Scenario Planning post Pandemic – What About the Dollar?

Scenario Planning post Pandemic – What About the Dollar?

Americans take it for granted that all currencies are measured against the US Dollar. It’s been that way since WWII, so they just expect it will always be that way. But, things have a way of changing.

In this pandemic the US Federal Reserve is printing money as fast as possible to help prop up the economy. That’s better than the alternative, which would be another Great Depression. But, eventually we have to create value via goods and services to put value in those dollars, or they will be worth a whole lot less. In other words, if we don’t change our fiscal policy to improve production of goods and services, the US Dollar will fall in value – maybe a lot – and it could even lose its status as the world’s “reserve currency.”

Back in 2008,  I wrote that there was no inherent reason the US Dollar would be the benchmark for all currencies. It gained that position as the dominant economy after WWII. American’s like to assume superiority, and therefore the US Dollar will always reign supreme. But as I also said in 2008, that’s an assumption that can easily be changed – especially regarding currencies. Lots of factors could cause the US Dollar to suddenly lose a whole lot of value – creating inflation rates that make the 1980s (>18%/year) seem tame.

Since WWII, a lot has happened. Economies in Europe grouped into the Economic Union (EU) making the Euro more powerful. And the economy of China has grown enormously. (China’s economy will be bigger than the USA economy sometime in 2020 or 2021.)  Simultaneously, isolationism has hurt growth in America, and caused the EU to lose the UK. What’s rapidly happening is a shift in economic power away from the US and Europe to China.

Additionally, the largest holder of US debt is China. As I pointed out in 2009, this policy of supporting US debt has aided China’s desire to grow. But, as China becomes larger it will no longer need to prop up the US Dollar by purchasing Treasuries. Once bigger than the USA, China could demand that its trade be in Yuan and the value of the dollar could fall very far, very fast.

China has developed enormous inroads into the global economy, across dozens of countries, with its “Belt and Road Initiative” created in 2013. China has quietly become more important to the economy of 70 countries than the USA.  Instead of supplying countries guns, China gave them infrastructure and facilities – and jobs – and economic growth.  In most of these countries, the USA is more feared than adored, while the Chinese are seen as a very good friend.  Meanwhile, the USA “put America first” policies, including trade wars and social justice, have isolated the USA from not only rivals but its global friends – including Europe (threats to kill NATO, for example.)value of money is declining

Now, we are in a pandemic.  The Chinese are very determined to control its impact.  Meanwhile the USA, UK and many other democracies are being far less careful.  If this plays out with a full pandemic recession in the USA, China could stop buying American bonds and the value of the dollar could disintegrate in weeks.  Disintegrate as in $1 could be worth 1 penny.  It would take bushels of dollars to buy imported goods in stores.

In this election year, the biggest concern is, do those leading the USA realize the peril? Do business leaders?  Do you?

Harley Davidson Has Far Worse Problems Than President Trump or EU Tariffs

Harley Davidson Has Far Worse Problems Than President Trump or EU Tariffs

On Monday, Harley Davidson, America’s leading manufacturer of motorcycles, announced it was going to open a plant in Europe.

Ostensibly this is to counter tariffs the EU will be imposing on its products if imported from the USA. President Trump reacted vociferously on Tuesday, threatening much bigger taxes on Harley if it brings to the USA any parts or motorcycles from its offshore plants in Brazil, Australia, India or Thailand. He also intimated that Harley Davidson was likely to collapse.

Lots of heat, not much light. The issues for Harley Davidson are far worse than an EU tariff.

Harley Davidson has about 1/3 of the US motorcycle market. But in “heavy motorcycles,” those big bikes that are heavier and generally considered for longer riding, Harley has half the market. Which sounds great, until you realize that until the 1970s, Harley had 100% of that market. Ever since then, Harley has been losing share – to imports and to its domestic competitor Polaris.

It was 2006 when I first wrote about Harley Davidson’s big demographic problem. Basically, its customers were all aging. Younger people were buying other motorcycles, so the “core” Harley customer was getting older every year. From mid-30s in the 1980s, by the year 2000 the average buyer was well into their mid-40s. In 2007, I pointed out that Harley had made a stab at changing this dynamic by introducing a new motorcycle with an engine made by Porsche, and a far more modern design (the V-Rod.) But Harley wasn’t committed to building a new customer base, so when dealers complained that the V-Rod “wasn’t really a Harley” the company backed off the marketing and went back to all its old ways of doing business.

Simultaneously, Harley Davidson motorcycle prices were rising faster than inflation, while Japanese manufacturers were not. Thus, as I also pointed out in 2007, it was struggling to maintain market share. Slower sales caused a lay-off that year, and despite the brand driving huge sales of after-market products like jackets and T-shirts, which had grown as big as bike sales, it was unclear how Harley would slow the aging of its customer base and find new, younger buyers. Harley simply eschewed the trend toward selling smaller, lighter, cheaper bikes that had more appeal to more people – and in more markets.

Globally, the situation is far more bleak than the USA. America has one of the lowest motorcycle ridership percentages on the globe. Americans love cars. But in more congested countries like across Europe or Japan and China, and in much poorer countries like India, Korea, and across South America motorcycles are more popular than automobiles. And in those countries Harley has done poorly. Because Harley doesn’t even have the smaller 100cc,200cc, 400cc and 600cc bikes that dominate the market. For example, in 2006 (I know, old, but best data I could find) Harley Davidson sold 349,200 bikes globally. Honda sold 10.3 million. Yamaha sold 4.4 million. Even Suzuki sold 3.1 million – or 10 times Harley’s production.

But, being as fair as possible, let’s focus on Europe – where the new Harley plant is to be built. And let’s look exclusively at “heavy motorcycles” (thus excluding the huge market in which Harley has no products.) In 2006, Harley was 6th in market share. BMW 16%, Honda 15%, Yamaha 15%, Suzuki 15%, Kawasaki 11% and Harley Davidson 9%. Wow, that is simply terrible.

Clearly, Harley has already become marginalized globally. Outside the USA, Harley isn’t even relevant. The Japanese and Germans have been much more successful everywhere outside the USA, and every one of those other markets is bigger than the USA. Harley was simply relying on its core product (big bikes) in its core market (USA) and seriously failing everywhere else.

Oh, but even that story isn’t as good as it sounds. Because in the USA sales of Harley motorcycles has been declining for a decade! Experts estimate that every year which passes, Harley’s customer base ages by 6 months. The average rider age is now well into their 50s. Since Q3, 2014 Harley’s sales growth has been negative! In Q2 and Q3 2017 sales declines were almost 10%/quarter!

As its customer demographic keeps working against it, new customers for big bikes are buying BMWs from Germany – and Victory and Indian motorcycles made by Polaris, out of Minnesota (Polaris discontinued the Victory brand end of 2017.) BMW sales have increased for 7 straight quarters, and their European sales are growing stronger than ever – directly in opposition to Harley’s sales problems. Every quarter Indian is growing at 16-20%, taking all of its sales out of Harley Davidson USA share.

Going back to my 2016 column, when I predicted Harley was in for a hard time. Shares hit an all-time high in 2006 of $75. They have never regained that valuation. They plummeted during the Great Recession, but bailout funds from Berkshire Hathaway and the US government saved Harley from bankruptcy. Shares made it back to $70 by 2014, but fell back to $40 by 2016. Now they are trading around $40. Simply put, as much as people love to talk about the Harley brand, the company is rapidly becoming irrelevant. It is losing share in all markets, and struggling to find new customers for a product that is out-of-date, and sells almost exclusively in one market. Its move to manufacture in Europe is primarily a Hail-Mary pass to find new sales, paid for by corporate tax cuts in the USA and tariff tax avoidance in Europe.

But it won’t likely matter. Like I said in 2006, Harley Davidson is a no-growth story, and that’s not a story where anyone should invest.

GE Kicked Off the Dow (DJIA) – The Worst Board of Directors in America

GE Kicked Off the Dow (DJIA) – The Worst Board of Directors in America

An American epoch has ended. General Electric was part of the first ever Dow Jones Index in 1896. When the Dow Jones Industrial Average was formed in 1907 GE was a participant. GE has been the only company to remain on the index. All other original companies long ago completely disappeared.

GE did so well because its leadership had been able to constantly change the company to keep it relevant, and growing. During the century prior to hiring Jeff Immelt as CEO GE went from light bulbs to generating electricity and making all kinds of electrical infrastructure equipment, electric locomotives, mainframe computers, medical equipment, computer services, financial services, entertainment…. The list is very long.

Although not all GE CEOs were great, the Board was able to place CEOs in office who could sense market shifts and make good decisions. GE leadership thoughtfully analyzed markets, and made investment decisions to sell businesses that were not growing. And they made investment decisions to invest in trends which created growth. One of the best of these was Jack Welch, who developed the nickname “Neutron Jack” for his willingness to jettison businesses that were not growing and leading their industry, while willingly investing in entirely new growth markets where trends showed high rates of return like financial services and entertainment – wildly “non-industrial” markets.

But CEO Immelt was completely tone-deaf to the outside world. He was wholly unable to understand how to lead a team that could make good investments. Instead under Immelt’s leadership GE over-invested in historical products where they were losing advantage but trying to “keep up.” Selling businesses that were growing but faced stiff competition, rather than investing in growth. And refusing to invest in new external growth opportunities that could keep revenues increasing – and drive a higher GE market capitalization.

All the way back in 2009 I pointed out that GE was in a Growth Stall, and had only a 7% chance of consistently growing at 2%. I warned investors. At the time I said GE had to go all-out on a growth strategy, or things would turn ugly. But a lot of investors, employees – and apparently the Board of Directors – were ready to blame the Growth Stall on the economy. And blame it on Welch, who had been gone for 8 years. And say GE was lucky Immelt saved the company from bankruptcy with a loan from Warren Buffett’s Berkshire Hathaway.

Say what? Saved the company? Why did Immelt, and the Board, let GE get into such terrible shape? It was time to replace the CEO, not double down on his failed strategy.

Six years ago, May, 2012, I published in Forbes “5 CEOs that Should Have Already Been Fired.” At the time I said Immelt was the 4th worst CEO in America. I cited the 2009 column, and pointed out things really weren’t any better in 2012 than in 2009. That column had well over 1million reads. There was no way GE’s board was not aware of the column, and the realization that Immelt was a horrible CEO.

The Board of #3 (Walmart) fired Mike Duke. And the Board of #1 (Microsoft) fired Steve Ballmer. There is no real board at #2 Sears (which will file bankruptcy soon enough) because the CEO is also the largest shareholder (via his hedge fund) and he controls all board decisions. He should have fired himself, but had too much ego. But the board of GE – well it did nothing. Even though GE almost went bankrupt under Immelt, and its value was being destroyed quarter after quarter it left him in place.

I revisited the performance of these five CEOs and their companies in August, 2014 and reminded hundreds of thousands of readers – which I’m sure included GE’s Board of Directors – that company revenues had declined every year since 2009. And this string of failures had caused the company’s value to decline by 2/3. Yet, the board did nothing to replace this horrific CEO.

By March, 2017 I was so exasperated I finally titled my column “GE Needs a New Strategy and a New CEO.” Again, I detailed all the things that went wrong. It took 7 more months before the Board pushed Immelt out. But the new CEO failed to offer a better strategy, continuing to promote the notion of selling businesses to raise cash to “fix” the broken businesses – without identifying any growth strategy at all.

The only thing that can “fix” GE – save it from being dismembered and sold off – is a growth strategy. I offered how the new CEO could undertake this effort in October, 2017. But the Board, still wholly incompetent, still isn’t listening. Nobody should be surprised that GE is now removed from the Dow, and the new CEO is clearly without a clue how to find a path back to relevancy.

Too bad for investors, employees, suppliers, customers and the communities where the GE businesses reside. This didn’t have to happen. But due to an incompetent Board of Directors, which did nothing to properly govern an incompetent CEO, it did. And there’s little doubt it won’t be long before GE meets the same end as DuPont.

My 2017 Wish: Less Talk, More Doing

2016 was an election year, and Americans were inundated with talk. Unfortunately, a lot of it was pure hubris.

President-elect Donald Trump inspired people to “make America great again.” In doing so, he developed the theme that the reason America wasn’t so great had to do with too much work being done offshore, rather than onshore. And that there were far too many immigrants, which harmed the economy and the country. This became rather popular with a significant voting block, led in particular by white males – and within that group those lacking higher education. These people expressed, with their votes and with their words at many rallies, that they were economically depressed by America’s policies allowing work to be completed by people not born in America.

Source: Metacool

Source: With permission of Metacool

Oh, if it was only so simple.

Any time something is manufactured offshore there is a cost to supply the raw materials, often the equipment, and frequently the working capital.  These are added costs, not incurred by U.S. manufacturing.  The reason manufacturing jobs went offshore had everything to do with (1) Americans unwilling to work at jobs for the pay offered, and (2) an unwillingness for Americans to invest in their skill sets so they could do the work.

 In short, don’t blame foreign countries or immigrants. Although they are easy targets. Instead, those Americans should blame themselves for not knuckling down and working harder to make themselves more competitive.

Since the 1980s America has lost some five million manufacturing jobs (from about 17.5 million to 12.5million). That sounds terrible, until you realize that the amount of goods manufactured in America is near an all-time.  While it may sound backwards, the honest truth is that automation has greatly improved the output of plant and equipment with less labor.  America isn’t making less stuff.  Productivity more than doubled between 1985 and 2009. As the Great Recession has abated, output is again back to all-time highs. It just doesn’t take nearly as many people as it once did.

 But it does take much smarter, better trained people.

Manufacturing today isn’t about sweat shops. Not in the USA, and not in Mexico, China or India. The plants in all these countries are equally high-tech, sophisticated and automated. Just look at the images of workers at the Chinese Foxconn plants, or the Mexican auto parts plants, and you’ll see something that could just as easily be in the USA. The reality is that those plants are in those countries because the workers in those countries train themselves to be very productive, and they make great products at very high quality.

And don’t blame regulations and unions for creating offshoring.

For almost all U.S. companies, their offshore plants comply with the U.S. regulations. Most require the same level of safety and working conditions globally.

Union membership has been declining for 75 years. Fifty years ago one in three workers was in a union.  Today, it’s less than one in 10. In 2015 the Bureau of Labor reported that only 6.7% of private sector workers were unionized – an all time modern era low. Unions are almost unimportant today. It hasn’t been union obstructionism that has driven jobs oversees – it’s largely been an inability to hire qualified workers.

Much was made the last few years of a lower labor participation rate. Many Trump followers said that the Obama administration was failing to create jobs, so people stayed home. But that simply was not true. While the economy was recovering, the unemployment rate fell to its lowest level since the super-heated economy of 2001. To find this low level of unemployment prior to that you have to go all the way back to 1970!

There are plenty of jobs. The issue is getting people trained to do the work.

And here is the real rub. You can’t sit home complaining and moping, you have to study hard and train.  Before today’s level of computerization and automation, when work was a lot more manual, it didn’t matter how much education you had, nor how well you could read and do math and science. But today, work is not manual. It takes minimal manual skill to operate equipment. Today it takes computer programming skills, engineering skills and math skills.

Trump appealed to those who have let their skills lapse, and shown an unwillingness to study hard to make themselves more employable.  He took the Lake Wobegon approach of claiming that U.S. workers were like the people of that famous fictional city – “where all the women are strong, all the men are good looking and all the children are above average.” As much as these “angry white men” who voted for Trump would like to think they are smarter and better trained than immigrants and offshore workers – that just is not true. The problem is not “them.” To the extent there is an American problem, it is U.S.

The Organization for Economic Cooperation and Development (OECD) does an annual Program for International Student Assessment (PISA) study. This looks at test scores across the world to see where students fair best. Of course, economically displaced Americans are sure that Americans are at the top of these test results – because it is easy to assume so.

Americans are in the bottom half of the planet’s educational performance .

The 2015 results are here, and in reading, science and math America doesn’t even crack the top 10. In fact, the poorest 10% of Vietnamese students did better than the average American teen. In all three categories, the USA scored below the global average. American’s are not above average – they are now below average.

American’s have simply gotten lazy. For far too long, when somebody did poorly Americans have blamed the teacher, blamed the test, blamed the “system” — blamed everyone and everything except the person themselves.  It has become unacceptable to tell someone they are doing a below-average job. It is unacceptable to tell someone their skills don’t match up to the needs of the job. Instead, we simply give out trophies for participation to everyone, imply that everyone is good, nobody is bad and let mediocrity blossom.

Instead of forcing people to work hard – really hard – and expecting that each and every person will work hard to compete in a global economy – just to keep up – the expectation has developed that hard work is not necessary, and everyone should do really well. Instead of thinking that hard mental effort, ongoing education and additional training are the minimal acceptable standards to maintaining a job, it is expected that high paying jobs should just be there for everyone – even if they lack the skills to perform.  American no longer want to admit that someone is being outperformed.

In 1988 Nike set the company on a growth trajectory with their trademarked phrase “Just Do It.” Just get up off the couch and do it. Quit complaining about being out of shape – just do it.

And that’s my wish for America in 2017. Quit blaming foreigners for working harder at school than we do. Quit blaming immigrants for being better trained, and harder working, than Americans. Quit pretending like the problem with the labor participation rate is some kind of problem created by the government. Quit finger-pointing and blaming someone else for being better than us.

Instead, get up off the couch and do it. Go back to school and study hard – harder than the competition.  Grades matter. Learn geometry, trigonometry and calculus so you can make things – or operate equipment that makes things. Gain some engineering skills so you can learn to program, in order to improve productivity with a mobile device – or even a personal computer. Become facile in more than one language so you can operate and compete in a global economy.

Hey Americans, instead of blaming everyone else for workers lacking a job, or a higher income, quit talking about the problems. If you want to “make America great again” quit complaining and just do it.