Odd Lots - How The Opioid Crisis And The Trump Administration Are Changing Middle America's Economy

Episode Date: January 29, 2018

If you cover the economy from New York City or Abu Dhabi, it's easy to get caught up in a media bubble. But the U.S. economy is obviously not a monolith. On this week's episode of the Odd Lots podcast, we speak to Jeff Korzenik, the Chief Investment Strategist at Fifth Third Private bank, a major bank in the Midwestern states. During our discussion, we talk about the ramifications from the opioid crisis as well as the Trump administration on the economy and the markets.See omnystudio.com/listener for privacy information.

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And I'm Joe Wisenthal. So, Joe, I am not in the American Heartland, but I'm certainly closer to it than I was last week when I was in New York. Yeah, I kind of feel like even if someone's not technically in what people think of as the heartland, as long as they're not in New York City or Abu Dhabi, then you're probably closer to it. than you normally are. All right. Well, I am in Naval Town, Annapolis, Maryland, where the Naval Academy is. I've been listening to local radio and getting a good feel for some of the local issues.

And every time I come back here, I always notice a couple new things that kind of catch my attention. So what do you learn when you step out of the bubble? All right. So first of all, it has to be the polarization of American politics and media. Even the local radio stations now seem to be divided between Republican and Democrat. So that's pretty amazing to me. But the other thing that I always find interesting is I watch the commercials on cable news, and there are always new trends that you can find from watching the commercials. What do you see on the local ads there?

All right. So there's one thing I'm really noticing that I can't remember seeing ever before, and that is all these ads for basically addiction treatment centers, opioid addiction treatment centers. I've seen some ads, and I know that also you get there, I think there are a lot of ads for drugs that treat the side effects either of painkillers of painkiller treatment. So it's pretty extraordinary how much this issue and this crisis has sort of soaked into the media.

Yeah. So huge, huge social issue in the United States and such a big social issue that people are starting to take it seriously from an economic standpoint for the very first time, as you know. Right. So the issue that people are talking about is whether or not opioid addiction is now so pervasive in American society that it's actually having an impact on the workforce and in particular the labor participation rate. Right, because there has been this so-called mystery, which is that the economy has rebounded in an impressive way. Many indicators are at the highest level well above their old pre-crisis highs. But there do seem to be pretty large swathes of the population that have not returned to the labor market the way economists would expect. And more and more people are wondering and talking about this possibility, right, that the addiction issues that so many people are facing is having a real macroeconomic impact. Yeah, that's right. The workers are missing.

So today in a podcast that I would describe as notes from the American Heartland, we are going to be talking to Jeff Corzennick. the chief investment strategist over at Fifth Third Private Bank. Fifth Third, of course, is a big, big bank for a lot of the Heartland American country. He's going to be talking to us not just about the opioid crisis and its impact on the economy, but also how the economy is faring in general, in the Midwest. So it should be good. Looking forward to stepping outside of our New York Abu Dhabi bubbles and talking about the real economy of it more. All right. So let's bring Jeff. Jeff, thanks so much for being here. It's my pleasure. Thank you. So you're coming to us from, I think you said it was Columbus, Ohio. Is that right? I am. I'm speaking at the Ohio tax conference.

It doesn't get any more Midwest business than that. For some of our listeners, maybe everyone is familiar with it, but tell us a little bit about the size and scope of Fifth Third Bank, its geographical footprint and the type of customers, whether on the business side or the retail side, it typically deals with. Sure, happy to. We're coming up on our 160th anniversary. We're founded in 1858 in Cincinnati. If you think of Cincinnati in that time and place, it was essentially the gateway to the Western expansion, the gateway to the agricultural boom in the United States and industrialization. And we're still very much the bankers to the American heartland. We have a 10 state footprint of retail branches as well as other offices that are not retail. That extends. from the northern Midwest, the traditional Rust Belt states down through the southeast in Florida, $142 billion bank. So when people talk about the opioid epidemic, they often seem to connect it with the decline

of the manufacturing industry in some ways, or at least they say that it's more pervasive in states where that's happened. Is that your experience as well? I think that's certainly the start of it. We believe that there are three closely connected social ills, long-term unemployment, the opioid epidemic and the incarceration recidivism cycle. And the starting point is long-term unemployment. And I think for many years, a sense of despair that was prevalent in the Rust Belt. But to be fair, the opioid epidemic has spread well beyond there. It's in Massachusetts. It's in

New Hampshire in a big way, as well as really in every, in all of the states to some degree or another. So obviously people have been talking about this for a while from a public health standpoint and a sociological standpoint, but you have the perspective of talking to businesses all the time and their challenges and hiring and things like that. You're at a conference right now in Columbus, Ohio. So what are people saying about the effect that this is having on their ability to hire? A long-term theme that we've been hearing from business owners in the spaces that we focus a lot of our banking efforts, that's construction, manufacturing, transportation. For years, business owners have been telling us that hiring people who can pass a drug test or finding people who can pass a drug test has been a challenge. And it was actually four or five years ago. I remember the moment of breakfast with CEOs in Lexington, Kentucky, where they talked about it. I said, what is it, you know, marijuana? And everyone responded, no, it's pills. And that really got us looking. And that continues to be a theme and a theme that has intensified as the labor markets have tightened in these industries that need people who can pass a drug test. It's because, because,

increasingly difficult to find people. And then there's also this epidemic of existing employees who are becoming addicted. And so we have just a terrible problem. And it's an economic problem, not just a social problem. So I have a really stupid question, but I've always wondered this. If labor market tightness is a problem, if you can't find enough good workers because they're all failing their drug tests, why not just do away with the drug test? It's a workplace safety issue. Speaking to one manufacturer, for instance, in Kalamazoo, Michigan, told me that he did not drug test his employees until existing employees came to him and asked him to do it because they felt they had a few bad apples who were endangering others. You know, if you think about these industries, you want someone who is clean and sober operating the crane or the forklift or, you know, around electricity or molten metal. You know, these are heartland industries and it's a safety issue.

What about, you know, I know you mentioned another one and that is criminal justice recidivism. Have you seen employers relax some of their background checks? So drug test aside, other things that might have previously been a red flag in an employment application, such as a conviction for a crime in light of these tight labor markets and in light of the sort of general desire to reincorporate people into the workforce. Is there any flexibility on stuff like that? There is increasing flexibility. So the other barriers on the drug testing end, by the way, are often insurance requirements or federal contracting or sometimes state contracting requirements. There aren't the same hurdles for hiring people who are ex-offenders. But there are some hurdles, nonetheless, often there's extra liability. If you hire someone with a criminal background and then there's an event at the workplace, you as an employer may be more vulnerable. This is state-by-state. like Ohio have actually gone ahead and alleviated that liability. So you have no more liability for someone who is an ex-offender than for any other employee, which is really fair when you think about it. Employers are coming around. We do see at least anecdotally more and more employers willing to consider that. This has been highlighted in the press. Our concern at Fifth Third, having researched this quite a bit, is that this is necessary but not sufficient. If you look at the truly successful private sector models for employing ex-offenders. They require you to do a few extra steps,

not just willing to consider them. You have to staff your people a little bit differently. Actually, best practices are offering an extension of your EAP program that allows for some of the very specific social and economic needs of this population. If you do that, hiring an ex-offender is a tremendous advantage. You actually have very low turnover rates and get a more dedicated employee. But the way it's going on now, some of that pickup is more haphazard. So we're not sure how sustainable that will be. So I'm looking at a chart of the labor force participation rate. Joe isn't going to believe me, but I am actually looking at it.

It was a peak of 67% in 1998, and it's drifted down basically ever since then to about 63% as of mid sort of last year. When we look at ex-offenders and people addicted to painkillers, is there something specific? about that problem that seems to translate into them just leaving the workforce entirely versus just being among the pool of unemployed? So we don't know the exact numbers. There's some very good work that's been done looking at people who are not in the labor force, so who are not job seekers, they're completely out of the labor force. And for instance, Princeton economist Alan Kruger has done some very good survey work.

And he estimates that among prime age males, 25 to 54-year-olds, These are people who are typically close to all in in the labor force. Of those who are not in the labor force, over 40% admit to taking pain pills, which probably means that a higher number are taking pain pills or other forms of opioids like heroin. And by his estimate, 1.4 million prime age males are not in the labor force because of the opioid epidemic. It's a tremendous number. Then there's also the issue of those who might be job seeking. so who are unemployed but are technically in the workforce.

And then those, I think it's also important to consider those who are underemployed, who are not able to get a job in, say, manufacturing that could offer a good paycheck and a career because they can't pass a drug test. We recently got the U.S. Department of Health and Human Services updated their numbers. Here's where that government arm believes we are in, or we're at the end of 2016. 11.5 million Americans misusing prescription opioids and 2.1 million people who could be defined as actually having an opioid use disorder, essentially are addicted. So those numbers suggest to us that it's not just the people who are out of the workforce. It's not just the unemployed. It's also a productivity and underemployment problem of those who are in the workforce. You can get the news whenever you want it with Bloomberg News Now. I'm Amy. Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your

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Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Jeff, do you see anything on the state level or? the local level that looks like a substantial policy response. So obviously, it's gone beyond a social crisis. It's also an economic crisis. Almost nobody in any aspect of sort of modern life isn't being affected. But at the national level, you look around and it's hard to see a whole lot of action. But from your perspective, do you see any meaningful change? We're starting to see

some change. It's not necessarily government-led. So, for instance, you saw, CVS limit the size of an opioid script that they will fill at a given point in time. You see places like Michigan are talking about, I spoke to someone on a Michigan Medical Oversight Board, and they are looking at doctors who overprescribe and requiring education or at least talking about doing that. So you see a lot of small policies that hopefully add up to some impact. Part of the problem here is it's more than one problem. So the low-hanging fruit from a policy perspective seems to us to be preventing over prescribing. And it still goes on. I can't tell you as I speak about this around the country. How many times someone comes up to me will

tell me about their child who had a sports injury, had maybe a fracture, required some minor surgery, and was given a prescription for 60 oxycontin with an automatic refill or 100 pills with a refill. You know, this sort of thing shouldn't be going on, but it still is. So there are policies, whether it's proactive from a company like CVS or at the state level, there are policies that can impact that. The stickier problem is what do you do with the 11 million plus people who are already misusing those? About a quarter of opioid addicts started with a prescription for themselves, which means that three quarters got a prescription from someone else or otherwise are using things like fentanyl or heroin, illicit drugs. So they're out there. It's very difficult.

to kick this habit. And then even if you kick the habit, it's often associated with, if you're an opioid addict, you've probably had some interaction with the criminal justice system. You probably have difficulty getting back into employment. And so if you kick the habit, people who run rehab centers and rehab programs all tell me that one of the secrets to staying off of this addiction is to be actively engaged in a community and have a job. And so that's another barrier. So there's a whole, there's a whole system that has to be addressed here. It's sort of a catch-22, isn't it? Can I just go back to the prescription thing that you were saying?

Because I have a personal anecdote, which was two years ago when I was living in New York, I sprained my wrist in a very misjudged throw at a punching bag at the gym. Sprained wrist, go to the doctor. He gave me a two-week supply of Percocet or sprained wrist, which I could not, I just couldn't believe it. I'd broken my wrists in Europe a couple times and in Asia. No one had ever given me painkillers for that. It was just a completely different treatment of pain. So putting that aside for one second, silver lining, I guess if we have labor market tightness

and we have this long-awaited missing wage increase and we have a declining labor force participation rate, does that mean that eventually wages for people who aren't addicted to painkillers or who are eligible for the workforce are eventually going to go up? We think so. In fact, we think there have been a couple of catalysts for wage increases. We've obviously had a tight labor market, and it's been made tighter by all these social ills. But the Fed likes to talk about inflation expectations being well anchored. Anchors are great as long as they're stuck in the mud, but the minute you lift them up, you're at the whim of prevailing forces. And the prevailing forces today are inflationary. But we think a couple of

A couple of shocks to the system are helping to lift that anchor. The demand for labor in the wake of the hurricanes that impacted Florida and especially Texas, that's put an extra squeeze on the market and we at least anecdotally hear of employers paying up. And then now I think clearly tax reform is causing wages to move higher. We're not done with this. We're expecting a real pickup in wage inflation here at fifth third. Let's talk about the current state of the economy a little bit more.

been a lot of debate and skepticism about the sort of pass-through from tax reform to labor and two wages. And of course, the big argument from the White House has been that cut taxes for corporations, that'll make them invest more, that'll cause wages to rise. Skeptics have said this tax reform is largely a tax cut for the rich and very little will trickle down ultimately. We've had a series of very public announcements from companies and they say in the wake tax reform, we're going to be giving a bonus or going to be increasing the minimum wage we pay our employers. But even that doesn't really solve the mystery because some will say, A, maybe this is publicity and B, they're probably going to have to do this anyway because the labor

market's tightening. So really walk us through the mechanics of what you're seeing on the ground of the interplay between the new tax regime and how companies are thinking about their wage and investment decisions. I certainly understand those who have criticized. Because if you look at the historical data, when we've done, first of all, it's been so long since we've done meaningful tax reform. But in general, tax cuts have not produced much in the way of wage increases. But that's because these kind of stimulus bills are typically done when you have a lot of slack in the labor market. That is not the case here. So we have felt very strongly that some of the benefits to corporations from the tax bill would be shared with workers.

Obviously, some is going to go to share buyback. Some may go to dividend increases and some will go to capital investment. So it's really a company by company and industry by industry decision. But I think because we are doing this at a time of tight labor, it's more likely that a greater percentage of that benefit will flow to workers than has in the past. It's also the case that a greater benefit will flow to investment than might have in the past for two reasons. Number one, you obviously have the ability to expense capital investment. So that's that acceleration of a depreciation schedule so aggressively is very productive. Number two,

CAPX is how a business responds when you run out of labor. If you want to grow your business and you can't find employees, you have to make your existing employees more productive. The way to do that is through capital investment. So one thing that amazes me, again, sitting outside of the U.S. for the most part is when I look at things like these small business optimism survey, and it's just been off the charts since Trump was elected. What accounts for that optimism? Is it all the tax policies, the promised infrastructure spending, or is there just something that has changed in the sort of collective American psyche? You know, it's a really interesting question, and I think it requires one to be in touch with the type of customer base we have.

We actually were the first private bank to increase our equity allocation in the wake of the election. It was about a week after the election. And we had actually been planning on doing it in the then unlikely instance that Trump was elected because we felt very strongly. It's not because we liked or disliked the president, but we felt very strongly that small business owners. And by small, I mean the official sort of government definition is under 1,000 employees. small businesses were going to react very positively to the election. I do these CEO roundtables in a number of our major cities. I did one in March that the New York Times actually sent a reporter to to sit in. And we met with the CEOs of local companies, anywhere, employees,

anywhere from maybe 100 to 5 or 600, so small to mid-sized businesses, mostly manufacturing and transportation. The reporter in his article likened the meeting to a group therapy session where even those who clearly had not voted for Trump felt a palpable sense of relief. And the feeling is that if you are an employer of a couple hundred people, you are in the worst of all worlds. You felt like you were a target of regulator intrusion and excesses without having the resources to counter those or to support all of that. And this is not a pro-regulation or an anti-regulation stance. This is just the reality of how businesses react. Large corporations simply have a larger infrastructure to deal with that. It tends not to distract the CEO to the

degree it would have a smaller business. When you look at smaller businesses, typically these are family-owned businesses, often second generation. And so business, owners take anything that is standing in their way or risk to their business, essentially they take very personally. And it's almost an emotional decision. So the reason we up their equity allocation was we saw that optimism coming and we were looking for that optimism to have its traditional relationship to driving capital investment. It usually takes six to eight months. This cycle was just like all the past cycles. Business optimism rose. Six to eight months later, you started to see a real pickup in CAPEX.

And are the small and medium-sized businesses owners that you speak to, are they experiencing on a day-to-day business fewer calls and fewer complaints from regulators? Or is it they feel more of a vibe that the administration has their backs, more from sort of a tonal thing, I guess I might ask? I believe it's more a tonal thing. You know, the regulations are still out there. They're still being enforced. There's obviously been some lightning up and say the energy sector, which is one of the industries we bank.

But for the most part, it was the tone. So out of this meeting and back in Toledo and what a consistent theme I've heard in the months since then is it's not so much that we have less regulation. It's that we know we have an end to the onslaught of new regulation. And that's been very, very meaningful. So business owners feel that they can play offense again and not just a constant defense. And again, I'm not defending their view, but their view is meaningful. And one of the things that I think we forget, those of us who are involved in the public markets, large corporations are what we tend to talk about all day.

But job creation in the United States is usually done by small private companies. Jeff, from your vantage point, both at fifth third, which obviously has a lot of links to smaller, medium-sized businesses, but also as chief investment strategist, what do you think about the current state of public markets then. Do you think a lot of that optimism has been priced in at this point, or is there more to go? No, we do think a fair amount is being priced in right now. We are slightly overweight equity. We actually cut back towards the end of last year from in the magnitude of our overweight. We're still shy of bonds, but we've just spread our risk-oriented assets beyond traditional equities and two things like our real asset class, which is REITs and infrastructure

and MLPs, and even for the first time since 2012, we even have a little gold in portfolios. We also have upped our weights to alternatives, all these things that we still categorize as risk assets, but we think the best of the run in the public markets, it's not over, but the best of it is probably behind us. All right. Jeff, that was great. Jeff Corzinnick, Chief Investment Strategist at Fifth Third Private Bank. That was great to have you on. Really enjoyed talking to you.

Great perspective. Thanks, Jeff. Thanks so much. It's a pleasure to be here. So, Joe, I think postcards from the American Heartline was probably an apt summary of that episode. Yeah, I thought that was a really useful discussion because you and I, we spend so much time, A, in our respective bubbles, but beyond that, sort of looking at markets in the economy from a very high-level perspective. And so hearing about these micro things, like about how, say, small business owners think about the regular environment and how that then feeds through to jobs and other stuff like that. It's just like a good reminder that there are actual people who have to make these decisions and it's not not everything

is just a function of sort of supply, demand, interest rate, stuff like that. Yeah. Well, ultimately, the macro is all about the micro, I guess. I also love that Jeff is a chief investment strategist, but also has all these insights to actual on the ground decisions that are being made. He's like the perfect guy to talk about this. Before we go, I just want to give a plug for two things. We are at sort of the early stages of studying what the opioid epidemic actually means for the economy. But Jeff mentioned it. Alan Kruger of Princeton has done some amazing work on this.

His Brookings paper, where have all the workers gone, is well worth a read. And there's one other one I found called Prescription Opioids and Labor Market Pains. And they actually look at county by county prescription levels and try to draw a connection with the labor market. So that one's really interesting as well. Great. We'll have to check both those out. And I agree. Like this, you know, it doesn't seem like the labor force participatory.

And I'm making air quotes in the studio because I hate using that word mystery. But it's, you know, it's totally been solved. But it does seem like, especially in the last year, sort of more awareness of this sort of. of this crisis being a macroeconomic factor. All right. So this has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway.

And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should follow our producer, Tofor Forges, on Twitter at Forhes T, as well as the Bloomberg head of podcast, Francesca Levy, at Francesca today. Thanks for listening. On April 4th, 23, around two in the morning. A man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm.

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