Every now and then, an infrequent purchase comes up. This week a power supply on one of our desktop computers died with a big popping noise. It’s an easy swap, 4 screws and a couple of snap connecters – a less than 10 minute process. I ordered one at the end of the day and it arrived at lunchtime the next day.
The new one cost $31.99. In my head that was considerably more than the last one we had purchased. I was right. The last time we purchased one, it was $24.99 in January 2019. That’s an increase of 28% in 4.5 years. The first two of those years were in a lower inflation period. It works out to an average annual increase of 5.6% – likely much more since 2021 started. This is a commodity item that hasn’t changed (same wattage, and certainly no new patents apply).
Purchases like this make it clear that inflation is running hotter than the official statistics the government puts in front of us. It seems clear that for the foreseeable future, we are going to have to adjust to the new normal. This is a reminder to adjust inflation assumptions in your Financial Planning.
The Bottom Line: Incorporate the real world in your Financial Planning.
For quite some time, I have been pontificating two things – well, OK more than two things, but these two came together for me today.
I believe that investing in non-publicly traded startup and early stage companies offers the potential for returns that can dwarf the returns one can reasonably expect by investing in public companies. There are many reasons for this, but the reality is, by the time the company goes public, via an IPO, the new investors are buying out the earlier funders and founders. In other words they are selling to you. What does that tell you? These investments come with a much higher risk – requiring much more homework and verification, and statistically the failure rate is higher. It’s an arena where nobody (except maybe founders) should put all their eggs in one basket. However, all it takes is one real home run and the duds are long forgotten.
Besides the higher risk, there is an additional caveat. Most people cannot legally invest in them. According to the SEC, you must be “accredited”. You don’t have to pass a test, just have a high level of income and/or assets. In other words the rich get richer.
I have also been a fan of AI Robotics. AI is promising us the moon. Most of it on a practical basis is still a bunch of hype and truly useful applications to date are far and few between. I guess if you have a HS term paper due tomorrow, it could be helpful. The ability to produce smart robots is one of the areas that hold short term economic promise. A robot that can efficiently do complex non repetitive tasks in a varying environment has real value. Most of the companies developing and producing these are relative cottage industries.
Today I stumbled across a company called Nala Robotics. I did some digging. They are based in Illinois and make a series of fast food kitchen robots. You can see for yourself here; www.nalarobotics.com The videos on their site are really cool. I could only find information on one round of funding for $1.9 million, although I suspect there must have been more than that.
It’s hard to cull information on small closely held companies without really digging. Since, I am not doing this on behalf of a client, I did a quick search. Pricing info was vague, but they offer one of their products “The Wingman”, a robotic fryolator for rent at $2,999 per month. If you do the math, that’s less than what it would cost in salary, taxes, benefits, and workman’s comp for one month of a $15/hr. minimum wage fry guy being available for all the hours a location is open. I would guess there are other efficiencies. No sick days. The ability to react instantly to demand as food is being ordered. It even automatically cleans itself.
It’s hard to tell if Nala will be the grand slam home run in this field. I would guess the makers of these machines that get the order from McDonalds and the other biggies will go to the head of the class. It does seem that we are on the precipice of an explosion in this genre and many other AI robots.
Earlier this week, I attended the Exchange Conference in Miami Beach. One of the speakers was Jeremy Grantham, of GMO, a well-respected, multi decade institutional investor.
He went to great lengths to point out that while the equity markets in America are overvalued by many historical measures, we have the best economy on the block. In fact, he noted that since 2015 the rest of the industrialized world has not participated in our economic boom.
He didn’t seem to be able to come up with a reason why. For instance, they also had low interest rates and went on a Covid fueled fiscal spending spree. Yet they almost all have slowed down in recent years. Why not us too?
It made me think. What is different here? After pondering a bit, I now have a theory. The Tax Cuts and Jobs Act (TCJA) took effect in 2018 and brought the corporate income tax rates down from the mid to upper 30’s to 21%. It is a huge cut by percentage.
It did a few things. It brought our corporate tax rates down to levels comparable to most of the rest of the developed world. No longer would our multinational companies have to keep profits earned overseas, offshore to avoid more taxation upon repatriating them, or be at a disadvantage competing with foreign companies. It increased profits and Return on Equity for many, so they could raise additional capital at more favorable terms. Most crucially, it created more cash and retained earnings that could be reinvested in growth, development, and technology. This created jobs, efficiency and growth.
Was this the catalyst? Did companies largely divert spending from Uncle Sam to investing in their own growth, productivity, and efficiency? This investment has been despite higher interest rates. Efficiency equals economic growth.
The overall earnings of the S&P 500 firms have moved up some 50%+ since the TCJA took effect. This has meant more economic growth, more jobs, and more innovation, such as AI. This is the real trickle down. Every American benefits.
The Bottom Line: Capital serves us better in the private sector than in government hands.
I don’t have a crystal ball, but being well into my 4th decade of helping people navigate the financial world, I like to think I have a good feel for what might be coming down the road.
We all know the pandemic will mitigate and end in the coming months, but what will be left it its wake? And what is the new normal? Let’s discuss some of what we might see and encounter.
As the economy fully reopens and people stop sheltering, there will be changes. Some will be more temporary and some will be permanent.
