Labor Shortage Continues & Higher for Longer | Top of Mind Series

Welcome back to another Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser. Another top of mind episode coming at you. So these are shorter episodes focused on more trending topics, things that we're seeing in the market and think are relevant to our listeners. So, and some other articles we've been reading. Obviously we had GDP that was released a few weeks ago and just blockbuster numbers, right? The economy is on fire. Most people were not expecting that, but we've been, we've been calling this for a little while.

I know.

Can we just keep tooting our horn Bob Fraser here. I mean, it's like, it's all these surprises, right? That everything is surprise inflation, surprise higher for longer, surprise strengthen the economy. We've been talking about this for almost 2 years now. So our, our followers are not surprised.

Our followers are not surprised. And one of the other quote-unquote surprises is workers and wages continue to go up, right? And we've been talking about this for probably 18+ months of this is being one of the primary things driving inflation, right, is the labor shortage, which causes more pressure on wages to increase, which then causes more inflation.

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The article just came out from the Wall Street Journal. If you're a subscriber, go ahead and just, um, and just Google this article, Workers Keep Getting Big Raises, Just Not as Much as Last Year. And the subtitle is Wages and Benefits Gains Have— Wage and Benefit Gains Have Eased but Remain Elevated as the Fed Tackles High Inflation. And, and they have a great chart there that shows that all of a sudden, beginning around 2021, wage increases just spiked up to 5, 5.5%. Gains on a, on a 1-year basis. So we're looking from a year earlier, people are getting more. Well, how much is that still continuing? Well, today it's still 4.5%. So looking back at your post, so people are still getting, getting raises, not as much as they were before, but you're seeing, you know, 4.5% annual raises still happening, you know, on a, just on a 12-month basis. And I look back, you know, trailing 12-month basis and I mean, it's pretty significant. And this is exactly what we've been saying. And, you know, and here's, you know, so everybody's looking at inflation. And if you look at PCE, which is, which is what the Fed looks at in core PCE, well, wages is not really a part of that. It's not a component. Right. And neither is energy, or it's only a very small component. And so So, but the reality is, what in our economy does not require wages, right? What, what part of our economy does not have wages? And what part of our economy does not consume energy, right? I mean, a bakery has to— has a delivery truck, right? I mean, you know, a, you know, restaurant, you know, Uber. I mean, everybody has, has energy costs, but it's not a component. So what happens, it ends up being underrepresented in people's minds in analysts' minds, you know, how vast the impact is of wages and energy are, I'll call them the mother of all other, you know, components, right? You know, both those things, because everything requires energy or humans. And so when those things go up, you have inflation, which is why we have been predicting higher inflation for longer. Because these things are not cyclical. What's, what's happening now is not cyclical. So typically of this market, say this business cycle, right? Up and down, up and down, up and down, you know, strength. And that's normal. What's happening today, the, the energy, the energy, you know, high oil prices is not cyclical. It's not based on the business cycle. And same with the wages, the employment cost. It's not business cycle related right now. It's structural. Because there are structural problems in that that are not going away by easing the business cycle, by the business cycle going to the next phase of the business. That's not going to change the structural shortage, uh, supply deficit in, in oil right now. And it's not going to change the fact that the, the structural shortage in way— in workers, worker supply, um, worker shortages. It's not going to change that because that's structural. And the structural thing there is that people have exited the workforce as you're seeing an aging demographic. And what's more is a lot of the people that are aging out are the skilled workers. So you're seeing a skills gap, right?

Yeah.

There's actually still the, the, the people unemployed, you know, the job openings is still way higher than the unemployment. Yeah. You know, and that's because there's a, there's a, there's a skill gap. So there, there's maybe people looking for work for their work, but they're not qualified for the jobs that are out there. And that's the problem. So we have, we have— and what's happening, the retire— the people are retiring are those higher skilled people, right, at the, you know, who have developed those skills over decades or whatever, right? So, um, so we have a structural problem underlying inflation, and it's a structural problem that's kind of masked because it's not a component. Neither of them are components of inflation. They're just more the foundation, you know, that's the invisible foundation. And so I had a couple of charts that showed the correlation between oil prices and inflation, and it's just extremely highly correlated, more than people are giving it credit for. So anyhow, here it is. We're still having the same problem and it says we're going to continue to have higher inflation. I mean, you know, so we've been saying this for over a year. You know, 18 months and, and coming up on 2 years. And we keep looking at the data. We keep waiting for data to change in the energy sector or data to change in the, in the, you know, the wages sector. And we're not, we're not seeing it. We're seeing slight easing, but not enough. Yeah.

I mean, we just had, you know, the Fed's meeting here in November and they decided to hold, hold the rates. It not giving any indication of rates going down anytime soon. And, you know, I think partly they're pausing to feel more comfortable with that because the higher or longer tail of the yield curve has been going up, which means the market is anticipating higher for longer and it's kind of doing, you know, the job for them a little bit. But, you know, it's so interesting too. I saw a data point just recently on, you know, the labor participation rate. So, you know, kind of over 64 age bracket and has it, it has it, you know, rebounded post-COVID. You know, there's a lot of people in that elderly demographic that cut to early retirement or just decided, hey, I'm happy, I'm good, I'm getting my severance package, I'm calling it, you know, a day here and leaving the workforce. But the 15 to 64 age bracket, the labor participation rate has actually gone back up. And so the argument would be, well, we have low unemployment, but that's not a great measure because people aren't looking for work. You know, there are different things to look at. You get more nuanced into unemployment and participation, but we've seen that tick back up. So we actually are seeing a more engaged workforce.

And we're seeing what that means is people are entering the workforce. So labor participation rate is the percentage of that age group that is considered in the workforce. That means they're in it, they have a job or they're looking for a job. And we've seen that tick up the, the, the, the, you know, 18 to 64, which is considered, you know, the, the working age population.

And the reason that's important is to your earlier point of this being secular, not cyclical, right? The argument could be, well, as the labor force comes back in the market, that's going to absorb all these, these job openings. But we're still having this huge gap of job openings. Even with this participation rate going up. And again, it comes back to that skilled labor force issue that, you know, we're not going to solve at any time, you know, in a short period of time. So, right, again, you know, it's, it's not changing, you know.

And here's, here's another component that no one is thinking about. Okay. And there's a chart we showed in one of our presentations. I can't even keep track of them all. But if you remember the, the, the, the, the, the number of, of Americans employed in the manufacturing sector. You remember that? And it's been dropping since 1945. And that's because we're exporting jobs to China, Mexico, Vietnam, right? India, right? And we've been doing that since 1945. And then it just stopped. And now it's going sideways and up. So we're seeing manufacturing employment returning to America. Why? Well, it's another megatrend we've been talking about, the reshoring trend. Over $1 trillion spent by U.S. companies last year to bring manufacturing back to America. And this is not a one-time deal. This is going to continue for 20 to 30 years. I mean, we have been globalizing for, what, 80 years? Globalizing? Yeah, 80 years. Okay. It's over now. The world realizes we have over-globalized. Maybe we don't need to save 5% more to get our, get our, get our little chip from China. Maybe we'd pay that extra 5% and get, get our chip from Texas. And then we know we can get a chip. And that's— and it's happening. That's just an extreme example. It's happening across the United States. Well, it's going to take humans. Now, a lot of these, a lot of these— this manufacturing resurgence is going to be automated. Right. But Okay, you still need people to build the robots and you need people to work the robots and you still need a, you know, skilled workforce. And so, you know, there's a— we're not seeing— we're going to see more jobs needed. We're going to see actually an increase in demand for jobs. So, you know, it's a it's going to continue. It's going to continue.

Yeah.

So what does it mean? Do we want to— we want to, you know, what does it mean for everybody, Ben?

Well, the higher for longer, right? We've been saying this, that's how the Greek stays all the time. We're talking about all the time. And it's, it's something that I think needs to inform your investment thesis, because if you believe inflation is going to be higher for longer, you want to get on the right side of inflation, right?

Right.

Inflation is not neutral. And, you know, the best way to do that is not sitting on idle cash. So you want to have cash reserves, you want to make sure you have access to cash and lines of credit, but you don't want to sit on too much cash because inflation is eroding the value of that over time. And so getting into assets that track with inflation, and we've talked about a lot of those before, but, you know, housing is a big one. We believe in this big reshoring trend in industrial. And another big inflation driver is energy.

So we're very, very bullish on oil prices and again, and real estate is perfect for inflation because as NOI go up, net operating income goes up because rents go up with inflation, your income goes up and that increases the value of the property. But also you mostly you borrow money and as you point out, it erodes your cash. Well, it also erodes your debt. Yep. Inflation. So it's a double whammy. You get paid twice and let inflation erode your debt and erode what you owe your bank and let it drive your income. So we're just very bullish on all things real estate. I mean, obviously not all things real estate. Let me, let me— because there's a lot of real estate we're, we're avoiding, staying a long way away from like the plague. And the office is an example.

You know, but it's a very simple, you know, framework here. It makes sense, right? So you— inflation is higher for longer. Again, assets that are tracking inflation. By doing that, you're going to grow your revenue and over time you're going to grow your net operating income.

Right.

And even though borrowing costs are higher, it's, you know, more expensive to buy that asset right now. Rates aren't going to be higher for longer forever. Right. And at some point We hit a dip in the economic cycle. The Fed's going to reduce rates again. And okay.

And Benny, so if we were to go and refinance, get a Fannie loan on one of our multifamilies, what is the rate we're going to pay for a good solid Fannie long-term loan?

Long-term loan. There's different programs. You're probably right now, as we know, talking November of '23, probably the mid-sixes.

Okay. So mid-sixes. So let's say 6.25% for fun. Well, the core PCE inflation rate is 4.25%. So our real rate, what you're really paying for that debt, is 2% real rate. Okay. And the rest is being eroded at a 4, 4.25% per year, right? That the— what you owe is being eroded. Um, so it's, it's still a, you know, it still makes sense. And it really is, can you buy good good solid properties in great locations with good upside and can buy them cheap. And they're getting cheaper, right? They're, you know, the prices are coming down. So yeah, it's just, it's going to be a really good time. We're not, you know, we're only doing a couple unicorn multifamily deals right now as Aspen, but we're going to, we got our eagle eye out. We're, we're circling up there looking at, you know, looking at what's looking for the the nice lunch, you know, the multifamily lunch we're going to be feasting on here shortly.

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