Disorderly Markets–A Case Study
Thomas C Schleifer, Ph.D.
Contractors are used to managing in volatile markets that go up and down in predictable cycles. This post pandemic market, however, is not simply cyclical or volatile. It is disorderly. It veers from pillar to post without warning or logical cause and effect. First recession, then inflation, then recession again, and finally inflation. All this waffling and wobbling has occurred in the span of a little more than 2 years, and nobody really knows what’s going to happen next. It calls for a whole new look at management practice. We can no longer rely on the trusted instincts we learned in normal volatile markets.
A Disorderly Market
For a clear description of the current market disorder let’s look at a recent AP article. Associated Press, Washington, July 27, 2022
EXPERTS HAVING TROUBLE KNOWING WHAT TO EXPECT
The U.S. economy is caught in an awkward, painful place. A confusing one, too. Growth appears to be sputtering, home sales are tumbling, and economists warn of a potential recession ahead. But consumers are still spending, businesses keep posting profits and the economy keeps adding hundreds of thousands of jobs.
In the midst of it all, prices have accelerated to four-decade highs, and the Federal Reserve is desperately trying to douse the inflationary flames with higher interest rates. That’s making borrowing more expensive for households and businesses. The Fed hopes to pull off the triple axel of central banking: Slow the economy just enough to curb inflation without causing a recession. Many economists doubt the Fed can manage that feat, a so-called soft landing.
Surging inflation is most often a side effect of a red-hot economy, not the current tepid pace of growth. Today’s economic moment conjures dark memories of the 1970s, when scorching inflation co-existed, in a kind of toxic brew, with slow growth. It hatched an ugly new term: stagflation.
So, the Fed and economic forecasters are stuck in uncharted territory. They have no experience analyzing the economic damage from a global pandemic. The results so far have been humbling. They failed to anticipate the economy’s blazing recovery from the 2020 recession — or the raging inflation it unleashed.
Governments Managing in a Disorderly Market – A Case Study
- MANAGEMENT DECISION # 1 – As the COVID virus grew into a global pandemic, governments in the U.S., Europe, and China shut their workers in at home to stem the spread. This public health decision cratered the economy since both producers and consumers suspended economic activity.
- MGMT. DECISION #2 – The whispered word among government economists quickly became the dreaded R-word, “recession”. The government responded by printing $2.2 trillion and giving it away under the title, the CARES Act. This, of course, stimulated demand and warded off immediate recession fears. However, since most workers were still confined to their home, this did nothing to stimulate supply and soon prices began to rise. (People confined to their homes bought Pelotons, MacBooks, Netflix, Omaha steaks, and Old Fitzgerald).
- MGMT. DECISION #3 – The only word more feared by government economists than the R-word (recession) is the I-word (inflation). With demand artificially stimulated and supply artificially constrained by COVID confinement, inflation was ignited. The only thing to do was to declare that the Pandemic was over and send everybody back to work to resume production (supply) and ward off inflation by attempting to put the economy back into supply/demand balance.
- MGMT. DECISION # 4 – More and more people became deathly ill as we all emerged prematurely from COVID confinement. People then lost faith in government COVID pronouncements and decided not to go back to work. They still had plenty of money saved up from “stimulus”, so they just stopped working and tried to wait COVID out on their own schedule. Many took early retirement, like thousands of truck drivers who never returned to work, thereby freezing up the supply chain at ports of entry where there were not enough trucks to haul the goods away.
- MGMT. DECISION #5 – China, a country not given to second-guessing the government, locked down whole cities to prevent the renewed COVID spread and stopped producing the much-needed chips that run the modern world. Prices on all manufactured goods began to rise as manufacturing was interrupted and supplies became scarce.
- MGMT. DECISION #6 – Inflation began to “run-away” so the Fed (following its mandate) got busy raising interest rates. A quarter of a point here and a half a point there made some people nervous but did little to tamp down supply restricted inflation.
- MGMT. DECISION #7 – It dawned on Russia that this might be a good time to steal back the Ukraine while the West was otherwise occupied. Energy supplies were immediately curbed by both user (Europe, in protest) and supplier (Russia, in retribution) and the world-wide energy markets shot up immediately. (Energy inflation is particularly punitive as it cuts across all economic segments).
- MGMT. DECISION #8 – This made the Fed mad, and it threatened a three-quarter point increase. This made investors nervous, and markets started to look downright recessionary. Each decision made things worse!
Tune In Next Week
Management responding reflexively to chaos and disorder never ends well. Next week we’ll look at how the construction industry is responding to the post-pandemic disorderly market, and how we might reduce risk in chaos by making novel, rather than reflexive, management decisions.
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