Friday, May 26, 2023

Supply and Demand and Inflation

Prices will come down when people stop buying.

I noted before that while we were re-habbing the condo, we saw a Dunkin Donuts delivery person (or DoorDash or whatever) deliver a two donuts to someone at our condo development.  Now, our condo isn't quite a ghetto, but it is a working-class kind of place.  Simple garden-style apartments and outside parking.  This isn't a place for rich people, or even upper-middle-class.  It is mostly young people starting out, a few old people living on social security, and yes, some section-8 housing.

It was weird, but a few minutes after the donut delivery, the person living in that apartment left for work.  Now, the Dunkin Donuts is about 1/8 mile away - across the street, really, and you could have gone there on the way to the Metro or in your car if you were driving to work.  Why pay a delivery fee on such an inexpensive item?  It boggles the mind.

Yet, I read online all the time, people complaining about missed deliveries, cold food, wrong orders, and steep delivery fees.  It isn't like the old days where you would have friends over and buy $50 of Chinese food and have it delivered by the restaurant owner's son.  No, today, people are having a Big Mac and fries and a Coke delivered - the Big Mac arriving cold and mushy, the fries ice cold and congealed with hardened grease, and Coke watered-down by the melted ice, and warm.   What's the point of paying a delivery fee for that?  Deep-fried food - if it is to be consumed at all - should be consumed piping hot.

But people are in a state of denial.  They rage against companies for making "record profits" during an inflationary period.  Of course, this attitude is negated by two simple observations.  First, as I have noted before, everything in the world is always "the most this" and "the most expensive" that.  Populations are always at "record highs" and prices are always at an "all-time-high" because population always increases, goods always become scarcer and prices, over time, always go up.

Yes, prices do drop from time to time, but the overall trend - measured in decades, not months - is upward.  So companies are always - or mostly always - going to be posting "record profits" over time, as profits will go up with prices.

The other aspect is supply and demand.  When a commodity becomes scarce, people bid up prices, and as a result, suppliers profit more.  In turn, this profit incentive motivates them to procure or produce more product to meet demand (and make those tidy profits).  During the pandemic and accompanying "supply chain" shortages, well, prices shot way up.  And the poor bastard whose car lease expired during that period really got raked over the coals, as his options were limited to (a) buying the car at an inflated price, or (b) buying one of the three cars on the dealer lot at an inflated price.

But all of that is going to change, and very soon.  And again, the change is not permanent - over time, prices will continue to go up.  But we will see, in the short term (a few years) prices may decrease or at least stabilize.  And what will trigger this is anyone's guess.  In 2008 it was gas shooting up to $5  gallon (which would be about equal to $7 today).  This time around, it could be the Government defaulting on its obligations.  Who knows?  The herd can be stampeded by something as simple as a coyote howl.

A reader sends a link to an article opining that car prices are set to "plummet" shortly as automatkers, worldwide, have built 6% more cars than the market demands.  I am not sure where they get their numbers from, but like "unaffordable housing" there is no such thing as "unaffordable cars."  No, no, those Facebook ads you see crowing "unsold SUVs going for pennies on the dollar!" are just a come-on.  Cars, like houses, always sell - maybe not for the price the seller would like, but they do sell, sometimes even at a loss to the dealer or manufacturer.  But no, they aren't going to crush brand-new cars because they don't sell for list price - better to sell for 20% off than for nothing.

A good example is the Audi TT roadster.  Volkswagen overproduced these models, and after a famous rally car driver was killed in one that went airborne, they were all recalled to install a rear wing to keep them from experiencing high-speed lift.  But the damage was done, and the roadster craze of the 1990's (have to write about that sometime, if I already haven't) was winding down.  What to do with excess inventory?

Well, VW gave dealers a hefty credit and the cars were moved from the new car lot to the used car lot - some with less than a dozen miles on them - and sold at used-car prices.  This avoided having the new-car sale price being dinged (and yes, this information is tracked by a number of sources) and moved the cars off the lot, particularly as some were sitting there for a year or so.  Better to sell them used, and at least recoup costs, than to simply throw them away.

But speaking of old inventory, it is pathetic, but small-town dealers often have older inventory they try to sell as new.  I saw one dealer, locally, trying to sell a Nissan pickup truck for sticker price, even though it was two model years old.   I took a pass.

Funny thing, though, two years later, I got a call from the "big city" Nissan dealer who I had made inquires of 18 months prior.  It was October, and the 2013 models were aging on the lot and 2014's were arriving daily.  So they offered me a deal - a nicely loaded 4-door SV model for about what the local dealer wanted for a stripped 2009 model.  Needless to say, it wasn't a bad deal.

Fall is a good time to buy car. Some say Christmas as well, as other than idiots who are buying cars as gifts, the showrooms can be somewhat empty, and "last year's model" is something they want to get rid of.  Others argue that when buying at the end of the year, you take a larger depreciation hit.  For example, if you went to the dealer in October of 2023, you could buy a 2024 model and in 2025, it would only be one model year old and subject to a lot less depreciation than a 2023 model, which would be two model years old.  An interesting argument, I suppose, if you trade-in cars every three years (and like to set fire to piles of money as well).  On the other hand, if you are keeping the car for several years, it doesn't make as much a difference.

But I digress.

We have a pulse on the car market locally, as our little port is one of the largest roll-on, roll-off car carrier ports on the East Coast (some years, the largest).  They have huge lots where cars are parked after coming off the ships.  We also export cars - Mercedes, KIA, Hyundai, BMW, Suburbans - as well as construction equipment.   So there's that.

They recently added an expansion lot across the street to house more cars - just in time for the pandemic.  Also in time for the pandemic, Stellanis (Chrysler) built a staging lot for their ill-fated production model, where they were cranking out cars with no buyers, in anticipation of a UAW strike which never materialized.  A lot of people, including dealers, criticized this move, as it created a huge inventory of cars and "forced" dealers to take oddly-optioned vehicles they didn't want (e.g., a work truck with a sunroof and alloy rims).

Well, Chrysler had the last laugh, as during the pandemic, that lot, which had been full to bursting, was cleaned out.  It was almost abandoned, with nothing but a bunch of car carriers parked there.  Similarly, during the pandemic, the lots by the port went from acres of cars to empty.  The Ro-Ro ships stopped coming into port, and in fact, for a while, the only ship we saw was the Golden Ray, until they finished cutting it up.

So you can get an idea about car sales, just from the inventory on these lots.  Back in 2009, the lots were overflowing with cars, as the recession hit and people stopped buying cars.  VW had a surplus of cars (probably exacerbated by dieselgate) on the lots.  They hired people to drive them from the car port, across the causeway to our island, and then back again, presumably to charge the batteries and circulate the oil.  This went on for months until the economy recovered.  It was comical to see the Audis being driven with their shipping blankets in place, with the drivers looking out a little hole made over the windshield.

Today, the lots are pretty full and the Stellanis overproduction lot is also seeing an increase in cars - but not like the old days.  I think the guy who came up with that brilliant idea was fired.  But it isn't like the pandemic, when the lots were empty.  And dealer lots are filling up, even in small towns.  We drive by a Ford dealer on 301 in Florida, and they used to have literally 100 F150's lined up out front.  During the pandemic, they had six.  Today, it seems like they have 50 or more, brand-new.  Maybe not as many as before, but certainly a helluva lot more than a year ago.

So does this mean that car prices will be slashed?  That you will be able to buy a coveted (yuk) SUV for "pennies on the dollar" like those Facebook ads promise?    Well, not exactly.   They will offer deals and rebates and low-interest or no-interest financing to move cars off the lots.  And they will adjust production schedules - and already have, I am sure - to decrease production in view of recent sales and future projections.  They may lay off the third shift, or maybe even the second.  An extra plant may be closed or mothballed.  Supply will decrease to meet demand.   And prices will drop - not dramatically, but significantly.  Maybe even the Toyota dealer will drop the attitude that they are selling rare collectibles.

But all of this won't happen until people stop spending like drunken sailors.  You can't complain about high food delivery prices, period.  If money is that dear to you, get off  your fat ass and go pick it up yourself.  Or try meal-planning and buying groceries and learn how to cook - instead of wallowing in your own crapulence, for chrissakes.  But I digress, yet again.

It is human nature, this hysteresis in the economy.  When prices go up, people grouse about it but initially do nothing about it.  Spending goes up (I know mine has!) and credit card balances increase, as people try to continue to live as before without making sacrifices.  It is a lot easier to increase your spending habits than decrease them - which is the reason why I started this blog in the first place.

I saw a posting online of a sign at a grocery store explaining that Coca-Cola had raised its prices significantly and suggested to shoppers that they try Pepsi or store-brand soda instead, as it was far cheaper.  I have that beat entirely - we have largely given up soft drinks in favor of tap water, which is nearly free and a lot better for you than a bunch of high-fructose corn syrup.  Or as one friend put it, "I'm saving my caloric intake for more important things - like alcohol!"  The man has his priorities!

People will change habits, much as they did back in 2009 and back during earlier recessions.  I was only 18 in 1978 and living on my own for the first time, so it seemed "normal" to me that some things were in scarce supply and rather expensive.  But people were scrimping and things like Raman noodles became popular around that time.  Staples like peanut butter were also popular - to the point there were shortages and the price skyrocketed.  A staple became a luxury - it made no sense, but people rarely do.

Like I said, there will be some triggering event that will cause people to wake up and take notice.  Credit card debt is at an "all-time high" (remember what I said about that phrase?) and default rates are increasing.  People will start to cut back, particularly when the media starts running "recession" stories.

Remember all the stupid crap from 2008?  "Our family decided to stop spending money for a week!" one headline crowed.  But of course, they just spent twice as much the next week.  But it was a chance for people to re-examine their spending habits.  I realized that I was just paying "whatever" and not looking at prices - of food, insurance, utilities, you-name-it.  It took me a long time to start examining each expense in my life and cutting back.

And yes, over time, my spending has gone up, little by little.  I need to re-examine some recurring costs, particularly insurance, which seems to be jumping up quite a bit, for homeowner's and automobile.  But more on that, later.

Supply and Demand - it is a law that cannot be ignored.  You have too much supply, you have to drop prices to spur demand.  You have too much demand, you raise prices until it drops, or supply increases.  We see this on a day-by-day basis at the gas pump - prices vary from week-to-week depending on supply (refinery goes offline) or demand (holiday weekend).   And while you may think demand is steady and inflexible, the effects of the 2008 recession proved otherwise.  People will make changes in their lifestyle, when prices go high enough.

Maybe this time around, no one will be trading in their Dodge Ram for an Aries K-car or a Ford Fusion, as they did in 1981 and 2009, respectively, but perhaps people will slow down, drive less, and yes, maybe consider a compact truck at trade-in time.  This will mean pain for some folks, but again, being "poor" in America means driving a shitty car.  In Africa, it means you didn't get shot at today.  No one feels sorry for overfed, overpaid, and overweight Americans.

Nor should they!