Geopolitical Developments: The American Labor Market Is Running Hot But So Is Discontent

The blockbuster payrolls number this morning is causing pure divergence between equities and bonds, as investors debate whether an American soft landing is possible in the face of an increasingly aggressive Fed. That bullish scenario is unlikely not only because it goes against historical dynamics but more importantly because of the souring of the mood across the nation. I see discontent inexorably rising and leading not just to short-term changes like control of Congress, but to longer-term trends like increasing automation of service-sector work and rising inequality and a worsening of the work ethic. Should investors study the jobs report and see the same cultural negatives then lower lows in the S&P 500 are all but guaranteed. For now, however, equities are consolidating the recent bull run and look set to move higher next week. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Oil is pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly over the next few days before beginning a new leg down later in the month.

While across the globe consumers are becoming more like Americans, another key to the global economy is whether workers in Europe, Latin America and Asia are becoming more like Americans too. Today’s jobs report distressingly shows that despite a tight labor market and the burden of inflation, the labor force participation rate actually fell slightly. This is clearly a socio-cultural development, less about economics than about the social and personal preferences of the American worker. To understand what is going on Brookings has analyzed trends since 2000, and how they compare with the pandemic and post-pandemic state of work. They note the following:

“As of June 2022, the size of the labor force has shrunk relative to its pre-pandemic path: the labor force is roughly three- to three-and-a-half million workers smaller than its pre-pandemic projection. A large portion of the decrease in the size of the labor force relative to pre-pandemic projections—approximately a third—has nothing to do with labor force participation. First, the population is smaller because of pandemic-related deaths. Second, there are ongoing pandemic- and policy-related factors that are depressing immigration. The declines in participation likely reflect early retirements, concerns about health, and to some extent excess disability and lower life expectancy caused by disability due to COVID-19.”

So the horrors of the pandemic are still with us from an economic perspective. These effects are understandable for the most part, but some of these factors aren’t easily defensible, as they reflect a change in the work ethic. Excess disability is one factor Brookings notes, another is the trend of young people to continue attending school in some form instead of working as they did pre-pandemic. Given the clear demarcation between those young people shrewdly earning a 4-year college degree or not, and between those majoring in a business-friendly subject (e.g., STEM, economics, accounting, marketing) or not, it’s unlikely that the majority of young people continuing school in community colleges or for-profit programs (instead of entering the workforce) reflects clear thinking of a desire for higher productivity.

And finally there is the issue of immigration. Brookings notes “the flow of net international migration to the United States has decreased substantially since 2016.” The choice of Biden to continue most of Trump’s immigration policies ensures this trend continues unless Mexico implodes under the weight of illiberal president AMLO. Should Republicans fare well in the mid-terms this trend will only worsen. The decline in the work ethic in America is one of the most chilling economic developments that goes hand in hand with the aging of the nation and the rising need for immigrants. If demography is destiny, then a fundamental change in mindset is needed to ensure the liberal order dominates the 21st century as it did in the latter half of the 20th.

My current positions are a moderate but relatively large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU.