We’ve talked all week about what I’m calling the Great Reorganization.
To bring new readers up to speed, the thesis is rather simple. Virtually every aspect of our economy has been “financialized” over the past 50 years. This caused some major distortions that threaten to sink the entire dollar-based financial system.
As we discussed yesterday, the mass financialization of our economy was itself a fundamental reorganization of American society. Painting with a broad brush, we went from being focused on quality of life to being obsessed with maximization.
That is to say, the rat race became our reality… and family-owned shops on quaint Main Streets became our past. The case of Downer’s Hardware we talked about yesterday is a microcosm of that massive trend.
However, a major sea-change at the heart of the global financial system signals that we’re in a new era now. We’re at the cusp of another major reorganization of American society. It will resemble some of the better features of our past… as well as new aspects we can’t possibly envision yet thanks to technological innovations.
The vision for this Great Reorganization began to take shape in my mind when SOFR replaced LIBOR as the interest rate benchmark for dollar-denominated loans. The seeds have been sown for several years now. But something caught my attention last week that seemingly confirms it for me.
On October 12th, the Wall Street Journal ran an article titled: America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs. The article went on to detail how private equity (PE) firms are now rushing to buy skilled trade businesses.
The PE guys plan to “rollup” the skilled trade industry by purchasing locally-owned plumbing and HVAC businesses that can be integrated into a larger company. That way the revenue and profits from a range of small businesses accrue to the larger company… to make it look good.
From there they intend to aggressively cut costs in each local business so as to drive the larger company’s profitability metrics higher. Then in a few years they plan to sell the larger company for a profit and walk away with their pockets fattened.
But here’s the thing – the PE guys aren’t smart. They know very little about the businesses they acquire… and they care about them even less. They only know one game and that’s the financialization game.
What’s more, the PE guys are always three years too late.
I say that with confidence because one of my old colleagues from the investment research world knows them very well. He was the top salesman at a company they acquired around 20 years ago. He saw first-hand how they operate.
The first thing they do is fire every employee with any kind of independent drive. They only want employees who will do what they are told from corporate headquarters without question. But the people with independent drive are always the ones who get things done… so it usually doesn’t takes long for things to go downhill.
My old colleague also has some friends in the PE space. He goes out to dinner with them a few times each year… and he describes them as robotic in their thinking. They aren’t innovators. They aren’t pioneers. They are always looking backwards by at least three years.
So if the PE guys think that they’re going to buy up small plumbing and HVAC businesses from all across America to consolidate the industry… I’m confident in saying we’re going to see a resurgence in locally owned skilled trade businesses over the next decade.
The PE guys will quickly make a mess of things. And then young folks who learn these trades will have the chance to start their own companies, hire the best talent, and quickly capture a huge slice of the market share in their area.
It’s a fundamental dynamic that life reverses entropy. One could even argue that reversing entropy is the primary purpose of life.
We can think of the situation above as reversing entropy within the American economy. And it’s going to happen in most of our industries as the Great Reorganization plays out.
And that brings us back to where we left off yesterday – there is a time for everything… and a season for every activity under the heavens.
Mass financialization – the only world the PE guys understand – its day has come and gone. Because that world can only exist with cheap money and artificially low interest rates.
As we’ve discussed, normalization is now the order of the day. And normalization changes everything. We’ll talk about how on Monday…
-Joe Withrow
P.S. We’re now a week out from our live webinar: The 4.5 Things You Need for Financial Freedom: How to Create True Financial Security in Today’s Economic Climate
I know we’ve spent the whole week talking about economics and the big picture. I find this stuff fascinating. But more practically, I firmly believe that we have to understand the big picture if we want to get our personal finances right.
So we’re going to talk about practical, actionable investment strategies at our webinar next week. We’ll go live on Friday, October 25th at 3:00 pm Eastern. The core presentation will run for about an hour or so. Then we’ll open it up to unlimited Q&A.
And I promise, we’ll make sure you walk away with some robust strategies that you can begin to implement immediately. We’ll even send you three financial guides to help you put everything into practice.
You can register for the event at https://phoenician-league.lpages.co/webinar-oct24-int/. We have some great bonuses prepared for those who register ahead of time – for those who would like to study up on some of our strategies early.
See you next week!