The Great Stagflation

[spartansaver]

I've been reading a fair amount about certain industries having labor tightness as well as skyrocketing costs of certain commodities. This got me thinking that there a fair share of people who claim since the labor market as a whole has slack, deflation is likely to persist. But if we look at labor markets on micro levels we start to see different stories (see WSJ article below). Does the tightness in labor of specific industries have any parallels to a previous event? One parallel that comes to mind is post-WW2. Amidst WW2, the US rejiggered its economy as a war machine and when the war ended we had all the troops come home and our needs greatly changed. Inflation as well as employment spiked upon their return. We are in the process of dramatically changing certain parts of our economy to cope with a post-COVID world. Is this parallel off? Can you think of any other parallels that refute this hypothesis?

https://www.wsj.com/articles/blue-collar-jobs-boom-as-covid-19-boosts-housing-e-commerce-demand-11613903402?mod=hp_lead_pos1

[Viking]

I am wondering about how the US economy will develop each month as we progress through 2021. In terms  of inflation pressures i wonder what will be one time (supply or demand shock) and what will be ongoing/secular. We also likely will see lots of crazy developments (like we are seeing in the shipping container market) and it will likely be difficult to separate short term impacts from those that last for years. 2021 could be a year where we see lots of noise given covid, government stimulus spending, historically low interest rates, people going stir crazy etc.

Residential housing has the potential to be a big deal. Likely a secular economic driver given the under-building that happened for years post GFC. Historically low interest rates could over the next couple of years create another housing bubble in the US (happening everywhere else so this is my no brainer forecast). Housing is a big employer and driver of GDP so a residential housing boom would be very good for the US economy.

The service sector of the US economy should also outperform big time as the economy slowly opens up. And this is a massive employer of people. And pent up demand should be especially strong here which would be very supportive for employment.

I wonder how mall type retailers will do; how much purchasing has shifted to online. Makes sense parts of commercial real estate will face headwinds.

When i weave it all together i think we are living through the grand experiment: does all the government spending result in a rapid recovery allowing the economy to return to close to full employment in 2022 or 2023. If this happens they will need to re-write economic text books (regarding what governments should do to combat severe recessions).

In the short term the key stat i will be following is the 10 year US treasury; if trouble is brewing with inflation this is where we should see the first indications.

Looking into 2022 and 2023 we will also start to learn if total debt levels matter (if Japan can be used as an example the early answer is likely ‘no’). 

[Spekulatius]

The service sector will be interesting since essentially the min wage will be $15 (Walmart raised it to $15 after Target and Amazon did so). I assume that will set essentially the floor for wages going forward.

I think this time, inflation will come from wages, not from energy and commodities like in the 70’s. That may not be that great for corporate profit margins, at least in some sectors.

[bookie71]

I heard on PBS Friday that gas is up almost 30% from one year ago, meat (beef, pork and poultry)about 30-40 %(this is apx as I am old and forgetful) and building materials and supplies about 300%.
Is this the edge of the sword to come. I remember the Nixon and Carter years.  Wasn't real pretty.

[scorpioncapital]

Is chasing full employment a chimera in an age of automation? Or rather, is it full employment of a constantly dwindling labor force? 100% of 20% is different than 100% of 80%.

[ratiman]

I've been reading a fair amount about certain industries having labor tightness as well as skyrocketing costs of certain commodities. This got me thinking that there a fair share of people who claim since the labor market as a whole has slack, deflation is likely to persist. But if we look at labor markets on micro levels we start to see different stories (see WSJ article below). Does the tightness in labor of specific industries have any parallels to a previous event? One parallel that comes to mind is post-WW2. Amidst WW2, the US rejiggered its economy as a war machine and when the war ended we had all the troops come home and our needs greatly changed. Inflation as well as employment spiked upon their return. We are in the process of dramatically changing certain parts of our economy to cope with a post-COVID world. Is this parallel off? Can you think of any other parallels that refute this hypothesis?

https://www.wsj.com/articles/blue-collar-jobs-boom-as-covid-19-boosts-housing-e-commerce-demand-11613903402?mod=hp_lead_pos1

A Chicago-based truck-trailer manufacturer is increasingly hosting drive-through job fairs and raising wages by up to 7% as hiring picks up across its nine production plants.
 

"Rising trucker wages" is such a joke at this point. WSJ, Bloomberg and Washington Post have run "trucker shortage" stories literally every two weeks for the last twenty five years.

[SharperDingaan]

Over what period?

Exiting, and post, Covid - costs (everywhere) are going to be a lot higher - get over it.
There aren't enough truckers, there is a strong desire to remain closer to home, it is not a 'preferred' occupation, and many are treated like trash. While Covid is with us, a great many have voluntarily either deferred (or come out of) retirement; post Covid a good 20% of long-distance drivers are going to walk away. Pay up, and pay more for everything being transported.

No migrant workers, no crops planted, or picked. You still have to eat, but with less supply, food is going to cost a lot more. Current grocery store increases are just the beginning, and it's everything relying on cheap labour doing what locals will not. 20-30% increases pretty common.

Stimulus comes at a future cost. Most would expect at least another 20-30% in either higher taxes (income, consumption, etc) or FX devaluation as imported food now costs more. How much impact, depends upon what you buy.

Income for the unskilled is not going to rise - unless either 1) minimum wage increases, 2) workers work more hours, or 3) there is some kind of governmental minimum income. Severe disruption, and most places are looking at option 3.

Point? Little Johnny/Suzie should now expect a much lower inheritance, because gran/grandpa now need the money to eat. For many young people, cutting their dependency on golden handcuffs, will be the best thing that's happened to them in quite some time.

SD
 
 


 

[Ice77]

Timber didn't have a single losing year during the last period of stagflation in 70s. The returns in most years were double digits.

Here's an excerpt from a resource investing book i read awhile back,

"First of all, trees grow year in and year out. Trees in good growing regions in the U.S. grow at 6%-8% per year. They grow through recessions. They grow through wars. They grow through stock and real estate crashes. They grow through everything. They give you built-in investment growth that isn’t guaranteed with a stock.

Along with the tree growth, the price of wood has grown at a consistent rate throughout the years. It’s extremely difficult for a company to increase the prices of its goods by 6% every year. But the price of wood, according to legendary money manager Jeremy Grantham, has increased by that amount for the last 100 years.Specifically, he says “stumpage” prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.Another thing is timberland is a resource investment, but it’s not a constantly depleting one, like a gold mine or an oil well. Trees will grow back. It’s a sustainable resource investment.

What happens when the market is slumping? When you can’t get the price you need to make the business profitable? Did you just waste eight… 15… 25 years on an investment with nothing to show for it? The answer can be summed up in five words: “Bank it on the stump.” In the industry, it’s a phrase that means if conditions aren’t right for harvesting your crop, you just keep letting it grow. You keep the profits on the stump and wait for a more profitable time to sell your timber – most likely, when timber prices are in your favor.Here are the rough numbers on where timberland returns come from: • 1% Landvalue increase • 6% Biologic growth of the trees • 3% "Stumpage" price increase (the price of the actual tree).

It’s important to point out that rather than just going out and buying a forest, you want to make sure to invest in managed timberland. The reason it’s important to make the distinction is simple: Managed timberlands, according to a study conducted by the University of Georgia and published in the Journal of Forestry, generate returns almost four times higher than non-managed lands.The big names in the U.S. are Weyerhaeuser (WY), Rayonier (RYN), and Plum Creek (PCL). To spread your risk, you can buy the U.S. big names through an exchange traded fund with the symbol: WOOD. You can get much broader international exposure through the Guggenheim Timber Fund (CUT)."

[cherzeca]

it used to be dont fight the fed. now, treasury is joining with the fed to make it a two barreled money/credit creation machine.  I found this newsletter piece interesting, with its reference to the two nuclear keys by having the fed and treasury work together in this unprecedented (going back to WW2) manner:  https://www.lynalden.com/february-2021-newsletter/

strap in for the ride and get out when she blows.

[Cigarbutt]

...Amidst WW2, the US rejiggered its economy as a war machine and when the war ended we had all the troops come home and our needs greatly changed. Inflation as well as employment spiked upon their return. We are in the process of dramatically changing certain parts of our economy to cope with a post-COVID world...

For several years now, in involved private businesses, there is an unusual trend in low or average skill workers: large turnover and unusual negotiating leverage for salary and conditions. It’s unusual (and puzzling) because the micro situation should reflect the macro situation (which has been evolving for a while) showing the very large pool who have somehow decided not to get involved in the working force. It’s hard to see how this wage pressure will be sustainable. A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation. The shifting environment means higher costs related to wages but this seems more like short-term noise.

The following is submitted for historical perspective:


Headline: Ouch! The yield curve is steep (the 30-yr at a threatening 2.16%..) and inflation is here, there and everywhere.


Headline: Since the advent of the unprecedented use of unconventional tools and various stimulants, inflation has remained dormant and now we wonder if two nuclear bombs work 'better' than one.


Headline: The allusion to previous ‘dramatic’ events is interesting.