Rate Hikes, China & Covid, Discipline, Gordon Moore and Reader's Advice
March Madness
And what do we have so far? San Diego State in the Final Four! Go Aztecs!
It’s kind of fitting since the original Aztecs in Central America did play a game that involved a ball and a hoop, except the hoop was sideways. And sometimes players were executed; that’s what I call a technical foul.
But that’s not what this report is about. Let’s talk about the Fed Chief in the room.
Federal Reserve Rate Hike
The Federal Reserve raised their rate again. Not unexpected. There was some guessing as to whether they would, given the issues with some banks, but they continued on their track to cool the economy.
So they raised the rate at which banks borrow from them: The Fed Funds Rate.
That rate is now in the range of 4.75% to 5%. The actual rate on Friday was 4.83%.
Remember, this is the rate that banks pay to borrow from the Fed.
And now, thanks to the last couple of weeks, we are learning about one of the reasons they would borrow from the fed: when they don’t have enough cash to pay out depositors pulling their money out of the bank. That’s a liquidity problem.
Consequently, more banks are making sure they have the cash to pay out depositors – primarily uninsured ones – if they need to do so.
And of course, the Prime Rate is now 8%. So if you pay Prime + 2.00 on your business loan, you are paying 10%. Or on your Home Equity Line Of Credit - HELOC.
Many HELOCS are based on prime, some at prime -1, some at prime + 2.
That’s 7% to 10%. Makes your 30 year, 3.5% fixed rate look REALLY good.
Businesses and Consumers will think twice before they borrow, which is the whole point of the Fed raising rates to achieve a lower inflation rate. They want you to think twice before borrowing. So…
Businesses and people borrow less to purchase less.
Less inventory is purchased to produce the things that less people are buying.
Less employees are needed to make less of the things produced.
Less employees needed means less jobs required.
Less jobs means less people employed means less spending.
Less spending leads to less price increases.
And less price increases leads to less inflation.
Yes, the last seven lines were a literary stretch but I expect you got the idea.
If not, here you are: Higher interest rates slow down spending. At least it did in the past.
China and Covid
Well, as fast as it started, it’s over. Covid, that is, in China.
Once China started locking down in 2020, they really locked down, and they were the last to let up, and let up they have.
I bring this up because what happened in the US in 2022 is going to happen to China in 2023. Namely, over a billion people freed from their 3-year residential quarantine are going to have a lot of money to spend.
What is going to be the impact on the Chinese economy and perhaps by influence, the rest of the world?
I expect we’ll see come inflation over in Beijing and a lot more Chinese travelling abroad. Stay tuned.
The Pain of Discipline or the Pain of Regret
I received a text from a friend that included an audio recording from Dr. Kevin Elko. In it, Dr. Elko talks about the pain of discipline or the pain of regret.
Think about it.
The Pain of Discipline:
Making 20 customer calls/day instead of 15.
Staying late when everyone cuts out early because “they deserve it”.
Managing your customer deposits so that they are not at risk, even though you may not make as much revenue and your bonus may not be as big and your stock price may not be as high.
Those are examples of the pain of discipline.
The Pain of Regret:
Losing key customers because you failed to maintain regular contact with them; the pain of regretting not making all of those retention calls.
Losing your job when the company decides it needs to cut expenses; the pain of regretting cutting out early.
Having your bank taken over because you went after the revenue instead of safety and soundness, and the pain of the regret of having to explain to your employees that they no longer have jobs.
If the pain of regret is more than the pain of discipline – that will motivate you to NOT fail.
The minute the pain of discipline exceeds the pain of regret and the thought of “this isn’t worth it” enters your mind, your business will be an average performer AT BEST.
Heck, you may not even be around.
Be disciplined in your work no matter how painful it may seem to be, because if you are not disciplined, the pain of your regret will be exponentially higher than any pain you may have felt by being disciplined.
Who was Gordon Moore?
He was one of the founders of Intel, along with Robert Noyce; Andy Grove was employee #3.
Intel was derived from Integrated Electronics.
In 1965, he wrote an article that predicted the pace of miniaturization in computer chips and anticipated the development of home computers, smart wristwatches, automatic controls for cars and many other things. Why the predictions?
He stated that advances in engineering would double the capacity of computing power every year.
This was modified in 1975 to every two years.
This became known as Moore’s Law.
In his previous company, Fairchild Semiconductor once sold transistors for as much as $150 each. Now consider this:
In 2019, a typical Intel microprocessor contained five BILLION of them. This comes to a penny per 100,000 transistors.
That’s why your 75” OLED TV costs less than the 42” plasma purchased 20 years ago.
The founder of Intel and the creator of Moore’s Law passed away this month. He used his Intel shares to endow a foundation that managed $9 billion in assets and has disbursed more than $5 billion since its founding.
He was 94.
Moore’s Law is reaching the end of its reign but Mr. Moore never wanted it to be set in stone; he just said he had made a simple observation about a phase of industry activity that would be technically impossible to continue at some point, but he never stated when he thought that would happen.
“One thing I’ve learned – once you’ve made a successful prediction, avoid making another one!” he said in 2015.
Most economists seem to follow that adage.
Best Pieces of Advice
From the March 6 Russell Report – some of you wrote back with your best pieces of advice:
If you want to help others, you first need to be strong yourself.
Wake up every morning and try to know what you don’t know, then go find out who knows it.
Networking is the most powerful vehicle in building a business, you don’t have to know everything; you just need to find the people that do.
I think I have some pretty smart readers!
The First Quarter is in the books. Are you tracking to your plan/budget? If not, make adjustments. Sounds like a good topic for next week.
