The past two years taught us an important lesson- companies and deliver record results while allowing workers to live where they can afford to and have actual work-life balance. The big boom in cheaper tier two cities? Remote workers. The record level of discretionary income savings? Remote workers. The explosion of the gig economy, extensive retail penetration into the stock market? Remote workers.
Hilariously, most large companies have decided to celebrated yanking everyone back, stealing two hours a day driving and countless more on office politics and rules like “you can’t leave before your boss”. They claim it’s for a culture that no one wants to be a part of, but they don’t recognize how they’re shooting themselves in the foot.
We have an inflation crisis that’s largely driven by two things- 1.) a housing shortage and runaway shelter inflation in second tier cities like Tampa, Nashville, and Houston, where New Yorkers and San Franciscans fled to during Covid; 2.) a supply chain crisis caused by labor shortages and production delays in far away manufacturing districts driving up the price of everything from cars to furniture; 3.) Russia’s war in Ukraine that’s created a global commodities crisis skyrocketing the costs of food and energy; and 4.) runaway labor rate inflation.
Now inflation has been a problem since mid last year, but some of this was attributable to the rapid speed of the recovery in demand. Companies by and large guided that since the savings rate had reached record levels, that wages were higher than ever before across all income brackets, and that savings balances reported by JPM Chase and BofA were vastly elevated, that they could simply pass along demand to the consumer.
The problem is, suddenly in 2022 that savings rate has dropped below pre Covid averages. Suddenly despite earning higher pay than ever before, the consumer is retaining less than before and it’s dropping. This implies that either; the cost of goods and services is grossly outpacing wage growth, or suddenly consumption has increased causing a deficit, or most likely a combination of both.
Suddenly the middle class is being forced to pay for a tank or more a week that’s double what it was in 2019, for lunches that are 20% higher on average than in 2019, and likely for dinners given that hours worked are also now up given employer’s realization that staff can effectively work after they go home as well. Not to mention used cars that are INCREASING in value year over year despite being a notorious depreciating asset, for work clothing they won’t wear elsewhere, for hair cuts that cost much more, for dog walkers and babysitters, the list really goes on and its staggering!
Additionally, they’re calling BACK the people who moved where they get more leverage on their income and purchased homes. That is going to drive cancellations for home builders, drop the median income closer to historical levels due to the high income exodus back to the city meaning a smaller population of renters that can cover an elevated mortgage payment for a landlord, and less currency transacting through these developing cities.
We are on the cusp of an economic crisis that will be taught in school in the decades to come. That is, if people can still afford it, given reactivating student loan payments will likely push the consumer over a cliff in the coming months regardless.
Good luck all.
Edit- I’ve been reading a lot of Wall Street economic research. For context, the market almost always goes up, and it’s almost always right about prices, and those who bet against it and will can be chalked up to random luck. It’s called the efficient market hypothesis and random walk theory if anyone is interested. Anyway, this is a major reason they’re usually overly optimistic- it’s a safer bet. The other big reason is that those research papers are used as marketing tools by bankers to get companies to raise money by listing or by placing their shares in the investor community. The prospect of a research paper that says “hold” even is often enticing, but who would want a salesforce that’s pushing a recession call to be the guys trying to raise money for your company? The fact big guys like Piper, DB, Morgan Stanley, etc are all calling for a possible recession in 2023, makes me very concerned for the next 12 months.
Also since we got on that subject- not financial advice, not suggesting anyone sell anything they own or bet against the market. Not intended for that use.