The end of cheap labor is a good thing, despite inflation fears

We’d be better off with higher wages and higher interest rates

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One of the summer reads that really caught my eye was The Great Demographic Reversal: Aging Societies, Waning Inequality, and an Inflation Revival, by Charles Goodhart, Emeritus Professor at the London School of Economics.

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In the book, Goodhart argues that the immediate availability of labor – first from the baby boomer generation in developed markets, then through the large pool of cheap labor from of China that globalization has unblocked – has been the main cause of the deflationary pressures experienced over the past 35 years. Prices have been under pressure because these workers have lacked pricing power – until now.

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Goodhart argues that this is rapidly coming to an end as the labor force ages rapidly, especially in the service component of the global economy. We believe that at the same time, continued supply chain disruptions and deteriorating relations with China could lead to an acceleration in the relocation of manufacturing, as consumers in developed markets are willing to pay more for certain items in order to to ensure the reliability of supply.

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Worse still, many have ignored the raw material supply side of the equation, particularly in sectors such as oil and gas, where we believe the common wisdom – that new technologies such as electric vehicles and renewables have caused permanent and growing disruption – is seriously flawed.

To prove such assumptions wrong, look no further than the current global supply shortages, which have left governments such as the Joe Biden administration scrambling. Their decision to release oil from the Strategic Petroleum Reserve was like putting a bandage on a gaping wound.

In addition, European countries are bringing coal generation online in the midst of a full-fledged energy crisis to compensate for the lack of natural gas that might have been readily available had they opened up domestic drilling.

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Even euro-friendly jurisdictions like Canada can’t help since they’ve gone down the same path of imposing anti-infrastructure and anti-resource development policies like Bill C-69. Essentially, developed countries would rather shut down their own sources of supply to make a statement on climate change, unaware that this simply forgoes production in favor of jurisdictions such as Russia. This means energy instability, constantly higher prices and more rigid inflation.

Interestingly, while some central bankers warn companies against raising wages in order to avoid a wage-price spiral, Goodhart argues that higher wages are actually needed to reduce the current wealth inequality that seems s worsen, not improve, despite expansionary monetary policies. .

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For example, the wage gap between American workers and Chinese workers fell to just 5.1 times in 2018, from 34.6 times in 2000. It is fair to say that this narrowing has been extremely beneficial for those who live in China, but why wouldn’t it be? will it be the same for developed markets like the United States and Canada? Some might even argue that it could slow the pace of political polarization.

Who would have thought that we as a society would be better off with higher wages and higher interest rates and without all the excessive speculation in assets due to low rates, the housing market being the prime example? more obvious.

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From an investment perspective this has many implications, and a good place to start is to ask whether we are really going to go back to how it was before COVID-19? If not, then perhaps the strategies used in the past will no longer be effective, which is worth considering when listening to long-term experts offer their opinion on monetary policy and its impact on the economy and investors.

At a minimum, before you hit that buy button, why not analyze the numbers to see if the target companies you’re looking at can meet their growth targets if the US Federal Reserve doesn’t pivot and rates rise as inflation is falling, but at levels well ahead of the Fed’s 2% target. If you are underweight commodities and other inflationary segments, ask yourself why and how they will behave in this potential new environment.

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Finally, perhaps we as a society would be better off positioning portfolios and investing capital around narrowing wealth inequality rather than continuing to profit from it.

Martin Pelletier, CFA, is a Senior Portfolio Manager at Wellington-Altus Private Counsel Inc, trading as TriVest Wealth Counsel, a private client and institutional investment firm specializing in risk-managed discretionary portfolios, audit /investment monitoring and advanced tax, estate and wealth planning.


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