Where are all the workers?
It seems some may be earning plenty, for now, just trading crypto.
I traveled this week in Chicago, where I was told center city is still a ghost town. Meetings were in the suburbs, with the last one in town—just as I was thinking, this isn’t so desolate, my local colleague remarked that “this looks like Pittsburgh.” Grrr! The topic at most meetings was “Cryptocurrencies Demystified,” and I was amazed at how unfamiliar most advisors are about them even as their clients are asking for guidance. With numerous meetings over two days, I heard several common remarks: “What is Bitcoin?? It is nothing!” Bitcoin was compared numerous times to trading baseball cards, Pokémon cards and the dreaded Tulips. A number of advisors said they could talk with us about crypto for hours; and without a convenient vehicle in which to place in their clients’ portfolios, they asked me to “just tell me it’s a bad idea.” Sorry, I can’t do that as I believe the blockchain is for real, it’s spectacular and cryptocurrencies (at least most of them) will survive. Stay tuned, it’s a rabbit hole and worth the ride to demystify.
Even with increasing job gains and pandemic lows in jobless claims, job vacancy rates and the number of people quitting their jobs are at record highs. Bank of America estimates retirement, family responsibilities and worker discouragement have each taken at least 1.2 million out of the labor force. There are multiple reasons—Covid fears, childcare, stimulus benefits, increasing numbers of start-ups—behind the worker shortage. Mask and vaccine mandates may be playing a role. The American Truckers Association reports 80K open driver positions, an all-time high even with $15K signing bonuses and annual pay of $100K and up. TIS Group asks, “Why would over-the-road truckers, many of whom drive alone, sleep in rest stops and pretty much live on cell phones, put up with wearing a mask in their trucks’ cabs?” Airlines with their mandates are facing similar shortages. So are jails, fire and police departments, nursing homes, even hospitals. Will it get worse if the Biden administration’s order that companies with 100+ employees require vaccines holds up in courts? One other factor—crypto. TIS says its analysis of data from market researcher Civic Science suggests potentially 6 million who left jobs during the crisis are earning enough from crypto trading to stay away.
Risk is being rewarded. The cyclical versus defensive ratio among all stocks is at new highs, as is high beta versus low beta. The valuation gap between cyclicals, whose P/Es contracted 3.3 times over the past year and 8x since May 2020, and Tech stocks is the widest in over a decade. Small-caps relative to large-caps also are the cheapest they’ve been in more than 10 years. Some operating margins are starting to turn on rising costs. But they’re holding steady and even expanding among many cyclicals, particularly in Energy. The sector’s margins touched a 10-year high of 14.6% this week (contrarian investors, what are the odds?!). The yield curve is narrowing in a bear flattener as short rates are jumping on early liftoff odds. But at roughly 100 basis points wide, the 2-/10-year curve is in the 6th historical decile, hardly worrisome for stocks. The Financial Times says 2022 could see a “ketchup bottle’’ economy, with unclogging supply chains leading to a rush of goods (like what happens after you pound on a ketchup bottle for a while). Management discussions suggest supply chain trends are starting to stabilize—the Baltic Dry Index collapsed in the past month, U.S. and Asia backlogs are reversing, and several companies, including Toyota this morning, expect to fully restore production this month or next. Nearly 9 million have been dropped from jobless benefits rolls. Where are all the workers? A lot of them likely will be back if they’re not still drawing from excess savings, soaking in the sun on early retirement and … at their computers, trading cryptos.
- Santa’s helper Large gains in asset prices across the board are feeding into the biggest wealth effect on consumer spending ever recorded. Combined with strong employment growth and rising nominal wages and earnings, this should continue to propel strong spending growth through the holidays and into 2022 despite the negative shock from rising inflation, a savings rate that’s now back to pre-Covid levels and languishing consumer sentiment (this morning’s initial Michigan print for November came in at a 10-year low).
- Productivity to the rescue! Confronted with worker shortages amid supercharged demand and supply challenges, companies have been expanding capital spending since the second half of 2020. Robotics sales, for example, are on track for a record year. This suggests productivity, which fell in Q3 (more below) and tends to follow increases in capex with a two-year lag, should start picking up by mid-2022, helping offset pricing pressures.
- Peak deficit The federal deficit still stands at 10% of GDP but has now declined seven straight months, and by $117 billion in October alone. It’s expected to continue shrinking as taxpayers pull income into 2021 ahead of potential 2022 tax increases, tax revenues rise due to higher inflation and pandemic relief spending (stimulus checks, bonus jobless benefits, paycheck protection) continues to roll over.
- Food inflation looks to persist Forces driving the surge in real food prices to levels not seen since 1975 could remain in place through next spring, abetted by a colder-than-expected winter that’s almost certain to keep energy prices elevated. Natural gas is a critical fertilizer input for grain and soybean markets, while oil prices feed into shipping costs. This should keep up pressures on the delivery of food even if/as supply bottlenecks ease.
- We need “peak bottleneck” to get “peak inflation’’ Inadequate production, rising costs and high demand means October’s 6.2% year-over-year (y/y) jump in CPI is unlikely to mark a peak for inflation. Our own inflation dashboard suggests many elements behind the runup may not be transitory. A tight labor market isn’t helping. As long as workers embrace the “great resignation” rather than seek work, productivity improvements will prove difficult. Productivity plunged 5% in Q3 as labor costs spiked 8.3%.
- Small businesses don’t see things getting better The NFIB monthly optimism gauge dipped slightly more than expected but key underlying components were more worrisome. In another sign inflation has yet to peak, the net percentage raising prices jumped to the highest reading since 1980. Also, the net percentage expecting the economy to improve dropped to its second-lowest reading on record, just a tick above 2012’s all-time low.
Voters care about food and gas prices a lot Nearly half of those polled by USA Today/Suffolk University believe Biden has done a worse job as president than they expected and by 7-1 (44%-6%), independent voters say Biden has done worse, not better, than they expected. Almost two-thirds of those polled don’t want him to run in 2024. VP Harris, viewed by many as the likely first choice of Dems if Biden backs out, has even lower approval ratings, according to opinion analytics firm FiveThirtyEight.
Cryptocurrencies demystified Blockchain-based DeFi—or decentralized finance—activities that bypass traditional intermediaries such as banks and brokerages are far from being embraced by mainstream investors, JP Morgan says (isn’t it in JP’s interest to say so?). They largely are driven and used by crypto-focused investors seeking to generate leverage, liquidity or yield from their existing holdings. In its early stages, DeFi has a lot of potential to grow but faces several hurdles, especially regulatory.
No talking in elevator Illinois is one of only six states plus D.C. with a mask mandate. Got to have that mask close at hand, maintaining “physical distance at all times” and maximum capacity of just two in the building elevators. And, no talking.