Ok–so the UAW has implemented targeted strikes today at 3 auto plants in the U.S.–honestly as expected. Are markets riled – no, of course not–equities are higher. Just like so many things the strike was expected by all–no one–I mean NO ONE thought the gap in what the UAW was demanding and what was offered could be closed so we don’t have giant negative reactions. We’ll see where this one goes–I suspect it will just be an economic sideshow for a few weeks–longer term who knows.
I see that west Texas intermediate is over $90/barrel today–ouch! This WILL flow through the economy and help move inflation higher (or at least stop the lowering of inflation). I mentioned that gasoline was over $4/gallon in Minnesota–related to refinery outages, but as crude keeps increasing the odds that we will see very sticky prices at these levels grows. As is typical for these situations the ‘haves’ keep right on driving while the ‘have nots’ will be hurt.
After a couple days of flirting with the 4.30% level on the 10 year treasury it is trading at 4.33% this morning. The inflation numbers this week weren’t taken very seriously by equity investors –both consumer and producer prices were hotter than forecast. The CME Fedwatch tool still shows odds of a ‘skip’ in interest rate hikes by the FOMC next week–I would think more skeptics of this position would show up–but that isn’t the case as the FED has once again boxed themselves into a corner by shooting off there collective mouths. There have been many of the FED officials sending the message that skip is the right way to go–so now to hike would send markets in a tailspin.
Well I haven’t done anything this week–no buying or selling, but today is 9/15/2023 which means the fruits of our labor show up in brokerage accounts–dividends and interest. It is fairly gratifying to be virtually fully invested and collect very tasty payments especially in the months of March, June, September and December.
We’ve had onshoring in place for about 15 minutes into a tsunami of rising wage pressures and strikes. My concern for strikers and all good employees, is it will take another 15 minutes to re-offshore many jobs that put corporations at risk if based in the US. We’ve become experts in this country at exporting jobs.
We can be certain of three things:
1) C-suite offshoring discussions are already underway
2) Kiosk manufacturers are celebrating
3) China and Mexico are celebrating
4) AI will be accelerated
We need to learn to work together toward common goals and stop the blaming, shaming and incessant finger pointing. It’s so tiresome and so out of control.
Hi Alpha,
I agree that C-suites are talking about offshoring. Recent demands for wage increases like the recent publicly reported 25-46% scare the hell out of the C-suite. The only way they can make their financials close is to raise prices or reduce US employment.
Some of that is coming from increased automation. Been to a newly updated McDonalds lately? – automated ordering, automated drink stations, automated drive throughs, etc., all to reduce headcount.
Its a tough thing to balance. Everyone screams about higher prices, but at the same time, there is lots of screaming about higher wages (minimum wage in California will have almost doubled in the last few years). While not all price increases are purely driven by wage increases, it is a major factor.
It is interesting to study. A lot of jobs areas are exploding in the US and likely won’t offshore, largely because the labor content they provide is a minuscule part of product price.
For example, you see lots of semiconductor fabs going up in the US. We did a study a few years ago and the labor content in a “chip” (at the wafer stage) is around a penny. Even if wages for semiconductor engineers doubled (and they are already pretty high), the price of a finished chip would barely move. The key requirements for a fab are capital (each costs several billion dollars), highly skilled staff, and strong gov. support. There is a huge shortage of skilled engineers in the US, so these companies are all hiring like mad in Europe (esp. Eastern Europe), India, Taiwan, etc.. We used to jokingly call it “domestic offshoring”, meaning that you build the factory here, but staff it primarily with (highly skilled, highly paid) foreign engineers.
Just as an aside – the demand for American semiconductor engineers is tremendous. That is an area where the US desperately needs workers – yet we can’t figure out how to motivate students to go into that field. Instead, I keep seeing people writing about how “students don’t need to go to college to succeed”. Education in a field that is in high demand and pays well is the key for young people.
Anyway, back to C-suite thinking:
Some of their focus is on offshoring, but as you point out, is often more focused on “near-shoring”.
Latin America is certainly a key target area.
-I love Costa Rica. We have helped move several operations there, but it is a small country and just doesn’t have the population to absorb huge offshoring.
-Most of the rest of Central America is just not viable. Lack of skills, lack of stability, ongoing violence, massive corruption.
-Mexico, of course, is benefiting a lot from near-shoring, but the growing instability from the cartels is starting to scare foreign investors away from many areas. Personally, I think it is an area the US needs to be much more focused on – helping Mexico fight the cartels and stabilize itself.
-Brazil would be a great opportunity, but they have crazy laws that make it really hard to do export business there. We did some studies for clients there and just couldn’t get the government to even consider making things workable for export businesses. We showed them a path to 100K new jobs (high percentage were high skill jobs), and it went nowhere.
-Argentina could also be great (lots of skills – was almost a first world country a hundred years ago), but they can’t seem to get out of their own way.
I assure you China is not celebrating any of this. Almost no “offshoring” is going to China. Lots of things going to Viet Nam, Thailand, Malaysia, Philippines, etc., but much of that is businesses shifting out of China. There is very little foreign investment going into China at all. For the last several years, our China practice has been working almost exclusively with companies trying to leave China (as opposed to those trying to set up operations in China).
Chinese Gov is not helping foreign investors feel comfortable with investing in China, and sanctions from the US are strangling growth in technology sectors. I have several acquaintances from the US who left their jobs in China in the last few months because of fear that they could be seen as violating the US technology sanctions. Sanctions are also pushing technology companies to move from China. Nobody wants to be caught between the US and Chinese gov. about sanctions.
It will be a messy next few years. Sure wish my crystal ball was working to see how this all will play out.
Private, Thank you for your response – a truly excellent, insightful and enlightening summary. Would absolutely love to work on such a team with you for a period – though we are now crossing the retirement rubicon and building a term sheet for retirement.
Of your above-referenced players, the winners I think are those that continuously adapt, evolve and execute. Brains and muscles are not enough (Darwin). Strikes then, are abject failures for everyone.
For many of the reasons related to unknowns outlined by you above, I am driven to the safest balances sheets first, yields second. Plenty of unforseen risk out there, which we see play out on these pages regularly.
Thank you again Private. Great read.
It used to be that the UAW would target one of the Big Three at a time and then negotiate with the other two.
Now they need to strike all 3 at the same time.
Perhaps this illustrates the loss of power of the UAW and the Big Three?
Politics aside, neither party can control costs. Look at other places in the world. Just because the government of Venezuela says a Bolivar is worth x amount the economy says otherwise. I sell Solder. The price fluctuates based on tin besides recycling most tin comes from outside of the US. We Placed an embargo on certain countries in Africa I’m not going to go internet searching to find which president or party put it into law but definitely every administration after has kept it in place. I can go on from my experiences like having no plywood or OSB to sell because all the hurricanes in the south closed mills and every mill around the US was shipping stock to Florida or Louisiana. Prices went through the roof and I couldn’t blame the government.
TIM: “Are markets riled – no, of course not–equities are higher.”
Checked the markets later in the day? A bit riled….
Like all things, everything has an opportunity to evolve and fulfil a role in a social complex. VIVA LABOR!
The queen is nothing without the hive.
Tim; I will try hard not to get political but since you brought up the UAW strike I want you all who really gets screwed the worst with this crazy high inflation. Start with UPS getting a $7.50 per hour raise, then the unionized freight railroad workers getting a 24% pay raise over 4 years. Now, the UAW asking for a 46% pay raise over 4 years with a 32 hour work week. We all know that when companies raise prices it just gets passed onto the consumer one way or the other. So at the end of the day the people that really get the screw job is the “retirees” as they can’t raise their prices or demand a pay raise. The best example is look at the items you bought at the grocery store 2 years ago compared to todays price’s. On many things that I buy they are up 25 to 30%. Not the BS that the GOV. wants you to believe. One last example every contractor has really raised their prices over the last year, from painters to plumbers to electricians. Their prices have really taken a jump. Also property taxes are really taking a nasty jump where I live. Retirees are getting absolutely hammered due to all this crazy printing of money.
Chuck–I agree–in the end we all pay the price. I am a instant iced tea freak—what I paid for a jar 3 years ago (3.95) is now $6.75 and I expect it to never go down again–so I am now a brewed iced tea guy.
My wife and I received our Untied Healthcare part D pharmacy insurance premium notice from AARP. Monthly payment went from $30.50 to $70.00, a 100% increase. AAA Homeowners insurance for the house went from $850 to $975, only about 13% higher, just waiting for the yearly auto insurance bill.
I have yet to see any bill increase less than 10% including utilities and of course being California our regular gas averages $5.25 a gallon. Not to get political either, but November 24 cannot come soon enough.
This is not accurate. The NEED for inflating the bubble is NECESSARY for the top tier tranche holders…their secured debt. More disposable income leads to more security for their bonds.
Cycles of Debt are well defined and are now the primary tools of compounding interest to the sky, for those who know how to do it, then crisis deflate, save the bond holders (bankers…again (The Fed, the private Banker’s Bank)), seize the assets through the Courts and Laws written by Their-Selves and begin at a higher level of mortgaging with full security.
We just THINK we know how the System works, but it is a trained paradigm and only one narrative. Why do you thing they can just PRINT?
These higher wages will lead to more security for bond/mortgage holders when the asset prices (your complaint) rise. It’s part of the Cycle, but it is NOT the only cycle we know how to act upon as a Society. How do you think the 1% control half of all assets and now it’s going global?
The Playbook is well written and described. Look up some Michael Hudson or Matt Stoller books. Alan Longbon on SA talks about this frequently.
In Friendly Terms, JA
So higher prices are good?
No absolutely NO. Inflation is a tax on Americans, and the less you earn the greater the burden.
Depends on where you are on the rungs. Yes it is a tax in the bottom rungs. So change it. There are other options in a a society and we have seen them tried and pushed aside by powerful opponents. Our history and the cycles are longer than our individual lives, but history for some is only their personal experience.
when debt Jubilee year.
Chuck- I agree that retirees who invest are often the victims of high inflation costs and often wind up paying for litigation expenses. But at least we have all gotten a huge increase this year on our safe fixed income investments including things like money market funds, CDs and T-Bills.
GS..yes interest rates going up helps our safe fixed income investments, and let’s not forget the nice COLAs on social security that helps retirees, investors or not, and in one way is potentially better than higher mm funds or T bills in that if interest rates go back down, then the mm funds or other short term instruments will pay less, even though prices are not likely to fall, but the COLAs will stick.
Lucky, Im still under 60 but hang out with a large group of golfing guys in their 70s and 80s (Im the pup of the group). They are all comfortably retired in a middle class way, but none of them are in the market. Their idea of investing is CDs or money markets.
Anyways they are all doing cartwheels with the 5% CDs and such. They bitch about gas prices while loving the higher interest yields. They are certainly happier with 5% CDs and higher inflation. When you have the house and cars paid for with good Medicare plans, they definitely feel more financially comfortable now than a few years ago. Perception is likely reality and that is all that matters for them.
It’s easy to say the worker’s pay increases are causing inflation – I say it’s more like top management and shareholder’s cut that is causing inflation. All corporations increased prices because they could as consumers simply had no choices in the market place.
I have a Cohen’s optical near my place which reduced service and increased prices. They used to charge $70 for an eye exam + $20 if you needed your retina checked. They got taken over by “new investors” and they increased prices to $150 for an eye exam – Retina exam would be extra. Why the over 100% increase – profits for the new owners.
This has been the case for all industries around the western world – managers get massive bonuses, stock options while the workers can’t even get a pay rise to cover inflation.
How can this happen – because there is no free market competition within a huge swath of industries (healthcare, supermarkets, housing, dental, airlines, telecom, ISPs, Veterinary Care). As a consumer we have no choice.
> We all know that when companies raise prices it just gets passed onto the consumer one way or the other.
This is, from an economics perspective, categorically untrue. It depends on the structure of the particular market and various parties’ bargaining power.
*Sometimes* supplier price and wage increases are passed on to the consumer. Other times profits decline and shareholders end up eating the costs. All depends on the business.
In any event it’s a little rich for boomer retirees–who’ve benefited from strong unions and cheap state schools, and who tried their best to destroy both for the next generation–to suddenly bemoan the younger workers finally catching a break for the first time in fifteen years.
I don’t know if you personally know any auto plant workers, I do, many are Boomers, so I guess they destroyed themselves. As far as “destroying” state colleges, I haven’t a clue what you are referring to. My kids went to California State colleges and my oldest granddaughter just started at San Jose State last month, I ( a boomer) think they are a great option and wrote some pretty big checks to them, Fresno State, Sacramento State and now San Jose State.