Pricing Power (Pt. 1)

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When an inflation regime shifts, there’s only one question that really matters for your business model: do you have pricing power?

With apologies to the Monty Python troupe, I want to write about three forms of pricing power that often go unnoticed, but will be incredibly powerful as the great economic pendulum swings from deflation, falling rates and a wealth creation zeitgeist to inflation, rising rates and a wealth distribution zeitgeist.

Because if you don’t see that this is where we’re going – a sea change reversal of the supply-side narrative that dominated our political zeitgeist for the past 35 years, now becoming the MMT narrative that will dominate our political zeitgeist for the next 35 years – then you’re just not paying attention.

I think that both supply-side economics and MMT economics are BS “theories”, no more than post hoc rationalizations of the preferred policies of the Nudging Oligarchy in the former and the preferred policies of the Nudging State in the latter. I think that supply-side policies have been a disaster for anyone who values justice and an equality of opportunity, just as I think that MMT policies will be a disaster for anyone who values justice and a liberty of mind.

But what I think and $2.75 will get you a subway token.

These are the cards we’ve been dealt. Let’s play them as well as we can.


Pricing Power #1 – Client Ownership

Willie Sutton famously said that he robbed banks because that’s where the money is, and the same thing goes for business models when inflation expectations shift (in either direction) – you need to go where the money is.

Put more directly, I mean that you need to get closer to the end client – whoever is spending the money that drives your business ecosystem – even if that means getting farther away from developing the products or services that your business ecosystem is known for.

This is particularly true for the financial services ecosystem, which has been totally wrecked by financial asset inflation, a tide that lifts all boats and squeezes all margins regardless of skill or smarts.

It’s a wrecking inflationary flood that is coming soon to all service industries.

It’s a Monty Python parable for our times.

In the beginning there is the great Black Knight, most fearsome of all warriors.

This is the asset manager, most cartoonishly represented in the popular narrative by the Hedge Fund, but it’s just as much the long-only actively managed mutual fund complex.

Thou shalt pay me my toll of a 2% expense ratio!

None shall pass!

And then the wirehouse takes off your arm. 

Tis but a scratch. I’ve had worse!

That’s the immediate asset manager reaction, of course, to being told that access to the financial advisory “platform” – the menu that the end client will see – is now going to cost you an arm.

Or two.

But even so, the asset manager still believes that they are the great Black Knight. Just look at their long-term track record, for god’s sake! Pay no attention to their inability to beat a Fed-inflated benchmark for the past ten years.

Ooh, had enough, eh? It’s just a flesh wound!

At which point the financial advisory platform says, “what are you going to do? BLEED on me to death?” And there goes a leg.

I think this is pretty much the current state of play between product-facing companies and end client-facing companies in the financial services world. Asset managers have had two arms and one leg sliced off in squeezed margins, but they still think they can win this fight.

I’m invincible!

And they’ll continue to think that.

Until we get here. It’s not that far off.

Oh, alright, we’ll call it a draw.

Over time, this is what happens if you’re not close to the end client. This is what happens if you are on the product side of ANYTHING when inflation hits your world. Financial services is just the canary in this coal mine.

Pricing power in a services-based industry goes to whoever owns the end client relationship.

That’s where you want to put your investment dollars. And your career.


Next up … your mother was a hamster and your father smelt of elderberries … the pricing power found in intellectual property (and a legal system that lets you prosecute those property “rights”).

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Mike Hanlon
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Mike Hanlon

I spent a chunk of my career in academia, and as an academic economist, I was deeply frustrated by (1) the profession’s complete lack of understanding of how inflation is transmitted through the economy; and (2) its complete disinterest in even thinking about that question. As Romer wrote in his Advanced Macroeconomics text, a standard in that profession, “[I]nflation’s costs are not well understood. There is a wide gap between the popular view of inflation… Read more »

Ben Hunt
Member
Ben Hunt

Spot on, Mike. As a former academic, too, I recognize my experience in everything you say here. Welcome to the pack!

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Mike S
Member
Mike S

“If you can’t see how this relates to the legacy of the financial crisis; the legacy of quantitative easing; the deflationary impact of globalization and technological innovation–well, if you can’t see how all this interrelates, I’m not quite sure what to tell you.” —Demonitized *BL…the vast majority of people can only be brought to beliefs other than those held by their society and peers either when they are young, or after prolonged and catastrophic failure–either… Read more »

J Z
Member
J Z

“The FED is trying to get the country to a better place”…… You know, with LA teachers went on strike with average of 75K annual salary, and Yellow Vest all over Europe, my son can NOT even have a stable preschool teacher because of housing cost forced them to move around, and government workers tapped out after missing just TWO paychecks due to government shut down, I am NOT sure this country is going to… Read more »

Christopher
Member
Christopher

When I initially read your question “do you have pricing power?”, I initially thought of my pricing power as an employee. While my answer as an individual to this question is “to some extent”, my answer as an employee is an almost emphatic “no”. The average worker has virtually no pricing power in today’s employment market and hasn’t for some time as made evident by the lack of real wage growth over the past few… Read more »

J Z
Member
J Z

This is labor thinking. This note is “capital” thinking. I think the goal is to identify businesses or resources that will survive the inflation while those who are lack of pricing power will die in inflation. Whether inflation will happen or NOT is up to debate. But if it does happen, I guess we all want to hold securities that can survive that. I am proud of my skill and stuff that I design, but… Read more »

BobK71
Member
BobK71

The winning coalition during the Glorious Thirty Years post-war comprised of Western governments and voters. (The coalition being the joint major beneficiaries of issuing money and financial assets by the West.) This was sold as a Keynesian-economics/great-society-for-all project. When the glory faded from Western social democracy in the 70s (i.e. that particular bubble had burst,) the winning coalition went back to its age-old composition of top politicians and bankers. This was sold as a supply-side-economics/fiscal-and-personal-responsibility/globalized-economy… Read more »

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