Labor, China and the velocity of miney

Investment Analysis Clubs Macro Economic Trends and Risks
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The UAW strike is an interesting topic.

UAW workers making 33 an hour. Ridiculous! Top wages before benifits should be about 50 an hour with retirement being possible by age 55 with 60 or 62 being the common check out age.

The work simply demands a body that old people do not have. The only way to extend working age is to add more robots so that assembly line worker are mostly standing there and monitoring robots.

I just finished watching videos on Tesla and the one by Peter Ziahan on China. A couple of things stood out.

One Tesla employee compensation is listed sans stock options.

Two and this is more important, China wage cost have gone up 14x in the last 20 years and the demographic problem in China is actually much worse than the data indicates due to inadequate data reporting in China.

Now before you say it doesn’t matter. China has 400 percent more labor than the USA. A 5 percent drop in labor availability in China correlates to a 20 percent labor demand increase in the USA. (Of course China supplies the whole world not just the USA) With a labor situation in the USA of over employment (Anything under 5 percent unemployment is over employment ) There is no room to make up any Chinese labor short fall.

This means, all labor has a significant bargaining position and capital does not. My expectation is that some very interesting things are happening.

  1. Labor costs will rise and capital value will fall to a more historic valuation. (I do not know that valuation and it would be a valuable study)

  2. The rise of labor cost will change the trajectory of the velocity of money. This change will increase inflationary pressures and those pressure will increase interest rates in the USA. I cannot model the follow on effects, drinking second glass of Makers Mark)

  3. In the end, industry will become much more labor efficient.

Take aways.

  1. I am investing in AI. i.E. Tesla, Nvidia, and advanced chip production.

  2. I am attempting to delay my retirement and increase my time earning wages.

  3. Increases belief in the US Dollar.

  4. Looking for investments in the rust belt, particularly Wisconsin as it has water, transport and a history of manufacturing,

Cheers
Qazulight

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In real terms both in Japan and Germany the workers have been paid far more for decades. The American executives just kept on screwing up.

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A thought just occurred to me: of late, we have seen several states deregulate child labor, at least incrementally.

Can a 14 year-old join a union? Forget, for a moment, that most of the states that are deregulating child labor are also militantly anti-union. Can someone under 18 sign on to a union? They can’t sign a binding agreement for anything else at 14.

Steve

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I like your thoughts on labor.

As far as capital, why do you think valuations will fall?

It seems like the world has excess capital and so too much money looking for assets and hence the relatively high valuations we see (high P/E, low yields - yields have come up, but they are not high, especially in international developed markets).

Tighter labor markets could lead to higher interest rate policy which puts downward pressure on asset valuations, but there is still lots of investable money pressuring valuations up. I guess it’s tough to judge the net effect of these forces.

Best not to drink and derive.

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Qaz

An excellent thought provoking post. Thnx.

I will add a speculation that there might conceivably possibly (uncertain uncertain!) be an additional positive to the picture, and that is that Russia and China are the only remaining entities both committed to and capable of maintaining major war waging forces against USA and allies. They may be stumbling and failing. If that proves out over the next half decade (especially with a strengthened Poland and Ukraine facing Russia) then the USA would have enormously more capacity to shift investment from Military Industrial complex to infrastructure of all sorts, including human capital, and that would boost all of your three points. Fat chance, but worth noting,

david fb

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Business seldom bears the increasing costs, they are passed on to customers. As workers pay more they demand higher wages and an inflationary spiral sets in.

Paul A. Volcker stopped it with high interest rates.

The crisis would end, and most economists give credit for ending it to Paul Volcker, the chair of the Federal Reserve. Volcker got inflation under control through the economic equivalent of chemotherapy: He engineered two massive, but brief, recessions, to slash spending and force inflation down. By the end of the 1980s, inflation was ebbing and the economy was booming.

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  1. In the end, industry will become much more labor efficient.

This is certainly been proven to be true for the last several decades. It will continue.

If a step change in efficiency is expected from manufacturing, it will come from automation, AI, integrated manufacturing systems and technology. It will not come from labor except as a support or enhancer of the human in the process.

(there are no capable bodies to be had, so we must expand capability and competency through engineered solutions, learning systems support and through integrated coordination with humans at the -few- interface points)

“They’re taking our jobs!” is very accurate, here.

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Paul A. Volcker stopped it with high interest rates.

Paul Volcker brought interest rates positive, maybe a little high. It has been a long time, so I forget the interest rates exactly, I do remember financing a car at 12 percent and a house in 1982 at about the same. However, I think my older brother paid something like 18 percent. Still, if inflation was running at 12 percent, then the adjusted interest rate was only 6 percent and 2 to 4 percent above inflation is considered a decent return on a long term loan.

It is my opinion that what caused the 1970’s inflation was the Texas Railroad commission. They held the price of oil too low for too long and the economy grew big and fat on cheap energy.

What ended inflation was the Wintel alliance. The efficiency that worked its way through the economy after the introduction MSDOS and the Intel 8088 chip (Maybe as early as the 8080, I forget the exact architecture now. ) reduced the energy per dollar of GDP. In fact, my direct experience in the oil field showed me that the personal computer and open format of MSDOS allowed for innovation that allowed much more and more efficient extraction of fossil fuels.

These technology driven changes along with the need to drive energy cost out of every aspect of every business killed inflation. The exporting of inflation to Asia in the 1990’s to present kept a lid on wage and the inflation driven by wages. Additionally, there were a great many working age people available and from the early 1970’s to about 2010 we added females to the work force.

Today, we have a very energy efficient economy, and in some aspects a capital efficient economy, but we are moving from the capital light technology business sector to a more capital intensive manufacturing business sector.

For example:

Batteries must be built, the factories to build them must be built, the mines to mine the materials must be dug, and the refineries to process those materials must be built. All capital intense.

That is just one example but, it should suffice. My guess, and it is a guess, is that these two pressures, strong capital and labor demand, will keep interest rates positive at 2 to 4 percent above inflation indefinitely. Of course I am not placing big bets on what inflation would be, buy I think 1.9 to 2.9 percent is where the FED will be comfortable.

I might add, I am pretty sanguine on the debt of the USA. I believe that as the velocity of money increases the tax revenues will increase much faster and the income tax system will capture a larger percentage of the national economy.

Cheers
Qazulight

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https://www.macrotrends.net/charts/interest-rates

The Captain

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The period of pre-Volcker into post-Volcker saw a longer drought of US capital.

We have a normalization at this point in the capital markets. That will be painful for those who sell into it.

I think the US being well-capitalized is more the norm or the rule.

I see this three-year period as similar to the date change in 2000. As the capital dried up the market bottomed a couple of years later. We are talking about possibly before mid-2024.

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Leap, it seems to me that you often assume we are all sitting around with your mental context firmly in place ready to receive short cryptic pronouncements with obscure refererents.

To me, this is one such needlessly obscure statement. Do you mean now is a good time to buy or sell bonds, debt, stocks, or something else?

david fb

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There is a lot of cheap labor still remaining: India, Africa, Malaysia, Indonesia, much of the rest of southeast Asia. Rising labor costs in China will likely just mean a shift of labor intensive industries to these regions. Not sure that it will impact US labor much.

The elephant in the room not mentioned is the aging demographics of most of the industrial world. Lots of money will soon have to be spent on supporting the rapidly growing demographic that is too old for the work force. That will likely mean much reduced capital investment and declining domestic consumption. Less spending on new homes/cars and more spending on health care.

The future will likely be Japan today, the oldest major economy. Deflation was a much bigger concern than inflation for the past couple of decades.

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Or importing lots of low-skill domestic workers to take care of the elderly. So, more consumption because more people living in US–who may be allowed to remain and then become citizens. INCENTIVES.

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I am not here to help.

I am here to profit.

But you did notice I was public in Dec 2021 when I said the market would go down and got myself out. What more do you need?

If I make sense of it a more popular point of view by someone who does not know what they are talking about will pull down my explanation. All the likes etc…I must be jealous? Nope. I just do not have to work myself into a lather to override someone who knows nothing.

Popularity in a bear market never made anyone any money.

In other words, David look at the happy answers and then apply your special seasoning salt.

Seriously I do not want to be bothered explaining this. I do not want anyone telling with applause the wrong answers just to counter me.

To each his own on his merits.

On the other side of this David, I have given explanations repeatedly. Not meaning to be rude but I have often explained myself.

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Leap, relax!

I am not poking at your strategy or character or transparency, but only asking what you actually meant in your post because I actually want to know.

“Capital markets” is a little vague as there are quite a lot of “markets” wherein various instruments of capital are bought and sold. Normalization also covers a lot of different meanings.

I may be just stupid, but I genuinely would like to understand your post. Please help.

d fb

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You ask for an awful lot!

Pete

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It was not obscure. The issue is timing the market.

I answered that.

We know the US bond and equity markets are on edge. As they go further down selling into that is a very bad idea at this point. Sit tight and hold. It is too late to sell into it to time the markets. Far too late.

Literally, a month ago people here were bullish on the US markets. I was not. I am not here to constantly straighten out people. It is not my business to stop the separation of a fool from his money. Wall street will welcome them heartily.

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Leap

Thank you, and I agree.

david fb