More Signs of the Bullwhip Effect (part 2)

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I wrote a post at the beginning of the year that the bullwhip effect was what kept me up at night. It actually was one of my most-read posts thanks to a bump from Andrew Walker (thank you sir, if you are reading). To summarize, it was a fear that while everyone else is focused on inflation, I was thinking about the after effects of a bullwhip. That is, on the way up, customers tend to see strong demand, prices are going up, and they realize they don’t want to be caught short and also want to get ahead of price increases, so they pre-buy.

Once demand tops out or reaches a tipping point, prices start to fall, customers say, “eh, I’ll just wait to buy when it is cheaper” and it is a destocking downcycle. It isn’t quite intuitive because sometimes  prices of inputs can really overshoot to the downside yet buyers are still reluctant to step in. But that is the point. The bullwhip overshoots on the way up and down.

With COVID, I think we saw this on steroids. Where customers saw strong demand, cost increases, but also supply chain challenges that made them consider having safety stocks. You can imagine why I have a fear of this upcycle-on-steroids turning into a down-cycle-on-steroids. Anything with steroids isn’t good, except for professional baseball, football…


I won’t rehash Target or Wal-Mart‘s earnings, or Bed, Bad & Beyond, which all seem to be experiencing excessive inventory in some fashion. In the latter case it completely sapped their liquidity. This could be true of Big Lots as well, we shall see but the tea leaves are not good.

But now, we have chip companies – center of the storm for supply chain challenges – calling out the bullwhip. Nvidia, which is a top 10 S&P500 company, recently came out and said,

Second quarter results are expected to include approximately $1.32 billion of charges, primarily for inventory and related reserves, based on revised expectations of future demand.
“Our gaming product sell-through projections declined significantly as the quarter progressed,” said Jensen Huang, founder and CEO of NVIDIA. “As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory.

Not only did they get demand completely wrong, they actually are taking an impairment charge on inventory! That is quite a change from 2021.

Here is Micron as well. They don’t just describe the bullwhip, they talk about its financial impact (demand down, but they also need to throttle back production. Doing so leads to bad decremental margins).

But they aren’t the only ones. Check out what Armstrong (a ceilings company) said about what they are seeing. I think they describe the bullwhip effect beautifully! I know it is a lot of text, but at least read the second half.

Low and behold, many other building products companies are reporting similar impacts. Here is Trex, a composite decking company, which typically viewed as a compounder, long reinvestment runway company (but also decking benefitted from the home being a sanctuary).

Their competitor Azek also mentioned similar things.

Here is Ryerson, a metal distributor:

And here is Stanley Black & Decker


So you get the point. There has been a swift change in what companies have seen and we look to have a destocking cycle on our hands. The last time we saw this was around 2015-2016, when there were similar fears of a recession, prices were correcting lower, inventory was fine so it was a perpetual down cycle.

It didn’t last long though. But you can probably guess why I was recommending municipal bonds a month ago when the 10 year treasury got to 3.5%. My bet was we actually have a disinflation problem coming, and that is starting to prove itself.

My advice would be to continue to avoid things with too-good-to-be true “demand.” Especially those that experienced strong bumps during COVID. That seems like it could unravel quite quickly. On the positive side though, I think the Fed will accomplish its goal on tamping down inflation! At least on the goods side.

One thought on “More Signs of the Bullwhip Effect (part 2)”

  1. Interesting. Thanks for collecting those quotes.

    In the past few months I’ve also often thought “that’s what Diligent Dollar predicted.” It seems likely to me that the bullwhip effect explains (at least part of) the inflation problem, made worse by the supply bottlenecks due to covid. I don’t think there is evidence for “monetary” inflation but I’m open to the idea that inflation can be a sticky thing. However I also remember looking at historical inflation data and my takeaway was that inflation can cool down surprisingly quickly (= not sticky).

    It’s tricky to try to predict something like this, but it’s good to be aware of possibilities. Perhaps you said it best when you said:
    “avoid things with too-good-to-be true “demand.” Especially those that experienced strong bumps during COVID. That seems like it could unravel quite quickly.”

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