LABOR UNIONS RETURN
Are unions having a moment? It is quite possible, after decades in the wilderness. President Reagan famously fired 11,345 air traffic controllers when their union (PATCO) called an illegal strike. This marked the beginning of a long decline for labor unions in America. Decades of disinflation and prosperity, and the twin rise of a service economy and a digital economy, eroded the appeal and effectiveness of unions. In addition, a steady supply of new young workers and of more women joining the workforce impaired the negotiating power of workers. But today, several of these factors are reversing, and we may see as a result a revival of unions. Inflation has come down from last year but prices have outpaced wages. House affordability is low and is keeping young people in rentals where they have less opportunity to build wealth. Borrowing rates are higher than they have been in over a decade.
Most important, the supply of new workers is less strong than it was in the 1980s and 1990s. There are fewer women joining the workforce. And there will be fewer new adults per year in the next 20 years than in the last 40 years. This can be see in the population pyramid below from the US Census. The narrowing of the pyramid at its very bottom means that there will be fewer 20 year olds this year and every year for the next twenty years than there were in decades past. Immigration can fill some of this gap but not enough. A large share of immigrants are low-skilled workers who do not speak English and who require some training.
Unlike in Reagan’s time, unions now have a friend in the White House. President Biden joined the UAW picket line yesterday and endorsed their demand for a 40% wage increase over three years. This is unprecedented support, even among Democrat presidents. There have been three Democrat presidents since Reagan. Clinton was more interested in Wall Street. Obama was helpful to unions in the GM rescue of 2009 but kept himself aloof. But Biden assumes the role of the working man’s friend more comfortably. It is possible therefore that the current period will be seen as the closing bookend of a period that started with the PATCO firings.
Yet demographics and politics are not everything and are often upstaged by technology. Increased adoption of robotics, now AI-assisted, will work against labor unions’ attempt to increase their power. How effective unions are in the next five years will depend greatly on how fast Artificial Intelligence applications spread into all corporations. In our view, there is now a window of time for unions to make some gains, but perhaps not a very long one.
Several indicators point to a stock market correction. Before we get to them, it is worth mentioning that the valuation of the market seems in line or slightly high for this level of interest rates. The large 7 tech companies have very high valuations and skew the valuation of the market upward because of their important weighting in the S&P 500. It follows that the weighted valuation of the remaining 493 in the index is on the low side of its historic average. This should bring some reassurance about the probability of a broad and severe correction.
If there are any value investors left out there in the world, an obvious hedged trade for them would be to go short the seven tech names and go long the other 493 names (or representative subset thereof). This can be dangerous if the tech mania somehow reignites in the last few weeks of 2023. Then the last value hedge funds will limp to the end of the year before they die out, a month or two before a reversal of fortune.
Outside of the scenario of a grand finale rally by the big techs, there are many reasons to be cautious about the market: oil prices are rising and with them the possibility of inflation reaccelerating; unions are getting more active and pressuring wages upward; unemployment is ticking up from a low base; the ten-year Treasury yield continues to climb; earnings of Apple, Tesla and other large techs may disappoint when released in October; questions are being raised about the quality and longevity of NVIDIA’s earnings boom; student loan repayments have resumed; tensions are rising in the Taiwan Strait; the federal budget deficit is out of control etc.
Peter Lynch reminds us frequently that there is always something to worry about, and that those who worry too much miss out on the market’s gains. This is undoubtedly true. Market-indexed optimists have fared very well this year and on a multi-year basis (except for the occasional year like 2022). The S&P 500 is having a bad month and is down 7.2% since its July 27 high. The mid and long term look promising if the US can clean up its fiscal mess, but the near term will be driven by the 10-year Treasury yield.
Illegal (or undocumented) immigration is certain to be one of the hot topics in the upcoming presidential campaign. Under President Trump, the number of new immigrants declined but that was mainly due to Covid. The Cato Institute found that Trump had no impact on illegal immigration but that he reduced legal immigration. That may be a generous appraisal. Once Trump was out of office, the number of illegal immigrants surged to unprecedented heights. And now that Title 42 has been lifted and that Trump is leading the GOP field, the number is surging again (see chart). So is it possible that Trump in fact caused a net increase in illegal arrivals during periods when he was not president, with immigrants deciding to take a chance while they still can? Trump supporters will scoff at this notion that a president may be held responsible for events that take place when he is out of office. But decisions by any executive have long-lasting consequences.
Whether one feels permissive or restrictive about illegal immigration, nearly all will agree that the present situation is chaotic and unsustainable. The huge influx is impacting communities and cities near and far from the border. Most places are under severe budget constraints and do not have the resources to house, feed and otherwise integrate large numbers of migrants. The number apprehended at the border this month will reach a new record of about 210,000, a run rate of 2.5 million per year. When Title 42 was still in force (until May 2023), as many as 30% of migrants were deported after being apprehended. This percentage is likely lower today and of the order of 10 to 15%. If we add the approximate one million legal immigrants, the total net inflow comes to more than 3 million annually, or approximately 0.9% of the US population. This is an elevated but not unprecedented percentage by historic standards. The biggest question is how effective is the economy at integrating those who end up staying here.
2024 PRESIDENTIAL RACE
This evening, the second debate among GOP presidential hopefuls (minus the clear frontrunner Donald Trump) will take place. The lineup will be the same as last time, except for former Arkansas Governor Asa Hutchinson who did not qualify. The remaining seven participants are former Vice President Mike Pence, Florida Governor Ron DeSantis, former U.S. Ambassador to the UN and South Carolina Governor Nikki Haley, South Carolina Senator Tim Scott, former New Jersey Governor Chris Christie, businessman Vivek Ramaswamy and North Dakota Governor Doug Burgum.
One dividing line among the candidates is where they stand relative to Trump. The “I am not at all like Trump” contingent includes Christie, DeSantis, Scott and Burgum. The “I worked with Trump but I am over it” are Pence and Haley. And finally, the “I can be like Trump, more or less” is Vivek Ramaswamy. Because Trump remains very popular with the base and is leading the polls by a wide margin, the first group faces a daunting challenge. The eminently reasonable (based on his first debate performance) Burgum would normally get more traction, but we don’t live in normal times. Ramaswamy’s rise seems to have deflated and there are questions of how exactly did he get so rich, and whether his trading acumen surpasses even Nancy Pelosi’s.
That leaves Pence and Haley. Pence seems cast from a different period and would gain from an image reboot. Although he stood up to Trump on January 6th 2021, he is straddling an impossible line of trying to distance himself from Trump without completely alienating the base. Haley has no such qualms and has wagered on the risk of criticizing Trump openly. She has shrewdly invoked the name of Margaret Thatcher and promoted her own experience and foreign policy credentials. Her performance tonight may confirm her as the leading alternative to Trump.
CHINA AFTER THE DIVIDEND
S&P SECTORS UPDATE
The major indices sold off hard in the past week. The S&P 500 was up 19.5% for 2023 as of the end of July, and it is now up 11.3%. The Nasdaq 100 was up 44% and is now up 33%. All sectors were down in the week. Health Care XLV and Energy XLE were the best performers but they were down 1.4% and 1.5%. See the bottom table for more detail.
The table below shows September and year-to-date performances as of yesterday’s close. The major indices are down 5% or more in the month. The Russell 2000 has given back all of the year’s gains. Real Estate XLRE, Technology XLK, Consumer Discretionary XLY and Industrials XLI were down the most in September, while only Energy XLE was positive. Among the large tech names, NVIDIA gave back 15.1% in September but is still up 187% in 2023. Apple and Amazon are down over 8% in September. The next few weeks will hinge on the price of oil and on the 10-year Treasury yield. The market will struggle if they keep rising.
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TWEETS AND CHARTS
The economy is doing well on the surface, with low unemployment and moderating inflation, but some negative indicators are churning below. In this case, it is worth keeping an eye on BANKRUPTCY FILINGS as they have now reached levels of 2008 and 2020. (via @WhaleWire)
Is ACADEMIA TOO LIBERAL? Boards of Regents may resist this idea but more academics self-described as liberal in 2018 than in 1970. In fairness, it is possible that the meaning of the word “liberal” has evolved since then, which would make the comparison invalid and the chart moot. (via @cremieuxrecueil)
Here is an update as of Friday of an issue that we discussed at length. This year’s stock market performance is nearly all from the SEVEN LARGEST TECH NAMES. They are up 50% in 2023 while the remaining 493 in the S&P 500 are flat. (via @KobeissiLetter)
Holger Zschaepitz expects US TREASURY YIELDS to rise further, if this chart reverts to the mean. (via @Schuldensuehner)
As does Michael Howell of CrossBorder Capital. The BUDGET DEFICIT will push Treasury rates higher. (via @crossbordercap)
The US OIL RIG COUNT has been trending down, confirming that incremental US production will be limited. For fund manager Eric Nuttall, this means that oil prices will continue to rise. (via @ericnuttall)
Jurrien Timmer of Fidelity Investments sees 2024 earnings expectations as ambitious and does not see upside in the stock market unless the equity risk premium (ERP) falls below 4%, which is the average ERP for the past sixty years. (via @TimmerFidelity)
MILLIONAIRES MOVE to other countries for reasons of lifestyle, taxation and political repression. China is losing more millionaires than any other country (via @ianbremmer). Their favorite destinations are the United Arab Emirates, Australia, Singapore, the European Union and Northern America.
SANCTIONS DON’T WORK is an often heard argument. They only raise the costs of transactions and push those transactions onto a black market. (via @igorsushko)
GOLD is not far form its all-time high but investors are unenthusiastic. Most of the buying is from central banks etc. (via @VogtAlexander)
As noted previously, the vast majority of HOMEOWNERS are unaffected by RISING MORTGAGE RATES because they locked in lower rates years ago. This chart shows that the aggregate mortgage to income ratio is still near all time lows. (via @SteveHarney)
When it comes to HOUSE AFFORDABILITY, one reason the average house is less affordable than in the past is that it it much larger. (via @donnelly_brent)
The Wednesday Letter is not investment advice. Please do your own work and discuss with professional advisors before committing capital.
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