From lumber prices to gas prices, all the way down to toilet paper, everything is more expensive. A New York Fed survey in early July 2022 showed near-term inflation expectations at record highs. The outlook was a whopping 6.8 percent. In this Tough Things First podcast, Ray Zinn explores the causes of inflation and explains where we’re headed. (New: Video Option here)
Rob Artigo: Welcome to a Tough Things First podcast, a new one and a special one because we’re on video today. We’re going to try to do it more often. It’s a top rated Silicon Valley podcast. I’m Rob Artigo, a writer in California and he’s Ray Zinn. Hello, Ray.
Ray Zinn: Hey, how you doing there, Rob? It’s so good to be with you with a video.
Rob Artigo: Yeah. And seeing you while we’re talking is unusual, because we’re usually in sometimes different states. So I should let the listeners know that this is a video podcast as well as being online as just an audio podcast. So if you’re listening online and you want to watch it on video, go to the Ray Zinn’s YouTube channel, check it out there. And if you’re watching on video and you want to follow it later on the website, toughthingsfirst.com. It’s your option, and we hope you enjoy us being on camera as well.
So, I think we should just jump right into this.
Rob Artigo: This subject, it’s on everybody’s mind right now, inflation. We know it’s tough out there for people. And here’s a quote from an interview on CNBC that I saw today. It says, “We were wrong on one thing. And that was inflation being as sustained as it has been.” That’s Cathie Wood. You may know the name. She’s founder and chief executive officer of ARK Investment Management. She told CNBC quote, “Supply chain. I can’t believe it’s taken more than two years and Russia’s invasion of Ukraine. Of course, we couldn’t have seen that. So inflation has been a bigger problem, but I think it sets us up for deflation.” We’ll talk about that in a little bit, but that’s the end of that quote.
Now here’s a couple of quick headlines for you. From CNBC, 58% of Americans are living paycheck to paycheck after inflation spike, including 30% of those earning $250,000 or more. And this one from California, our state at the moment, about 23 million Californians will soon receive inflation relief checks of up to $1,050 under a budget deal reached by the governor and state lawmakers over the weekend. And I don’t know, I immediately wonder Ray, do you see any folly in that?
Ray Zinn: Well, the folly is that it’s just temporary. I mean, it’s kind of like a political thing. It’s not really something that’s going to be substantial. It’ll help for any long term.
Rob Artigo: Ray, what is driving inflation right now?
Ray Zinn: Okay. Let’s briefly describe or discuss in an economic way what inflation is. So there are two components to inflation there’s supply and there’s demand. And the typical supply demand curve looks like an X. So as supply goes up, and then demand of course will drop or vice versa. As supply drops and demand goes up, it causes the cost to go up. And so that’s the classic supply demand curve. So let’s go back to 2000. What they call Y2K, the year 2000. We had that dotcom explosion that took place. It happened in about August of 1999, and it took off and it was growing at a much faster rate. In other words, the demand was going at a much higher rate than supply was. And then all of a sudden supply took off and exceeded demand.
Ray Zinn: And then about the middle of 2000, we had this where they crossed again, the supply and demand crossed, and so when the supply went up tremendously like 30% then demand dropped. And of course that bubble was because we had way too much inventory. And then in 2001, we had that big crash in the tech market. Well, we’re kind of seeing that now. So in fact, I just read an article this morning that said that tech stocks are going to see another dotcom implosion and we’re seeing that. We’re seeing the tech stocks going down as much as 30% and maybe some even 50%. So unfortunately the worst thing that can happen is what we call stagflation, where you have inflation with no growth.
Ray Zinn: So, what happened this time was in my mind, is that we increased the demand tremendously in 2021 with the stimulus checks. In other words, people had a lot of money and places to spend it. And of course supply was falling off because of the pandemic. And when you have that happening, when you have demand going up and supply going down, then you have cost increases. And it’s a balance. I mean, it’s difficult and under normal circumstances to control supply and demand. And so right now, because of just the stimulus of more money flowing into the economy and then the reduction in supply because of COVID or the pandemic, well, you’re naturally going to see inflation. So inflation is as high as I’ve seen it in my professional career.
And unfortunately, I don’t see it abating until inflation actually tops or kind of levels off and it starts going back down. Some are predicting it’s going to be July, some are saying August. In other words, you have to see the actual inflation level drop. And of course, it’s hard to predict when that’s going to happen because supply is not increasing rapidly enough. We’re hearing all about food shortages, fuels shortages, or energy shortages, and of course that does nothing more than exacerbate inflation. So those are two very large components of inflation are food costs or housing and then energy. We’re seeing the housing. Housing, I think will begin to moderate sometime in September. I see that’s going to happen.
So we know that the cost of materials is coming down dramatically. And so that means that the costs to build a house are dropping. And so it will moderate. I mean, this inflation is not going to go on forever. Now, once inflation moderates and actually begins to tip over, it takes at least three months for it to kind of show some kind of drop. In other words, any significant decline. And so I think we’re into an inflationary period, at least high numbers even if it’s dropping for at least another six to nine months, which means we’re into next year. And then so what we got to do is just kind of buckle down and deal with it. There’s not much we can do about it.
The government or the feds as you would, they can affect supply. I mean, excuse me, demand. Let me back up. They can affect the demand by increasing interest rates. And as interest rates increase that also to some degree will affect the supply, because at some point as demand drops then supply’s going to drop. And so, because nobody’s going to make the product if it’s not going to be purchased. So it’s a cycle thing, it’s going to be ups and down topsy turvy for some period of time. And as far as the stock market’s concerned, we’re looking at least another year before the stock market, or at least from the equity side is you’re going to see any kind of rebound. So we’re in a bear market and it’s going to stay that way for quite a period of time. I’d say at least another year, year and a half. We may be into 2024 before we actually see things improve.
Ray Zinn: Typically, a cycle lasts about a year and a half, well, a year and a half to two years. So that’s a typical cycle. And so we began this cycle, this inflation cycle about six, eight months ago. And so that’s going to continue with us for at least another year, minimum of a year and maybe a year and a half as we now see these numbers come out and see what the Fed’s going to do with regard to interest rates. And so that’s kind of the 40,000 foot view of it, Rob.
Rob Artigo: And you ran Micrel, a semiconductor company for close to four decades. So, 38 years is a long time. And during that period, you saw many ups and downs. This podcast has a lot of listeners who are like myself and you, entrepreneurs, innovators, people creating and coming up with ideas and trying to project out what they’re going to do in the future. You had a policy at Micrel where you gave, I think it was, you needed to have on hand was it two or three years? Three years of operating expenses, operating capital in order to weather the storm, was it two or three years?
Ray Zinn: It was a little over a year.
Rob Artigo: A little over a year. Okay.
Ray Zinn: Yeah, a good running company needs at least six months. Now, if you figure that a cycle lasts a year and a half to two years, you’re right you need operating capital that’ll last you a year and a half to two years. That’s kind of hard to do. So if you can have at least a year, then you can kind of pare down your expenses, get your company in, as they say for the long haul, and be able to weather the storm. So having a year’s worth or year and a half worth is good, but it’s difficult. So you got to have at least six months, because it takes often six months to nine months to reorganize your company, to get yourself on a firm footing so that you can kind of, as they say, weather the storm, Rob.
Rob Artigo: And this is, if you think about the kind of lesson this is for young entrepreneurs, people who maybe are a part of ZinnStarter, another program that you run, is that they can look at this and go, in times of inflation interest rates rise, and that means borrowing money is more expensive. And that can be extremely burdensome on a company if they’re trying to chase their tail rather than having been prepared in the first place.
Ray Zinn: Well, I’ve always said that the best policy is to have enough money to take you to profitability before you can start your company. And so if you don’t have enough money to take yourself to profitability, then I’d wait. Certainly the economy right now, both in the US and worldwide actually is not in good shape. And so we’re not only seeing a US economic downturn, we’re seeing a worldwide. Recession is I think inevitable, in fact, the feds want to see a recession, maybe what they call a soft landing recession. That means that it’s not going to be so severe that we’re going to be having massive layoffs, but we are going to have some retraction in employment. So unemployment’s going to go up. And so a soft landing would be kind of minimal layoffs, but we are going to see a recession. There’s absolutely no doubt in my mind about that.
When will it occur? Anywhere within the next six months, five to six months, I think will actually see the effects of the recession. There are a lot of companies out there right now, even looking at some form of layoffs and cutbacks. That affects supply again, because again, remember supply and demand is what affects the pricing or the price of goods. And it does take longer for inflation to come down than it does for it to stay down. So it’s going to be a while for us before we’re going to see prices back to where they were a couple years ago.
Rob Artigo: So we’re talking about stages and we’ll wrap this up with this. It’s just, we’re talking about stages here. In the near term hopefully the inflation will slow, maybe mid-late summer. And then after that, we’re going to hit that recessionary period. And that could be a struggle for a while, and people need to be prepared for that if they’re in a tight spot. I mean, we talked about the quote there about 58% of Americans living paycheck to paycheck. That’s a lot and that’s now. And so later on, it could be a lot worse. Don’t you think?
Ray Zinn: It’s going to get tougher, Rob. There’s no question that when we talk about a soft landing, there’s still a bump involved. I mean, you don’t land without a bump. And so it’s going to be somewhat painful. I mean, I hope it’s a soft landing. Again, I don’t know. It depends again, how severe these interest rates increase are going to impact and affect manufacturing and production because they don’t kind of go hand in hand. I mean, you can reduce inflation, but what you want to do is you want to reduce demand as opposed to just reducing supply. And unfortunately increasing interest rates affects supply probably even more so than demand. So, it’s going to take a year for this or a year and a half for this cycle to end. As I mentioned, we were probably into it about eight months now, seven or eight months we’re into it. And so we’re looking at least, at least another year, maybe a year and a half before we’re going to actually see this thing recover.
Rob Artigo: All right, Ray. Well, thank you. I hope we get to do another one of these videos soon. If we make it a regular thing, I hope our listeners will come back and join you because you’ll have the same opportunity to talk to special guests on the show and do a little hosting yourself where you get to ask a lot of questions of interesting people, just like the podcast and we’ll do it right here on video, and it should be a lot of fun.
So that’s it for this edition of the Tough Things First podcast. Please follow Ray across all the platforms on LinkedIn, Facebook, YouTube. Just Google Ray, you’ll find him. Also, toughthingsfirst.com and that’s where you’ll find all the podcasts and other contributions that Ray makes. Don’t forget to check out the book, Tough Things First at your favorite retailer and the series of books, the Zen of Zinn one, two, and three.
Ray Zinn: Right. Hey, so also let us know what you think of our video podcast so that we know how effective it is relative just to straight audio. So we’ve had some of you request a video, but we need to know how popular this is going to be. And then we’ll keep it up. So again, thank you for joining us and listening in on our messages.
Rob Artigo: Thanks, Ray.
Ray Zinn: Thank you.