Economic Update: The Great Resignation, Ramped-Up Inflation & What It Means For Investors

This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser. And today we are doing something kind of unique. This is kind of a hot report right off the presses here, and something that we will do periodically on this podcast is Kind of as things are happening in real time, we want to address them and really provide a lot of value to our listeners. And one of the things, as you kind of get to know us and listen to this podcast, maybe you've been following us for a while, but, you know, Bob has a really great background in economic analysis and has been doing macroeconomic analysis for at least a decade, if not a decade and a half, and has had very incredible success kind of calling tops and bottoms in kind of macroeconomic trends And so what we do for our investors is we put together an annual economic analysis and we want to start sharing this more with our listeners and just kind of sharing some of these insights that we're seeing and also doing these kind of periodic updates. And so one of the big ones we're seeing in the headlines that everyone is seeing right now is about inflation, right? And rewind a few months ago, the headlines were, "Oh, inflation is just transitory," which just means it's just here for a little bit and it's going to spike and then go back down, kind of like we saw in the lumber prices. Right, when lumber increased by, you know, 5 to 7x in price. And then pretty shortly, once the supply chain issues were solved, went back down. And, you know, there's a lot of nuance here, and we're going to kind of talk a little bit about inflation, what that means, what it's comprised of. We're going to also spend a little bit of time on the worker shortage, which has kind of been this big conundrum, at least it was for me. And, you know, until recently, We kind of dove into this to research it. And then we're going to look at what are the implications. And as investors, it's kind of the lens we're always looking at from what does this mean and how should we position our portfolios? How should we invest with the information that we know and where we're seeing these trends going? And so with that, I will say, if you're listening to this podcast on Spotify or iTunes or some other auditory-only channel. I would suggest, if you're able to watch this on YouTube or watch this on our website, thebillionairepodcast.com, because we do have some slides that Bob Fraser is going to be walking through that will also be available for download on our website. So you will be able to track along here as you listen, but it'll be easier if you kind of see some of these charts because we're gonna be referring to those a lot. But really excited to dive into this, and hopefully it's helpful to kind of clear up some questions you may have had recently with inflation?

Good. Yeah. So we've seen headline inflation just, just print at over 6% growth, which is very concerning to investors, as it should be.

Right.

So in fact, so we've, we've kind of done our own analysis and, you know, our theme, you know, at Aspen as well as for our, for our, you know, podcast listeners, we really want to understand the macroeconomic trends.

Yes.

Because people are way more successful if you invest with the trends than if you try and resist the trends. So we're very passionate about understanding what trends are going on and investing with the trends. So, so seeing this inflation happening, you know, we were much more in the transitionary camp, uh, uh, this spring. And so we went back to do another deep dive on inflation to actually look really what should be our expectations and what's the outcome. So we're going to actually look at what, what is driving this inflation, whether it's likely to persist or not, and then what it likely means for your investments. All right. So here, let's dive in. So first thing I want to show you is this chart on the actual inflation rate. So this is all the way from, you know, the Great Recession all the way to today. And you see basically just recently we've seen inflation start to tick up pretty powerfully, as I said, just a, just a big print at over 6%. Now, there's 3 components of this inflation in our, in our view. And I'll just list them. First, it's supply chain issues. So this caused by COVID primarily. There's consumer demand, booming consumer demand, and then there's wage inflation. Driven by, you know, what has come to be known as the Great Resignation and the job shortage. So let's look at all 3 of these components and kind of break down everything. And the first thing I want to just look at is the supply chain issues. And in our view, the supply chain issues are definitely waning. So when we saw lumber prices spike up, you know, 5 to 7 times and, you know, and fall down pretty quickly, back to normal. That's kind of, you know, one example. But when you have entrepreneurs, you know, they're going to figure out a way to solve the problem. And, you know, when you can sell lumber at 7 times what it sold for, you know, 3 months ago, you're going to figure out how to sell lumber, you know. And so I guarantee you somebody was figuring out how to sell lumber. So we're going to see these supply chain issues resolved. For example, the chip shortage. You know, I'm just reading reports from Intel They're building 2 new chip factories in Arizona. And, you know, now it takes a while to build a chip factory. So this is not instantaneous in many cases, but we are definitely going to see these supply chain issues easing throughout 2022. So the supply chain issues are waning and they are definitely transitory. But let's look at the other, the other big components of inflation. And, and one of, one of the, one of the strongest components is consumer demand. So consumer spending is just hitting, hitting massive highs. And this, this is, this is driven a lot by, you know, deferred demand, deferred consumption through COVID. So people locked in there in their houses, you know, and they're pining for their favorite restaurant or their favorite brew or their favorite travel destination. And they're going stir crazy. So when the, when the things are lifted, there's just massive demand. So, so we're seeing, we're seeing one deferred, deferred demand ending, but we're also seeing a consumer that is suddenly in incredibly good shape. Now, this is very surprising to me when I looked at the data, but it is— this data cannot be disputed. So we're seeing booming household net worth. So this is, this is the, the amount of net worth in a house. And this is basically completely skyrocketed just since 2020, just in the last 18 months in the COVID season, primarily driven by, by the stock market and housing prices. So, so that produces something called the wealth effect where people feel wealthy, they want to spend money. The second thing we're seeing is record personal income per capita. And again, this is, this is quite shocking. But during COVID in spite of some of the news headlines about the, you know, the difficulty suffering and the need for the stimulus packages and all that, we saw personal income per capita take a quantum leap higher. So people are earning more money than they ever have. And I did the analysis of this, of these numbers from the US Bureau of Economic Analysis. And it is entirely due to transfer payments. So basically, you know, all the direct stimulus paid to— Direct stimulus paid to. And, you know, I've been around a while and I remember when Ben Bernanke was was involved with the Federal Reserve. And there was a lot of concern about deflation. He had made a very famous speech now called the helicopter speech. And he said, "You should never fear deflation. If I wanted to stop deflation, I could simply drop cash from helicopters and we could stop deflation." And he's absolutely right. And it created a lot of controversy because direct payments had never been made where stimulus Direct payments to individuals had never been tried. And so the stimulus in the past was always tax breaks or, you know, lowering interest rates, which helps businesses and has more of a trickle-down effect over a longer period of time and doesn't affect necessarily individuals. So this one, you can just helicopter money to individuals, you know, boy, that's, that's direct. So the question is, what would happen? Well, we're seeing what's happening. You see record personal income. And some of these things we're talking about happening. And so, you know, there was a famous quote I just read recently. It said, you know, when the government robs Peter to pay Paul, you can guarantee that Paul's going to vote. You know, Paul's going to give them a vote. But all right. So, record personal income. Here's another shocker is that savings skyrocketed in COVID. So, what people did with this excess income and reduced consumption is they saved. So they paid down debt and saved, resulting in pretty large balances. And, you know, just pretty healthy balance sheets for consumers at this point. And as a result, you're seeing record low debt service. So this is the blue line here is debt service as a percent of disposable personal income. And you see it as an, as a 4-decade low right now. And this is the, is the total financial obligations, again, including things like rent and autos and everything else. It's still the consumers are just in very, very good shape. Contributing factors here are soaring income, low interest rates, debt paydowns. And so the consumers are just incredibly healthy. So what's happening is is consumers are spending like tomorrow, like there is no tomorrow. And, and they're, you know, this is likely to continue. So let's look at consumer demand. Is it going to continue? Well, here's the factors that are going to cause easing. One is the stimulus is done. So there is, you know, no more stimulus coming, at least direct payments to individuals. It looks unlikely that's going to happen. And deferred demand is waning. We're at the tail end of that. But the continuing factors are many, including the income gains are here to stay. The wealth effect is here to stay. The low debt, low debt service is here to stay. There's high confidence in the job market and strong, strong GDP growth. All, all basically would say that consumer demand is here to stay. And so, and given that the GDP is 70% of the GDP is consumer spending, it's no accident that GDP is on fire as well. So we've kind of learned what happens when you make direct payments to individuals. So, you know, it is like a shot of adrenaline directly to the heart of the economy. There's no trickle down. It's a, it's a, it's a jolt. And extremely powerful. And so we're seeing that. So the other factor is the third factor in this inflation scenario. We've hit, you know, supply chain disruptions. We've hit high record, high consumer demand. The other is the Great Resignation, which is causing wage inflation. Right. So go ahead and summarize what we've seen there. Yeah.

And putting this all together, it's a pretty, pretty big impact. But specifically on the Great Resignation, as it's now been, been called, it's been this very unique thing to witness in the economy from kind of pre-COVID to post-COVID. So, you know, kind of pre-COVID era, we were already operating at a pretty low unemployment rate. And then COVID hit and unemployment spiked. And there's a lot of concern about where is the economy going to go? And restaurants were shutting down, retail was shutting down. And then the economy is kind of open back up and we're kind of through the worst of it, obviously. But we look now and the simple question is, where did all the workers go? Right. You, you know, you walk down the street on all your retail stores and you see every single one of them has a now hiring sign. And, you know, they're— Domino's is now doing a $3,000 you know, one-time sign-on bonus just to deliver pizzas, you know. And so there's just an enormous need for workers. And, you know, the simple question is, well, where did everyone go? Did everyone just disappear, you know, in this last year? And it's a lot more nuanced than that. As we kind of dug into it, there's a great piece by a journalist of the Wall Street Journal that really delved into this. We're going to kind of pull out some of these pieces of information. What's really interesting is that the unemployment rate is really low again. And so we kind of are back to where we were before, but the real big difference is the labor participation rate. And so what that means is basically measuring all those workers that are in the workforce, whether that is—

has shrunk.

Yes.

So the percentage of the population is actually working is shrunk and the percentage of population that's that wants to work has shrunk. Right. So, so they just decided to, to retire. They decided to, you know, stay home with their kids.

Yep.

And, and or, or, or do a, do a side hustle. And so we're seeing a massive amount of people that have simply left the workforce, about 4.3 million according to the Wall Street Journal article. Yeah.

So, so 4.3 million is a very You know, it's a huge number, very big number. And like, to your point, a lot of these baby boomers that are kind of maybe close to retirement age, you know, because the stock market has been doing so well and has been so hot and, you know, everyone's household net worth is booming, a lot of them decide to retire early. Right. And then you have these kind of dual income families where, you know, both spouses are working. And right now there's been a huge issue in daycare staffing. Right? So if you have kids and daycare staffing is an issue, they're raising rates on daycare and at the same time the wages are increasing. Well, it actually kind of makes sense now for one of the spouses to pull out.

Who may have gotten a raise.

Who may have gotten a raise that can now cover the difference between what the other spouse is making minus the daycare costs. And they're actually ahead by only one spouse working. And so that, um, the other spouse just stays home with the kids, right? And so it's— it remains to be seen. But there is some concern that this is not just a short-term issue. It's actually a kind of systemic issue that may be here for a little bit with this labor participation. But it's also pretty uneven. It's not been just all across the board. It's mostly on kind of uneducated workers.

It's more on them. Yeah. It's more on women, workers without a college degree.

Right.

And on low-paying service industries. You're seeing outsized drops in participation rate and jobs disappearing. Right. So as you can see on the chart here, so this is the participation rate. You can see the, you know, the prime age participation rate here and you can see it drop down during COVID and it's been recovering, but really not that strongly. This is men here has recovered a little strongly and women has really not been recovering that much. And so to Ben's point, what's happening is you look at the marginal gains from, you know, a spouse getting a job, having commute costs, daycare costs, and tax increases.

Yep.

That it's not worth it. And I want to make the point here too, you know, we're not, this is not a political show at all, and I don't want to hit politics, but I do want to hit policy because policies, it's very difficult to separate economics and policy. Every policy has an economic impact. And so I want to hit those things without kind of making it political. And the first thing I want to make a point about with this participation rate drop is this is an entirely US phenomenon. Yes. We're not seeing these seeing this anywhere else. And so it is primarily US policy-driven, this issue. And what's happening, so you realize, as we've said, you know, this working spouse phenomenon, well, when you count a progressive taxation, you basically, you're penalizing incremental dollars earned through the tax system, right? Well, then that's one more reason, add Add that to daycare and commute costs. And, you know, maybe it's just easier to stay home, especially when you look at that, you lose the tax breaks and the tax breaks you're lost in chunks. Once you hit about $70,000, $80,000 a year, incremental dollars can put you in a different tax bracket. And all of a sudden you lose major tax deductions. You hit $100,000, even more. So, it's just the marginal interest in working simply goes away. So it is, and it's clearly stimulus-driven. So because of the increase in wages and savings, you know, people are feeling like, you know, who wants to work? I can take time off or I can, I'm just gonna retire one or the other.

And also a less contributing factor, but still contributing, especially these kind of frontline retail hospitality type jobs is immigrant workers. So because of the pandemic, the border's been closed, you know, a lot less people coming in. So there's less, you know, labor from that standpoint as well. And it's causing a lot of these service-based businesses to have to dramatically change how they're doing their business and also push those increased costs.

So, and I want to make a policy comment here too, that America needs a smart immigration policy. And I would say both on both extremes are kind of nut jobs. You know, I mean, you know, we, we don't need a completely closed border. We need a, we need a smart open border with, with where people without, who are not criminals and who want to work and are not going to, you know, burden the social welfare system. And then they, you know, and who are knowledge workers and are hard workers, we definitely want them to come in and Good for them. It's good for us. And so we need a smart immigration policy and we need politicians that will, that will implement a smart immigration policy. And that's— it's actually super important. All right. So moving on, I want to just look at interest rates here and make the point that we're seeing negative real rates. Now, real rates are the difference in interest rates and inflation, basically. And if you look at inflation expectations right now, it's called the break— the 10-year breakeven rate. And it's investors' view of expectation of inflation. And it's super accurate. This is what investors, smart investors, are betting that the inflation rate is going to be. And it's, it's over 2.5%. It's approaching 3%, not close to the 6%. But if you look at actual interest rates, they're 1.7%, the difference is negative. So negative interest rates mean that your, your, the cash value is decreasing with inflation. It's in the value of it's being inflated away. So cash is kind of burning, it's on fire. But if you put that money in a bank and earn interest, you buy a Treasury bond, you're earning less than inflation. And so what, so what that means, it's going to create massive demand for assets. So So, I've got cash that's literally disappearing while I'm looking at it versus an asset, let's say real estate, that is increasing in value with inflation. What am I going to do? I'm going to turn my cash into hard assets. And so, that's exactly what we're seeing in this kind of environment. Historically, just looking at commercial real estate, commercial real estate is priced 100% based on cap rate, which is the, which is the multiple of operating earnings. And cap rates are highly correlated to real interest rates, not nominal interest rates. Nominal interest rates are the headline interest rates, but to interest rates less inflation. And so cap rates right now are being driven to the, to the floor, and that is likely to continue. I want to also make a point about the CPI. So here's our CPI chart from before, and I want to overlay that with changes in housing prices. So you see, you know, housing prices go up in inflation, which again is, you know, is— I think everybody knows that.

I think just real quick for those that are maybe less accustomed to inflation, the definitions of that, there are the kind of two broad measures of inflation, right, which is CPI and asset price inflation. And we've been talking about today is mostly consumer price inflation. But so I make that note. Yeah.

So, you know, there was some great studies done that basically showed that housing prices, you know, when, when real interest rates go negative, like right here, housing prices spike. When real interest rates go, go quite a bit higher. Then housing prices slow. And this obviously makes sense. So this is all based on data. So again, pointing to real estate as a, as a good investment. You can see even here is our other chart on real interest rates. You know, I do want to make the point to negative real interest rates is actually a super rare phenomenon. And it's, but it's also likely to continue because it's primarily created by central banks.

Yeah.

And they're going to continue. So look what happened as soon as we had negative interest rates here. Look what happened to, to the real estate prices. And as soon as we had negative interest rates here, look what happens to home prices. Yeah. So, so they're definitely correlated. All right. Bottom line is I want to, I want to basically give you the outcomes that we're looking for in this time and how to, how to be successful as an investor. So just to recap, The supply chain disruption and the inflation through supply chain is transitory. We're going to see that being solved gradually throughout, you know, '22. And I was predicting that for '21, but I didn't see Delta coming like it did. So it's still going to happen. We're going to see massive, massive easing of the supply chain issues. Consumer demand, we're going to see continuing but easing. So consumer demand is going to continue high. I think GDP is going to continue record growth. And for the reasons I said, yes, the stimulus is done. Yes, deferred demand is waning. But all the other drivers of an extremely healthy consumer, they are not going away. I actually saw some people predicting economic crash, you know, and it's, it's just honestly, please just don't listen to that stuff. It's just not right. It's not accurate. And we're not going to see that anytime soon. The Great Resignation is also continuing, but easing and but easing at a slower pace. It's going to, it's going to more continue than not. But as people run out of cash and as, as the savings diminishes, people are going to, going to look at entering the job market again.

Okay.

So what does all this mean for us? Well, bottom line, You know, as we've learned since 2012, inflation is bifurcated into CPI and API. So when you see high consumer price inflation, CPI, you want to understand that asset prices are also going to go up. And, and in fact, more, you know, more of the, of the money going— more of the easing that's going into the economy does not flow into consumer prices as much as flows into asset prices. So we are going to see, you know, for every, every measure of consumer prices, you're going to see much more measures of, of asset price inflation. Um, I believe the Fed is going to be very much pressured to raise rates. Uh, you're going to see right now with 6% inflation and they're keeping the rates at, you know, these super low, low term, they're going to be highly pressured to do this to kind of ease the, uh, the overheated economy. At the same time, I think they're going to be limited to, to by midterm elections coming up here next year. Who's going to want to raise rates right in front of that? What, what existing politicians are? And then in 2024 as well, when Biden's coming up for reelection again, I see the same issue. And in the past, you know, the Fed has not been as politicized. I think the Volcker days in the '70s and the Greenspan days in the '80s and '90s, the Bernanke days, you know, I think the Fed chair position has gradually become more politicized because they're appointed by the president. In the past, that was more of a banker and no one really thought about it or paid much attention to it. But today it's really become front and center and part policy is you want to get the right person elected who is, you know, So, so honestly, I just, I don't know how much that I, you know, my guess is they'll probably try to raise rates or raise rates slightly, but they're not going to, not going to raise them very much. You're going to see negative real rates drive up asset prices. And as I've showed, we are going to see asset prices continue to rise, including the stock market, including Bitcoin, gold, silver, including especially real estate. As I said, CPI will rise, but unevenly. So we're going to see CPI rise, but unevenly. Local— locally produced and served goods and services are going to continue to be the hardest hit. So you'll see, you know, restaurants, you know, very much raising rates, cutting hours, trying to survive in this very difficult environment and implementing lots more automation and those kind of things to to, to try and stay in business. But you're going to see anything that can be offshored to be offshored. So you're going to see an offshoring boom in manufacturing. For example, right now, all this inflation that's hitting in America, it's really not at all hitting in Asia.

Zero.

And Europe is having slightly higher inflation, but not much. It's really a U.S. phenomenon. And because of the— of this, of this, basically the stimulus creating this outsized consumer demand, and the Great Resignation has just spiked inflation. So, you know, for every action there's a reaction and a consequence, unintended consequence. So you're going to see an offshoring boom. And then my final prediction is that we're going to see a reshoring boom.

What?

Which is it? And especially in strategic goods. And I will say things like, uh, like, um, like chips, where the cost of that chip is very little, but its strategic value is very high. So we're going to see strategic reshoring of various, you know, what you call it, the rare earth metals and chips and other kinds of things will be reshored to America to eliminate supply chain issues from continuing. So We'll see all of that. And the bottom line is get ready for asset prices to continue rising. Yeah.

So as an investor, what does that mean? If inflation is increasing, the consumer price inflation is increasing, that means asset price inflation will be increasing. Where should we be investing? How should we be posturing?

Yeah, the number one is of course, of course, real estate. And that includes both residential, you know, residential real estate as well as commercial real estate, I believe is going up. Again, I think the stock market is going up. It's hard to predict the stock market going up though, because it's already gone up so much and it's got so much froth built in. So, how high can a tree grow? Well, it can grow higher, you know? And so, but I do think demand is going to continue. There's just so much liquidity and so much, you know, when your cash is on fire, And that means that 6% inflation rate means your cash is decreasing in value at 6% per year.

Yeah. So, you need to be earning more than that to just stay—

Yeah. So, to break even, you got to earn 6%.

Right.

So, what do you do? You're going to be looking for high yield. You're going to be looking for everything else. So, you know, and I think those numbers might ease a little bit here. Sure. But, you know, we are going to see higher inflation.

And one other point, when inflation is going up, that's actually really good for borrowers, right? When you have fixed rate debt and you can borrow at a fixed rate, and then the value of that dollar decreases over time because of inflation—

cash is on fire. So the more you owe and let it burn, right? So, so yeah, that's absolutely right. One of the, one of the keys to, to prospering in inflationary environment is fixed rate debt, is owning a lot of— owing a lot of fixed rate debt.

Yeah, yeah, awesome. Well, thank you guys for joining us on this. Hope this was helpful. Um, and again, just kind of a special kind of news report here. And if you guys have questions on this, you know, we, we are very communicative and want to hear your feedback and other things that maybe you're thinking about for issues that you're seeing kind of economically and other things that you would like more analysis on. We're always open to other things and always try to put out as much helpful content as we can. So thanks for listening, and, uh, go be successful in your investing, and hopefully this will give you the tools to do so.