No. 39: No point in generating demand, Energy Woes, Semiconductors turn from "Must Haves" to "Nice to Haves"
I mentioned in my previous post that it gets harder and harder to say something that actually adds value. How many Twitter pundits are going to be around in 10 years? How many posts are going to age well?
I think that’s why I’m shifting to less frequency - but hopefully higher quality and energy in each post.
Enjoy - and tell your friends to subscribe!!
Why advertise something you can't produce?
Across the consumer space, firms continue to downshift ad spends. After all, if they're struggling to fulfil existing demand - how can they possibly think about generating new demand? Most likely this would lead to pissing consumers and retailers off with out-of-stocks.
The downshift in consumer brand ad spend is likely to flow through to the ad supported internet economy. Since companies like Google and Meta increasingly rely on consumer products advertising, online ad markets will also likely soften.
During the pandemic, technology companies used windfall profits to take advertising slots that consumer goods companies couldn't use due to supply chain issues. But in 2022, capital markets are not supportive of tech companies overspending their P&L for growth. Moreover, the companies that are currently generating windfall profits (such as energy or travel) are supply-constrained, so probably would run into similar issues as consumer brands if they try to generate more demand.
But back to the consumer goods companies.
Even after consumer companies cut advertising to the bone, they will still struggle to preserve margins - given continued cost inflation. Where can they still go to get margin?
Most consumer companies have already pushed prices up. But as they continue this playbook they'll eventually destroy demand. So what's next?
The lever that companies will reluctantly pull is to cut overhead. Even Google and many other Big Tech companies came through COVID talking about Diversity and Inclusion, Work From Home, and other trends aimed at attracting armies of people through COVID. Now they're talking hiring freezes. Soon they will be talking about layoffs.
It's crazy that in less than one year we've gone from "Diversity and Inclusion" to layoffs and bankruptcies.
Which leads me to the next topic...
Energy, Energy, Energy
There's a bigger elephant in the room. Energy.
The failure to implement common-sense energy policy has exacerbated problems in Europe and the US - with unfortunate implications for the rest of the world too.
Old school energy and geopolitics folks were silenced in the ESG, Climate, zero-interest rate, Greta-Thunberg-esque environment of the last ten years. And now Europe, the US, and other energy importing nations are learning lessons the hard way:
- It's very dangerous to be dependent on single sources of energy (i.e. Russian gas).
- Its premature to virtue signal about green energy while showing the middle finger to Oil and Gas - especially when there is no cheaper, energy dense alternative.
- A safe, reliable energy grid is well-diversified - even if that means nuclear energy and O&G (I'm talking to you, Germany).
People need to eat. People need mobility. People need to live. Energy is crucial for life.
Europe's energy dependence on Russia helped create the war. I'm not blaming the war solely on Europe - but shutting down perfectly good energy sources and increasing dependence upon Russia let Putin dictate terms of the war more than he otherwise could have - with basically zero consequences. Europe's energy virtue signalling was stupid and short-sighted.
Now energy companies in the non-OPEC nations have almost zero incentive to invest - given uncertainty around the political climate due to anti-O&G posturing from the Biden administration and the EU.
Meanwhile, Arab nations and Russia, who to this day despise the US and EU, don't necessarily have an incentive to go out of their way to help the western world out of the ditch. Furthermore, Arab nations probably couldn't lift output due to technical reasons even if they wanted to.
Energy over-dependence and shortage enabled the Ukraine war, which led to commodity shortages in Ukraine, which has increased tensions across the world - making political stability a tougher proposition.
This will get fixed. But it will take time as boosting long-term energy capacity involves big investments over a long period of time. But for now, energy shortages will damage consumer demand for other important things over time.
Which leads me to my next point...
"Necessary Infrastructure" becomes "Waste of Money"
This time last year, I was talking about how semiconductors were enabling AI, Cloud, Smart Homes, Autos etc - which will have massive impacts on our lives. Which is true - in a world that doesn't have bigger things to worry about...
However, rampant inflation and slowing consumer demand have turned semiconductors from "must haves" to "nice to haves" - at least for the short to medium term. CFOs may (for once) start to be heard in boardrooms as they call for engineers to increase ROI on existing hardware rather than ordering new gear. And consumers delay buying the next iPhone as they increasingly live hand-to-mouth.
I wouldn't be surprised if cloud ecosystem growth slows as both capital and artificially high internet traffic goes away post-COVID. Companies too, as they search to preserve margins, will start to question cloud spending as there's no "Digital Transformation" agenda for executives to hide behind while pretending to be busy. CTOs will wake up to the reality that companies can't make increasing debt and interest payments with slides about "digital transformation".
Of course, I'm not saying that hyper scalers are worth zero at all. They're still incredibly powerful businesses - but I wouldn't be surprised to see a period of mediocre growth as new corporate and start-up cloud use gets tougher as capital gets increasingly scarce.
But...
Nothing is Permanent
We might be in an economic downshift right now, but at some point new technologies emerge, cycles reverse themselves, wars end, and we figure out ways to produce more with less. Then some businesses rev up and grow like crazy again. It could happen at any point, whether that's next year or ten years from now. These tide changes are not predictable.