Playing the beer game
Remembering the 1990's Peter Senge classic in 2022.
I remember listening to The Fifth Discipline by Peter Senge when it came out. Systems thinking was a big topic at the time and has only gained in importance thanks to our ever more interconnected world and the massive disruption from COVID that we are all still living through.
There’s a link below with a better description, but the beer game is about systems thinking. A small beer company (Lovers) has been chugging along when a huge rock star is seen drinking it on stage. (Kind of like an Oprah moment.) Suddenly, people want to drink more, so stores run out and double their orders. But the supply chain can’t scale up fast enough, so the deliveries are short of what’s ordered. So the stores double their orders again. Deliveries are less than what was ordered. So they double orders again.
Eventually, production increases and supply begins to “catch up” to these orders. But all the orders are now *multiples* of what the channel wants. Stores get truckloads of beer that will take them months or years to sell.
Here come the trucks!
Today, we’re seeing a flood of merchandise showing up after severe constraints in supply. Here are just a few random points from the last week or two. (links and graphs below)
The homes for sale inventory in Austin, Texas, bottomed at just below 1,500 and has since increased to over 9,000. For context, the new number is more consistent with normal levels, at least so far.
Reuters ran a story that included recent data regarding warehouses being out of room at the beginning of August and the trend for it to worsen.
Retailers reported dramatically expanded inventory levels during their Q2 inventory reports, and industry publications like WWD expect an uptick in promotional activity in Q3.
We’ve had too many job openings and not enough people to fill them for quite some time. We’re beginning to see more waves of layoffs as companies come to understand that conserving capital and driving profitability is more important than growth. The MongoDB MDB 2.61%↑ chart below shows quarterly net income vs. share price. Those lines need to be going in the opposite direction!
The global economy and the markets are bigger than the Beer Game! But it still matters and will help you think about what is happening in some sectors.
Contextual aspects are very, very large. For example:
The Fed is removing liquidity at an increasing pace beginning this month.
We have been through massive wealth destruction in the past nine months.
Corporate managers continue to hope for the best and point to still-high Q2 margins as evidence that “things won’t be that bad.”
We have Russia/Ukraine and a deteriorating trade situation with China.
FWIW I still have the same *fundamental* level on the S&P of ~330 versus the current level. This is only my *personal* view of the market. I focus on individual stocks but need a market context to factor into position sizes, long/short mix, and risk management.
REMINDER - NOT INVESTMENT ADVICE. NOBODY KNOWS ANYTHING.
Austin Homes Inventory
More on the Beer Game: What is The Beer Game?