Financial writer John Mauldin has two pieces: the first one, with the argument that we should expect inflation, and the second one, arguing that the case for deflation is stronger.
Read, consider, and comment if you feel so inclined.
Business
Thinking, Making, Profiting
256 years ago this month, James Watt made the conceptual breakthrough that enabled a much more efficient steam engine…an engine that would play a major role in driving the Industrial Revolution. He had been thinking about possibilities for improving the coal-hungry Newcomen engine, then the best available, which lost huge amounts of heat every cycle through the successive heating and cooling of the cylinder walls:
It was in the Green of Glasgow. I had gone to take a walk on a fine Sabbath afternoon…I was thinking upon the engine at the time…when the idea came into my mind, that as steam was an elastic body it would rush into a vacuum, and if a communication was made between the cylinder and an exhausted vessel, it would rush into it, and might be there condensed without cooling the cylinder.
But in addition to the many details involved in reducing this idea to practice, there was another problem inhibiting the creation of reasonably-efficient steam engines. The boring of the cylinders…even when the best tools and the highest skills of the day were applied…was so imprecise that considerable quantities of steam escaped around the piston, greatly lowering the overall efficiency of the engine.
Enter Matthew Boulton, who became Watt’s partner, and John Wilkinson, a Boulton associate and foundry operator who was obsessed with all things cast iron. Boulton and Wilkinson wanted a steam engine to provide the blast for Wilkinson’s foundry, and they wanted an engine with especially-large cylinders…which made the problem of tight cylinder/piston fit even harder to solve.
Wilkinson saw that the technology he had already developed for the very precise boring of cannon could, with some modifications, be adapted to the boring of steam engine cylinders. Amid “searing heat and grinding din,” he achieved a cylinder, four feet in diameter, which “does not err the thickness of an old shilling at any part.” With the combination of Watt’s separate condenser and Wilkinson’s improved boring process, the steam engine was ready for the starring role that it was to hold for the next century and beyond.
Key point: It wasn’t only the design of the improved steam engine that mattered, but also the process for making it.
What if Britain had been offshoring its foundry operations, with their “searing heat and grinding din” to another country? Spain, let’s say. Given the importance of the interaction between the design talent and the manufacturing talent, would the improved steam engine have been developed in the 1770s timeframe at all? And whenever it had been developed, to which individuals and countries would the financial benefits of steam power have accrued?
The present-day parallel is the relationship between microchip designers and microchip manufacturing facilities…foundries, as they are actually called.
More about John Wilkinson, here.
Continuing Supply Chain Issues
I have been sharing supply chain woe stories over the past year plus, ever since the Chinese commie crud took over the headlines. I work in the world of industrial distribution.
Many of those supply chain issues remain to this very day, and some are getting worse. I have been in the industry for 35 years (HVAC distribution specifically, a subset of industrial distribution) and with a mature industry such as the one I am in, supply chain always had ebbs and flows, however these were easily predictable and looked like a very shallow sine wave. Over the past year and continuing to today, the supply chain is very spiky and extremely difficult to navigate.
Disasters such as the Suez Canal closure and plants getting damaged in Texas over the Winter added to an already miserable time. Many businesses are opening back up and demand is surging as equipment that was previously mothballed or otherwise inoperative is coming online (and breaking). We continue to have transportation issues with LTL (for those who don’t know, LTL stands for Less Than Load, or semi trailers that are making deliveries of many skids of product to different locations rather than a straight shot to one location) being a disaster right now. Labor is a problem as many that were laid off have either moved to other jobs, or simply refuse to come back to work due to overly generous federal and state unemployment benefits.
The whole enchilada is quite the mess. Oddly, when I go to work in the morning I am resigned at this point to just saying to myself “I wonder what insane thing I will have to deal with today” and just put my head down and deal with it. When you get used to adversity things don’t bother you as much, I suppose.
I made the decision to never cancel any orders and simply take on more inventory. This hurts in the short term as cash flow and inventory turns are adversely impacted, but mission number one is to smooth out these spiky curves to our customers, so they can continue to make money – it needs to be my job to bear the brunt of this and to make it virtually unnoticed for our contractors. It remains quite the challenge. There will be major issues this Summer with imported equipment such as ductless mini splits, window airs and dehumidifiers imported from over there due to the persistent port delays on the West Coast. These issues are already happening. As hard as I am trying, I can’t get every product for every customer in these conditions. Most have been understanding. If they aren’t, well, I can’t unload the containers so….
Here is an interesting story about a different industry, flowers. I always take my wife out to a nice brunch for Mother’s Day. In addition, I always get her a corsage with three spray roses, the white ones with the red tips. I called the florist to order it up yesterday and the person on the other end laughed and said that they hadn’t seen spray roses in a year. In fact, when I go to pick up my corsage, they couldn’t even tell me what type of flower it would be. The shipment of flowers shows up and they have to make do with what shows up. She said that it was probable that I could get a single white rose but no guarantees. I told her that I could completely relate as I have been living this hell for a while too. She was pleased to speak with someone who was sort of in the same boat and went on to tell me that the last year was full of enormous challenges in the flower industry – that a lot of flowers simply didn’t exist to purchase.
While that is an anecdote, it is still telling of how we will likely see supply chain issues for some time to come.
Thrift and the Virtue of Home Made
It amused me this week, to read of the list of professions which have proved historically to always provide a living of sorts to those who practice them; fine carpentry, construction carpentry, metalworking, innkeeping and I don’t know what-all. Seamstressing was not among them, which is a pity … but since it his historically been an almost exclusively female-practiced profession/hobby/amusement, perhaps it’s one of those things that we can really blame the patriarchal establishment for. Women could make a living, even if relatively a barely marginal one from sewing, although if you glommed onto a high-visible and high-value client who patronized you extravagantly, a certain degree of prosperity would be assured … but I think mostly that it was one of those things that women were expected to do anyway as part of keeping and maintaining a house, which brought the wages down for those exercising the skill professionally. Eh … never mind.
Random Observations From the World of Industrial Distribution
Things got kooky in my world last year, and they continue to be, well, interesting (I guess that is one word you could use – this is a family blog after all) this year. A few random notes for those who may be interested. For those who may not know, I own an HVAC distributor, which is a subset of industrial distribution.
We recently received an increase of 15% in sheet metal fittings. The manufacturer just announced that due to continued pressure on steel, there will be another 15-20% increase coming in 60 days.
This news about sheet metal fittings dovetails into some interesting news I have been hearing about new construction. Lumber and other materials are skyrocketing so fast that builders are going back to people who are building houses and redrawing up contracts and demanding more money. Banks aren’t appreciative. It’s ugly.
Cans are in short supply. We sell a boatload of aerosol based cleaners for everything from commercial cooking equipment to air conditioners to refrigeration coils – I have heard that there are problems in aluminum, and cans themselves as the sanitization industry is taking up much of the can consumption for cleaners and germicides.
One of the major HVAC equipment manufacturers that we represent announced a mid year price increase. I can only remember one other time this happened. It is rumored to be in the 8% range.
An ice machine manufacturer just announced a 10% price increase, then another 20% on top of that one month later.
There is a force majeure on one of the components that is used to make foam in a can – I think this is from the damage in Texas that was caused by the cold snap but I am not sure. This affects a lot of markets. I have heard that a refrigerator manufacturer is getting ready to idle production because they can’t get foam.
Industrial distribution is on allocation for PVC pipe and fittings.
Shipping woes worldwide continue. The Suez Canal thing didn’t help. Shipping costs are triple what they were last year.
I am getting daily bulletins from all of our vendors with these types of things. With copper, steel, plastics, silver and chemicals all having problems right now and at record prices, it is going to be another interesting year, to say the least.