So, You’re Finally Awake To America’s Inventory Problem

So, You’re Finally Awake To America’s Inventory Problem

It wasn't so long ago that the idea of "excess" anything seemed patently absurd. The post-pandemic macro reality is defined by shortages, after all. Shortages of raw materials, shortages of energy, shortages of goods and shortages of the labor needed to meet pent-up demand for services. But buried beneath tales of firms' desperate efforts to secure scarce "stuff" was the story of how that desperation led to double-ordering, overstocking and over-hiring. Last week, management teams at America's
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5 thoughts on “So, You’re Finally Awake To America’s Inventory Problem

  1. Unless there’s enough demand to absorb the inventory, it’ll have to be discounted.

    So, hum, can we expect prices of finished goods to come down aka core inflation to come down surprisingly fast in the second half of the year? I mean, it still won’t be “transitory” inflation as I had anticipated it in early 2021 so I’m still wrong about that but it is “transitory” inasmuch as the excess cash injected by fiscal largesse will have been digested without triggering a wage price spiral 70s style. Despite f%?# Putin and his invasion of Ukraine…

  2. Economics – the art/science we still haven’t figured out because we don’t understand human behavior. Supply demand curves are still nothing but wild often wrong guesses. The ultimate red herring is the rational consumer. Read the news and you are hard pressed to find a rational anybody. The classic Seinfeld ‘nobody knows what a balm’s gonna do’ could surely apply to humans as well as balms.

    1. Not only don’t we understand human behavior very well, we can’t understand human behavior the way we need to. In financial markets we like to aggregate information whenever possible to get a sense of the direction and magnitude of change. The trouble is, all investment decisions, including those made by algos, are made in a personal individual (machine) context intended to achieve certain explicit and implicit goals. There are many millions of investors, each with their own personal take and situational context, about which we who try to study markets, know nothing. Even if we think we know how an individual will behave in this or that situation, such conclusions are still correct only if the entire context is known. The failure to get a true sense of the financial markets or the economy is not something we can readily remediate because the collective results of individual behavior have their source in a black box whose contents are unknown.

  3. Over-ordering is not confined to consumer goods. I just read a recent (May 19) research piece on Cisco from UBS. They made an observation about over-ordering by that firm:

    “Elevated purchase commitments, a metric to monitor in light of shortages Given material supply chain constraints, most Networking and Hardware companies have increased purchase order commitment with partners to mitigate disruptions for customers.

    Roughly 12 months ago, Cisco materially increased purchase order commitments from roughly $4-$5 billion to over $12 billion in the January quarter. Although mgmt did not provide data for the April quarter (available in the pending 10Q) the company did note commitments were “up substantially in Q3.

    Importantly, prior to the April quarter, purchase order commitments were already roughly 370% of quarterly Product COGS, up from ~160% a year ago and ~130% of quarterly Product revenue, up from 54% a year ago.”

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