The Great Stagflation

[spartansaver]

I've been reading a fair amount about certain industries having labor tightness as well as skyrocketing costs of certain commodities. This got me thinking that there a fair share of people who claim since the labor market as a whole has slack, deflation is likely to persist. But if we look at labor markets on micro levels we start to see different stories (see WSJ article below). Does the tightness in labor of specific industries have any parallels to a previous event? One parallel that comes to mind is post-WW2. Amidst WW2, the US rejiggered its economy as a war machine and when the war ended we had all the troops come home and our needs greatly changed. Inflation as well as employment spiked upon their return. We are in the process of dramatically changing certain parts of our economy to cope with a post-COVID world. Is this parallel off? Can you think of any other parallels that refute this hypothesis?

 

https://www.wsj.com/articles/blue-collar-jobs-boom-as-covid-19-boosts-housing-e-commerce-demand-11613903402?mod=hp_lead_pos1

[Viking]

I am wondering about how the US economy will develop each month as we progress through 2021. In terms  of inflation pressures i wonder what will be one time (supply or demand shock) and what will be ongoing/secular. We also likely will see lots of crazy developments (like we are seeing in the shipping container market) and it will likely be difficult to separate short term impacts from those that last for years. 2021 could be a year where we see lots of noise given covid, government stimulus spending, historically low interest rates, people going stir crazy etc.

 

Residential housing has the potential to be a big deal. Likely a secular economic driver given the under-building that happened for years post GFC. Historically low interest rates could over the next couple of years create another housing bubble in the US (happening everywhere else so this is my no brainer forecast). Housing is a big employer and driver of GDP so a residential housing boom would be very good for the US economy.

 

The service sector of the US economy should also outperform big time as the economy slowly opens up. And this is a massive employer of people. And pent up demand should be especially strong here which would be very supportive for employment.

 

I wonder how mall type retailers will do; how much purchasing has shifted to online. Makes sense parts of commercial real estate will face headwinds.

 

When i weave it all together i think we are living through the grand experiment: does all the government spending result in a rapid recovery allowing the economy to return to close to full employment in 2022 or 2023. If this happens they will need to re-write economic text books (regarding what governments should do to combat severe recessions).

 

In the short term the key stat i will be following is the 10 year US treasury; if trouble is brewing with inflation this is where we should see the first indications.

 

Looking into 2022 and 2023 we will also start to learn if total debt levels matter (if Japan can be used as an example the early answer is likely ‘no’). 

[Spekulatius]

The service sector will be interesting since essentially the min wage will be $15 (Walmart raised it to $15 after Target and Amazon did so). I assume that will set essentially the floor for wages going forward.

 

I think this time, inflation will come from wages, not from energy and commodities like in the 70’s. That may not be that great for corporate profit margins, at least in some sectors.

[bookie71]

I heard on PBS Friday that gas is up almost 30% from one year ago, meat (beef, pork and poultry)about 30-40 %(this is apx as I am old and forgetful) and building materials and supplies about 300%.

Is this the edge of the sword to come. I remember the Nixon and Carter years.  Wasn't real pretty.

[scorpioncapital]

Is chasing full employment a chimera in an age of automation? Or rather, is it full employment of a constantly dwindling labor force? 100% of 20% is different than 100% of 80%.

[ratiman]

I've been reading a fair amount about certain industries having labor tightness as well as skyrocketing costs of certain commodities. This got me thinking that there a fair share of people who claim since the labor market as a whole has slack, deflation is likely to persist. But if we look at labor markets on micro levels we start to see different stories (see WSJ article below). Does the tightness in labor of specific industries have any parallels to a previous event? One parallel that comes to mind is post-WW2. Amidst WW2, the US rejiggered its economy as a war machine and when the war ended we had all the troops come home and our needs greatly changed. Inflation as well as employment spiked upon their return. We are in the process of dramatically changing certain parts of our economy to cope with a post-COVID world. Is this parallel off? Can you think of any other parallels that refute this hypothesis?

 

https://www.wsj.com/articles/blue-collar-jobs-boom-as-covid-19-boosts-housing-e-commerce-demand-11613903402?mod=hp_lead_pos1

 

A Chicago-based truck-trailer manufacturer is increasingly hosting drive-through job fairs and raising wages by up to 7% as hiring picks up across its nine production plants.

 

 

"Rising trucker wages" is such a joke at this point. WSJ, Bloomberg and Washington Post have run "trucker shortage" stories literally every two weeks for the last twenty five years.

[SharperDingaan]

Over what period?

 

Exiting, and post, Covid - costs (everywhere) are going to be a lot higher - get over it.

There aren't enough truckers, there is a strong desire to remain closer to home, it is not a 'preferred' occupation, and many are treated like trash. While Covid is with us, a great many have voluntarily either deferred (or come out of) retirement; post Covid a good 20% of long-distance drivers are going to walk away. Pay up, and pay more for everything being transported.

 

No migrant workers, no crops planted, or picked. You still have to eat, but with less supply, food is going to cost a lot more. Current grocery store increases are just the beginning, and it's everything relying on cheap labour doing what locals will not. 20-30% increases pretty common.

 

Stimulus comes at a future cost. Most would expect at least another 20-30% in either higher taxes (income, consumption, etc) or FX devaluation as imported food now costs more. How much impact, depends upon what you buy.

 

Income for the unskilled is not going to rise - unless either 1) minimum wage increases, 2) workers work more hours, or 3) there is some kind of governmental minimum income. Severe disruption, and most places are looking at option 3.

 

Point? Little Johnny/Suzie should now expect a much lower inheritance, because gran/grandpa now need the money to eat. For many young people, cutting their dependency on golden handcuffs, will be the best thing that's happened to them in quite some time.

 

SD

 

 

 

 

 

 

[Ice77]

Timber didn't have a single losing year during the last period of stagflation in 70s. The returns in most years were double digits.

 

Here's an excerpt from a resource investing book i read awhile back,

 

"First of all, trees grow year in and year out. Trees in good growing regions in the U.S. grow at 6%-8% per year. They grow through recessions. They grow through wars. They grow through stock and real estate crashes. They grow through everything. They give you built-in investment growth that isn’t guaranteed with a stock.

 

Along with the tree growth, the price of wood has grown at a consistent rate throughout the years. It’s extremely difficult for a company to increase the prices of its goods by 6% every year. But the price of wood, according to legendary money manager Jeremy Grantham, has increased by that amount for the last 100 years.Specifically, he says “stumpage” prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.Another thing is timberland is a resource investment, but it’s not a constantly depleting one, like a gold mine or an oil well. Trees will grow back. It’s a sustainable resource investment.

 

What happens when the market is slumping? When you can’t get the price you need to make the business profitable? Did you just waste eight… 15… 25 years on an investment with nothing to show for it? The answer can be summed up in five words: “Bank it on the stump.” In the industry, it’s a phrase that means if conditions aren’t right for harvesting your crop, you just keep letting it grow. You keep the profits on the stump and wait for a more profitable time to sell your timber – most likely, when timber prices are in your favor.Here are the rough numbers on where timberland returns come from: • 1% Landvalue increase • 6% Biologic growth of the trees • 3% "Stumpage" price increase (the price of the actual tree).

 

It’s important to point out that rather than just going out and buying a forest, you want to make sure to invest in managed timberland. The reason it’s important to make the distinction is simple: Managed timberlands, according to a study conducted by the University of Georgia and published in the Journal of Forestry, generate returns almost four times higher than non-managed lands.The big names in the U.S. are Weyerhaeuser (WY), Rayonier (RYN), and Plum Creek (PCL). To spread your risk, you can buy the U.S. big names through an exchange traded fund with the symbol: WOOD. You can get much broader international exposure through the Guggenheim Timber Fund (CUT)."

[Guest cherzeca]

it used to be dont fight the fed. now, treasury is joining with the fed to make it a two barreled money/credit creation machine.  I found this newsletter piece interesting, with its reference to the two nuclear keys by having the fed and treasury work together in this unprecedented (going back to WW2) manner:  https://www.lynalden.com/february-2021-newsletter/

 

strap in for the ride and get out when she blows.

[Cigarbutt]

...Amidst WW2, the US rejiggered its economy as a war machine and when the war ended we had all the troops come home and our needs greatly changed. Inflation as well as employment spiked upon their return. We are in the process of dramatically changing certain parts of our economy to cope with a post-COVID world...

For several years now, in involved private businesses, there is an unusual trend in low or average skill workers: large turnover and unusual negotiating leverage for salary and conditions. It’s unusual (and puzzling) because the micro situation should reflect the macro situation (which has been evolving for a while) showing the very large pool who have somehow decided not to get involved in the working force. It’s hard to see how this wage pressure will be sustainable. A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation. The shifting environment means higher costs related to wages but this seems more like short-term noise.

 

The following is submitted for historical perspective:

 

Headline: Ouch! The yield curve is steep (the 30-yr at a threatening 2.16%..) and inflation is here, there and everywhere.

 

Headline: Since the advent of the unprecedented use of unconventional tools and various stimulants, inflation has remained dormant and now we wonder if two nuclear bombs work 'better' than one.

 

Headline: The allusion to previous ‘dramatic’ events is interesting.

 

[LC]

A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation.

 

Do we have demographic information on this group?

 

A theory that is worth investigating in my opinion is an aging population that was working longer into their lifetime, who "finally decided to retire" in response to an extreme stimulus (COVID).

[TwoCitiesCapital]

A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation.

 

Do we have demographic information on this group?

 

A theory that is worth investigating in my opinion is an aging population that was working longer into their lifetime, who "finally decided to retire" in response to an extreme stimulus (COVID).

 

PIMCO did demographics work while I was there. Ultimately, their opinion at the time was demographics were likely to be a headwind into the mid-2020s and then change to a tailwind after that.

 

Maybe Covid accelerated that a hair since it primarily impacted older generations, but I'd still expecting demographics to be a drag until 2023-2024.

[Cigarbutt]

A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation.

Do we have demographic information on this group?

A theory that is worth investigating in my opinion is an aging population that was working longer into their lifetime, who "finally decided to retire" in response to an extreme stimulus (COVID).

A small addition as the topic has been an opportunity for me and it may have some relevance to this thread.

As you likely know, while the labor participation rate (LPR) has come down significantly for the entire 'group', for the age 55+ group, LPR has gone up significantly, at least up to the 2020 pandemic. With Covid (i think it was the potential exposure to the virus more than exposure to the stimulus), the 55+ age group's LPR has gone down a little (very small decrease compared to the huge rise over many years and, from anecdotal stuff mostly, this group is likely to go back to previous trends once it feels 'safe' out there). The big question that remains (and which is relevant for the deflation/inflation question) is why such an enduring and significant decrease in LPR. Most of the decrease over the last few years has happened in the younger cohorts and the decrease has been inversely correlated to education (or skill) level.

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In relation to the question that disappeared, when dealing with the LPR question, just like the inflation question, those in the know divide the potential causes into push and pull categories. The tightness of the safety net and high taxes on working wages will tend to pull people away from work. Also, over time, the residual pool of jobs has become relatively less attractive for the residual population left for those jobs, pushing them away from the work force. There are some mild differences between the US and Canada but the developing pattern of decreasing participation has been overall quite similar. The disincentives to work have historically been higher in Canada but the stimulus response by the US in 2020 and beyond left everybody else in the dust.

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This topic has some importance for me. In the late 90s, i studied the LPR and expected significant declines over time and developed some private business ideas, with the main one around disability evaluation (asset-lite, high returns on intangibles etc). It seemed somewhat irrelevant for a while but what seems irrelevant is sometimes devoid of competition. Anyways, the way it worked is that people who left the work force were typically young and after long-term unemployment insurance often ended up on 'disability'. This does not seem to be a much talked about topic but the issue is very significant. What has become discovered is that people who become long-term unemployed (even more so if 'disabled) are unlikely to go back to work when/if economic conditions improve (hysteresis at work).

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The bottom line here (apart from business ideas) is that a low (especially a declining trend) LPR will tend to be highly deflationary. Dependence to benefits, over time, may lead to overheating of the printing press.

https://fred.stlouisfed.org/series/CIVPART

[Guest cherzeca]

disability insurance is an interesting and somewhat taboo topic. there are a lot of people on disability insurance who one might think are able bodied but there is difficulty to get them off of disability (lots of SS benefits lawyers and the SSA is somewhat disinclined to get people off rolls once they are on them). plus there is a lot of outright fraud.

 

I had a long discussion about this with a guy who wanted to buy my old Land Rover about 10 years back. very entitled guy, I had to come to him rather than he to me to look at car. he was on disability but when we compared medical records it was clear I was more "disabled" than he was. he essentially admitted he was a slacker but the gig was too good to give up. at the end of discussion, he wanted me to lower price on car, and I left saying the price had just gone up.

 

the safety net is pervasive and that is either a feature or a bug, I am not here at this point to argue it...but now add in forbearance on mortgages and student loans, and work ethic takes the hindmost.  I just see an economy that is becoming increasingly fragile for too many people. 

[DooDiligence]

Entitlement is big business:

 

Statistics on Title II Direct Payments to Claimant Representatives

 

www.ssa.gov/representation/statistics.htm#2019

 

https://secure.ssa.gov/apps10/poms.nsf/lnx/0203920017

 

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I couldn't find anything on ad spend by disability attorneys but I found plenty of marketing info describing expected returns vs. spend. This ATRA page shows some older statistics for trial attorney spend.

 

Trial Lawyer Ad Spend Coast to Coast July to Sep 2018:

 

www.atra.org/2019/01/10/study-226-million-spent-trial-lawyers-advertising-quarter-3-2018/

 

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Who says trickle down economics doesn't work? The most entitled segment of our society is creating a well lit path for the rest of us. Tort reform? Pfffft...

[Morgan]

disability insurance is an interesting and somewhat taboo topic. there are a lot of people on disability insurance who one might think are able bodied but there is difficulty to get them off of disability (lots of SS benefits lawyers and the SSA is somewhat disinclined to get people off rolls once they are on them). plus there is a lot of outright fraud.

 

Why is the SSA disinclined to get people off the rolls?

 

I live in WV and a lot of people here are on disability and I think it’s really a problem. Sometimes the entire family, even the young kids, will be on some kind of government disability plan and between the 3-5 people they’ll make a nice little bundle. Some people surely need disability, but many look like they’re cheating the system. I suppose the only thing to do is make it harder to get and review edge cases. 

[Guest cherzeca]

disability insurance is an interesting and somewhat taboo topic. there are a lot of people on disability insurance who one might think are able bodied but there is difficulty to get them off of disability (lots of SS benefits lawyers and the SSA is somewhat disinclined to get people off rolls once they are on them). plus there is a lot of outright fraud.

 

Why is the SSA disinclined to get people off the rolls?

 

I live in WV and a lot of people here are on disability and I think it’s really a problem. Sometimes the entire family, even the young kids, will be on some kind of government disability plan and between the 3-5 people they’ll make a nice little bundle. Some people surely need disability, but many look like they’re cheating the system. I suppose the only thing to do is make it harder to get and review edge cases.

 

there is a certain mentality, prevalent imo at SSA and many other areas of our society/culture, that moving people off the dole and into self-agency and individual responsibility is a bad thing...that people are entitled to their entitlements. the other view is that this the worst thing for people...cf fishes v fisherman

[Morgan]

disability insurance is an interesting and somewhat taboo topic. there are a lot of people on disability insurance who one might think are able bodied but there is difficulty to get them off of disability (lots of SS benefits lawyers and the SSA is somewhat disinclined to get people off rolls once they are on them). plus there is a lot of outright fraud.

 

Why is the SSA disinclined to get people off the rolls?

 

I live in WV and a lot of people here are on disability and I think it’s really a problem. Sometimes the entire family, even the young kids, will be on some kind of government disability plan and between the 3-5 people they’ll make a nice little bundle. Some people surely need disability, but many look like they’re cheating the system. I suppose the only thing to do is make it harder to get and review edge cases.

 

there is a certain mentality, prevalent imo at SSA and many other areas of our society/culture, that moving people off the dole and into self-agency and individual responsibility is a bad thing...that people are entitled to their entitlements. the other view is that this the worst thing for people...cf fishes v fisherman

 

Hmm. That very well may be true. This kind of thinking leads to a Beggars in Spain type situation.

 

In my view, and yours is probably similar, the percentage of people on government programs relative to the population would hopefully decline over time. Recipients should use the time to improve them selves so as to provide for themselves at some point. Some recipients of course are permanently disabled and we should help them.

 

Do you think there’s a way to change the culture around government programs so a smaller percentage of people use them over time? 

[Guest cherzeca]

disability insurance is an interesting and somewhat taboo topic. there are a lot of people on disability insurance who one might think are able bodied but there is difficulty to get them off of disability (lots of SS benefits lawyers and the SSA is somewhat disinclined to get people off rolls once they are on them). plus there is a lot of outright fraud.

 

Why is the SSA disinclined to get people off the rolls?

 

I live in WV and a lot of people here are on disability and I think it’s really a problem. Sometimes the entire family, even the young kids, will be on some kind of government disability plan and between the 3-5 people they’ll make a nice little bundle. Some people surely need disability, but many look like they’re cheating the system. I suppose the only thing to do is make it harder to get and review edge cases.

 

there is a certain mentality, prevalent imo at SSA and many other areas of our society/culture, that moving people off the dole and into self-agency and individual responsibility is a bad thing...that people are entitled to their entitlements. the other view is that this the worst thing for people...cf fishes v fisherman

 

Hmm. That very well may be true. This kind of thinking leads to a Beggars in Spain type situation.

 

In my view, and yours is probably similar, the percentage of people on government programs relative to the population would hopefully decline over time. Recipients should use the time to improve them selves so as to provide for themselves at some point. Some recipients of course are permanently disabled and we should help them.

 

Do you think there’s a way to change the culture around government programs so a smaller percentage of people use them over time?

 

of course. sunset them.

[Cigarbutt]

^Morgan and cherzeca, thank you for the discussion about various government-sponsored enterprises and the sunset option. Entitlement spending is bound to remain a hot topic.

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The opening poster suggested pockets of labor tightness, a very unusual topic given the very large pool of ‘non-participants’ in comparison to the much smaller ‘unemployed’ group. As the US is about to enter an era of net negative labor force growth (Japan is the leading the way), this may be an area worthy of some soul searching. When Keynes came up with his expectations of a leisure society, he assumed the Beggars in Spain story line would apply ie the ‘productives’ would more than compensate for the ‘non-productives’. He did not envision an entitled and unproductive rentier elite with a bunch of ‘disableds’, financed with debt.

 

The monetary tools, for the employment mandate, are mostly geared to the headline unemployment number and, like the consensus view, the Fed expects inflation on that front in the short to mid-term (Waiting for Godot style). The monetary minds have looked at the declining labor participation and have concluded that it was, essentially, a secular trend (i agree), not a cyclical one, so out of their control or purview. So the Feds won’t interfere with secular trends here, at least not directly.

 

Central bankers are very bright people but often come to interesting conclusions when out of public office. For example, in 2016, Mr. Alan “The Maestro” Greenspan suggested the following:

• Entitlements now probably require a three to four percent growth rate in the United States.

• Rate cuts, negative interest rates, buying corporate debt is no part of the solution.

• Gross domestic savings as a percent of GDP has been declining over the years largely because entitlements have dug into them.

• You just can’t print money and buy the infrastructure. Productivity will only increase if there is savings behind the investment.

• We should be more concerned about inflation than we appear to be.

• The issue is how long can we maintain long-term interest rates by continuously pushing money into the system, at rates which I would say, human psychology doesn’t “continence”.

 

The fiscal tools used to deal with the growing disability problem has been to fund the payments with growing debt (Mr. Greenspan is more politically correct by saying that increasing entitlement spending has been funded by decreasing national savings) and, with present trends firmly entrenched (and incredibly bipartisan), it’s hard to see how this will change. But it will, somehow, when restructuring becomes possible.

 

Japan is an interesting example in relation to this ‘labor shortage’ question. Since 1990, Japan has been a champion of reform delay and lately has been able to delay the eventual day of reckoning by adapting their labor profile. Older Japanese citizens, including the much older ones, have shown impressive resilience with a growing ability (as documented by rising teeth count and walking speed per individual, age-controlled) to participate in the labor force. Japan also has come up with an unusual degree of innovation to make care of the poorly functional elderlies more productive (helping slightly with the overall declining productivity trends (since the 80s, Japan total productivity has been a story of  ‘productive’ sectors more than compensating the ‘non-productive’ ones, at least until recently and in spades)).

 

i’m not sure what this means about the stock market today but interesting and real business opportunities (one related to continence or the absence thereof) are shaping up in my local area in this respect.

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For those getting excited by rising rates, yesterday the US Treasury did something for the very first time. It sold ($60 billion of them) two-year notes at a yield of 0.119%. Because Treasury notes and bonds by regulation have a minimum coupon rate of 0.125%, the yield below that level means the notes were sold at a premium (!) above 100 cents on the dollar -- 100.011965, to be precise, a record. A weird world, we live. Somebody putting a million into the stuff would get about 3$ per day and they say inflation is coming.  My bet is ‘we’ can’t have interest rates rise meaningfully and/or for any length of time. Famous last words.