I am going to make a case for some real actual inflation, the kind that stocks don’t like. I’m not going to mention any of the usual inflationista the Federal Reserve Balance Sheet, Money Printing, or even Supply Chains. Yes, a truly hot take. The inflation that I see as a underappreciated risk is labor cost inflation.
Note: Most of my analysis is based of anecdotal data. Which is little better than a hunch but these anecdotes and observations provide a natural path for further analysis.
STORY TIME: Sydney gets some coffee
The other day my Wife Sydney (real) picked up some donuts and coffee that she ordered from a local restaurant. When she arrived at the store, the server behind the counter announced to the people waiting “large coffee for whoever (bitchy tone).” Having lived in Rochester a few years Sydney has become accustomed to the almost hostile customer service that is of the area. In any case this was another piece of anect-data that I have added to my investing framework.
Is this Barista a signal of a tight labor market? Of the barrel being scraped for just a pulse to hand out coffee? Maybe (people tell me similar stories all the time), but what it does demonstrate is that the owners aren’t monitoring their operation and aren’t setting a standard.
The Pandemic ends the Mandemic begins
With the vaccination process in the United States well under way with 30% of Americans having received their first dose at the time of writing. Everyone has been trying to predict what the transition out of COVID is going to look like. The economic consensus is that we are going to see a pronounced recovery due to the current and expected fiscal stimulus, loosening of COVID restrictions, and reduction in the general public’s fear around the virus. The only disagreement seems to be with how much of a boom we are going to have. Are we looking at a robust economic reflation or is all the stimulus and pent up demand going to cause inflation society isn’t ready for. Either of these cases demand different asset allocation and getting the macro wrong could catch a lot of portfolios off-sides.
Dirty Jobs and Pixel Pushers
I would separate the labor pressure dynamic across 2 different types of jobs:
| High Turnover Shitty Service Jobs | Skilled Professionals |
|---|---|
| Generally Low Paying | Craftsman and Tradesmen |
| No Healthcare and No Advancement | Certifications with long training periods |
| Customer Facing (Karens) | Those that can execute at a high level |
The service sector has always had difficulty finding quality workers that can show up on time, deal with customers (the worst), accept the crappy comp, and pee clean in a cup. All of those things conflict with each other.
Generally the way that restaurants, warehouses, and retail manage these constraints is to design processes that can withstand the massive rates of employee turnover that they will face (>100% in some cases). This is accomplished by automating every process possible and limiting the human tasks to require little training as possible to keep training costs (time) low. This strategy works when there is a large labor pool to draw from. But immigration the past few years has been slowing, and the Pandemic has only made that more difficult.
Smaller businesses have been having a tough time staffing themselves. The other day I heard this desperate ad on the radio for a window installing company. It must be pretty hard to find quality staff is local businesses have resorted to begging on the radio.
There seems to be this consensus narrative amongst the #riseandgrinders and the grumpy conservatives that people are making more on unemployment and are thus incentivized not to work. Similar to many organizations were incentivized to take PPP loans even when their business That’s rich coming from the people that preach taking ownership. Perhaps in never occurred to them that maybe their ad sucked or that they need to pay up to get quality employees (RIP their margins). The experience of last year might have woken the marginal worker up to the fact that their existence is fragile and they need to up skill so they don’t get wiped out if the cycle turned. I know I did.
Skilled craftsman have been able to demand more for their work for awhile now. The average age for plumbers, masons, and contractors has steadily increased due to a confluence of factors: the push for higher ed, limited immigration, soft hands. The boom that is currently happening in housing has fueled demand for these services. If the proposed infrastructure plan ($2-3 trillion at the time of writing) is passed, there could be immense compensation opportunities for these workers to capitalize on it. This could provide an impetus for young people to become tradespeople as opposed to office workers.
Work From Home & White Collar Burnout
Nearly all businesses that could operate distributed did at some point during the Pandemic. This was not without with challenges as many organizations confronted deficiencies in their communication processes that weren’t noticeable when you could walk over to a colleagues office to get clarification. Adaptive organizations flourished and were able to take advantage of the situation. However, a higher ops tempo mixed with balancing the stresses of the pandemic has left many workers burnt out (pour one out for the parents out there) and many teams are kinda over it.
Now, people say a lot shit and we all know the guy who feels that they are underappreciated and how they’re gonna quit and they never do so take these surveys with a grain of salt. Also, I think we need to try and tease out how much of the stress we are feeling is from remote working or from the pandemic. The loss of the social aspect of the workplace is one of the biggest negatives of distributed work. Video calls just don’t do it. Sidebar: I don’t understand what the value-add of seeing my face is on a call. Bottom line: For some orgs the cost benefit of re-engineering processes/systems to be in line with distributed best practices may exceed the cost of heinous 3NNN commercial leases.
While individual workers enjoyed the time and money savings associated with remote working. F for those suckers with a NYC shitbox apartment. I suspect at that margins, introverts with technical skills will find different employment if they get called back and others will demand increased comp. This churn could increase labor costs over estimates and could stall the momentum for companies that are coming out of the Pandemic .
Ford and Facebook have announced that employees will have the flexibility to work remote post-pandemic. I bet they did some internal polling and realized they’d have a mutiny on their hands. Remote working arrangements may keep a lid on some of the white collar labor pressures.
For the extroverts among us, working from home has been nicht so gut. Everyone needs to acknowledge the Pandemic will end at some point so the kids will go back to school (they better), restrictions will be lifted. Remote extroverts may find themselves with more time to socialize, get in shape, eat better, or god forbid have a hobby.
Housing Market
You have probably known someone who tried to buy a house in the past year. Use any metric you want, its a hot housing market out there. I believe the bubble fears to be overblown considering banks are only approving buyers with a hefty down payment and pristine credit.
The housing market relates to labor costs pretty directly. Cost of living is a major component of compensation. That is why salaries in New York and San Francisco are what they are. That being said, the notion of working in corporate America without being able to buy a house isn’t going to sit well with us Young Bucks. A similar feedback mechanism where the marginal worker moves to a job where they can afford a home may lead to increase labor churn and costs.
Feedback loops often go unappreciated by the scrubs. If demand keeps pace, which by many indicators it should (imagine if banks loosen credit standards) then it is highly probable incremental labor costs will increase for in demand professionals.
Keep A Lid On It
The case that I am laying out may not even happen and would be a result of miscalculations by leaders in the aggregate. Not like we haven’t seen that before but sustained labor cost inflation is entirely avoidable. In the past five minutes I thought of three simple ways to reduce labor costs.
- These boomers gotta go – Its simple, they cost more and some of them have been hanging around too long which stifles development of junior employees.
- Invest in distributed systems – we compute from the cloud , what if we human’d from the cloud.
- Put some cost controls on those vampires in healthcare – This would have to come from the public policy level and is long overdue. It should not cost a company over $1000/month to insure two healthy >30 year olds.
But How Does This Affect My Portfolio
Long story short: it depends. In a macro environment with volatile prices on critical inputs the broad market indices may not perform that well. This means that captain stock picker might have to come out of retirement. The game changes when labor is hard to find. It becomes less about using financial engineering to grow EPS and more about the game of inches that is ops so process improvement and deployment of human capital. If the sustained labor inflation does occur I’m looking for long (effective operators)/short (over-leveraged shitcos) opportunities within sectors to get some alpha.
Final Thoughts
I’m a sucker for a sea movie, The Bounty is a classic with some star power. Anthony Hopkins plays the bastard captain who ruins everyone’s fun, until the crew has had enough. In any case, whenever I get nostalgic about the military I watch this clip of the crew getting bitched at (which is one of the things you forget). Maybe some of you out there could use a reminder. That we all have a breaking point.
He Was A Data Boi 