Bryan J. Kaus
Happy families are all alike; every unhappy family is unhappy in its own way. - Leo Tolstoy, Anna Karenina
I have been reading Alfred Sloan’s My Years with General Motors.
Sloan is not a fashionable management thinker anymore. Born in 1875, he became president of General Motors in 1923, later served as chairman, and spent decades building much of the management architecture behind one of the defining industrial enterprises of the twentieth century. His book was published in 1964, and parts of it unmistakably belong to another era.
What surprised me is how much of the underlying logic does not.
Sloan believed sound management required a continuous, factual approach to a changing business. Markets change, technology changes, customers change, competitors respond. He warned, in effect, against letting an idea that worked once become permanent simply because it had worked before.
That has been on my mind lately. So has something much older.
Newton’s third law says that for every action there is an equal and opposite reaction. Economics is not physics, and the analogy breaks down the moment you try to make it literal. Economic reactions are not neatly equal. They are not always opposite. They can arrive late, surface somewhere unexpected, be amplified by leverage, dampened by inventories, or partly erased through productivity and substitution.
But the instinct is useful. Push on a complicated system and the system responds.
The problem is that the response rarely manifests uniformly. That distinction matters more than it sounds.
The same shock, different economics
We talk about economic events as though the event itself determines the result. Rates rise. Oil rises. Labor gets expensive. A regulation changes. A shipping route closes.
But those are pressures entering a system populated by businesses, households and institutions with radically different capacities to respond. One company passes a higher input cost through to its customer. Another absorbs it in margin. A third pushes it backward onto a supplier. A fourth changes the product, substitutes an input, or redesigns the process altogether.
The pressure is the same. The economics are not.
A large carrier with contractual fuel surcharges experiences a diesel spike very differently from an independent operator bidding loads in the spot market. A cash-rich household experiences higher gasoline and grocery prices differently from one already carrying revolving debt. A company with no meaningful maturities until 2032 experiences the credit market differently from a leveraged business that has to refinance next quarter.
That is where the idea becomes more useful than simply saying costs flow through an economy. Pressure can be absorbed, in margin, cash flow or purchasing power. It can be transmitted, to customers, suppliers, workers or lenders. It can be adapted around, through substitution, rerouting, financing structures, automation or productivity. And sometimes part of it disappears outright, as demand is destroyed, a bottleneck is removed, or a substitute finally becomes viable.
Most real shocks do several of these at once. The interesting question is where. More precisely: where does the capacity to keep absorbing, passing or adapting around the pressure finally run out?
That is often where an economic inconvenience becomes an economic event. It is also, very often, where opportunity begins.
Sloan and the problem with managing averages
This is where Sloan becomes particularly useful.
One of his central problems at General Motors was how to manage something enormous and varied without pretending the whole enterprise was a single homogeneous business. His answer became known as decentralization with coordinated control, and the words matter together. The operating businesses needed enough autonomy to respond to their markets and make decisions close to the facts. The center still had a role: financial discipline, capital allocation, common standards, and an understanding of how the pieces fit. He rejected two bad choices at once. Manage everything monolithically and you lose the differences that matter. Let every business become an independent silo and you lose the economics of the portfolio.
That distinction travels well beyond General Motors, because management teams, and plenty of consulting exercises with them, tend to simplify until the nuance disappears. This is our fuels business. This is our consumer exposure. Rates are high. The economy is strong.
Aggregation is necessary; no organization runs without it. But simplification becomes dangerous when it hardens into homogenization. Two businesses in the same industry can react very differently to the same cycle, because their assets, contracts, feedstocks, customers and debt structures are different. Two businesses with quite different economics can rationally belong in the same portfolio, one throwing off extraordinary cash when conditions tighten, another holding steady through the trough.
There is a caveat I would not want lost. Diversification is not a substitute for economics. A countercyclical business still needs economics good enough to survive until the cycle in which you need it. A strategic platform that destroys capital in every regime does not become attractive merely because it balances the portfolio. Portfolio value comes from differentiated economics, not from pretending the differences do not matter.
The same applies to reading an economy. GDP, employment, inflation, industrial production and credit spreads are the consolidated numbers. They are real and they matter. But by themselves they cannot tell you which operating divisions are carrying the pressure.
The last few weeks offered some unusually good examples.
Energy: the system reacted
Take the Strait of Hormuz. The simple model is intuitive: constrain one of the world’s most important oil transit points, fewer barrels move, supply tightens, prices rise. And some of the visible data looked extraordinary. Kpler counted only four commodity vessels transiting Hormuz on Thursday, September 3, against a ten-day average near fifteen.
If that were the whole story, the conclusion would be easy. It was not.
The visible count excluded vessels traveling with transponders off. Dark transits were being reconstructed after the fact. Cargo was moving through ship-to-ship transfers and Gulf of Oman shuttle arrangements. Kpler’s broader measure of reconstructed clearance had been running near 8.6 million barrels a day since mid-June.
That does not make the disruption imaginary. It means the system reacted. And this is where the discipline has to work both ways. If I argue that a falling crude price does not prove a physical constraint has vanished, I also cannot look at a collapsing visible ship count and insist the barrels disappeared when better operating evidence says otherwise. The facts have to be allowed to change the explanation.
What actually happened is more interesting. Some of the pressure stayed in physical availability. Some appeared in freight and war-risk insurance. Some moved into refined-product margins. Some was absorbed in added logistical complexity. And some routes, assets and operators became more valuable because they offered an alternative. The reaction existed. It simply did not manifest uniformly.
Credit: one market, very different realities
Credit may be the cleaner example. As of early September, U.S. borrowers rated CCC and below faced effective yields near 14.9% and spreads over Treasuries above ten percentage points. BB borrowers were operating in the same market, against the same Treasury curve, with spreads of roughly 1.5 points.
It is tempting to summarize both with one sentence: capital is expensive. True, and insufficient. For whom?
There is an enormous difference between capital that costs six or seven percent and capital that costs fifteen. The stronger borrower can still choose. The weaker borrower increasingly cannot, and that loss of choice is the whole story. A company that can refinance can wait. A company that cannot may have to sell an asset, issue equity, restructure, or accept terms it would never take in normal conditions. Meanwhile the buyer with liquidity acquires leverage of a different kind.
Williams closed a roughly $5.5 billion acquisition of contracted natural-gas infrastructure in early September. That does not prove higher rates are irrelevant. It proves something more useful: capital does not disappear uniformly when financial conditions tighten. It becomes more discriminating, and discrimination redistributes optionality. One balance sheet loses it; another gains it. The same rate environment is a threat and an opportunity at once, depending on where you sit.
That is why the cost of capital, taken as a single number, tells us less than we think. The macro environment sets the weather. The balance sheet determines how you experience it.
Productivity: the reaction can solve part of the problem
Labor is the important counterexample, because otherwise this framework becomes too mechanical. Not every cost gets handed to someone else. Sometimes the response changes the economics themselves.
Companies spent the past several years confronting expensive and scarce labor, higher input costs and harder operating conditions. They responded. They automated, redesigned work, invested and changed processes. The latest Bureau of Labor Statistics revision showed manufacturing productivity rising at a 2.4% annual rate in the second quarter, output up 5.4%, and manufacturing unit labor costs actually falling 0.3%, the first quarterly decline since 2021.
That combination matters. Output grew faster than the labor required to produce it. Part of the original pressure was not absorbed or transmitted. It was answered.
The consequences did not disappear; they changed. The manufacturer able to fund automation experiences labor scarcity differently from the competitor that cannot. The business that can lift output per hour can raise wages without the same rise in unit cost. The business that cannot improve productivity takes the pressure directly, in margin or in price. Same pressure, different capacity, different economics.
Capacity buys time
Underneath all of this sits a variable that deserves more attention than it usually gets. Time.
Cash buys time. Inventory buys time. An undrawn credit facility, a long-dated maturity, a second supplier, a contractual pass-through, a flexible asset: each one buys time. And time matters because adaptation is rarely immediate. The company that can tolerate six months of disruption can find another supplier, redesign a product, renegotiate a contract, or simply wait for the market to normalize. The company forced to act Monday morning has none of those options.
That is why pressure so often becomes significant at the exact moment someone stops being able to wait. A borrower has to refinance. An owner has to sell. A customer has to trade down. A producer has to curtail. At that point an abstract market pressure becomes a forced decision, and forced decisions change bargaining power. That is where risk accelerates. It is also where opportunity becomes unusually attractive.
Which is the part worth holding onto: nuance is information. The difference between a BB borrower and a CCC borrower tells you something. The gap between a visible ship count and a reconstructed physical flow tells you something. The divergence between rising wages and falling unit labor costs tells you something. The mistake is never simplifying. It is simplifying away the one variable that determines the outcome.
The Point Taken
Newton’s third law works cleanly because physical forces obey a symmetry markets do not. Economic systems are messier. But the instinct survives. Apply pressure and the system reacts, and the reaction can be every bit as consequential as the original action. It just will not necessarily arrive with the same participant, in the same variable, at the same time, or in the same size.
The system pushes back. It simply does not push back everywhere at once.
That is why an economy can grow while parts of it contract. Why the same credit environment creates distress for one company and an acquisition for another. Why an energy constraint can enrich one part of the value chain while compressing another. Why higher labor costs can eventually produce lower unit labor costs for the company able to adapt. None of it is a contradiction. It is a system of participants with different economics and different capacity to respond, and Sloan’s contribution is the discipline not to lose those differences inside the consolidated result.
Newton gives us the instinct to look for the reaction. The work of the manager or the investor is to follow it far enough to ask who can absorb the pressure, who can pass it on, who can adapt, and then the question that matters most. Where does the capacity to respond finally run out?
That is usually where the real economic event begins. And very often, it is where the risk and the opportunity were hiding all along.
Don't ask whether the pressure disappeared. Ask who is absorbing it now. Where? How much? Why? What is the next order impact?
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