The Dividend Cafe - We Work, or We Suffer

Episode Date: April 22, 2022

If there is one thing that animates me it is the application of real-life economics to investing. I have always been obsessed with economics – both theory and application – but it is in more recent years that I have really found it a calling to synthesize the foundational truths of economics to financial markets. And truth be told, that calling transcends the applications of economic theory to financial markets. I believe properly understood economics has profound implications for all aspects of human living. My extra-curricular endeavors in economics (the book I wrote last year, the class I teach at the high school I co-founded) are all extensions of this passion I have for a free and virtuous society. But yes, applying these things to financial markets is my real passion, and the inability and disinterest the financial advice community has for applying economic principles to markets is a constant source of irritation. Today’s Dividend Cafe is about the labor market – the state of jobs in America. For 99% of the media and even economic analysts these days this is an econometric subject. In other words, it is a data point that provides an input to a spreadsheet, and from there carries some numerical relevance to another input (i.e. if wages are here or unemployment is here, then consumer spending is possibly going to be here, etc.). Worse, it is often just a mere political data point, perhaps an even more imbecilic understanding of work than even reducing it to an economic data point. But economics is the study of human action around the allocation of scarce resources. Our understanding of what is happening and not happening in the world of work will be improved to see it through the lens of the human person. Political and econometric reductions will tell us almost nothing, and in fact, may tell us things that aren’t true at all. Investors and actors in financial markets need a fuller understanding of current realities in American labor. To that end, we work … (see what I did there). So jump on into the Dividend Cafe. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to another Dividend Cafe. Appreciate those of you listening on the podcast and those watching the video. I am here in the Newport Beach office today and would like to have a little candid discussion about an issue that I think is of profound importance to investors and to financial market actors and is an issue that I think has a lot of economic undertones to it and at the same time a lot of social and cultural undertones. The issue is work and specifically the present state of the American jobs market. And I need to do a little history lesson here, but I'm talking about 25 months of history, not 25 years or a couple of centuries.

And a lot of this history and then the applications I want to derive for you today out of what I believe about the labor market and the kind of good, bad, and ugly that is incorporated therein for those of us in financial markets, a lot of it requires an economic understanding that is different, or perhaps I should say more complete, than the economic understanding that I think far too many economists have today, let alone non-economists. The notion of every Thursday looking at the initial weekly jobless claims numbers and the weekly continuing jobless claims numbers, or the first Friday of every month looking at the BLS monthly jobs data. The Bureau of Labor Statistics, by the way, is across the street from Union Station, Washington, D.C., where I frequently take the

Acela from New York to when I'm going to D.C. on business. And this building of the BLS is filled with S, statistics. It is not the arm of the Department of Labor that is there to focus on qualitative considerations of the jobs market, to focus on existential thoughts about work. It's not strategic in how to improve various elements. It's statistical. And of course that has its place. So much of what I want to do qualitatively and substantively is more, I guess, enhanced when there is some data that is being used in the formation of an argument or affirmation of a position. We have a full federal agency around the mere creation of statistics, and that is suitable to today's economic mindset that views economics as sort of the statement of those statistics.

And what I want to argue is that saying we have a 3.8% unemployment rate is not a useful economic metric when you want economics to be a more thorough understanding of human activity around the allocation of scarce resources. That is a basic definition of economics. And a 3.8% unemployment rate carries with it a pretty easy to conclude positive headline. It sounds like a lot of people are employed. Fair enough. But being able to look further and understand what the data cannot capture can be very important. Inversely, there are numerous data points that have a headline interpretation that may seem negative, that also do not capture the whole story. The explosion of job openings relative to those looking for a job. In other words, this notion of us being not able to find people.

That is a negative data point, and I'm going to argue has even worse connotations, but it's incomplete. It lacks the ability for us to take it and really do much with it. Weekly jobless claims, monthly BLS, you can create graphs and charts, and I've seen all of them, and I've read all of them, and I've studied what any of this could possibly mean. But I don't believe that economics can be or should be reduced to these data metrics. Economics starts with the study of human activity. And human activity is largely driven by incentives and an inability to understand that, to believe that data points can tell you something that can inform the wisdom of central planners from on high, as opposed to understanding from a more bottom-up basis, let's say, the kind of creational reality of how humans are made, what they're made for. of how humans are made, what they're made for. And when I talk about incentives, I've said this before in Dividend Cafe,

incentives describe the way the world works, that humans respond to incentives. They make bad decisions. They misread incentives. They make mistakes. But the idea that humans lack the rationality and reason to be responsive to incentives and that the primary need for incentive is in production, not consumption. Those two things are more or less at the core of economic fallacy and misunderstanding today. So right now, when I look at the jobs market and this history lesson I wanted to talk about, I have to view the conclusions or develop conclusions through a lens that I think requires a greater economic philosophy than unfortunately is being used in a lot of the economic labs of American thought and practice.

And this is what the history lesson kind of entails. It is one of the greatest economic reversals and paradoxical shifts in a paradigm that we will ever see in our lives. 25 months ago, COVID begins to wreak havoc across the global stage and policymakers in what I now believe will end up being considered as a just, absolutely, incomprehensibly bad idea. But at the time, with less available optics, the entire economy was shut down, more or less entire society was shut down. And 22 million people lost their job almost instantly. 22 million people. Now, a lot of those jobs came back quickly. Now, a lot of those jobs came back quickly and that lockdown itself that was completely comprehensive, depending on where you a real ongoing limitation, distancing of social activity and therefore economic activity. And so there was

a handcuff around the economy for what ended up being a very sizable period of time. And so we had conversation after conversation in 2020 amongst economists, amongst policymakers, financial analysts. Maybe you did. Maybe I certainly did. And the debate was always something around when those job availabilities would come back. That's what happens in a recession. You lose job positions. And the question is, when will those job positions come back? And the 22 million who lost their job turned to 10 million pretty quickly. So a little over half got jobs back. And that made sense because we didn't really believe the world would actually end. I mean, some did. Some have even wanted it, but it didn't happen. But still, getting a quick bounce back of half the jobs and still being at 10 million who had had a job before COVID and now didn't.

The debate really was for quite some time into 2021 and all of 2020, some version of, OK, well, will the employment rate get to 6 percent? Could it even get as low as 5 percent? Will it end up leveling there for a year, for two years? What will the new normal look like post-COVID? Because let's face it, a lot of these jobs cannot come back. Those employers have eliminated those positions forever. A lot of these companies are going away and so forth and so on. That was the logic.

That was the conversation. And people could have a disagreement, like if it was going to come to 7% or 6%, the unemployment rate. And at the time, there could have been plausible arguments to be made for either position. But my point is the entire argument was coming from a framework of job positions coming back into the market. And all of a sudden, about springtime of 2021, one year later, and now one year ago, by the way, so maybe in this halfway point where we were to where we are, the entire conversation changed to not about the job positions coming back, but the workers coming back.

And then by the summertime and into the fall, it became a conversation on steroids. As we set record levels of people quitting jobs, record levels of people not coming back to jobs that were re-offered to them, jobs that were re-offered to them, and then record levels, all this data somewhat correlated and overlapped of people, of job openings that were unfilled relative to the amount of workers who were looking for a job. And I'm not going to get into the weeds on this, but baked into a lot of that is also a skills mismatch that I've talked about several times where the job openings cannot be filled even though job opening A might have a person of interest A, but person of interest A is not skilled for that and not qualified for that job. And so we do also struggle immensely. for that job. And so we do also struggle immensely. It's kind of a shame that I didn't unpack this element more in Dividend Cafe today, but there was a sort of different lane I was going down.

So you have a jobs mismatch, but fundamentally, we just had a significant amount of people leave the workforce and decide they weren't coming back. And so you can say, well, look, there was such and such person who was already ready to retire anyways and then retired a year early. You can say there was such and such person who ended up getting sick and had physical, emotional – I mean, obviously I understand there's going to be those exceptions, but there are not 3 million of them. There are not 3.5 million of them. There are not even 1.2 million of them.

Now, why do I use those numbers? three and a half million of them. There are not even 1.2 million of them. Now, why do I use those numbers? There are right now 1.2 million less people working than there were pre-COVID. That number is massive, but it does not tell the whole story because from a trend line standpoint, we're really about three and a half million, less than we would be had COVID never happened, meaning where we were in 2019 to 20 to 21 to 22. We would have 3.5 million workers more than we do right now if it were not basically counting on the 2.3 million that we would have added. And you add that to the 1.2 million we've lost, there's your 3.5.

So we have 1.2 million less people putting things in boxes and delivering things on trucks and making things and doing services and whatever their function as economic actors is. Obviously, I understand the bulk of these are lower income and lower skilled workers. There are some that are higher up in that distribution of labor, but it's immaterial to the point I'm making today. They perform a function in the economy that has a need or there wouldn't be the position open. It is not a charity job being turned down. It is a needed job not being filled. It is a needed job not being filled. And I will argue that the extension of benefits, the transfer payments, the significant amount of economic incentive that was put on people to not go back to work is a huge part of it.

But I will also argue it's not all of it. And this is where I write Dividend Cafe today that I just assume I'm going to manage to perfectly upset everybody. Because I believe President Trump made some big mistakes about this, and I don't think he's to blame for all of it. And I think President Biden's made some huge mistakes on this, but I don't think he's to blame for all of it. So I have this perfectly unacceptable opinion that thinks both of these presidents made errors in policy decisions. And I think both of these presidents are not 100% to blame for this. And so if one really likes one president and hates the other and vice versa, or if one really wants it to all be political, or one wants it to not be at all political, I unfortunately cannot accommodate anybody there because this is somewhat political and it is not entirely political. And that's not good enough anymore. People either want it to be

totally apolitical or pile on the tribalistic moment that we find ourselves in. But policy errors exacerbated this substantially and entrenched an incentive that was non-work oriented, and it was not good. And that is not a statement I think very many people would disagree with if they were willing to become apolitical for a moment. Yet on the other hand, it's very difficult to say that federal employment extensions that expired six months ago, government direct transfer payments that all combined were done being sent out a year ago, that they remain today the entrenched reason. At some point, policy errors combined with a cultural malady, reason. At some point, policy errors combined with a cultural malady, and the cultural malady to which I refer is humans acting without, and I'm referring to all humans because we know the

164 million that are, and we know there's 50 to 100 million that are not appropriate for the workforce, the elderly and the infirm and children. But when you look to the eligible pool of able-bodied workers, there's, I think, about 3 million people less contributing to the economy than they should be, could be, would be. And I think that the effects from that are hyper relevant to the inflation story. I think they're more relevant to the inflation story than the money supply issues from the Fed and to even the government spending. And I've talked about inflation ad nauseum and I've talked about my beliefs about causation, primary, secondary, ultimately where I think the real impact is of excessive indebtedness, putting long-term deflationary pressures in the economy.

And I'm very happy to discuss those things and argue those things until the cows come home or the workers come home. But I don't think that you can really measure how severe a lack of workers has been into the inflationary aspect. And through Dividend Cafe today, Fred Smith, the CEO of FedEx, they have just hundreds of thousands of employees and they're responsible for delivering packages and have such a key role in the engine of our supply chain and him talking about the profound impact that it had and their ability to deliver goods in the economy from a shortage of workers and where that incentive damaged that effort.

So what is the reason that I bring this subject up as it pertains to investors? I think financial actors have to be sitting around praying and looking and desperate to find growth. And in an environment that I believe, first of all, socially is exacerbated by haves and have-nots and the sort of inequality that is misunderstood and also getting more wide, not less. I do not exactly think that some people working more and harder and smarter and better while others don't work at all is exactly going to help that issue. But fundamentally, I bring it up just for the basic fact that when humans act, they're producing, and when they're producing, they are facilitating some role of growth, and it can be marginal or it can be substantial,

but we need all the marginal and substantial growth we can get, and growth is the byproduct of productivity. So we lose that productive edge when we lose workers. This is hardly necessary as an econometric statement. It is a tautology. It's inherently true. And I believe that right now, if one wants to look to the data inputs that will help drive growth, we can continue and we will, talking about debt, and we can continue talking about productivity metrics. There's a lot of factors that are global in nature. There is allocation of resources. There's monetary policy. But how could we possibly have a full understanding of the landscape that is our economy without really viewing the workforce as the key ingredient. Because I believe, as an economic first principle, that work is the verb of economics.

It's the acting out of what humans kind of are naturally made to do. And we right now are in a period where, look, it is economically damaging when there's a lot of people wanting to work and they can't find it. And in that case, you need more incentives for companies and investors to be investing into the supply side of the economy. And then you get opportunity for work. But when you have the inability to have work or necessary work or a diminished access to work, because it isn't like nobody's working. I understand that. I'm talking on the margins because all economics is on the margins. That's another principle we have to get into someday. All economics is on the margins. And on the margin, when you have this three million

hit to a workforce, the exponential impact of that into the future is substantial. And is that what we need right now? Is yet another repression of growth into the future? So this is why the work issue is a big deal to me. It's not for politics. Like if we get a certain job number, we'll help one candidate or hurt another candidate. That stuff is such small ball nonsense. What it does is it speaks to the soul of society, the existential function that work plays in the life of a human being, but then economically, on a more macro basis, it really truly speaks to the kind of productive engine that we will be in a time that we desperately need to be a productive engine. I hope this is helpful and useful.

A lot of charts and information I've added into DividendCafe.com this week. Thank you, of course, for watching the video and listening to the podcast. But reach out with more questions. I'm happy to unpack it further, but I wanted to at least come bring the sort of high level treatment of this subject because I don't think it's being talked about the right way. That's my take here in the Dividend Cafe. Thank you as always. And please do review us, rate us, subscribe, put it in your player choice, tell a friend. And with that, have a wonderful weekend. We'll see you back next week in the Dividend Cafe. Thank you. and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

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