What caused all the supply chain bottlenecks? Modern finance with its obsession with "Return on Equity."
To show great ROE almost every CEO stripped their company of all but the bare minimum of assets. Just in time everything. No excess capacity. No strategic reserves. No cash on the balance sheet. Minimal R&D.
We stripped the shock absorbers out of the economy in pursuit of better short term metrics.
Big businesses are supposed to be more stable and resilient than small ones. And economy built around giant corporations like America's should be more resilient to shock. However the obsession with ROE means that no company was prepared for the inevitable hundred year storms.
Now as we're facing a hundred year storm of demand, our infrastructure simply can't keep up.
The global logistics companies have no excess capacity, there are no reserves of chassis (trailers for hauling containers), no extra shipping containers, no extra yard space, no extra warehouse capacity.
The brands have no extra inventory. Manufacturers have no extra components or raw materials on hand.
Almost nobody has any employee loyalty because they haven't been willing to take care of their people through thick and thin of business, and thus they can't staff up quickly to meet surging demand. All businesses now complain about employee loyalty, but have we earned it?
To show larger profits and return on equity to juice their stock price, companies now use FIFO or LIFO accounting that doesn't account for the full costs of replacing the units in a rising price environment.
The proper way to do accounting is *Next * in First Out (NIFO). This means you price your goods against the cost of replenishment.
If you buy 100 widgets for $100, and then their price of replenishing them goes to $150, under LIFO or FIFO you can sell at $120 and recognize $20 in accounting profit. But under NIFO you would never sell them below $150.
How much of the amazing quarterly earnings we're seeing out of public companies right now is actually just accounting shenanigans?
A well run business seeks to minimize accounting profit to reduce its tax bill, freeing up cash to reinvest in compounding the value creation. Most public companies now do the opposite, overstating profits to trigger bonuses and applause from Wall Street.
Modern finance has removed the shock absorbers from the economy. Over the long run, in our complex, dynamic, power law world, the reference assets will be those companies winners willing to challenge the dogma of modern finance.
When the hundred year floods inevitably hit, the survivors will be those who invest in excess capacity, in strategic reserves of key capital assets, in employee trust that let them attract and retain talent.
Few will have the courage. CEOs hired by committees can never have the security required to challenge dogma of an entire generation of finance professionals, including all the people who hired them.
The feedback mechanisms of modern finance work too well for the bureaucrats to resist--you go asset light, strip the companies of operating capital, cut R&D, make employees peripheral and bam, your ROE surges, your stock price follows, and your performance bonuses pay out big.
So your a hired CEO who doesn't run that playbook, who starts to plan for the hundred year flood? Sorry, your ROE metric sucks, we're replacing you with someone who will run the playbook and cash in on the rewards we're holding out.
Only founder led companies and family owned businesses can stand up to the immense pressure from the dogmas of modern finance.
The proposed tax on unrealized capital gains will force founders to sell larger and larger pieces of their companies to pay the tax, until eventually they lose control of their businesses and turn them over to the Wall Street sharks to run their disastrous playbook.
Founder-led businesses are the last shock absorbers left in the economy. And the best hope we have to avoid the kinds of supply chain shocks we're seeing right now.
Washington must protect and nurture these engines of competitive dynamism, but instead they're conspiring to kill the golden goose.
ROE is a logical idea taken too far

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More from @typesfast

2 Dec
The decline in ships waiting just offshore of Los Angeles/Long Beach continues to be touted as a sign that port congestion is easing — despite the fact that the true number of waiting ships has not actually declined.

The ports just made the ships wait out at sea to avoid air pollution in LA. The overall queue, including container ships waiting out at sea is larger than ever.
"The total — 94 — was just shy of Monday’s all-time record of 96 (including ships outside the SAQA), and up 27% from the count on Oct. 25."
Read 12 tweets
18 Nov
Global supply chains are a mess. The world's logistics infrastructure has proven incapable of scaling to the demands of a global economy going through more chaotic evolution than ever. 1/
Prices for pretty much all logistics and supply chain services have reached all time highs while service levels and transit times have never been worse. 2/
In hindsight, the signs were there for years. Almost no logistics companies can show you where your freight is in real-time on a map. Most data is exchanged in unstructured email messages with attachments. There are almost no logistics APIs to speak of. 3/
Read 32 tweets
31 Oct
Tomorrow the new fees for not picking up your containers on time at the Ports of LA-Long Beach go into effect. The fees go up by $100 everyday, so by Day 30 charges reach $46,500 per container. 1/n Image
In my tweetstorm last week I called out all the reasons that it was so challenging for importers to find available chassis and get appointments to pick up containers at the port. 2/n
This new 'emergency fee' punishes importers for a problem totally outside their control. Brands need the merchandise for the holidays. They would LOVE to come get those containers. 3/n
Read 12 tweets
22 Oct
Yesterday I rented a boat and took the leader of one of Flexport's partners in Long Beach on a 3 hour of the port complex. Here's a thread about what I learned.
First off, the boat captain said we were the first company to ever rent his boat to tour the port to see how everything was working up close. His usual business is doing memorial services at sea. He said we were a lot more fun than his regular customers.
The ports of LA/Long Beach are at a standstill. In a full 3 hour loop through the port complex, passing every single terminal, we saw less than a dozen containers get unloaded.
Read 30 tweets
20 Oct
Last night Flexport brought a taco truck to the Port of Long Beach as a big thank you to the ILWU laborers there working like crazy to clear this container backlog. A thread on what we learned! /1 ImageImage
First off, they told us that Flexport is the first outside company in the history of the port to send in a food truck as a sign of gratitude. They loved it. /2
During our evening at the port only one truck showed up. The 24/7 gates don't matter if nobody comes to pick up the containers. Big opportunity for companies that can operate their receiving facilities at night and send trucks to the port when there is no line. /3
Read 18 tweets
28 Apr
I wrote a children's book about the ship that got stuck in the Suez Canal. All proceeds will go toward Flexport.org's urgent shipping of supplies to frontline medical workers in India. Order yours here! gum.co/flexport
Big thanks to @paulg for editing the copy and making it more wonderful :)
Also thanks to @alexrkonrad who I'm pretty sure gave me this idea during our interview about the Suez a few weeks ago.
Read 5 tweets

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