Odd Lots - Stinson Dean on the Lumber Crash That Followed the Boom

Episode Date: November 8, 2021

These days, commodities around the world are on a tear. But earlier this year, there was a lot of fixation on one in particular: lumber. Lumber went absolutely parabolic in the spring before collapsing rapidly. What's interesting is that this collapse was not due to a slowdown in housing per se. Housing is booming. Instead, it was a variety of idiosyncratic factors (including lumber storage availability) that caused the wild move. So, for this episode, we invited back Stinson Dean, the founder and CEO of Deacon Lumber, to explain what happened, and what lessons there are for the rest of the commodities complex. He also offered his view on hiring, and why some companies seem to have an easy time hiring, while others have found it so difficult.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So, you know, you don't, you know, one of the things I really like about 2021 is? About 2021? Yeah, or 2020 and 2021.

I mean, I feel like I could take a guess, but why don't you go ahead and tell me. Well, so obviously, like, okay, it's, you know, we've been doing a bunch of on like supply chains and commodities. But I feel like this is a time for specialists. Like people who know. Oh, yes. Yeah. And it's,

I feel like one of the themes of kind of like this podcast, but also in general is like I'm kind of like weirdly less interested in some respects in some of like the pure macro stuff that we've like, I've covered for much of my careers. And the people that I like really yearn to talk about are like the people who just like know an industry really well. it's like super fun. Yeah, I think we've discovered the wonders of micro and just being able to investigate these individual markets that we haven't necessarily been familiar with before has been

really, really interesting. And also, I think I told you this once before, but when I was going into financial journalism, I always really wanted to be a commodities reporter because I was kind of interested in things and like this idea of global trade. And 2020 and 2021 has just been phenomenal from that perspective, like the actual study of things, like how they're produced, how supply and demand works for individual markets, the different players, plus the logistics of actually moving them from A to B. No, this is a year for granularity for specialists and the degree, you know, like if I want to understand what's going on in a commodity market or I want to go understand what's at some

aspect of the labor market, I'm not going to like ask some like, you know, there are certainly like macroeconomists who are useful. And we talk to them all the time and we've had them on recently. We just spoke to Matt King, right? Yeah. Yeah, yeah, yeah. So, you know, I would not want to slag any of our other guests. But I really like, there's so many things now where it's like, we got to talk to like someone who knows this thing.

And that's sort of been one of the fun things, I guess I would say, about learning and talking to people in 2021. I mean, what I will say, and Matt King kind of brought this up on the recent episode, but there are micro explanations. for almost every move in the price of something that people have been talking about recently. So, you know, we've been speaking a lot about individual commodities. You know, we did like one on sinks. I remember I wrote about mayonnaise. You can look at a particular product or market and come up with an individual perspective. But at the same time, like all of that are feeding into this broader macro backdrop where people are worried about inflation.

And we've been talking about that quite a lot as well. Right. So one of the first, you know, we've had a bunch of these, but one of the first episodes that was kind of like one of the breakout for us, like 2021 episodes that was like really extraordinary that we learned a ton about was back in April. And we talked to Stinson Dean. He is the founder and CEO of Deacon Lumber, which is a lumber trading operation. And if you recall, lumber was interesting because I guess it was kind of like the canary and the coal mine in a way. Because now we've got this a global, huge global commodity run, right? Like major bull market and basically everything you can think of. But at the time, I think commodities were running, but we did not, you know, lumber was like this, was like kind of like this like parabolic move.

And we're like, what's going on there? Why is this kind of weird? And now we've seen tons of commodities, European energy and natural gas and coal and stuff. Some of it's cooled down. But lumber was kind of like this canary in the coal mine. it's soared like crazy. And since then, it's actually one of the few commodities over the last few months that's kind of been in like a bare market.

It almost feels like it's been like a few months ahead of everything else. Right. So if you look at lumber as this canary in the coal mine or some sort of like mystical oracle when it comes to other supply bottlenecks, it's kind of telling you that, you know, some of those pressures might be easing. I think we're down to around, is it like $600 a little over? $600 down from a peak that was like more than $1,600. Yeah.

So that's pretty extreme. And it's something that you're interested in. And it's something, you know, there's like this idea. We talk about the bullwhip effect. It's like the question is, does major demand in right now, like, could we, you know, people are talking about, oh, or it could maybe one possibility is that we see persistent inflation in 2022. Another possibility is we just see like major gluts and everything.

if we have like major, you know, it's like maybe the backside that says crazy disinflation. Anyway, I'm very excited because we have Stinson back. Like I said, the founder and CEO of Deacon Lumber. And so now it is time to talk about perhaps the backside of the boom and what happens after the huge run-up. So I'm very excited about this episode. Stinson, thank you so much for coming on Odd Lots. Hey, y'all. Thanks for having me back.

It's been a wild ride since Odd Lots and then, uh, you know, we've come a long way. And yeah, we're trading at 600 on the future screen. We got as low as 450. Wow. A high of 1733, you know, for those paying attention. Yeah. You know, it fell faster than it went up, which was hard to believe that that was even possible.

But, yeah, it's a different world in lumber compared to what these other folks are going through right now. Yeah. And it's kind of crazy. I mean, it's a different world in lumber. And I don't know whether it feels like ages ago that we talked to or just yesterday. I can't only decide, but it was in April and now it's November. So I don't know. That's like six and a half months or something since the last thing we talked to.

Kind of hard to believe. But like, why don't you just sort of like big picture, you know, and we'll get into it in more detail. But give us like the sort of like big picture of what happened, you know, lumber peaked about four weeks after we had spoken last time. So it kind of timed to peak. We'll see. Maybe we're timing the bottom. bottom here. But why don't you sort of what happened after that? Yeah, I think that's good to kind of pick up where we left off from a price perspective. So when we recorded late April, May, the market

peaked in late May. But from mid-April to late May, the market had doubled. It's not like it did some about face immediately. Like there was a lot of price action left. It just all happened in a hurry. So it was a short squeeze. And I think we talked about last time, like eventually people will get covered and then what? And my argument was higher for longer, for lumber specifically because of a lot of structural, bullish issues in the log supply, manufacturing, and demand. Incredible wave of demand, as we all know for housing. We definitely squeezed from $1,000 to $1,700. That was all just short covering folks covering commitments that they had maybe committed

at $600, $700, $800, and they were just waiting for prices to come back down to normal to cover that for hopefully a profit. None of them thought about limiting their losses. There was going to wait, wait, wait, well, no one could wait any longer. They had to cover. And seemingly everyone was in that boat. So it squeezed us and we blew the top off at 1700. And, you know, when it turned, I felt pretty confident that it was over, but a lot of people didn't.

And that's what makes markets top is folks who thought we shouldn't be this high, all of a sudden start believing we're going to be $2,000 or higher, including the producers themselves. So it was a painful ride down for a lot of folks. and what was interesting, and I tweeted about it through the summer, we could watch lumber futures get cut in half and go from 1700 to 850, and we would see reports from builders or contractors going in and saying, my price is not half of my quote from three months ago. Why aren't I seeing price depreciation that we're seeing in futures and all the things? And to me, it was really telling because in a marketplace and certainly commodities,

you should have enough players that all have different trading strategies, different break-even points that one or two of them can offer lower prices, gobble up all the market share, and force their competitors to meet or beat their price. But we weren't finding that this summer. It was bizarre and inefficient. And I couldn't really explain it. And then I started to think maybe everyone was so upside down in their inventory that they were selling on cost plus with that cost being very high versus replacement cost. And if your competitor down the road also has a high break even and they could replace.

and buy more inventory for a lower price, they're going to try to blow out their high price inventory before they lower their prices. But you can only do that as so long as your competitors are not lowering their prices. And it's seemingly all summer, the cost savings seemingly were not passed along to the consumer. But the reality is they weren't cost savings because the lumberyard hadn't re-bought to lower their break-even price. So they were cost-plice. So they were cost plus with their cost being extremely high. And they were able to largely as a group pass along these higher costs and escape somewhat unscathed. It was quite impressive.

And wild to think that there was no entity out there that could undercut and gobble up market share because they had a lower break-even cost. And I was arguing this will be kind of my final point on that. like lumber kept going down certainly went lower than I thought it would go and I'm like well I don't think it's going to bounce until folks step back in and replenish their inventory and if they bought it 1500 and they could buy it 600 their average would be you know a thousand bucks or something and then you'll see lower prices push to consumers so until it's stopped going down indicating buyers coming in at much lower prices until we saw that, retail prices were going to stay high. And I think that's kind of how it played out.

Retail prices stayed high relative to replacement costs. And then finally, that high price inventory got moved out and prices have come down to the end user. So that was June, July, a little bit of August. Then something really interesting happened. I call it our negative oil moment. So y'all remember oil went negative. Of course. The fundamental reason was there was no place to store it.

Right. What's a number, Mr. Customer, that you would buy at? Just give me a bid, you know? And there's like, there is no number because I have no place to put it. And maybe this happened in oil, but certainly in lumber, I'd already bought what I thought was cheap at the time. So my cash is already, my budget is already spent an inventory. So I have no budget left to average down. And if I did, I have no place to put it.

So it turned into a negative oil, like, we'll pay you to take it from us because we don't have any place to put it either kind of situation. And with lumber, our negative oil moment was, and this is real geeky commodity trading verbiage, but the contango went to a $100 discount, which it was the September contract traded $100 below the November contract. It basically means you could buy lumber for today and pre-sell it 60 days later for $100 more. You just needed somewhere to store it. Right. Which is easier than with oil. Yeah, you would think.

You know, certainly yes. Like you can stack lumber in a field and it's not going to like contaminate anything. But like the facilities. that specialized in building materials handling were full. They're still full so that the market was paying you $100 to store it for 60 days when the hard cost to do that is like $12. So the textbook calls it riskless profit. It's an $88 profit.

No-brainer. Buy today, sell it for $100 more to more on a futures contract two months out. I mean, it was a no-brainer when it was at $20. And then it got the 30 and 40 and 50. There was no bid because no one had the money, the budget left to buy it because they, you know, they had bought lumber what they thought was cheap before. And they had no place to put it. So it's like, yeah, hey, Mr. Broker, that sounds like a great deal. I agree with you.

This is great value. But I cannot take it. There is no place to put it. So it certainly didn't show up. in flat price. We didn't go negative, but the fact that we had a $100 discount to carry lumber from one month to the next contract month was insanity. When I saw that happen, and we had pretty large carries in the July contract too, we got a while. There's a lot of lumber out there that we got to chew through before we get back to some kind of equilibrium. And we've been, you know,

for months and months, been trying to work through that backlog of inventory that's in the pipeline. It's in the hands of different players in the supply chain, largely out of the mill's hands. They've blown it out.

I own a lot, a record-breaking amount of lumber for my little company and a lot of my counterparts as well and a lot of my customers. So there's just a lot of lumber out there that needs to get delivered

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So, first of all, I feel really bad that neither Joe nor I think wrote about the big contango moment in Lumber Futures. Like, that completely passed me by. I think I did you? I'm sorry. I think I wrote a piece about the Contango. I'm not sure. I'll have to go back.

Well, it was a big deal in my world. And to be honest with you, there's only like six of us in Lumber who even pay attention to it anyway. But yeah, it was pretty dramatic. Well, so secondly, can we dig in a little bit more into that buildup in inventory? Because I seem to remember when we spoke to you in April, like one of your feces for why this might be, you know, higher prices for longer was this idea of the, like, lumber yards and lumber producers having been scarred by what happened in 2008 with the bursting of the housing bubble and that, you know, they had persistently. underinvested in capacity because they were always afraid of that happening again. And yet, you know, fast forward to the summer of 2021 and suddenly we're talking about a massive glut and

inventory and, you know, contango such that you can hold lumber, you know, buy on the cheap and then sell it forward and make a riskless profit. So what exactly happened? The lack of CAPX includes storage capacity. If the idea, is going to, we're going to run lean and mean, turn our inventory, like you don't need a lot of space to turn it. Like, ideally, you buy just in time inventory and you don't hold it very long. You turn it into AR, you turn it into the cash, you can do it over and over. And that's been the model from the producer all the way down to the retail lumber yard. All of a sudden, what we call in the lumber industry, outtake, how much lumber is leaving a lumber yard and getting installed in a house

or an apartment, I'll take grind it to a halt. And this is, I think, the bullwip effect. If listening to your last several podcasts comes into play in the global supply chain crisis, starting to peak right now, affects lumber. So a lot of the lumber that's piled up is largely sold. It's committed to a job. But that job is not ready to take the, lumber yet because they're still waiting on the windows and the appliances to finish the house before.

So they have a job on the books, but they can't close out the previous house until, you know, they get all the finish products in there that are heavily related to the global supply chain. The biggest issue for us was truss plates, floor trusses, roof trusses, the little butt plates that go on all the joints, metal trust plates. Two companies have 80% of the market share. And when these trusses are spec and approved by the county and on, no, no, no, no, like, you can't switch the plate to some other plate supplier. Like, it's spec specific to some certain technology. And you couldn't get trust plates.

And this is just metal from turkey or whatever. I'm not an expert in that supply chain, but it's not domestic. produced. So you couldn't get trusses. So it was almost like if you envisioned building a house, no one could get the lumber for the first floor. Then they got the lumber. Now we need a floor trust, the webbing that goes between the first and second floor. We can't get that. It's backlogged. We can't get the plates. So I don't really need the lumber for the second floor until I get my floor trusses in. And those are months out, months and months. So you had lumber, that was scheduled to deliver in July.

Now it's on indefinite hold. And you have lumber prices falling, falling, falling, so speculators like myself and other folks in the supply chain just kind of buy lumber because they think it's cheap, not anticipating the inability to turn your inventory because there's this bottleneck at the job site of the apartment and of the house, the single family home, that is all held up.

You can't get to the second floor because you don't have trust plates. And then you need the roof trusses. And then it became, I can't fit. Like, there's carrying costs for the builder and the construction loans and the draws. Like, they have to close out and deliver the house to get that last payment to that rollout into the next, you know, project. So it held up all these other projects because, like, couldn't complete homes. This is so fascinating. You know, we talked to Ellie Wolf, you know, who monitors this stuff.

I think a couple months after we talked to you. And so basically, you know, we think about, and again, think about also the Met King episode, just like the sheer, like, complexity of what we're talking about. So it's like, okay, like we think about supply and demand is, you know, these two lines that cross. And we know that there's a lot of demand for homes. And we're in a bit of major housing boom. Maybe there's a little bit of softening lately. But we've had this huge demand boom.

but it's something as simple and you know Tracy has written a lot about this like okay one part doesn't come and the house doesn't work like if you don't have faucets you can't live in a house so you could have major demand for housing and lumber and still no actual orders being placed because you're missing a part right and I've learned about trust plates I had no idea that that was like I'm going to Google trust plates right now so I can see what they look like while we're talking I'm thinking we need like like a trust plate episode now. I see.

Okay. Okay. I see what they are. Just that little like four inch by six inch little nothing, you know? And it is holding back an entire sector of the economy. And, uh, okay, you got the trust plates in. And then now you need faucets and toilets and refrigerators. So it caught me off guard.

and just being so narrowly focused on lumber, now I'm like, I got to think more macro than I would. Y'all were talking earlier about the specialists. And I'm highly specialized in a two-by-force. No idea about metal. But now I'm kind of like there's indicators and I'm looking at and supply data that now kind of come into view.

And largely just talking to my customers and what they're hearing on lead times on trusses. but didn't see that one coming. A lot of us didn't. So Tracy, to round out your question, we just kept seeing lumber prices fall. And we saw, we know that customers are paying homebuilders

extremely high historical prices for lumber. So every time I buy lumber, I'm largely booking a profit because I know not me, but the retail lumberyard, they know what their homebuilders are paying. The problem was no one saw just the backlog of

uncompleted homes. And it shows up very clearly in the housing starts data. The amount of homes we're completing is decoupling from home starts in a way that is pretty glaring.

And it all rounds out this whole point is we're just not completing homes. So it's hard to roll over and your money and build the next one. So it's just, you know,

people sold value. They kept buying, buying, buying, and then not being able to deliver. So for every, rail car, they bought five rail cars, they'd maybe deliver one. So every month, they'd accumulate four rail cars. And that happened over three, four, five months. And here we are. Okay. So here's another very basic question. But we're getting the sense that, you know, even if the lumber market had

reacted perfectly to supply demand changes, there would be things outside of its external control, like what's going on with trust plates or, you know, sinks and faucets missing in a house that would affect the market. So I guess my question is, like, what is needed for prices to stop falling and for things to sort of, like, come back into balance? Or is it just, like, completely beyond the lumber market itself at this moment and time? No. So it's the question the industry is trying to answer.

And to me, the answer is simple, but not easy. It's we have to cut production. and we're just we're producing more than we're I call it installing in homes and that's a recipe for oversupply and lower prices and a $100 contangos. We're just way out producing the capacity to build homes, which is shocking because just six months ago, we're at $1,700. And if you if you didn't see this, the $1,700 spike on a chart and here we are at $600. bucks on futures, that would be the record high price ever in lumber prices and lumber futures

going back 30 plus years. 600 bucks has never been seen before outside of the last 18 months. But now we're talking about curtailing production. So this idea of hire for longer, we're almost double the five-year average price. The mills used to love $400. Now we're over supplied at $600. And for it to change, we need to produce less. But the problem with that is the supply chain is so out of whack,

the amount of inventory held by each player, the producer, the secondary market, the retail lumber yard. Ideally, everyone has a little bit and it's all pretty smooth. Well, it just became this thing where the mills had all of it. And then the secondary market now owns most of it because the retail lumber yard, their whole goal this summer was work down that high price inventory. Like I talked about earlier, don't rebuy, don't add average in, get rid of the high price stuff, and then we'll deal with it.

So what we're seeing now is that big pile of lumber at the retail level is getting lower and lower. But now there's this big pile at the secondary level we got to deal with. So that's getting bought. But if a retail lumber yard is buying from the secondary market, they're not buying from the sawmill. So the sawmill is, I think, headed for a little bit of pain here. Their break-even prices are significantly higher because log costs are up.

Lumber tariffs are doubling in a couple weeks and labor. So they don't have the break-evens that they did in the past. So anything under 600, the major sawmills are losing money. And here we are at 600. And they're not seeing the demand because the buyer can lean on the secondary market, which has been painfully holding on to lumber since $1,100. I'm just trying to average, average, average, average. And now here's their moment to blow out their pile and turn their inventory into cash.

Everyone has held lumber longer than they've ever felt comfortable with and at much higher volumes. There's a big pile of lumber we've got to get through. So the producers need to reduce their output. And I'm afraid when they figure that out and they implement it and they reduce their own hand inventories, they reduce their output will be just around the time. The secondary market has been depleted. and now that end user, the retail lumber yard, will then turn to the mills to get ready for Q1 spring building season, the seasonal lumber party that we have every year,

and the mills are going to have tooled down because they haven't seen demand in three months. So we have to restrict supply to bring the contango in and work through the pile of lumber we have. But I feel like because we're so out of whack and we're hitting these extremes on the upside and the downside that we're not done. That pendulum is not done swinging. So I'm a little nervous for a really bullish Q1 and not enough production to meet it.

So one of the interesting implications of this, and this was something that we talked a lot about on the last time we talked with you, and we've talked with other people when examining this industry. But it's acute in housing, and that is, of course, that after the great financial crisis, so many actors within anything related to housing were scarred, they stopped investing, maybe they diminished capacity. And from what you're saying, and so that, you know, we sort of pay the price now because what, you know, the diminished capacity then becomes a bottleneck that we have to pay the price for in a boom, you know, what we're seeing now in lumber with that price, it's like,

I wouldn't want to, it does not sound like an environment in which there's going to be much appetite to increase sawmill capacity or that anyone's going to increase capacity or make a real long-term cap-ex environment because in a way they did just get burned again and maybe it's not as bad and as you say prices are still well above the five-year average and so forth but it did sort of once again and the home builders of course you know the bottom hasn't fallen out for them but at least for this one part of the market they're sort of like well yeah this is like a good reason to like remain hesitant about significantly adding capacity? Yeah, like I got mocked for saying,

for implying this time is different. And they were right, like, sure enough, like, we didn't stay above a thousand and a little bit of my naivete and inexperience and lack of macro appreciation for global supply chain and trust plates. But now I know. Yeah, we got to do a trust plates episode. Yeah.

There's a lot of announced investment, Greenfield acquisition in the southern U.S. to produce more Southern Yellow Pine. Southern Yellow Pine is incredibly profitable at these current prices, which are at the low end of the last 18 months. Incredibly profitable. Two by fours are going for over 700 bucks per thousand. And I don't know the Southern Yellow Pine game as well, but. I'm guessing their production costs are 300-ish, maybe a little higher, 350. So there's a lot of announced investment into Southern Yellow Pine. But this goes into the larger point of Canadian lumber and Southern Yellow Pine are different, used differently.

And you can't, unless we build homes differently, all that announced production doesn't really alleviate the shortage of lumber in the way we build homes now. If we start building homes with Southern Yellow Pine, that's different. But there is there is KAPX in the South. But in Canada, it's the finite log supply that limits anyone from putting risk on on a production basis up there. In fact, the Canadians are the ones opening sawmills in the U.S. South. So that's a really interesting dynamic. We actually, we've talked about, we talked over the phone a couple times, I think, between our last episodes. But your mention of the trust market and the 80% market share that the two companies have

reminds me that one of the interesting dynamics in the market right now, and it really relates to, like, who has market power at any given time? And so if you're a trust seller, you probably have a lot of market power because there's only one other competitor, and you could probably dictate terms. And if you're a home builder, you're probably forced that you're like a, you're probably a price taker on a lot of this stuff. Overall, in the housing market, what is the position of the home builders as it relates not just to their dealing with the lumber market, but also with all of the other things that they have to buy? Like, how does, like, who has market power right now to

sort of dictate terms, both in terms of price and financing terms in housing right now? And how did that play out over the last six months? I'll speak briefly. I'll attempt to, because this is a little out of my scope, because I'm further back in the supply chain, but from what I can observe, okay,

the home builder has less bargaining power and leverage than they've had this whole cycle 2008 onward because the supply chain is consolidated around them. Their suppliers have consolidated. The suppliers, suppliers have consolidated. So they're not in a great position. And it's really manifested in the last six months because on the lumber side, it came down to risk. Who is going to warehouse figuratively and literally the lumber price risk?

And for 12 plus years, it's been the lumber yard has been committing to prices over 90 days and buying the lumber second, hoping to buy it cheaper. And that's what got us in our squeeze. Now coming out of that, the suppliers who are bigger in scale than they were facing national home builders are like, yeah, we're not going to do 90-day pricing. So the home builder suddenly has to have expertise in lumber price risk management, which they don't have. They never had to have that because their supplier gave them a fixed price and they moved on. Now the supplier is giving them a two to four-week price and the home builder needs a fixed

used to is is accustomed to a 90-day fixed price. So I, you know, I've seen home builders actually steal very talented buyers from, from retail lumberyards to come work in-house. You hear stories of home builders warehousing their own materials. And I don't think that's going to end well unless they bring in some, some talent. But they're just not tooled to handle price risk. And then from a terms in negotiation, standpoint, there's less people for them to turn to in the supply chain because this supply chain has consolidated considerably in the last five years. You know, it's really interesting this idea that a commodity price can collapse not necessarily

because there isn't demand for it, but because of other things going on, they're just like no one can take delivery, even if there is still a lot of demand to build homes. And so you mentioned the trusses and windows and faucets. You know, we raised this question in the beginning. This idea of, like, lumber is kind of this canary in the coal mine. We have seen some big moves in other commodities down lately. We've seen a lot up. But, you know, if you look at, like, say, aluminum prices or coal prices in China or electric.

There's some violent moves down even in this. Is there a – and, you know, we're all just speculating here, but is what we've seen in lumber, could it be in your view that 2022, maybe we are looking at – not sort of persistent inflation, but sort of like an age of a glut after all that we've seen in 2021. Yeah, I do. To put a little bit of context around the lumber glut being, it really was exacerbated by the supply chain issues.

But it was happening before trust plates were an issue, before appliances were an issue. To me, in lumber, it happened because of the price risk transfer from supplier to homebuilder. And homebuilders didn't know how to deal with it. So they just over, Ali was on your show and she tweets a lot over and over. Limiting sales by design is wild. That a business would do that. But I get it, that's how they're mitigating risk.

So if risk is getting moved to a part of the supply chain where they're not used to handling it, like Costco chartering their own boat or whatever, right? You guys talked about that with one of your container folks. And he goes, it was reading between the lines. He was like, yeah, that's going to be an interesting one to watch because they have no idea. I know a guy, commerce, kind of how that works. And I think there's just going to charter a boat.

And so Costco or a home builder all of a sudden has to deal with this risk that they used to just easily lay off on their vendor. that will limit their ability to perform their business because they're dabbling in something, they have no idea what they're doing. And so it just limits production, if you think of like home building because we're not sure what we're doing. We're going to pull back on the risk

and try to feel our way through this market in which we find ourselves having more risk and price fluctuations than we've had to deal with in the past. So if that plays out, you know, on the other end, I mean, these are worldwide commodities. Metal, oil, natural gas. Like, we don't have a structural shortage of those raw commodities. You know, the line of the CAP-X has been reduced because of green. I just, like, these things are a little bit easier to switch on than, I mean, we've seen it over and over.

So I'm not super cycle for multiple years, commodity guy, because I just think, market forces will work itself out. This is Tom Keane inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open. We cover stocks, bonds, commodities, even crypto, all the information you need to excel. And I'm Alexis Christophers. Bloomberg Surveillance also brings you the analysis behind the headlines.

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That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophoris. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, Essential Listening, each and every business day. So one of the reasons we actually wanted to invite you back on the show was obviously we wanted to talk about what lumber prices were doing and the drop that we've seen. But we had a number of people looking at your Twitter feed who saw some of your tweets on the labor market. And we're really interested in getting your perspective on what's going on at the moment.

Because of course, in addition to physical shortages of various goods, one of the things that people have, have been talking about over the past year or so is this idea of an actual labor shortage. And we've sort of gotten mixed messages on it with the people that we've spoken to. You know, on the one hand, there are those who say it's really hard to get people at the moment. And then on the other hand, there are people who say, well, you know, if you have the right job and you pay the right wages, it's actually not that difficult. So first of all, I'd just be curious to get like more of a sense of where you fit in here. like how many employees do you actually have? What sort of business are you running?

And then secondly, what you've noticed in terms of the labor market recently. Yes. Tracy, are you sure you want to go down this road with me? I'm pretty passionate about it. Yes, yes, we totally do.

This is going to be like a two-part episode all in one. Let's do it. I love to talk about it. And I just for the record, I gave you like a heads up that you asked me. So, yeah, so I own several.

companies outside of lumber and inside of lumber that I have a total headcount of about 100 employees, the vast majority of which drive a truck and make $40,000 a year. So I just have been on the front lines of hiring, staffing, paying, negotiating with the but largely un-college-educated $40,000 a year laborer. So that's where most of my perspective has come from, is being on the front lines of the labor market. And what have you seen recently? What works in hiring?

Yeah. So if you pay people more, it works. I try to keep things that I start from the very simplest explanation. Like, you just, it's the labor market, as a commodity trader, the labor market, I don't want to liken folks to pieces of lumber, but it's a finite commodity that has fluctuations in supply. So as a commodity trader, I looked at this market and said, we're heading for very tight labor market. And if you are bullish on whatever commodity, you start buying, you get long. And so I told our operators that we need to start locking in labor that we already have and hire and build a bench and be overstaffed. If you're overstaffed, that's the goal.

Like, I'm not going to be upset. I'm not going to push back on budgets if it revolves around labor. So we are overstaffed. We have a very happy workforce and we're not working everyone to death because we refuse to pay higher wages. So what I see and what I've learned is the labor market's tight. Why it's tight as a business owner, I don't care. I have opinions on it. My business partners have opinions on it.

We don't agree. But we do agree on the reality that the life. lumber markets tight. And if you sign up to be a business owner, you sign up to be an entrepreneur, you don't have the luxury of complaining. You have to deal with reality. And the reality is if we're going to run a business and not at scale and not be the ones having to drive the trucks, which isn't the best use of our time, we're going to have to pay the folks and find a clearing wage. So we immediately raised our starting pay $2,000 a year more benefits. We actually offered college tuition before Amazon, I think, made the headline. And it's fascinating. Amazon

has commercials on the radio during football games promoting so this gal is a nurse and she's in her scrubs and she's like, I'm a nurse now, but it's because I worked at Amazon and they paid for my tuition. And Amazon clearly was not a lifelong career in the warehouse, but like I got to where I wanted to go. And I look at that. I'm competing for the same exact employee. Like we at minimum need to pay what Amazon's paying, 15 bucks an hour or more, 20 bucks an hour, depending on where you are. So the beautiful part from a commodity trading perspective, like I know where everyone's bid is. There's no secret.

I know where I need to be. And then, of course, we're dealing with human beings, and we feel like we can sell a culture and a vision in a community that can put us over the edge when you're doing the bare minimum of just paying as much as Amazon. And it's been, I don't know what word to use, enjoyable to watch business owners who are reliant on cheap labor lose their minds because they have to work at the staffing side

and they think they're entitled to profits. And we run our business, with our businesses, I should say, with our eyes wide open, saying, again, the reasons are debatable, but at least will give you my perspective. In Washington, the government, didn't have to do a federal minimum wage of $15 an hour.

There's a few levers to pull. And guess what? $15 an hour is the clearing wage. And that, like, I was like, that's where the rules of the game are going. So we just need to get there first and accept it. And this is the one where, to me, I differentiate a lot because nothing I said is super rocket science. It's just a market that you've got to pay to cover. and we no longer have unlimited cheap labor.

We, our companies, are fully aware and willing to accept lower profit margins to be in business. We don't expect to raise prices dollar for dollar for wage increases. We hope to raise them, you know, 70 cents for every dollar and wage increase we get. I'm just making that off the top of my head, but we accept the fact that this economy is pro-employee. and if you're not good at that part, you just won't have a business or you'll be running every aspect of the business yourself because no one will want to work for you. Can you actually expound? I think you said something I wanted to go back to before I forget, the idea of essentially not working your employees to the bone. Because I guess the one approach could be, right, you hire people, but really hire the absolute minimum number of people that you can hire.

May yes, you pay them more, but how much are these other factors not strictly pay but the idea of like you're not like running them ragged helpful in the recruiting process? Yeah, it's just a great point because the minimum is 15 bucks to just play the game. Then what is it after that? And we like to sell like we have a community. We're picking up for each other. if someone needs to have time off or there's an emergency, folks are expected and the culture is to pick up their slack. So there's coverage there.

And everyone doesn't feel like they need to come into work with or let the team down because they're so thinly staff, no one can do your job. And pay them well enough where they feel like they can take some time off and not get a full paycheck that week and be okay. And I just think it's such a short-sighted and stubborn practice by business owners to cry and complain about the cost of labor and take their most loyal, longest tenure, dedicated employees and work them down to the bone so you can maintain your margin. Because it's just a matter of time before they quit and you don't have a business anymore. And, you know, there's the altruistic side, which I'm not arguing for, or that's not my point. My point is it's great business practice to pay lower level employees and treat them as if, you know,

they're revenue producing high commission salespeople. It's, they're just as important. And now they're able to flex for the first time. And I think it's great. It's a lot of fun. It's challenging. but it's very fulfilling to know you pay equal to Amazon, but they come work for you instead.

And your turnover is lower than all of your peers and you're affecting lives and you're showing folks what a work environment can be and could be with folks who have a more communal mindset. And I mean, a lot of that, I tweeted a lot of that comes from my time as a football coach and a football player. It's kind of like a locker room vibe in that there's a brotherhood and a sisterhood of hard work and accountability. And we've all seen each other struggle and persevere and get promoted and have failures.

And building that culture, when we were recruiting athletes, like you had to sell something beyond scholarship. So everyone had a scholarship. And that's kind of the mentality we brought to this is everyone's got a $15 wage. now let's go compete with the best of the best. So we're trying to compete against Amazon by selling a differentiating culture. And that starts with, or a big component, I should say,

is being overstaffed and accepting less margins, lower profits to be overstaffed. If I wanted to squeeze my margins out, I would have a terrible business owner experience. I would be complaining all the time as well. But I'd rather make less and empower others more and have a sustainable business rather than being an employee at my own

company. That's the business side of it. There was something else that you tweeted that caught my eye, and it was this idea that one of the reasons it's difficult to find workers is because someone else has already hired them. And you made the point that, you know, expanded unemployment insurance might have given people more time to find a job that they really like. So instead of just taking the first thing that comes up so they can, you know, pay their bills, they have a little bit of extra time, a safety net to actually wait and try to find something that they really like and enjoy or something that pays a decent amount of money. And this is an idea that's like actually showed up in some macroeconomic research recently. So there's something called the beverage curve, which is basically the relationship between job openings and the unemployment. rate. And it's just massively shifted post the pandemic. So it's taking many, many, many more job openings in order to bring down the unemployment rate. So like it's taking employers much, much longer to find the right people to fill open jobs. So I would just love to hear your perspective

a little bit because like your experience seems to sort of bear this out. It's not that people don't want to work and, you know, it's not that wages necessarily have to go up astronomically, but it's more there's a mismatch between jobs and workers and people are kind of waiting longer to find the right thing for them. In any other job market, like folks who've been without a job, they have a gap in their resume, right? We've all heard like, you don't want a gap in their resume. Well, the leverage is shifted to employees so hard, it's like, we don't care if there's a

cap, you know, we're going to interview you and go trust our process and see if you're going to be a good fit. And the extended unemployment benefits allowed people who typically would be paycheck to paycheck and I just, I hate my job. I'm going to go to the next job and hope I like it without any time in between, without any time to do a job search because I, you know, I don't have the savings paycheck to paycheck. Well, unexended unemployment allowed folks like that to take their time. They get their bills paid. They don't have the, there's a mortgage forbearance, a rent moratorium. You know, they have a little bit of breathing room to evaluate what they want to do, what what the, what kind of hours they want to have and pick the right job instead of the

next job. And as a competitor and former athlete and coach, like that, that to me means you have to compete that much harder for labor than before because folks are being very picky. And they don't have to come work. This idea of unlimited cheap labor, it's just not a thing anymore. And folks who haven't experienced that market, like we did, my team did when we coached football and recruited high school athletes with a very limited supply of talent. Like it's weird to think that you really have to cater to and sell something. beyond the pay.

Because these folks, like, I've done the retail hours. And I've done being a waitress or a waiter and getting cut because we're slow and the unparticular, like, I'm going to take my time. And I heard about my buddy who works here. And this is the kind of culture they have. But it's like, we're being interviewed just as much as the employee. And when you're making minimum wage, like, you're not typically in that bargaining position, but now they are. So it just has exposed people. So the labor is out there. And the point of

that tweet was, we're well, we're staffed. We're not having a problem. We're also paying the money to be in the game. And we're investing heavily in the culture, which, you know, is a thing. But that's not new. But I do think it's new to emphasize the culture for low wage blue collar work. That has never been an emphasis to quote unquote retain talent. And we leaned into that. Is this condition, and I think a lot of people, people talk about a labor shortage, but it seems to me that what they're really saying is there is a labor shortage among management's expectation of what labor markets were like in 2019. So if you think 2019 was like the right labor market, that that was the right level of pay, that was the right level of treatment, then, yes, it's going to be

tougher. But there's no reason to think 2019 was right and 2021 is wrong, per se. 2021 is what it is. In your view, can this be sustained? Could we be in a structurally different era for labor bargaining power for this idea that an interview really does go in both directions, but the worker being interviewed, but also the potential company being interviewed. And could this be something that you see sustained for a while? Or is this the kind of thing kind of like $1,700 lumber where it's just something weird post-pandemic that can't last?

Yeah, a piece of data that shocked me was early retirees coming out of this pandemic was massive. Like those folks aren't coming back. They're at least not going to come back 40 hours a week. And we're in a different demographic patch that is incredibly bullish housing. But the teenagers in the early 20s, like that, that labor force is small. So to me, we do have a structural upshift forecasting five to 10 years out, certainly beyond that.

we have a demographic cliff that's in plain sight. And our productivity, we're going to have to have a productivity boom from automation to all the technological advances that happen in an economy. So I don't see labor being oversupplied anytime soon. On top of the political ramifications of all of a sudden turning the tables back against the employee, I don't know how you pull that off. So wages are sticky in and of themselves. To me, to answer your question, you got to ask yourself, how does labor get oversupplied again? With all these retirees that had early retirements, and then just every year, more and more boomers

are aging out, I don't know how we get oversupplied again, but I'm not an economist. Well, they didn't get anything right either, so. Yeah, yeah, I, largely, I don't see how we increase our labor pool outside of immigration. Stinson, this is, you know, once again, a real treat. Thank you so much for coming on, Adlaz. Thank you, see ya. Well, I mean, I think that delivered. We got to do, looking at these, like, trust plates and, like, the idea that, like, these, like,

just little pieces of metal. And it's exactly like what you've been writing about and sort of like the Mad King idea. It's like this is not like just simple supply and demand. And this is not simply just like, oh, we're going to like tap back on credit by raising rates or something like that. This is just like a series of like interconnected things. And you're like, okay, here's like a $2 piece of metal that caused like a massive crash of the price of lumber. It makes perfect sense. But it's also wild.

Yeah, so two things. One, I think we should not just do a trust plate episode, but we need to like go into the market and become the third trust plate company and challenge the incumbents and see how that goes because clearly there's an opportunity here. And then secondly, yeah, this, this definitely has me thinking about that. I mean, I called it whackflation, which isn't, I don't think it's the best name, but it was the only one I can think of for it. But this idea that like it's not really that we have this out of control runaway inflation for individual. components is that we have these mini cycles of like boom busts in prices that are basically a reflection of the boom bust in physical supply. So you have the bullwip effect in commodities and lumber is turning into a really good example where, you know, we had a massive shortage. Prices increased and now we have a glut and prices are going down. And it's problematic because it makes the entire supply chain unpredictable. And at the same time, lumber is being also impacted by things like trust plates and other components of the supply chain. And so you do end up having these like sharp short cycles and everyone sort of focused on just the idea of prices going

up and transitory inflation. But I feel like no one's talking as much about the prices going down. And you're totally right. We've seen it now in lumber, seen it in coal, aluminum and a few other things. And I don't know, like, it feels to me like that's probably the bigger danger here is just this, like, volatility that takes forever to write itself. Yeah, it feels like maybe the story is less inflation per se in more inflation volatility. It's like the first derivative of inflation so that you do have like, and also just like this sort of idea of like lots of things, lumber crashing while other things are surging, other things surging while other things are crashing and a very difficult process of like getting

something that resembles like the pre-crisis smooth manner and the lumber story is just like a great I'm sure it's you know if we talk to someone else and another commodity they would probably also have like some like weird part that they were missing I think we're going to do a grains one soon and the connection there between fertilizer and fertilizer and fertilizer and energy all kinds of things So I think that there is a lot of this going on. And again, I speak, you know, go back to the central bank question. It's like, yeah, inflation, okay, you're supposed to raise rates. But what exactly does raising rates do when the issue is like the two companies that make trust plates can't get them in time?

I don't know. It's a very difficult time to make forecasts. Yeah. And also, I mean, imagine like if the Fed raised rates because they thought the price of lumber was too high. and then two months later, it's crashing down because of the trust plate issue. All right. Well, plenty to talk about for sure. Shall we leave it there?

Let's leave it there. Okay. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Definitely follow our guest, Stinson Dean on Twitter.

He is the CEO and founder of Deacon Lumber, and his handle is at Lumber. an absolute wealth of information. Also just a great guy. Follow our producer, Laura Carlson, at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.

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