Surviving Stagflation – The Economic Tsunami That Lies Ahead

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By Thomas Whaley, President, Level One Technologies, Inc.

Brokers who are focused on managing their day-to-day activities, may have missed reports that show our economy is entering into another period of "stagflation," which is defined by Investopedia, as "an economic condition that combines slow growth and high unemployment with rising inflation."

Although the mainstream media is reluctant to discuss this problem, recent reports show that last year's 3^rd Quarter Gross Domestic Product (GDP) was revised downward to 2.1%. And despite the fact that 4^th Quarter figures are not yet available, many analysts expect the GDP to experience negative growth, due to supply chain problems at the nation's ports. 

During this same period, inflation was reported to be 7%. However, when you include increases in the cost of food and fuel, the Consumer Price Index is increasing at an annual rate of 15%, a figure that's more than double the reported rate. 

And finally, there are labor reports that show between the months of April and September of 2021, over twenty-four million Americans were forced to quit their jobs. Those losses were followed by another 4.2 million workers who left the workforce in October, and 4.5 million more who left in November. 

Under normal circumstances, when any one of these conditions' surfaces, there are proven economic remedies available to solve them. 

As an example, the traditional approach used to stimulate economic growth and job creation, is for governments to create new cash reserves, and then inject them into the money supply. Once the new reserves are created, businesses are able to borrow money, to expand and create jobs. The new reserves are also used to extend credit to consumers, so they can make major purchases. 

Alternatively, if governments want to cure inflation, they must take the opposite approach. That means, instead of expanding the money supply, they must restrict it, which limits the amount of money available for businesses to borrow and invest in expansion. The restriction also limits the amount of credit that's available to consumers, which slows the economy, by limiting their ability to make major purchases. 

The problem with these solutions, is that neither one works when multiple conditions occur at the same time, such as when the economy enters into a period of stagflation. 

If the figures I've presented are an indication of what lies ahead, then freight brokers should begin to think about ways to modify their business plans, so they're prepared to operate in a much more restrictive market. 

To assist brokers in modifying these plans, I'll use my experience in the 1980s, when the economy went through its last period of stagflation, to discuss the types of changes that freight brokers should make, if they want to succeed in an economy where top line revenues will be flat, and net incomes will be depressed by rapidly rising costs. 

One of my most vivid recollections of that period, was the moment I realized how harmful the negative effects of stagflation would be on my business. These included inflation rates that quickly rose to 17.5%, interest rates that exceeded 20%, and an unemployment rate that eventually reached 8% of the workforce. That was the point where I realized that if I didn't lower my overhead and reduce the risks I was taking, stagflation would prevent me from ever having another profitable year. 

Unfortunately, space limitations prevent me from discussing the full extent of those changes. But in the "Recommended Action" section that follows, the recommendations I make to help freight brokers protect their own businesses, are similar to the changes I made in the 1980s. 

History will show that the stagflation I experienced, wasn't cured until Ronald Reagan was elected president. But history will also show that it took several years for the economy to fully recover, after Reagan implemented his plan, that began when he used a tight money policy to cure inflation. 

When inflation was finally under control, Reagan implemented a pro-growth economic plan, that among its many attributes, featured a reduction in business regulations, and a new tax plan that significantly lowered individual income tax rates. 

Although each component of Reagan's plan contributed to the economy's revival, there was one underlying component that isn't given the credit it deserves. And that was the fact that during the 1980s, the national debt was less than 3% of its current size. 

The importance of that figure cannot be overstated, because with the smaller debt, Reagan was able to comfortably borrow the money he needed, to subsidize the workers who were laid off, during the tight money period he needed to bring inflation under control. 

Like many others at that time, who found relief in a newly revitalized economy, I made the decision to enter a new industry. As part of that decision, I purchased a specialized trucking company, that I planned to grow by expanding its services. But that expansion was put on hold, until I was able to reduce the company's operating costs, by using software to modernize its infrastructure. 

To facilitate that goal, I formed a software development company, known as Level One Technologies, that over a period of years built and released its flagship application, known as Epay Manager. At the time of its release, Epay was the transportation industry's first major advancement in back-office technology in several decades. 

I've included these personal milestones, because as you will soon discover, Epay's development is a key component of one of the five recommendations I'm going to make, that I believe will give freight brokers the best chance of remaining viable during the coming period of stagflation. 

Recommended Action #1: Brokers should protect the financial position of small to medium size truckload carriers, so they can remain viable and continue to haul freight for their customers. 

In an October 2020 article, published in Freightwaves, I discussed the plight of small to medium size truckload carriers, who at the time were in poor financial condition, due to mis-guided government policies that kept rates depressed for many years. 

Since that article was published, the economy has deteriorated, due to rising inflation and serious problems in the nation's supply chain. As a result, many of these truckers are in greater danger than they were before; and to make matters worse, they're facing future prospects of lower revenues and higher expenses. 

Hopefully, brokers see these trends as a warning, that unless these carriers are managed correctly, many of them will be forced out of business. If that happens, their trucks will no longer be available to haul freight for the broker's customers. 

To prevent this from happening during a period of stagflation, I urge freight brokers to resist the temptation to offer these carriers lower rates, even if competitive conditions exist that warrant them. 

Simply put, after years of being punished financially, these carriers no longer have the working capital to withstand any additional losses. 

But in addition to offering these carriers "profitable" rates, brokers should also offer them alternative payment terms, expedited payment processing, as well as complete transparency to their audit and payment process, as ways to help these carriers maintain adequate cash flows. 

Recommended Action #2: Brokers should protect their profit margins, by negotiating automatic rate increases with their customers, to cover rising costs due to inflation.

If we use history as a guide, during the coming stagflation period, shipping costs will spiral out of control. Given the high degree of certainty these costs will rise, brokers must pre-plan rate increases with their customers, to avoid losing money for either themselves or their carriers. 

For most brokers, this practice will be a radical departure from the past, but it will be a necessary one. Without pre-planning the thresholds that trigger rate increases, brokers and their carriers will be constantly fighting from behind, trying to protect profit margins that will be systematically eroded.

Recommended Action #3: Brokers should protect their working capital, by making certain that every customer they extend credit to is credit worthy. 

One of the most important lessons learned from the approach President Reagan took to cure stagflation in the 1980s, was that inflation had to be cured, before any policies to stimulate the economy could be implemented. More importantly, Reagan used a tight money policy to cure inflation, which required the Federal Reserve to reduce the amount of money in circulation, which in turn, reduced the amount of money that was available for businesses to borrow.

These are crucial factors for brokers to consider, as we enter a new period of stagflation. I say that, because any losses attributable to uncollected accounts receivable during the stagflation period, will permanently reduce the broker's working capital account, unless the broker has the ability to borrow money, in a restrictive lending environment, to replenish whatever losses are incurred. 

Recommended Action #4: Brokers must identify all current employees that are necessary to implement their current business plans, and they should take immediate steps to secure their services, by signing them to employment contracts. It should be noted that the recommendations in this section also apply to truck drivers, who are employed by Asset based brokers. 

Brokers must understand that the current labor market is unlike any other period in our nation's history. Despite the fact that more than thirty-two million able-bodied people were forced to leave their jobs in the last 9 months, due to pandemic related issues, the current labor market is so tight, that eleven million jobs remain unfilled, despite being advertised for many months, as "available" positions. 

One explanation for this anomaly, appears to be the fact that many workers who were forced out of their positions, have no immediate plans to return to work. 

Because of this, brokers who need to hire new employees, are being forced to recruit them from other brokers. This is why brokers, who want to remain in business, should identify essential drivers and staff members, and then negotiate long-term employment and/or retention agreements with them. 

Recommended Action #5: During an economic recession, rapidly rising expenses, caused by inflation, are the greatest threat to a company's survival. For that reason, brokers should take immediate steps to reduce all of their current overhead expenses to the lowest possible level. 

This recommendation calls for brokers to carefully examine all of their expense categories, to determine which ones can be reduced or eliminated. 

Because brokerage expenses can be classified into two major categories, namely "office overhead" and "direct carrier costs," I'll limit the discussion to ways that brokers can reduce the expenses in those categories, by using software, which in this case will be based on the cost saving features of Epay Manager. 

For those who are unfamiliar with Epay, one of the system's primary features is its ability to automate workflows. This automation is the primary reason the system is able to eliminate 75% of the time and cost it takes to process and pay carrier invoices manually. It's also why Epay is able to eliminate more than 95% of the time and cost it takes to manually create and send invoices to the broker's customers. 

To demonstrate why these savings should be essential components of any broker's cost reduction plan, consider the impact of these savings for a broker who currently employs ten people, to process an average of 2000 carrier invoices and customer bills each week. And then consider the fact that Epay's automated processes are able to perform all A/P, A/R and Document Imaging activities connected to that volume, with only three employees. 

If you assume the broker in this example, pays an average weekly salary of $700 per employee, plus a benefit package that adds an additional 20% to the employee's cost, the broker who processes those transactions with seven fewer employees, will save an average of $5,800 per week, or $311,600 per year. But the savings don't end there. 

That's because in a highly inflationary economy, like the one we're currently in, brokers who employ fewer people, will have fewer salaries to adjust, when cost of living increases are required to restore the purchasing power of each remaining employee. 

But, in addition to reducing the cost of back-office staffs, Epay is also capable of reducing a broker's "direct carrier costs." 

These reductions are realized, when brokers use Epay's early payment module, to offer their carriers multiple, early payment options, in exchange for discounts. In terms of dollars saved, one Epay broker, who processes approximately 1900 transactions per week, earned more than $320,000 in discounts using this module in 2021.

When these savings are combined, they not only offset the broker's cost to use Epay, but they also produce a residual benefit that increases the broker's bottom line, as well as its enterprise value. 

Conclusion:

Current economic metrics prove that something extremely bad is happening to our economy, which has the potential to destroy everything we've worked for. 

Unless something happens that provides immediate relief, brokers who implement the actions I've recommended, will have a better chance of surviving during the current stagflation period, compared to other brokers, who will either ignore the recommendations I've made, or fail to implement them, because they don't agree with the business logic on which they're based.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.