The irony of yesterday’s post contradicts today’s. Yesterday I wrote about a term I call headline syndrome. Simply put, reading headlines and becoming reactive as a result of what it says, rather than inferring the facts objectively. This causing one to forego any critical thinking skills to offset potentially false information being spread or consumed by the user. Now let’s briefly talk about this funky ass economy.
It’s been brought to my attention that a company I own (full disclosure) has reached its highest penetration rate. At the surface this looks great. It looks like “hey guys, more people walk through our doors and buy something.” While this looks like rising margins, increased revenue, and higher free cash flow, it’s a troubling sign. Why?
Because the economy does not experience negative shocks the moment monetary policy changes. There tends to be a lag. The technical terminology to describe this is a lagging indicator. The lag is a delayed response to previous economic shocks. In economics, consumers typically experience what could be called foreshocks.
The shake before the quake. This is something akin to economic instability in the form of subtle changes that point to more troubling conditions ahead. Now let’s simplify what could be happening. The fed had previously raised rates to cool inflation. Once the after effects were lifted, euphoria struck again.
Consumers spent more. Companies increased inventories to meet demand. Lenders found ways to add fees or looser standards. Everybody’s happy. Although we have our own printing press, there is a finite amount of productivity that exists via the spending mechanism that is the consumer. You eventually run out of money, or hit your budgets ceiling.
This means a few things. You either increase your productivity, and risk burnout, or cut back on spending. Companies sense this, and cut costs. But the time it takes for this to occur is much more subtle. Now consumers shop at the discount stores to cut more costs.
These discount stores experience a sudden surge in sales. They capture more customers than ever. Yet the customers cash flow statement (i.e, checking account) is tied up in too much property plant & equipment costs. Simply put, the consumers costs exceeds their monthly income. Eventually they have to borrow to stay afloat, and the rate of interest becomes unbearable.
The discount chain takes advantage of the last minute switch. Chaos ensues slowly but surely. We get a rebalancing of dynamics, and the cycle restarts. The difference is the speed and intensity of these dynamics playing out in real time. Be mindful when you hear about higher penetration rates.
Ask yourself, if everyone is switching to low cost carriers, what does that mean for the economy?
