Bullwhip, Normalization, Momentum

January 4, 2023 - Max Osbon (2 mins to read)

Bullwhip Effect

As we enter 2023, we’re now three years into the substantial and dramatic shifts brought on by Covid. Redrawing the economic landscape is like attempting to redraw country borders after shifting tectonic plates. The path back to homeostasis cannot happen without bullwhip effects and significant, momentum-driven ups and downs across all markets.

Earnings volatility reduces valuations. At a fundamental level, companies with volatile or unreliable earnings are worth less than the alternative, and everything is more volatile today.

The bullwhip effect refers to small changes in end-customer demand resulting in exaggerated swings further up the supply chain. Suppliers over-react and over-order at each layer. Today we’re living through one of the bullwhip troughs with higher inventory costs and lower demand. These swings are an inevitable and normal part of the business cycle. This particular cycle is amplified by the messiness of the Fed doing its imperfect best to help normalize the economy post-Covid.

The Fed’s last rate hikes will likely be Feb 1 and March 22nd, topping out at 5%. Many commodity prices are well off their highs:

  • Lumber is back to “normal” and down -70% y/y
  • Oil is down -6% y/y and -40% off the high from June 2022 high
  • Copper is down -15% y/y
  • Median US home price is up just +1% y/y and -9% from May 2022 high
  • Used car prices are down -10% y/y
  • International freight is down -75% y/y and dropping

Eventually, these prices make it into earnings and the official inflation print used by the Fed to set interest rate policy. Investors are collectively waiting to be on the other side of the final rate hike for this inflation fighting policy exercise.

 

The Short Term

When you can earn 4% risk-free via the treasury market, or .33% per month, it pays to wait. There’s very little pressure for anyone to allocate new capital in any market. Interest rates will fall from here, but in the meantime, they are having a dramatic effect on markets, valuations and real estate in particular.

 

Bitcoin’s 14th Birthday – Jan 3, 2009

Tuesday was Bitcoin’s 14th birthday. I first wrote about Bitcoin in December 2013, after the price had nearly quadrupled over 30 days from $250 to $950. I wrote at the time, “We don’t expect interest in Bitcoin to wane anytime soon. With a future price that could go to $20,000 or $0, it’s the ultimate speculative vehicle.”

You can read the original Bitcoin white paper here, and if you want a sober critique of the reality and shortcomings, you can read Nassim Taleb’s critique here.

Bitcoin’s hyperbolic media attention and sentiment are the same today as back in 2013 when I wrote the above, and that’s probably never going to change.

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