In a tribute to Olivia Newton John who died last week and who at age 29 acted as teenage Sandy to a 23 year old John Travolta in “Grease” I dedicate this timely reminder that grease is still the word.
Recent discussions with several of our portfolio companies suggest a new set of challenges for the manufacturing omelet. While unit demand shows signs of slowing down there are still supply chain disruptions and insufficient safety stock in inventory components. Component scarcity is still real issue along the whole length of manufacturing supply chains, especially small companies with broad bills of materials
When you consider the labor ingredients the omelet gets even messier. Almost all our companies are experiencing wage inflation as they try to protect key contributors. There is also an unending mismatch between skills needed and skills available as well as between wage expectations and wage affordability. While the latest jobs report showing 528,000 new jobs in July is wonderful news for employers, the mismatches remain sticky.
What is intended as the manufacturing equivalent of a a western omelet is being served as something else because important ingredients like peppers, onions, tomatoes, ham and cheese are simply unavailable and the chef wants $20/hour, but only knows how to scramble eggs.
A Well-Greased Machine
This is not the narrative we are hearing. The jammed parts of the recovery are being greased over by the Wall Street narrative machine and the cacophonous voices of all the Fed governors talking at once and often in direct contradiction to each other.
There appears to be calm acceptance of a return to normalcy as reflected in the equity markets’ strong rally since the end of June. Here is a chart from Yahoo Finance showing the one month performance of the S&P500 through the first week of August:
Prominent financial experts want you to believe a 25 basis point rise in March and two subsequent 75 basis point increases in fed funds rates since then are greasing a “soft landing”. Under circumstances not unlike the hand Chairman Powell is playing today, in 1980 it took Chairman Paul Volcker many interest rate increases and two recessions in three years to grease the skids for the subsequent 40 year taming of inflation as shown in the following chart:
My personal experience in almost every business interaction I have had in the last 12 months is employers cannot find enough qualified workers irrespective of price. It may be true manufacturers are looking for fewer people now, but the wage expectation gaps have not narrowed and skills don’t match needs.
Notwithstanding expert opinion, the investing public may be paying for western omelets but getting scrambled eggs –with a side of grease.
