Labor Has Pricing Power

The Most Expensive Input Into Production Is Cost of Labor

I have been waiting for some data confirmation and received it today. Labor costs are up 4%. A while ago, I had an extended chat with a good friend of mine who resides politically on the other side of the aisle. We agreed that it sure seemed like, for the first time in our lives, labor had pricing power over management.

That’s never before happened. You could always find workers because people were willing to work. They had a different ethos and the government support system wasn’t as thick. In an obtuse way, this illustrates what life with a universal basic income would look like. It sucks and doesn’t work.

Anecdotally, I speak with all the subcontractors on my rehab project here in Las Vegas. No one can hire anyone. People receive unemployment benefits and all they have to do to stay on the dole is “appear like they are searching for a job”. During Covid, that means just digitally sending out feelers on sites like Indeed since with Covid we can’t go out of the house and meet up in person.

Our government policy is so screwed up.

Inflation is here and right now it is here to stay. Any economist that looks at the supply chain crunch and thinks inflation is “transitory” is looking at the very long run and not the near term. I thought inflation might be transitory when it first manifested itself but not only did Covid show our reliance on China as a source for most goods, but China’s policies aren’t helping fix the supply chain problem. The only fix is to bring that manufacturing back to the United States.

The US government recently contracted to send free Covid tests to Americans. 500 million of them. Where are they manufactured? China.

Here is a clip from the WSJ article on labor costs today,

The Fed’s preferred measure of inflation, the core personal-consumption expenditures price index, rose at 4.9% in December 2021 over the prior year. A separate reading of inflation, the consumer-price index, hit 7% in December over the same month a year earlier. Wages rose fast as well, but not enough to keep up with the rise in inflation. Average hourly wages rose 4.7% in December from a year earlier, the Labor Department said.

The stock market cannot hold any bid at any price right now. There is no confidence in the leadership out of Washington. Not only that, the leadership is so unpredictable, it breeds a lot of uncertainty which finds its way into the heart and soul of the stock market.

Heck, these morons are going to start a pointless war in a place that is not strategically important to the United States to try and change the conversation and pump up the President’s favorable ratings because traditionally people rally around the flag when that happens. The Biden’s even adopted a cat. Biden couldn’t spell the word “cat” if you spotted him the C and the A. (tip of the hat to Hollywood Henderson) They are desperate. It won’t work.

How incompetent and misfocused are our leaders at every level? Today it snowed a ton and will be bitter cold in Boston. Instead of plowing roads, the city said they were prioritizing plowing bike lanes.

Yesterday, the Biden Administration put out a communique that said they were going to use an Executive Order to regulate cryptocurrency because it was a threat to national security.

Disclose.tv @disclosetv

U.S. feds to regulate digital assets such as #Bitcoin.

barrons.comBiden Wants Crypto Rules as National Security MatterThe order is expected to come in the next few weeks, a person familiar with the plan tells Barron’s.

Hey, at least we don’t have mean tweets. Sheesh.

We are in a bear market. Sell rallies. One day, a bounce will hold but it’s not on the near term (meaning in the next two weeks) horizon. One data point to hang your hat on if you want to remain bullish is that on average, we have drawdowns in the S+P 500 of 16.5%. However, that is an average. This market currently feels like it will go down a lot more than that, especially when you look at the high-water mark of late last year.

Crypto-winter has come as well. With the Executive Order threat, there isn’t a thaw on the horizon.

It’s easy to be a fear-monger, especially when it comes to stocks. We know that if you want to spread fear, attack people’s physical health or their financial situation.

When does the hyperinflation of labor costs end?

A recession would start the process of decreasing pressure on labor. But, that’s not exactly a great option. If a recession happens, Biden will blame the small rate hikes the Federal Reserve will do this year. However, historically, the rate of interest is so low people that who have any gray hair on their heads will still think it is close to free money. Our first mortgage on a townhouse in 1987 was at slightly over 12%.

Stopping the federal spigot of money would be a great relief to inflationary pressure. Don’t pass new spending bills for anything. No more bail-out bills. Shut it down and while you are at it, cut the bureaucracy and deregulate industries. Do something constructive like ending lots and lots of subsidies and making it easy for companies to enter industries so we get lots of competition.

Bringing manufacturing to America from China, automating the lion’s share of it, and locating it in “right to work” states. This takes time. It’s also expensive to build new production facilities. Building and staffing a warehouse is cheap.

I blogged about the cost of meat the other day and my friend Tony pointed out something that most people probably don’t know, especially Elizabeth Warren. Read his comments, but here is an excerpt that illustrates the challenges of building new capacity in any industry.

The reason for this "perfect storm" on rising meat prices is purely supply/demand driven and throw in COVID. It seems Biden's team is just clueless to this point. And your point on building a packing plant....after you spend the $300M to build it you have to find employees and workers to staff it. Good luck on that investment. It paid off these past few years thanks to Covid but wait until our meat supply shrinks over the next 24 months....the packing industry will be chasing livestock to slaughter.

I saw Steve Blank’s blog the other day on silicon chip manufacturing. He simplified the ecosystem but one thing stood out. It costs $10 Billion to build a plant. Intel is investing $100 billion in Ohio to build some. Blank also highlighted why it might be better to avoid tackling a war in Ukraine but to prepare for one in Taiwan and South Korea:

Fab Issues

• As chips have become denser (with trillions of transistors on a single wafer) the cost of building fabs have skyrocketed – now >$10 billion for one chip factory

• One reason is that the cost of the equipment needed to make the chips has skyrocketed

  • Just one advanced lithography machine from ASML, a Dutch company, costs $150 million

  • There are ~500+ machines in a fab (not all as expensive as ASML)

  • The fab building is incredibly complex. The clean room where the chips are made is just the tip of the iceberg of a complex set of plumbing feeding gases, power, liquids all at the right time and temperature into the wafer fab equipment

• The multi-billion-dollar cost of staying at the leading edge has meant most companies have dropped out. In 2001 there were 17 companies making the most advanced chips.  Today there are only two – Samsung in Korea and TSMC in Taiwan.

  • Given that China believes Taiwan is a province of China this could be problematic for the West.

However, the folks in charge aren’t friendly to free-market capitalism. They aren’t friendly to small businesses and independent contractors either. They are friends of big old-time unions.

Remember, when minimum wage laws hike wages, it hurts small businesses and independent contractors. It helps unions because they get automatic pay raises since many of their pay rates are based on a percentage spread above the minimum wage rate. Covid spending essentially created an expectation that you’d get $20/hr to work.

That governmental attitude changes the internal calculus of companies looking to build production capacity in the United States. Threats to hike corporate and individual taxes while passing new regulations aren’t helping. Notice, no one is building big operations in states like New York, California, or Illinois. At the same time, companies that have plants in states like that are looking to move production out.

This will work itself out if we let the free market work it out. It will work out faster if we embrace the free market too. My fear is we will have to endure at least three more, possibly six more years of this bullshit because even a switch in political parties at the White House level won’t be able to stop the momentum of the train that’s running down the track.

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