Each year I bring a few thoughts back from David Kotok’s annual gathering of economists, investors, philanthropists, and journalists in the woods of Maine. My soft and squishy takeaways I cover in a separate piece this year: Camp Kotok: Breaking Reality Tunnels.
Below, however, I recorded the drive up with Barry Ritholtz of Ritholtz Wealth Management, and Sam Rines, Managing Director at Corbu. I started the conversation mostly trying to understand what these two very smart guys were concerned about, in a constant effort to uncover my blind spots.
Dave Nadig, Financial Futurist, VettaFi: Alright Barry, let’s kick it off. How bad are things?
Barry Ritholtz, co-founder, chairman, and CIO of Ritholtz Wealth Management LLC: I have to answer this in two ways. When you look at human progress objectively — both in the United States and around the world — by every metric, things are actually getting better.
The collapse of civilization has been imminent forever and in a bizarre way, that is hopeful because people have been terrible forever. This isn’t new. The internet might be new. Connecting all these terrible humans might be new, but people are terrible.
But there’s good news too. The balance of power has shifted. And that it’s not a coincidence that you’re seeing a huge uptick in wages. Hey, when you take $1.4 trillion and give it to people stuck at home, a lot of them are going to upscale, a lot of them are going to launch new businesses, new ways of earning a living.
Nadig: Well, if wages shift up, and we deglobalize, that implies a lot of shifting. Who are the winners and losers?
Sam Rines, managing director at Corbu LLC: I think it’s almost somewhat hopeful because that’s the way that capitalism rebalances capital versus labor. If you have a shortage of nurses, nurses will make more money. Or even if there’s a wild shortage of plumbers, plumbing becomes a ticket to the middle class. So lower standards of living? I don’t think is going to be a real thing for anyone other than the upper middle class. The upper middle class is the one that’s going to get squeezed.
The middle class to a degree. But the middle class will also be populated by a lot of electricians and plumbers and people who can actually do things that are at a huge shortage right now. Those wages are going to continue to expand until you have enough people to do that.
That has only just begun when it comes to the labor versus capital model. Labor is going to have a lot of say going forward, particularly in those areas that we’ve underinvested in for 20 or 30 years already. Right. We did not produce enough electricians or plumbers 20 years ago.
Ritholtz: I think the shift is from the property and company owners towards the bottom and middle third, which will shock a few folks.
Deglobalization as a Wage Inflation Tailwind
Nadig: Because I’m an economic idiot, what about the other side of this equation though? We just ate at Eagles Nest [world famous lobster roll diner in Bangor, Maine]. Presumably, those servers used to get paid, I don’t know, $7 an hour. And now I’m guessing they get paid $15 because we have reset wages. At some point, a lot of those marginal diners cease to be viable. And not just diners, but companies with high labor participation.
Rines: Well, let’s back up. There was radical contestability of jobs that happened in recent history. Call it the outsourcing years of the ‘80s and ’90s. If your job was contestable or doable elsewhere, you had to compete on a global level for a given wage, or you were done. You were absolutely done as an American worker, and we saw that happen. What happened over the pandemic and post-pandemic period was a realization that a lot of the jobs that we considered contestable 20 years ago — manufacturing and natural resources — weren’t actually contestable from a national security framework.
Nadig: Energy, semiconductors, secure communications, cobalt.
Rines: Right, If you wanted that, that no longer existed within the U.S. because we globalized it. That is now reversing in a very meaningful way. That’s going to be a wage inflation tailwind for a very long time. Suppose you need to bring semiconductor production back to the United States. In that case, if you need to have critical infrastructure manufactured in the U.S., that implies you need to soak up a tremendous amount of labor — labor supply that currently does not exist in any meaningful way here.
Ritholtz: How big is the CHIPS bill? What’s that, $50 billion? That’s a lot of wood. And again, now you have the government stepping into an area where the private sector either couldn’t or wouldn’t deploy money because there’s a national security interest there.
Job Shortages Could Drive Innovation
Nadig: But while we rebuild manufacturing to on-shore, China continues to be the infrastructure provider for the rest of the world. Does that concern you?
Ritholtz: I think that we’re selective about it. For the past 20 years, China looked infallible. The past few years have shown that China is fallible, and their system leads to a certain type of specific groupthink that they have a harder time getting out from under than we do — even with all our partisan nonsense. I don’t care if you’re a Biden fan or not, you have to look at the first two years of his presidency and think bipartisan action is more possible than we were told. We’ve had a giant infrastructure bill. We’ve had not one, not two, but three CARES Acts in response to the pandemic. We now have the CHIPS bill. We now have a giant climate change bill that went through. Suddenly there’s an immense amount of bipartisan activity.
Rines: And from a population perspective, the U.S. is one of the very, very few developed countries that is expected to actually have the population grow. It is projected that China will lose almost precisely a U.S. population over the next 70 years. If you think about that, that is remarkable… They’re going to lose 350, give or take, million people.
We have headwinds in many industries because we simply don’t have enough people trained. We have the potential for significant changes in the demographics, which I think will be far less painful than people anticipate because we’re working a lot longer than the last generation. We’re not retiring at 65. We don’t have jobs that break our bodies like we used to in many ways.
And I think really cool things will emerge from this to solve the problems we’re talking about. Whether it’s plumbing, heating, or whatever it might be. I don’t think a robot will plumb a house or do the electrical work, but you’re going to have a lot of solutions that emerge from this that are really, really interesting because we’re a capitalist society that will richly reward people who come up with innovative solutions.
Ritholtz: People forget there was a shortage of contractors, electricians, framers, and people who could build houses, we saw a giant drop after the Global Financial Crisis [GFC] and they’ve only recently come back. There aren’t enough bodies to fill the open positions under normal circumstances. During a boom, it’s even worse.
Rines: Barry’s point there on the GFC is wildly understated. After the GFC, you had a collapse in the number of contractors, woodworkers, all of that. Right. Those jobs just disappeared. It’s worth remembering that in 2015, 2016, and 2017, a lot of the labor force in the oil patch did the exact same thing. There weren’t jobs to drill. Nobody was drilling for oil for a very long time. Part of the reason why you do not see a significant uptick in U.S. oil output has nothing to do with ESG or any of that, a lot of it has to do with there just aren’t the people that are still in the oil patch to actually drill. You can’t find the people. You can’t find the pipe. You can’t find the concrete. These are real issues that are going to take a much longer time than folks expect
The Need for Robust Supply Chains
Nadig: So it sounds like we need big productivity gains or big immigration and training gains. All while we’re turning inward and deglobalizing.
Ritholtz: So the deglobalization thing is really interesting. Capitalism is a vastly superior system to socialism, but capitalism also requires guardrails. Capitalism is the same system that gave us slavery and child labor and just-in-time inventory, right-sized warehouses, and a very fragile supply chain: because all of those things were more cost-efficient at those times.
So just as we had wages that were deflationary for decades, and now they’re inflationary, so now you’re going to have supply chain repairs and the moderation of just-in-time inventory. Amazon just built this immense logistics facility by me, and they’re doing that everywhere. You will see the supply chain become more robust, whether due to competitive needs or government mandates. It’s happening. So while we had this giant artificial productivity boost, at least it appeared that way, now you’re going to pay for the piper.
But we’ve under-measured and under-counted productivity for decades. I think half of the productivity numbers are a measurement problem, We produce far more real output with far fewer people and far fewer expenditures, and the productivity data just doesn’t seem to catch that.
Yes, that last mile, the frontline worker economy is somewhat immune to productivity gains, but a huge swath of the economy is becoming more efficient and more productive. Sometimes it ebbs, sometimes it flows. The idea of saying we don’t want a robust supply chain, we want a highest profit supply chain, well, you got that. And when there’s an emergency, and you can’t get gloves or masks or bleach because you set this up in a way that was reckless and not robust. You set this up, and it was fragile.
Rines: The last 20 years were great in large part because of what we are unwinding now. So now we smooth it out and say, “maybe we shouldn’t have done all of that, now we need to take some of that back.” But I wouldn’t say that means years will be harder ahead, simply because we’re taking some of that back in. It’ll be harder if we don’t do it. I just think we’re underestimating the ability to offset future costs by doing the work now because we’ve seen what the costs are when you just destroy supply chains for six months.
If you were to have some sort of a second significant COVID-like disease or something, we know the drill now. The drill is “everything is going to be more expensive if you can even get it.” We don’t want to go through that again.
Ritholtz: What Sam was saying about how things cycle — I love the book that Dan Gross wrote called Pop: Why Bubbles are Great for the Economy. My favorite example in the book is in the 1990s: all these companies laid fiber optic cables. Metromedia Fiber and Global Crossing, they were all doing it at $1,000 a mile. Then they all went bankrupt, and they were all bought by various entities for pennies on the dollar. Because of that, what you end up with are things like the bandwidth of YouTube and Netflix and arguably Twitter and Facebook, but the entire app economy, the entire 3G, 4G, 5G, the entire ability of mobile. It looks like this disastrous waste of capital.
Really, the early investors were the ones with the arrows in the back like pioneers always have. The second mouse gets the cheese. And when we look at these changes, whether it’s bandwidth or supply chain, all these things are live and organic and dynamic and adapt. And sometimes, the government gives it a little nudge as they did with the CHIPS bill, and sometimes it’s shareholders. Shareholders are going to say, hey, we are in this for the long haul, cutting your supply chain inventory to nothing to make a quarter doesn’t help us if you have three or four quarters of below average. We need a little anti-fragility, we need a little robustness.
Nadig: Well, gentlemen, it seems we’ve arrived. If I could summarize: the world isn’t ending, labor remains a critical issue, but we seem to be at least moving in the right direction. Certainly, if you’re a waiter at the Eagle’s Nest.
Ritholtz: Or if you like lobster rolls.
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