The Price of People
“Just as individuals are born, mature, breed, and die, so do societies and civilizations and governments.” ― Frank Herbert, Children of Dune
If there's one thing we're particularly thankful for, it is our diverse group of clients and friends who help us better understand - and appreciate - the world around us. Thank you for being one of those! One thing we are NOT thankful for is that US consumer prices jumped over 6% in October – the biggest jump in over thirty years. Investors seem to believe these price surges are temporary and will fade as bottlenecks loosen up. We worry, however, that there is wage inflation underway that may prove enduring. If that does prove to be the case, this may ultimately drive broader consumer prices higher than markets and Washington expect. Below we explain why … and why it matters to investors. People Are Not Commodities No question that many consumer and commodity prices, such as used cars and computer chips, are temporarily inflated. They will likely decline as bottlenecks eventually open up. Wages are another matter. They’re sticky. Try giving your employee a pay cut. That won’t go over well. Falling prices at the grocery store can induce good feelings and spur greater economic activity. Falling wages can induce very bad feelings – and can crush economic activity. October’s inflation surprise was broad based across many core categories. Wages, however, did not keep pace. In other words, real wages fell. We do not believe this is sustainable. In a recent Fielder note, we pointed out that real estate and stock prices have risen roughly in line with the money supply over the very long term. Wages did too – at least until 2008. Ever since, wages have not kept up with the money supply growth.
Wages vs. Money Supply Growth
Closing the Gap The arrival of Covid has sparked changes in the labor force. As a result of both natural economic forces and public policy changes, we believe this gap may be in the early stages of closing. Last quarter saw the highest jump in wages and salaries for private businesses in almost two decades. Real wages may have fallen, but nominal wages rose materially higher.
Employment Cost Index
This data is consistent with repeated anecdotes we hear regarding labor shortages across industries and geographies. Wages amount to over 40% of US GDP,* so labor is an important “price” in our economy. If a structural wage inflation is now underway, it is reasonable to worry that it may ultimately drive consumer prices higher. (To be clear, we are not making a near-term inflation call. The next 12 months are too hard to predict since falling commodity prices could more than offset near-term wage increases. Our focus - and worry - is on longer-term inflation.) Don’t expect to hear this kind of concern from the Fed or policymakers. They rationally fear that inflation expectations matter. If the public begins to fear inflation, that alone could drive prices higher. (A kissing cousin to toilet paper hoarding.) Why You Should Care Markets are pricing in very low inflation over the next decade and beyond. (For the wonks among you, the 10-year breakeven inflation rate is 2.6%.*) A surprise uptick in inflation expectations, commensurate with falling risk appetites, could be very bad for stock and bonds. Some investments, on the other hand, could do quite well. Fielder believes it is paramount that investor portfolios are thoughtfully constructed in a forward-thinking way. To be clear, the road is likely to get bumpy from here. We should all prepare for volatility ahead. It is paramount that you know what you own, and why you own it. Only then will you have the peace of mind to ride out the storms inevitably ahead. We appreciate any contrary or additive thoughts you might wish to share. Our thoughtful clients and friends, like you, are our most valuable asset. (And that’s not inflated!) Happy Thanksgiving! Yours in the Field,
Frank Byrd, CFA Steve Korn, CFA
*Source: Federal Reserve, St. Louis (FRED) ____________________________________________________________________
MPORTANT DISCLAIMER: This note is for educational purposes only. It is not a recommendation to invest in any particular security or strategy, since anything mentioned herein may be completely unsuitable for some investors. Speak with your financial adviser before investing. While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this email or any attachments. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Fielder’s employees are not attorneys or accountants and do not provide legal, tax, or accounting advice. Financial planning and investment strategies have the potential for loss. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Investing involves risk, including the potential of complete loss of principal amount invested. Fielder offers no guarantees or promises of success. Nothing herein should be construed as a recommendation to buy or sell any securities. Fielder or its employees may have an economic interest in securities mentioned herein.