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Dirk McCoy
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Dirk McCoy is CEO of Spendbot, Inc., a financial services startup company in Chicago. He has created thousands of man-years of employment in both Fortune 500 and startup companies, and has an engineering degree from Illinois and an MBA from Northwestern.
My company:
Spendbot, Inc.
My blog:
Spendbot: What We're Thinking
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  • Did Navy SEALS Kill Inflation?

    The price of oil tumbled Thursday and Friday to well below $100. Conventional wisdom is that this was due to the strengthened dollar and corresponding silver collapse. But the dollar only strengthened 2% on Thursday as oil was falling 9%. Something other than dollar strengthening was in play.

    There are a few alternative causes- increase in margin requirements, lack of short sellers, but I'd wager that it's a renewed respect for American resolve. And this renewed confidence, emerging from the success of the mission to bring justice to Osama Bin Laden, could spill over into other markets, including other commodities, US equities, and long bonds.

    For the past 18 months, a standard meme has been that the US Federal government would be unable to deal with the looming entitlements tsunami, that the Federal Reserve would collude with Treasury to monetize US debt at unprecedented levels, that foreign trade partners and debt customers would lose confidence in the value of the US dollar, that the price of commodities would soar and inflation would spiral out of control, and either hyperinflation or default would create a fiscal, economic, and social collapse.

    This possibility cannot be discounted to zero; default remains a possibility as there are committed conservative ideologues clamoring for the near-destruction of the US Federal government by holding fast to the current debt ceiling. But the political will shown by President Obama in taking decisive action to kill OBL on Pakistani soil- eschewing many in his party who abhorred unilateral action- could forshadow addressing other challenges, where the US has the ability and only needs to apply the will. This includes not just entitlement reform, but also domestic energy production. With the cost of fossil fuel alternatives estimated below $50/bbl, it could just be a matter of more supply coming on line in response to price signals.

    And if "yes we can" extends to drilling in the kind of seismic zones that Russia and Vietnam have plundered, if it extends to more refining capacity, and if it extends to broad adoption of ridesharing IT (one example can be found at www.pacerideshare.com/en-US/), then the price of oil could fall back to $80/bbl or lower over the long term. This means retailers such as Target and Wal-mart, and airlines, including Southwest and American, should perform better as their fuel and shipping costs fall while their customers have more money to spend on goods and travel instead of commuting.

    And since inflation has been and will continue to be offset by cheap labor (given an enormous output gap that will only grow as automation and productivity tools are adopted around the world), the best hope for cost-push price increases was energy. The rediscovery of American competence, starkly unveiled in Abbottabad, could be the death knell for inflation, and the drops in silver and gold could be extended to other commodities, long term interest rates moderate further. Lastly, multinational equities should hold steady for a bit, and then advance as the US and global economy strengthen near the end of next year as the Fed (and ECB) continue their easy money policies.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: TGT, WMT, AAL, LUV, energy
    Jun 07 1:21 AM | Link | Comment!
  • Disaster Planning and the Modern Supply Chain

    The recent earthquake in Japan has raised concerns about single point and JIT supply chains around the world.  GM shuttered an entire auto assembly facility, and Apple's ability to meet bigger-than-expected demand for Ipad 2s could be in danger due to five chips sourced from Japan according to IHS iSupply.  Supply chain design and management is as complex as ever in this age of technological specialization and globalization- just as it makes no sense for someone to be their own doctor, lawyer, and plumber, it's equally nonsensical for one company to be their own financial, fab, and assembly expert given today's cost of establishing fab and biopharma capabilities.  Yet, the risk of disruption in supply chains is not a new phenomena- a 1993 fire in a Sumitomo plastics facility that supplied 60% of the world's epoxy resin for integrated circuits led to shortages that lasted for months.  These potential disruptions are bound to continue- natural and manmade disasters will continue to occur without warning.

    But is the solution to go back to large lot production, safety stock, and captive production?  Given the waste associated with these practices (imagine the losses if the tsunami swept away 6 months of safety stocks in each home and factory) it makes much more sense to assure adequate disaster response plans are in place through the supply chain.  By conducting careful analysis into the specific risks of each point, creating viable backup plans, and constructing contractual obligations to prohibit unacceptable stoppages, risk can be managed if not totally removed.   These plans need to take into account the time sensitivity of the final product and value of lost sales, the fixed costs of operations that may be impacted, and the cost to mitigate various disasters, and many top companies have had them in place for years.

    A good disaster plan includes some safety stock (consigned on customer site, or goods shipping by boat that can be used for weeks while the line is moved and air freight then used to re-fill the line later), provisions for offsite information backups, redundant lines by technology if not for each product, standardization of components, and insurance.  In some instances, however, it will be virtually impossible to restart a line within three months, so a second source that could establish a new source of supply should be considered- including financial reward for the original supplier for successfully moving the business to another supplier.  And this should be a topic of discussion all the way down- and up- the supply chain.  Companies with databases that track formal disaster plan submissions- or perhaps a third party registrar as is the practice for quality registrations- will be used to eliminate- or at least identify- gaps.

    It's also likely that some companies will look to move operations to lower-risk locations, especially those with sensitive and/or large capital expenditures.  But companies have been considering the risks associated with earthquakes, hurricanes, labor unrest, tax policy, and the like for years.  At this time, a knee-jerk reaction against outsourcing, JIT, and other modern supply-chain practices makes no more sense than it would have the past 30 years as these practices were lowering costs- and raising living standards- for people worldwide. 

    Investors should be careful about assuming long-term supply disruptions.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: AAPL, GM
    Mar 30 8:06 PM | Link | Comment!
  • Getting to the George Jetson Economy
    Unemployment remains high (reported at 9.6% today but everyone knows it's really higher than 10%), and government action has not built the confidence (Economic Crisis Is Largely a Problem of Confidence) required for recovery.  The Fed is prepared to embark on QE2, albeit a couple years late and trillions short to the party IMO (Let's Just Say It: Print More Money).  Consensus is lacking.

    As we consider these gyrations of central planners and central bankers, perhaps we should consider the most difficult challenge any leader faces- predicting the future.  Leadership is about trust, and as anyone who's seen the Poseidon Adventure knows, knowing what you're talking about is critical.  But there's wide disparity of vision.

    If we go back nearly half a century, there used to be a more common view of the future.  It could be found Sunday evenings (a popular primetime cartoon, futurism at work).  The Jetsons- George, Jane, Judy, Elroy, Astro- gave a glimpse of their heavily automated, comfortable utopia of 2062, as prescient as HG Wells (anyone else worried about kids becoming Morlock progenitors with their late nights and bad eating habits?) but more inspirational.

    But there are a few facets of the George Jetson Economy worth considering.  First, George only worked 9 hours a week pushing a keyboard, except when he took a part-time taxi driver job.  Second, Judy didn't work, but delved into history, art, and homemaking.  Third, the children were focused on education and having fun.  Fourth, there was little work on basic needs other than fixing the automation, and there was lots of automation.  Fifth, what work was done revolved around new technologies and new products, although home decor was sparse (albeit with large thin panel displays).

    So, how do we move towards this utopia?  A flying car would be a nice start, and since these have been invented, the next challenge is clearing the skies.  Home robots would be nice- they've been invented as well.  And instant food- well, that's been invented as well.

    The trip to the Jetson economy will be enabled by technology, prosperity, and adjustment.  Technology builds on itself, but most breakthroughs are enabled by wealthy customers.  Consider mobile phones, MRIs, flying to vacation, indoor toilets.  These were very expensive propositions to start, but eventually cost decreased to the point these became widespread and necessities.  Robots, flying cars, space travel, 3D televisions, artificial organs could be the same, initially for wealthy customers and then more broadly as inputs (including labor) are commoditized, reducing the price.  And then we must move on to the next thing.

    The question for leadership in trying to channel what we move on to has been "what are we running out of"?  And here is where understanding reality comes into play.  The best system for making this determination is market pricing.  So it is critical that accurate price signals reach consumers and investors.  Central planners love fixing, regulating, subsidizing, and otherwise meddling with prices.  The worst example is when the Fed inverts the yield curve, artificially raising short term rates above long terms rates and creating recession (google it if you don't believe me), but oil prices, labor prices, and house prices come to mind.

    The benefit of price signals is it then stimulates investment where most needed.  Instead of building more roads, perhaps more bandwidth for home offices, or a ride-share app, or more car services are needed.  Instead of more windmills in the US, perhaps more coal plants in the third world (where three billion people still live on less than $2 a day and development is sorely needed).  Instead of higher taxes on US companies doing business overseas, perhaps lower taxes to encourage sharing of expertise.  And instead of higher-paying jobs in a shrinking healthcare sector, perhaps a booming healthcare sector with lower-paying jobs.

    I don't claim to know the market price for entry level labor, but I'm pretty sure it's less than the current levels.  This can be solved with inflation and/or deregulation.  Without it, more workers will be sidelined- not even getting George Jetson's 9 hours a week- and economic production and prosperity will suffer.  In addition, new economic directions must advance to absorb labor, many of them driven by the wealthy.

    The question of what the George Jetson economy will look like- and when it will arrive- is an interesting one because technology will not stop.  And, current bump in the road aside, prosperity will advance as well as mankind harvests more natural resources and learns to use them more efficiently.  A quick google search brought up a couple other views of the Jetson economy as well:

    http://www.threemovesahead.com/

    http://hnn.us/articles/131658.html

    I'm reminded of an old saying: "Without vision the people perish".  There are alternative visions vying for success, and since success is when preparation meets opportunity, preparation abounds.  The real opportunities await.


    Disclosure: No positions
    Tags: economy, bonds
    Oct 08 4:02 PM | Link | Comment!
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