Since 2010, I have been writing a private newsletter titled No Retreat/No Surrender. I write the article for executives, consulting firms, and financial institutions. However, due to the number of LinkedIn members that have asked me to write a newsletter, I have decided to make a version of No Retreat/No Surrender available to everyone. This is the first issue.
I created No Retreat/No Surrender, to provide my clients with an honest assessment of companies and industries. I write in a style that can best be described as fearless. I don’t play favorites and I’m not afraid to criticize. I don’t belittle or insult, and I encourage readers to criticize what I write if they disagree with me.
I focus mostly on the topics of business, retail, e-commerce, micro-fulfillment, logistics, and supply chain management. However, on occasion, I enjoy writing about politics and other topics.
I’ve learned over the years that I am extremely prescient regarding the topics I write about. For example, in 2013, I wrote a research paper where I made the argument that Amazon should acquire Whole Foods. Amazon acquired Whole Foods in 2017. In July 2019, I made the argument in a LinkedIn post that Walmart and Microsoft should partner to acquire TikTok – they teamed up in August 2020 but failed to acquire TikTok. Most recently, I argued that Microsoft should acquire Activision Blizzard; I was heavily criticized for the suggestion. Three days later, Microsoft announced the acquisition.
I’ve also learned that some of my posts on LinkedIn, my articles in Forbes, and articles that I write on my own website, brittainladd.com, aren’t always appreciated. Multiple companies have threatened to sue me because they didn’t like what I wrote about them, or they were angry that I accurately predicted their M&A and corporate strategies. I’m an analyst. I am only presenting my opinion. If you want to sue me, do so, but you’ll lose. There’s no law against writing articles that are accurate, influential, and that challenge the status quo.
Once a week, sometimes more, I will write about the topics I find interesting. Here is what I found interesting this week.
Enjoy.
TOPICS OF INTEREST THIS WEEK
Topic 1.
All About Inflation
I don’t believe the media is spending enough time adequately discussing inflation and the harmful effects of inflation on the economy and families. Inflation is insidious. Like a cancer that hides in the body and grows causing irreparable damage, inflation often hides within an economy causing significant damage to businesses and also to lower and middle-income families.
I’m always amused when I listen to people talk about inflation from the perspective of politics. Many politicians try and place the blame for inflation on everything and everyone who have nothing to do with inflation vs. naming the real culprit – Washington D.C. and monetary policy.
I was one of the few analysts writing on LinkedIn in 2019 that the U.S. was going to experience a massive increase in inflation for one very simple reason- the Federal government’s insistence on passing large amounts of financial stimulus. What a dumb idea.
It was clear to me that COVID was disrupting demand as countries foolishly shut down their economies, and states in the U.S. foolishly shut down retail stores that they deemed “non-essential.” I was convinced that as COVID rates declined, consumers would have pent-up demand for goods and services. I was also convinced that China’s ability to manufacture and ship products to the U.S. would severely be reduced due to bottlenecks in supply chains globally. When a supply chain is turned off, one does not merely flip a switch and turn it back on. This is why we continue to experience problems in the supply chain.
It was also clear to me that if Congress approved trillion-dollar plus stimulus packages, THERE WOULD BE TOO MUCH MONEY IN CIRCULATION AT A TIME WHEN THERE WAS ALSO INSUFFICENT GOODS AND SERVICES TO SPEND IT ON. Instead of allowing for a gradual return to normalcy and balance in the economy, stimulus cash actually crushed the ability of the economy to recover. For example, minimizing the need for millions of people to find jobs as stimulus money allowed them to remain at home.
On cue, the Federal Reserve is raising interest rates in an attempt to slow down and reverse inflation. It’s another bad idea. I suggest keeping interest rates low and instead put every effort into stimulating growth in the economy by eliminating as much red tape as possible to accelerate the growth of new businesses, and especially simplifying the process of companies to make acquisitions instead of questioning every large acquisition that is announced.
I also encourage CEOs and Boards of Directors to come to their senses and maximize the ability of their employees to work remotely in the industries where this is possible. We are in the 2020s, not the 1950s. Employers should do everything in their power to increase employment as doing so naturally stimulates the economy even it means allowing their employees to work remotely indefinitely.
The following information comes from the article, What is inflation and what causes it? I’m including the information to provide additional information on this topic.
Inflation occurs when the cost of goods and services in the economy goes up over a sustained period of time. Yet, distinguishing actual inflation from just a price jump can get pretty tricky — because both are different.
Inflation doesn’t happen overnight, and it also doesn’t happen when the cost of one particular good or service goes up. Say you go to the grocery store and buy a dozen eggs for $2. Then, the next week, that same product is now $4. That alone doesn’t count as inflation, as prices in the financial system constantly fluctuate.
From an economics perspective, inflation applies to the broader picture. So while prices on some items can definitely be inflated (think: college costs), it doesn’t equal what economists mean when they say inflation, even though your wallet can surely feel that squeeze.
“We may see prices rise on certain things like gas or milk, but it’s not necessarily inflation unless you see prices rising sort of across the board, across many different products and services,” says Jordan van Rijn, who teaches agricultural and applied economics at the University of Wisconsin’s Center for Financial Security.
https://infogram.com/inflation-1h8n6m3edmv5z4x
How Inflation is Measured
The way inflation is measured depends on the gauge. For consumers, the most important price tracker tends to be the Labor Department’s consumer price index. Policymakers at the Federal Reserve, however, closely follow the Department of Commerce’s personal consumption expenditures index. The indexes are broadly similar and track the same trend, though the consumer price index tends to show higher inflation over time.
https://infogram.com/inflation-1hdw2jpvv1njj2l
Data Collectors
Generally, both gauges track price changes on a variety of consumer products that reflect the typical basket of goods that a household buys — anything from appliances and furniture, to food, apparel and utilities.
Data collectors create an index tracking how much a typical basket of consumer items changes in price over time. Then, they multiply it to get what’s called a base period. That index then helps economists compare data over different time periods to get what’s called the inflation rate. Measuring quarter-to-quarter provides a quarterly inflation rate, while year-to-year gives an annual inflation rate.
But some categories tend to be more volatile than others. Food and energy, for example, experience sharp swings month to month. Sometimes, it’s best to strip those categories from the data, in what’s called a core inflation rate, which helps eliminate some of the noise.
Over time, however, both core and headline inflation tend to follow the same path. And regardless of whether it’s volatile, core inflation isn’t an index worth ignoring considering that many Americans spend a majority of their money on buying food, paying for utilities and filling up their gas tank.
Consumers
Yet, not all households buy the same goods. The inflation rate consumers experience depends on what they buy — meaning someone’s personal inflation rate might end up being lower, or higher, than the overall index.
One person who spends disproportionately more income on gasoline, for example, might feel a tighter inflation pinch right now than someone who currently commutes on public transportation. On the other hand, a consumer who bought a used car last year might’ve endured more inflation than someone who didn’t.
The Federal Reserve Bank of Atlanta’s “myCPI” calculator gives consumers an idea of what their personal inflation rates are based on how old they are, how many people live in their household, where they live, what they buy and whether they rent or own.
“If 50, 60, 70 percent of your money goes to paying a mortgage or rent and those prices are rising, you’re going to certainly be hit a lot harder,” van Rijn says. “People spending a lot of money on groceries and gasoline, they’re going to still feel the impact of a big increase in headline inflation.”
Research suggests that lower-income households tend to bear the biggest burden from inflation because they rent and spend a greater share of their income on the day-to-day necessities impacted by inflation.
Penn Wharton’s analysis found that low- and middle-income households’ expenses increased by about 7 percent in 2021, while the country’s top earners saw their expenses rise by 6 percent.
What Causes Inflation?
Economists like to lump the typical inflation causes into two categories: demand-pull and cost-push inflation. They sound wonky, but they reflect experiences that many Americans are familiar with.
Cost-push occurs when prices increase because production is more expensive; that can include both higher wages or material prices. Companies pass along those higher expenses by raising prices, which then cycles back into the cost of living.
On the flip side, demand-pull inflation generates price increases when consumers have resilient interest for a service or a good.
Such demand could result from things like a low jobless rate, a high savings rate or strong consumer confidence. A higher demand for products causes companies to produce more to keep up with demand, which, in turn, could lead to product shortages and price surges.
“You could have an economy that revs up very quickly and you end up with demand-pull inflation, where there’s too much money chasing too few goods and services,” says Greg McBride, CFA, Bankrate chief financial analyst.
What’s Going on With Inflation?
The cost of goods and services has steadily increased since World War II, when modern data collection was first made available. That’s partially just because the economy has grown.
But economists like to think about price gains by tracking how much they’ve increased or decreased from the prior-year period. In recessions, the year-over-year inflation rate tends to fall, reflecting disinflationary pressures as millions of consumers remain out of work and demand is subdued. In recovery periods, the inflation rate tends to pick up, reflecting higher demand and wages as individuals find employment again.
High inflation was last a major problem during the 1970s and ‘80s — reaching 12.2 percent in 1974 and 14.6 percent in 1980 — when the central bank moved too slowly to adjust interest rates amid big government spending and two oil-price shocks. The Fed took action by raising interest rates to get inflation back in line — to a target range as high as 19-20 percent. Inflation steadily cooled through the first half of the decade, sinking to 1.9 percent by 1986.
Since then, inflation hasn’t proved much of a threat. Price gains coming out of the Great Recession of 2007-2009 also proved to be tepid at best, mainly due to disinflationary factors from globalization, fewer labor unions, technological innovations and overall stagnant wage growth. Price pressures averaged at 1.7 percent in the years between the end of the Great Recession and the beginning of the coronavirus pandemic.
https://infogram.com/inflation-on-items-1hd12yxyp8orx6k
But in the aftermath of the coronavirus pandemic, inflation came back with a vengeance. Ensnared in labor shortages and supply chain bottlenecks, price surges were at first only impacting goods that needed to be produced at a manufacturing plant, from used and new vehicles to furniture and appliances. Then, demand for the lockdown-deprived activities of attending a sporting event or concert, as well as traveling, flying or staying in a hotel surged after consumers emerged from lockdowns with stimulus checks and ramped-up savings accounts.
Those increases were all assumed to be temporary, clearing as outbreaks lessened worldwide and post-lockdown demand calmed. So far, however, inflation has only gotten worse — and it’s spread to even more categories, impacting services, rents, meals out at restaurants, repair and delivery services, as well as apparel and food. All of that highlights one of the key fears about inflation: Once it’s taken off on the runway, it’s hard to turn around.
The Ukraine-Russia conflict has only managed to make the outlook for inflation worse. Oil prices have soared 82.4 percent from a year ago and nearly 21 percent since Russia invaded Ukraine on Feb. 23, according to the U.S. Energy Information Administration. Other commodity prices, such as wheat and corn, have also surged since the conflict began, considering Russia and Ukraine’s dominance as a global food supplier.
Oil is also an input for thousands of other consumer products, including Aspirin, computers, eyeglasses, tires, toothpaste and shampoo, according to the Department of Energy. All of that means the recent surge could raise prices in more places than just the gas pump.
“Everything you get off of a store shelf, even the stuff you order online — it’s planes, trains and automobiles to get it there,” McBride says. “There is a filtering-through effect over time, to other goods and probably services, too.”
An inflation calculator is a simple way to compare the buying power of money during different periods, by inputting a dollar amount and selecting the months and years for comparison. For instance, $10 in February 2000 had the same buying power as $16.71 in February 2022.
Consequences of Inflation
Consumers and policymakers wouldn’t be so fixated on inflation if it didn’t prove to have consequences — for both individual households and the broader economy.
In a high-inflationary environment, there are few places to hide. Think about the money you have sitting in your wallet in your bank account. When prices soar, consumers wouldn’t be able to buy as much with it. Taking into consideration the fact that two-thirds of U.S. economic growth is consumption, that could threaten the vibrancy of growth.
“If prices are rising faster than wages, which tends to occur in cases of high inflation, basically, that means people have less money to spend, less real purchasing power,” the University of Wisconsin’s van Rijn says. “It’s almost like having a pay cut.”
One of the many groups put into a precarious position by inflation are retirees on a fixed income, who may feel the need to cut back on purchases or resort to riskier investments in hopes of generating more income.
Retirees are “at this moment in their lives they really want to reduce their exposure to risky assets and be in a bond portfolio,” says John Cunnison, CFA, chief investment officer at Baker Boyer Bank. “But if inflation begins to run, those bond portfolios, they’re really not going to perform well. They have very limited options in a period of high-sustained inflation.”
Other groups often hit particularly hard by inflation include business owners. They might be forced to pass along higher prices to consumers, but not so much that it dampens demand for their products.
If the cost of borrowing also rises, anyone looking for a loan may also have trouble finding affordable rates, which can further slow down the economy.
How Much Inflation is Too Much?
A small amount of inflation is actually a good thing. Typically, that’s thought of as a 2 percent increase year over year, at least at the U.S. central bank, which is responsible for controlling inflation by adjusting interest rates.
The Federal Reserve formally set 2 percent as its inflation target in 2012 but has since said it’s willing to let inflation rise above that level for some periods of time, to make up for times when price pressures held below that threshold.
“That basically gives the economy the ability to slowly raise prices,” Cunnison says. “For companies, they can slowly increase people’s wages. You’re really looking at the goldilocks inflation — not too little, not too much.”
But increases in inflation that are too drastic could erode consumers’ purchasing power, stifle demand and threaten companies’ profitability, which may force the Fed to raise interest rates faster to cool down the economy. To cool inflation, Fed Chair Jerome Powell opened the door to one or more half-point rate hikes, which would be the biggest increase since 2000.
“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability,”
Even the mere expectation of higher prices can be a bad prophecy. If consumers start expecting prices to pop, they’re more likely to panic buy and demand higher wages. Those two forces combined prompt companies to increase prices, creating the very phenomenon consumers were worried about.
“If people think inflation will be high, prices are going to continue to rise,” says van Rijn, the economics professor. “If you’re an executive setting wages at your company, that depends a little bit on your expectations for how much prices are going to increase next year. As wages go up, then the same thing happens with businesses — they’re going to start raising their prices.”
To be sure, consumer prices have topped 2 percent in the past, but not in a way that compares with the ‘70s-’80s, as well as 2021-2022. That’s because prices in all other periods would oscillate, rising and falling depending on the month. On the contrary, year-over-year price gains coming out of the coronavirus pandemic have only lept, repeatedly hitting fresh 40-year highs. Consumer prices climbed 7.9 percent on an annual basis in February 2022. Back in January 2021, however, prices were up just 1.4 percent.
Topic 2:
The Peloton Brief
I don’t like the company Peloton. Never have. From the beginning, I doubted the ability of the founder and CEO, John Foley, to run and grow the company, and I never believed that the company had the right growth strategy.
This post is an example of how I feel about the company.
Instead of accepting reality, Peloton tried to get reality to fit their needs, and they failed. The once-hot company reported a dismal quarterly financial report Tuesday, with sales tumbling 15% from a year ago. Peloton lost $757 million last quarter.
Peloton has just $879 million in cash in the bank at the end of the quarter, which has left it “thinly capitalized,” new CEO Barry McCarthy said. That forced the company to borrow a significant amount of money from Wall Street to keep its operations running.
My argument is that Peloton should have placed their focus on becoming a fitness company and not a connected fitness powerhouse. Most people like working out in a gym because they have access to lots of equipment including weights, bikes, treadmills and rowers. I had no doubt that as COVID levels decreased, people would return to their favorite gym. Therefore, the best thing for Peloton would be to acquire LA Fitness and other large health clubs across the U.S.
In turn, Peloton could end the contracts with the fitness companies supply the gyms they purchased with bikes, treadmills, and rowers, and sell their brand of bikes, rowers, and treadmills to those same gyms. Commercial sales would generate the most revenue but home sales could still prove valuable to the company’s bottom line – just not as much as they did during COVID.
So what happened? As people returned to the gyms, Peloton has been struggling to maintain its growth from the early days of the pandemic. Bike and subscription sales have stagnated. The company has too much inventory, and demand is on the decline.
The stock is down about 90% from when it hit its all-time high in late 2020. To stay afloat, Peloton is borrowing $750 million in five-year term debt from JPMorgan and Goldman Sachs, two banks that helped underwrite its IPO.
I seriously doubt Peloton can operate as a stand-alone company, and I won’t be surprised to see them acquired. I constantly see the names of Apple, Amazon, Walmart, and Nike mentioned as potential buyers. I strongly advise all four companies to pass on acquiring Peloton.
Until next week,
Brittain Ladd
