Week XI - GDP and PCE, Oil & Hormuz, Tariff Update, Gas, Norms, and Joseph Contreras Being Prepared
The Economy Looking Forward
In this section, I am usually looking back to let you know what has happened, and if I am confident enough, to tell you what that may mean. Let’s start briefly with this past week.
Thing #1: The gross domestic product, the nation’s paycheck was originally thought to have grown 1.4% in the 4th quarter, right where expectations were at the time. Well, that wasn’t quite the case. It only grew 0.7%.
Four areas were revised downward. They were:
Consumer spending, exports, government spending and business investment were all initially softer than originally thought.
Basically, the government shutdown, and tariffs are finally catching up to the economy.
But it still grew 2.1% for the year, with that growth driven by consumer spending and business investment.
And that’s better than a poke in the eye with a sharp stick.
Thing #2: The PCE – Personal Consumption Expenditures index, came in pretty much as expected.
Year over year, inflation, per the PCE, was 2.8%, down from the previous month of 2.9%.
Core PCE was 3.1%, also in line with expectations and the same as the month before.
Not in line with the 2% target the Fed has in mind.
But now, the price of oil is going to be thrown in the mix, and that is a significant ingredient.
With fuel prices increasing, it’s a question of how long they stay increased to determine how they impact the national and world economy.
With increased fuel costs at the gas pump, that reduces the household cash available for spending on other items.
Reduced spending leads to reduced manufacturing and services, which leads to reduced employment in those manufacturing and services.
If the Strait of Hormuz stays essentially closed much past April, the impact will take longer to reverse.
It’s a wait-and-see sort of thing, but you'd better have a plan for a significant rise in your company’s fuel costs, at least for the short term.
In the meantime, the Fed will be watching the job numbers, not so much the inflation numbers, to make sure the economy doesn’t cool too much.
Because if this goes on long enough, GDP could go negative, and then people will be saying the R word.
Speaking of Hormuz…
The Strait of Hormuz is the only way in or out of the Persian Gulf.
By definition, a strait is a geographical term for a narrow passage of water connecting two large bodies of water. In this case, the Persian Gulf on the west side (the source of oil) and the Gulf of Oman on the east side (where it goes to get delivered). But it has to pass through the Strait.
How narrow? About 24 miles narrow.
For perspective, I can see Los Angeles from my freeway on-ramp, and that is 35 miles away.
Basically, if you are standing on the coast of Iran in the north, you can look across the Strait and see the shore of the United Arab Emirates.
And you can see every ship that is passing through it. That makes each one a nice target for small (11 feet long, 8 feet wide), hard-to-detect one-way drones travelling at 125 mph coming from the north side of the waterway.
Well, about 20% of the world’s liquified natural gas and 25% of seaborne oil trade comes from the Persian Gulf. That’s 21,000,000 barrels a day.
And it goes through the Strait of Hormuz out to the Gulf of Oman.
When you have 20% less of a thing, that raises the demand (i.e. the price) of the other 80%.
As long as oil and LNG tankers cannot pass through the Strait, that oil goes nowhere.
Another wait-and-see sort of thing.
Thus concludes your geography lesson for the week. Now, on to some things you may find more useful, because I have yet to talk to anyone who enjoyed their geography classes.
The Tariff is in the Details
Prior to the Iran thing, tariffs were in the news. That seems like two months ago. Sigh.
So, let’s go back to that.
If your business is/was subject to paying tariffs, there may be some things you should know. Like how the tariffs are actually calculated.
Most companies assume tariffs are based on the invoice price of the imported product.
That seems logical. But…
Customs rules often look instead at the “transaction value” of the product itself.
And what is that?
You may have to carve out many costs that may not have been carved out, like shipping and freight, packaging, engineering or design services, licensing fees, and installation or post-production services.
When those costs are separated properly, the value subject to tariff can be lower, which reduces the tariff owed.
Also, it’s a stretch, but if you are buying through a distributor, you can ask them what their price was from the original manufacturer. Of course, they are then telling you what their markup is.
At any rate, it’s probably worth a conversation with your customs broker.
Under the heading of Who Thinks of This Stuff?
There is a Fitbit (of sorts) to track flatulence.
Evidently, 40% of U.S. adults are challenged in that regard.
I thought science had gone far enough by installing a tracker in the toilet to monitor… whatever it monitors, but this goes the extra mile.
This device is planted in your underwear, and evidently, it tracks hydrogen.
Isn’t that flammable? Like Hindenburg flammable?
I guess it’s looking for digestive issues.
One tester had 175 measurements in a single day.
I’m guessing he lives by himself, works remotely, and has a limited number of friends.
And a fire extinguisher.
A Rose by Any Other Name
Sometimes the best way to break into a mature industry is to rebrand, or um, reposition the product.
That’s what Joshua Katz and Carli Roth did. What product?
Hemorrhoid cream. Go figure. Do you sense a theme this week?
In the last two months, they have risen to #3 in nonpaid search presence, behind Preparation H and Dr. Butler’s. How?
Social media, podcasts, and medfluencers. And repackaging/rebranding the product with the goal of taking the stigma off of what it medicates.
They have helpful videos that show how to apply the cream, or so I’m told.
So, Norms isn’t the innovator. It didn’t create the market. It doesn’t lead the category. It’s rebranding the market.
The MBA types call them a ‘follower brand’, a late-entrant competitor operating in the maturity stage of a saturated market.
Even mature markets reward energy over entitlement.
Is there a way for you to re-market your company or product to catch your competition off guard?
Something to think about.
Who is Joseph Contreras?
He was born in the United States to a Cuban father and a Brazilian mother.
He pitches – yes, we are talking baseball – for the Blessed Trinity Catholic High School in the Atlanta suburbs.
And he is a 17-year-old senior.
He is on the roster of the Brazilian national baseball team and is playing in the World Baseball Championship that is currently being contested.
He knew he would be facing Team USA, and I don’t mean Team High School USA, I mean fellows like Kyle Schwarber, Bryce Harper and Aaron Judge, a three time MVP in major league baseball.
So he prepared. His catcher told him three weeks before the game that the best way to get Mr. Judge out was to keep the ball high and away and then pound him on the inside.
When Judge stepped in the batter's box with the bases loaded and one out, Contreras felt ready. I’m sure Judge did too; I mean, what 17-year-old is going to get him out?
On a 1-ball, 1-strike count, he fired a 94-mph fastball moving in sharply. Judge was jammed and rolled a slow grounder to third into a double-play, shattering his bat in the process. And just like that, the inning was over. Why?
Because Contreras was prepared.
Which leads me to the quote of the week, one I have mentioned before but bears repeating:
It’s better to be prepared and not have an opportunity than to have an opportunity and not be prepared.
This was a long report, but I felt it was worth it for both the economic breakdown and the fun first-meeting, ice-breaker kind of stories, although I dare you to bring up the flatulence-measuring Fitbit in a first meeting.
Preparation is a fundamental ingredient of success, and the better prepared you are, the better chance you have of accomplishing what you are preparing for. To have the opportunity present itself and then you blow it, is amateurish. Professional athletes prepare every day for opportunities that they may never get, but that is the point of practice; when the opportunity is made or encountered, you have the best chance of capitalizing on it.
As every Eagle Scout knows: Be Prepared.
