I won't dwell on the huge, broader issues we are all facing on this, my first weekly blog post of the year. My purpose this morning is to offer some observations which could be valuable to business owners and help them better prepare for some of the most challenging issues they'll be dealing with including cost of capital, supply chains and personnel challenges.
Cost of capital -
"Since 2008, we have been in an era of unprecedented money printing and interest rate suppression. Now the cost of all of that easy money is coming due."
There were major increases in the cost of money from the conventional banking world last year; we saw mortgage rates more than double and high credit-quality business owners who had been accustomed to sub-6% working capital costs suffered a rude awakening when they saw their actual cost of capital. I have argued for years to owners that suffered "sticker shock" when they saw my private capital rates for the first time. They had been conditioned to expect low rates by the rate manipulation conducted by the Federal Reserve through their "Open Market Operations" so I can't really blame them.
Now the rate-manipulation party is over; if the Fed suppresses rates lower again as many expect them to (That's the "pivot" many talking heads have advocated for), then inflation will explode higher from an already increased rate. Otherwise, expect conventional rates to go higher. We could see 10% mortgages this year.
Private (unsecured) working capital financing has remained stable for now with factor rates ranging from 1.22 - 1.37. That will change but not due to interest rate increases elsewhere but rather due to increased risk profiles for businesses who now have to pay more for, well, just about everything. Private lenders are starting the year with a very risk-off sentiment. Many lenders aren't even making offers to new owners and only renewing existing balances. That has caused some stress because of the huge amount of return-seeking capital piling up in lenders' reserves. As higher credit-qualified owners seek capital the cost will stabilize, maybe ever go lower. Right now I can offer as low as 1.11 factor rate (11% over 12 months) on early-payoff agreements.
Supply Chains -
There were huge convulsions in the cost of transportation last year resulting in chaos to any business that depends on it. First, costs soared but then crashed. Now they're limping along at very low rates per mile for trucking and shipping containers are all over the place depending on what you're shipping and where is coming from or going.
This year, no one really can predict what will happen to transport-rates; does China lock down again? Do we? They will remain low until something "happens".
This same "whipsaw" effect was visible in material costs such as lumber which pumped in 2021 and dumped in 2022 when housing and construction deflated due to Fed rate hikes. This will continue in 2023 - I believe we will see an accelerating rate of deflationary pressure which means if you're selling, lower your price to get rid of it. If you're buying, wait it out because prices are coming down! This goes double for used cars because of the auto financing debt bomb explosion under way right now.
Personnel Challenges -
Here is where things get sticky and I want to present the information I have researched dispassionately without bias: There is something very wrong with the current pool of workers in this country. The lack of ability and/or willingness has become endemic causing massive disruption in operations for just about every industry that relies on human work force.
"the U.S. work culture is practically non-existent among younger Americans. They have grown up never expecting to actually produce anything. They are consumers, after all, not factory workers or creators of anything real (your favorite celebrity NFT or crypto coin doesn’t count). Thus, at a time when globalization is collapsing and when Americans are going to have to grow, manufacture and process things at the local level, there’s hardly any local work knowledge remaining that could accomplish such a transition."
"When staffing has eroded and there's no one available to call up, when spare parts have been depleted, when budget constraints, corruption and managerial incompetence have stripped the system of expertise and the willingness to sacrifice, the system breaks down and cannot be restored because the means to do so are no longer available."
"the competent are leaving in droves, leaving the ambitiously incompetent at the wheel while those keeping the whole mess glued together are burning out and retiring, quitting or downsizing to gigs with less pressure and more control of their work."
These are systemic issues which can't be resolved easily or quickly because they are the result of years, no, decades of internal rot which is just now being revealed. It's hard to understate the importance of this trend but I do not wish to become an alarmist when presenting the facts.
"Southwest Airlines flight attendants represented by TWI Local 556 call out the airline company for massive cancellations that are also leaving flight attendants stranded and blame years of neglect to technological improvements that would fix operational issues"
There's something else however which has disturbed me to my core:
"numbers about post-vaccine excess fatalities and excess disability claims: The short version of that conversation is that each day in America, there are about 2,500 excess deaths and 5,000 excess disability victims due to covid-19 vaccines. This means, on average, about 7,500 Americans are removed from the potential labor pool each day."
I wasn't sure if I should include this today. I'm still not sure. How can I ignore it though? Although the linked article above makes some pretty strong claims, I checked: These numbers are absolutely true, accurate and their analysis is sound, it's the results that I find horrifying. I have no way to verify the claim 100% so I'll let you, dear reader, decide for yourself. But I will say this: If it's true that somehow, the mandated covid-19 injections have essentially subverted the entire US workforce (or at least those who were forced to received them in order to keep their jobs), that will profoundly effect everything moving forward. I pray that it is wrong.
Here are some other observations that might also affect small business owners this year:
* There is a massive population shift between states going on that will affect business owners both from states gaining population and those losing it.
"The states of Texas and Florida grew their populations by more than 400,000 in 2022. Their pro-growth, pro-business, pro-taxpayer policies remain a magnet for both Americans and foreigners alike. In contrast New York, California and Illinois each had their populations fall by 100,000 or more in 2022."
* Consumers are under pressure and will cut their spending to make ends meet:
"This is all having a devastating effect on the budgets of individuals. In fact, we see catastrophe brewing. The personal savings rate is a mere 2.3%."
Despite the seemingly gloomy forecast I remain optimistic. I feel justified in my optimism because I have read and understand history which shows that times of great upheaval are simultaneously times of great opportunity and growth. I look forward to working together with my business owner friends to take on whatever 2023 brings.
God bless you all and here's wishing you a productive and prosperous New Year! Call me if you need capital for any business expenses.