I think the biggest risk which changes around labor and that's a global
statement. What's happened since Covid is we've
really seen a lack of people come back into the workforce and it's been
probably most pronounced in the US. But even countries like China, which
have a massive population, their population actually shrink in 2022.
So that has huge implications for not only society but also for companies and
ultimately how those companies are valued.
What is kind of the long term outcome here?
If this trajectory continues, I think I think ultimately what it will mean if
you have fewer, more people on the sidelines, less people in the labor
force, as you probably will have more government subsidies for those people
that are there out of work. But there there are actually a lot of
success stories around labor. If you look a lot of countries,
particularly Europe, I'd say Denmark, they're doing a lot more on worker
retraining. That hasn't really taken place in the
United States. And so there's a huge mismatch.
The U.S. right now spends about one sixth of what
Germany does and about one twentieth of what a country like Denmark does on on
labor. So to me, ultimately, the when you look
over history, the best economies, the best societies or where and when
laborers engage working and they're bringing in pay and they feel good about
their their job. What would happened after Covid?
Let's let's use the U.S. as an example.
Twenty twenty one. You should have had one hundred and
sixty six million Americans in the workforce.
We had one hundred and sixty two million.
So let's take a step back and say what happened there.
Point 1 is a lot of people that were 55 and older just stepped to the sidelines
and said, OK, that's enough. My house went up in value.
My stocks went up in value. I'm going to take my ball and leave.
And so that they've started to go into retirement early.
The second is there's been a real slowdown in immigration.
Not surprisingly, giving some of the issues around coded and rising
geopolitical tensions. And then the third that I mentioned was
really around the fast moving nature of the economy where technology has created
greater job obsolescence. How much of this is a structural problem
even beyond Covid? When you look at labor force, what is
GDP? GDP is labor force growth times
productivity. So get out those two things.
In the 2000s, U.S. labor force growth was one point two
percent. Today, it's less than half of that.
That's a huge dropoff. And so if you have only of two variables
that you can control the labor force growth and productivity, it really puts
a massive emphasis on productivity. And what happens is when you have a
workforce right now we're having job changing actually faster than we've seen
ever. That actually leads to lower
productivity. Or people decide they're going to be in
the workforce. They're not going be in the workforce
that dents your productivity. And if that's
underperforming, then your labor force growth is slower than expected.
You end up with slower GDP. So why is this the next big risk dry out
in 10 years at this trajectory? Trying to use this problem is not fixed.
What does the world look like? Well, ultimately, it's a slower growth
world. It is a world where you have less
corporate profits. It's a world we have more attention
where workers field disenfranchise. And ultimately that puts more burden on
the government. And you probably have more political,
I'd say angst. Those are all huge implications.
Is the idea here that, you know, you're facing a growth cliff in the world
because of these labor shortages or distortions?
Or is the idea here that the larger risk is, you know, a populist uprising in the
world? I think the more immediate risk is, is
when you're not a populist uprising. I think generally you are seeing GDP per
capita go up around the world. The question is, is we've been living in
a world where corporate for investors. Watch your show.
We've been living in a war where corporate profits have exceeded GDP.
We could enter a phase where corporate profits lag GDP.
If companies don't figure out how to address this labor issue, what is the
outcome here? A labor shortage leading to more
unemployment. Is that part of the Fed has raised rates
as fast as they ever have and into pretty high levels.
And we're now at a three and a half percent unemployment rate.
That's an unbelievable statistic. The Fed has two mandates, right?
One is around growth and the other one is around inflation.
If labor is a huge inflationary force, that means you have to have more
restrictive monetary policy. So we've been talking about some of the,
you know, the offensive things to do for companies.
From a macro standpoint, this is a huge issue.
This puts central bankers back on their heels.
They're raising rates as fast as he can. And they see unemployment rates going
down. Right.
Think about the Fed. Financial conditions actually eased
despite the fact that they've raised they've raised rates as much as they
have. So how do you kind of consolidate the
big conundrum for four central bankers? I think they're in a tough spot.
I think ultimately what they're going they're trying to use a housing, which
is a cyclical industry and a blunt instrument, a blunt instrument in the
form of raising short rates. And that calms the cyclical part of the
economy in the goods part of the economy.
But back to what we said earlier. It doesn't fix the services part.
And so where years what's. Happening right now is the feds actually
hitting its mandate on goods inflation. But it's missing badly on services.
And, you know, I think we're seeing this to some extent, too, both in terms of
the wages and both in terms of kind of that dynamic.
You've pointed out here, which is you can have a job, but you can't pay for
your house. Yeah.
And so there's a dichotomy. What the Fed what we what are we rooting
for as investors right now? We're rooting for that, that inflation
comes down and real wages actually go back positive so that employees can buy
more groceries. They can pay more for education.
They can do things for their households that they want to.
That actually hasn't happened despite the fact that wages have been growing 5
to 6 percent. That's at the household level.
The second is that will enable companies to have greater visibility on what
they're paying their employees and hopefully extend the duration of the
employees. Right now on the switching costs are
huge for employers because people are changing jobs at a record clip.
And then finally, the third point is the central banks.
The central banks, I believe, honestly believe they think they're at a
normalized level, but they're not seeing that show up in the labor date.
We need to end up in a spot where we have rates up a little bit higher.
Real wages are positive. And then you have some visibility around
that that the Federal Reserve and the government feel good about.
But I think this is going to I mean, it's one of the reasons I think this is
the big tension, which is this is not going away.
We talked about a few different places in the world.
Now, if you kind of think about kind of labor and distortion issue, where are
the areas that are most pronounced and where are some areas that are probably
winning and therefore could potentially. It sounds like, drive more investment.
What do we have? The last 20 years we had we were going
towards globalization and it was easy to move from your your centers to India to
China. Now, what's happening is that's coming
under pressure for geopolitical reasons and also to the point here for labor.
So I think if you ended up in a world where Asia could actually create more
domestic consumption, which is I think where we're going.
That would put them in an advantage. I mean, when we think about our
footprint globally, we've taken our balance sheet for 10 percent, Asia to 20
percent. We want to have that by 25.
So, you know, we believe in that. If you had to say what's the 30 second
elevator pitch on why we're having this issue, demographics, Covid and
ultimately geopolitics. And that is leading to a workforce right
now that's subscale relative to what we need.
And it's happening at a time of rapid technology, technological change around
the world.