaning tasks “so that workers can use their time to do essential sanitation. Robots are something a lot of our customers are looking at now, and it’s making a big difference.” says Phil Duffy, Bain’s Vice President of Innovation. Tally, an autonomous shelf-scanning robot produced by Simbe Robotics can audit inventory at grocery stores through computer vision and machine learning. Food markets are finding this essential as they struggle to keep products on the shelf during the disruption of the pandemic. Fetch Robotics, through its cloud platform, allows for the rapid deployment of robots in warehouses and similar facilities. Due to social distancing, robots are making up the difference, says Melonee Wise, Fetch’s CEO.

Autonomous mobile robots (AMRs) have more agile navigational abilities. They so are able to move about a warehouse by navigating with built-in sensors and laser scanners, retrieving goods, and bringing them to people. AMRs can avoid obstacles in their path, including people, but they can also work in collaboration with people. So AMRs can adjust to new layouts and patterns. With e-commerce and the variability of SKUs and orders that characterize it, these robots provide organizations the ability to flex and scale as needed without changing their infrastructure.

Intelligent robot arms ability to assess a wide range of objects and grasp each with the correct force and grip is improving dramatically. Thus, such robots arms can quickly sort items into appropriate bins or packages for shipping. With the expected, soaring demand for smaller, more local warehouses located closer to points of delivery, the need for quick and flexible operations will drive demand for these robots.

Nearly 28% of respondents to IDC’s 2020 Supply Chain Survey ranked “improving supply chain resiliency/responsiveness” as a top concern driving strategic change in their supply chains. An acceleration of automation and robots in warehouses is coming, as supply chains seek to ensure less fragility. More companies will operate “dark warehouses,” which operate 100% autonomously. However, more change will come as organizations seek to replace non-value-added movement with automation and robotics to make them more efficient.

IDC presented its 2020 predictions in January, pre the COVID crisis. Simon Ellis, program vice president, Global Supply Chain Strategies at IDC, said, “Digital transformation is now the overriding priority for most manufacturers and retailers, with the adoption of digital technologies aimed to improve efficiency and effectiveness in the shorter term while providing the opportunity to either disrupt their market segment or be resilient to others that may try.” The key predictions were:

  • By the end of 2020, half of all large manufacturers will have automated supplier and spend data analysis.

  • By year-end, half of all manufacturing supply chains will have invested in supply chain resiliency and artificial intelligence.

  • By 2022, 35 percent of firms’ logistics business outsourcing budget will be dedicated to process automation, focusing on order, inventory, and shipment tracking.

  • By 2023, 65 percent of warehousing activities will use robots and situational data analytics to enable storage optimization, increasing capacity by over 20% and cutting work order processing time in half.

  • To reduce stress on the service supply chain, by 2023, 25 percent of OEMs will leverage blockchain to source spare parts.

  • 2023, 60 percent of G2000 manufacturers will invest in AI-driven robotic process automation to automate tasks.

Worldwide, robot adoption has remained low as many companies have had little desire to deal with integrating them into operations, or in triggering a politically sensitive social backlash. However, approximately 60% of global production work can easily be automated. Robotic adoption across industries is different as tasks requiring significant dexterity remain difficult for machines. However, COVID is lowering the barriers to adoption, which are predominately attitude. South Korea and Germany are positive examples of countries that have achieved high factory-automation levels while keeping unemployment low.

A survey by Pricewaterhouse Coopers LLC found that while the majority of industrial production companies’ CFOs are expecting to cancel or defer investments, only 15% are planning to cut investment for automation, artificial intelligence, and industrial internet-of-things.

Given the high level of unemployment, a concern is many of the jobs lost to automation will not be regained. According to the International Labour Organization, COVID could reduce working hours by 6.7% across globally, the equivalent of 195 million full-time workers. This automation creates a new issue, what to do with displaced labor.  Low-income jobs are particularly vulnerable to automation. Thus, “automation and digital technologies are exacerbating social cleavages and could be a source of unrest for years to come,” said Carl Benedikt Frey of Oxford’s Future of Work. Social unrest will put pressure on companies to re-skill and accommodate their workers.

The pace of change is increasing daily, and addressing the resulting social problems will be hard. Watch this space.

 

Copyright (c) 2020, Marc A. Borrelli

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Big Tech is Getting Bigger

Big Tech is Getting Bigger

As I said before in this blog, COVID is shifting the power towards big business. For a while, many commentators said that when the next bear market hit, the FAAMNG companies would fall. However, that is not the case. It appears that COVID is exactly what they are built for and is prompting a dramatic reversal of fortune for the tech giants. Amazon and Facebook are viewed as essential services during a public in lockdown, and Google and Apple are building tools that will enable state health departments to trace the course of potential new COVID-19 infections.

  • Facebook. During a shutdown is providing connections between communities and people whether through Facebook or Whatsapp;

  • Amazon. Where would we be without Amazon? The company whose logistics is saving us.

  • Apple. Apple iPhones and iPads for communication and schooling. Apple TV for entertainment.

  • Microsoft. TEAMS and Office 365 for the displaced employees.

  • Netflix. When you are stuck at home, nothing better than to get caught up in Tiger Kings or Ozark.

  • Google. Well, Alphabet. With all of Alphabet’s portfolio of products from Hangouts, to Gmail, Google Docs, and search we have more options to work remotely.

Many of these companies are saying employees can work from home for a while, and maybe like Twitter indefinitely. However, they are still hiring like crazy, Facebook is seeking to hire 10,000 high-skilled workers this year. Amazon, leading the hiring spree of the tech giants, announcing more than 175,000 new, mostly low-wage jobs in warehouses and delivery. However, it is openly recruiting workers who have been laid off from other industries.

Over 400 start-ups have shed over 50,000 jobs since March 11. A recent survey by NFX of 400 investors and founders found over 50 percent of start-ups had initiated a hiring freeze or had lowered their value in the hopes of attracting new investment. Roy Bahat, head of Bloomberg Beta, said, “We’re telling the start-ups we invest in that the safest assumption is that the next time you can raise money again is never.”

With many start-ups collapsing due to lack of funds, the tech giants are expanding, hiring great displaced talent, buying or copying rivals, and eroding traditional industries. As many traditional companies disappear due to financial difficulties, tech companies will seek to take over their space. Eric Schmidt, Google’s former CEO recently said that the most powerful companies are able to bounce back far quicker than others. “When you have an industry leader, and something collapses, the industry leader, if it’s well-managed, tends to emerge stronger a year later,” he said. As a result, big tech is grabbing market share and with their large cash balances can outspend the competition.

According to Scott Galloway, “There are really two Americas right now. There is Big Tech and there is everyone else. They can do what very few companies can do, which is play offense in the middle of a pandemic.”

Since COVID all of these companies have outperformed the S&P 500 and considering they account for a large portion of the S&P 500 the performance is even greater.

Source: Yahoo Finance

As can be seen, only Facebook is below the beginning of the year share price.

Furthermore, COVID, to quote Isoroku Yamamoto, “has awoken a sleeping giant.” Jeff Bezos is back and energized! At the outset of his earnings call, Bezos warned shareholders they “may want to take a seat.” He has repeatedly snatched profits from the jaws of shareholders to reinvest in the firm. The investment had a theme: Covid-19. Specifically, Bezos outlined a vision for at-home COVID tests, plasma donors, PPE equipment, distancing, additional compensation, and protocols to adapt to a new world. Jeff Bezos is developing the earth’s first “vaccinated” supply chain. This effort builds on what he said in his letter to shareholders on April 27, 2020, where he warned of the size of failed experiments that are coming, which means Amazon is resting on its laurels, but pushing ahead into new markets and ventures.

Many small and medium-sized businesses are going to be roadkill as the FAAMNG companies expand through this time. Also, as I and others have noted before, the growing power of the FAAMNG companies is limiting the growth of, and investment in, many startups as investors will not bet on companies taking seeking to compete against them.

 

Copyright (c) 2020, Marc A. Borrelli

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You Should be Excited!

You Should be Excited!

Having a conversation with a Vistage member this week, he said, that while COVID was terrible from a point of deaths and financial damage, it was exciting. I agree! Business owners and CEOs don’t have to work on eking out an additional few points of revenue or margin in the same manner year on year. Whatever your business plan was on March 1st, that is now in the shredder. If you pivoted in December and invested in resources, those may be to use a economist’s term, sunk costs. You need a new business strategy and plan!

As Rahm Emanuel said, “You never let a serious crisis go to waste. And what I mean by that is it’s an opportunity to do things you think you could not do before.” COVID provides CEOs with many opportunities that were unavailable before. Organizations can:

  • pivot their strategy;

  • enter new markets that didn’t exist four months ago;

  • obtain talent that was once unreachable;

  • acquire companies that fit their strategic goals;

  • cut sacred cows, whether they are people, division, or products.

  • move quickly without some of the usual inbuilt restrictions

  • try lots of new things in a continuous A/B testing format.

For a great example, I look to Scott Cowen, President Emeritus and Distinguished University Chair of Tulane University who was President when Hurricane Katrina hit. A little like COVID, one day he was welcoming the class of 2009 to a university with 5,000+ students and thousands of employees, and three days he told the thousands of students and families to turn around and get out. A week later he students and employees all over the country, a city in disarray, a large amount of uninhabitable housing for students, employees many of the services needed by employees no longer available.

“In many ways, Katrina wiped the slate clean,” Cowen said. Cowen led a rebuilding and academic reorganization of Tulane through a rebuilding and academic reorganization, Many of his actions were criticized including the decisions:

  • to merge and eliminate Newcomb College wholly into Tulane, to form a new undergraduate college, Newcomb-Tulane College.

  • to eliminate several departments in the School of Engineering and merge its remaining departments with the science departments in the School of Liberal Arts and Sciences to form a new School of Science and Engineering and a restructured School of Liberal Arts.

Tulane also became the first and only major private research university to incorporate public service into its core curriculum. Many of these things were impossible without the crisis provided by Katrina. Also to house students during the cleanup he chartered a cruise ship and had them docked in the Mississippi to provide housing for students.

As I received my MBA and JD from Tulane, I had the opportunity to hear Scott talk a number of times as he developed and executed his new strategy for Tulane. His concern but excitement and vision during this period were amazing and I was in awe of him and what he had accomplished.

Right now many firms are living their equivalent of Apollo 13, the key to make it “our finest hour.”

 

Copyright (c) 2020, Marc A. Borrelli

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There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

Profit ≠ Cash Flow

Profit ≠ Cash Flow

Knowing how much cash you generate is essential for planning for growth. Too many companies don’t know and when they grow they find they are continually running out of cash. Understand your cash flow generation and how to improve it through improvements in your Cash Conversion Cycle and using the Power of One.

What Are Your Critical and Counter Critical Numbers?

What Are Your Critical and Counter Critical Numbers?

The key to achieving long term goals is to define short term goals that lead you there. Focusing those short term goals around a key metric is essential. However, ensure that the metric will not lead other areas astray by having an appropriate counter critical metric act as a counter balance.

Do You Truly Know Your Core Customer?

Do You Truly Know Your Core Customer?

Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.