The Fed's Worst Nightmare.

now we got to talk about the wage price

spiral and the potential of a wage price

spiral continuing remember a wage price

spiral is the worst thing that you could

experience because it leads the Federal

Reserve to have to force a deep and

dirty recession they will smack us up

beside the head the dirtiest with the

dirtiest smack and dirtiest nasty sticky

hand you could ever imagine you don't

want a wage price spiral it's very

important to remember what you want is

you want people to build their wealth

and incomes over time ideally people

build their income slightly due to

inflation slight increase to year over

year but mostly due to providing more

value to wherever they are providing

their labor that is good healthy wage

growth we want people to make more money

over time to offset slide inflation but

we also want people to make more money

when they provide more value that is the

American way nobody is suggesting that

we don't want people to make more money

but what we don't want is the growth of

wages to be so rapid that all of a

sudden we create unsustained inflation

where people are being paid and

compensated substantially more for

working less or not working at all a

wage price spiral can then ensue which

leads to a nasty depression or deep

recession much like what we saw in the

early 1980s when Paul volcker had to

raise interest rates to 20 percent to

crush the wage price spiral and that led

to a lot of layoffs remember the goal of

investing and the goal of economies and

capitalism and government is to operate

in the mean we don't want a government

that has their heads completely in the

sand and only does one thing we want a

government that operates in the middle

much like we want wage growth to be fair

and reasonable and in the middle we

don't want extremely high wage growth

because that could lead to a wage price

spiral and then job loss we don't want

really low wage growth because that

means people are falling behind and

suffering so where do we stand today on

wage inflation and what are the odds of

wage inflation potentially falling well

this is very very important and Goldman

Sachs has just released a piece on three

leading indicators of what caused

inflation in wages and where those

indicators are going and we're going to

go through exactly this Goldman Sachs

piece to see what their thesis is now

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all right let's take a look here so

number one inflation expectations

elevated inflation and inflation

expectations over the last year likely

drove workers to bargain for higher

wages to make up for lost purchasing

power it's difficult to identify the

effect of inflation expectations on wage

growth as there is no way to disentangle

the true inflationary pressures on wage

growth but basically leading indicators

suggest that when we look at one year

inflation Expectations by the consumer

which this is not what's estimated by

the bond market like break evens but

rather we look to the one-year inflation

expectations for the University of

Michigan

when we look to short-term inflationary

expectations we could see that if it's

possible that wages increase because

consumer expectations of inflation were

Rising therefore leading to them to in

aggregate demand higher wages then we

should be able to look at that one year

inflation expectation chart and also say

that number one most important inflation

expectations are starting to plummet

that plummeting of inflation

expectations could reduce that upward

wage pressure that we are seeing from

individuals

individuals moving to lower inflation

expectations could actually help us see

a reduction in wage inflation back to

normalcy in English this is very good

news we have one large indicator here

out of the three indicators we're going

to look at suggesting that wage

inflation is likely to decline neither

of the three wage indicators that we are

going to look at here have anything to

do with Supply chains or other of the

inflationary impacts this is solely on

wages and inflation expectations falling

could beget less wage inflationary

pressure per Goldman Sachs and that is

fantastic this is again not to say we

don't want people to make more money or

build their wealth too many people who

try to put on a political lens and go oh

you just want people to make this money

wrong we want people to make more money

especially people who provide more value

because that's the smart way to provide

more money or provide to build your

wealth because if you don't provide more

value and you just demand more wage

increases you'll end up getting replaced

by a robot or a chat bot when you get

fired by somebody who's willing to work

harder that's very important you might

temporarily win working the same amount

and getting paid more but you'll never

win in the long run it's very important

that you always provide more value but

when it comes to inflation expectations

on the market it's very clear that

Goldman Sachs tells us on a one out of

at least one out of their three

indicators is suggesting that wage

disinflation is coming it might take

time it might take patience but it is

obvious the inflation leading indicators

are suggesting that wage growth is going

to moderate further number two pandemic

related normalization as we pointed out

last year covid related labor market

policies pandemic bonuses and coveted

related labor market disruptions likely

contributed to elevated wage growth in

2021 and early 2022 specifically

temporary fiscal measure during the

pandemic especially the enhanced

unemployment benefits in the extended

and expanded child tax credit likely led

to very strong wage gains gains from

that last summer through last winter in

low-paid sectors where fiscal transfers

replaced a large share of normal wages

in addition many companies appear to

have offered workers larger than usual

pay increases as compensation for

pandemic hardship and to incentivize

them to resume normal work practices

in English maybe it was a bad idea to

pay people four to six hundred dollars a

week to stay at home and do nothing

because that meant businesses who relied

on labor had to pay substantially more

money to get people back to work and

even after those benefits went away

because of the expanded child tax

credits which were still running

substantially in 2022 maybe all of a

sudden you're out or the stimulus checks

that California stupidly sent out in

October of 2022 maybe you actually just

replenished the excess savings that

people had and still have today making

them less likely to return to work

leading to massive wage inflation and

worker shortages now thankfully that

trend is finally turning around

companies like Chipotle and Starbucks

are suggesting it's easier to hire and

retain workers less turnover easier to

find people cloudflare had 1300 job

openings in 2022 guess how many

applications they receive out of 1300

openings 400

000 applications Uber is seeing a 37

increase in the number available

available drivers Lyft is seeing an

extreme increase in the amount of

available drivers and so all of a sudden

labor is now chasing fewer available

jobs however this takes a while to

actually show up in our data it's going

to take a while to see this

disinflationary impetus thanks to our

incompetent government having spent as

much money as they did supporting people

for doing nothing now I'm not saying

that was a bad thing I was a big fan of

breaking down all of the ways that you

could make money from the government

because even if they're stupid I'm happy

to make sure you can take advantage of

those aspects but what I don't want you

to do today is be blind to think that uh

oh we are going into a wage price spiral

so far the indicators of that are

absolutely no inflation from a wage

point of view is absolutely pointing in

a disinflationary direction how long it

takes is the real question but the

Federal Reserve is paying attention to

this so number one wage expectation

inflation declining we see the chart

here not only that but as we normalize

away from these pandemic support

programs which seriously we're still

going on under 10 inflation five months

ago basically near 10 inflation five

months ago in California and in other

parts of the country those are finally

starting to normalize it's insane you

should send a letter to Gavin Newsom and

go you dumb idiot you made inflation

worse when it already was nine percent

you dumb nut but that's okay because we

know he's an idiot but he's an idiot

who'll probably end up running for

office in the white house one day and

hopefully you realize that during the

highest inflation he sets stimulus

checks to people making up to five

hundred thousand dollars to buy votes

and now what's California Oh California

is going into potentially a large budget

deficit oh wow no surprise the taxpayers

who were actually making money are

fleeing the state and they're leaving to

different areas now all of a sudden

paying the government less money and so

what do you actually have Gavin Newsom

predicting a massive budget surplus but

instead of actually getting a surplus

what we actually end up having is a

projected deficit for California of 22.5

billion dollars striking downturn from

the surplus of last year thanks to not

only coveted money that the government

massively double counted in political

rallies but also massive capital gains

as the biggest winners of the covet

handouts ended up being wealthier people

in the form of ridiculously expensive

IPOs stock surges and real estate

appreciation which led to massive and

temporary surges in capital gains in

California

now I've got to continue here with

Goldman Sachs third warning on wage

disinflation this is very important so

what is the third warning well the third

warning here is the one that's lagging

the most and is taking this the longest

amount of time to normalize but it has

to do with the jobs worker Gap we're

still at the highest the second highest

level in the gap between the amount of

job openings and the workers who are

taking those jobs however Goldman Sachs

makes it very clear it takes a long time

for this Gap to actually affect the wage

rate and fortunately if we actually if

we ignore the government's measure of

the job openings and labor turnover

index the jolts report we actually look

at the alternative jobs openings data

which is brought to you by like the real

economy rather than the government's

crazy adjusted data we can look at

indeed.com and Linked UP job openings

what we do take a look at this what do

we see ah how interesting a very clear

downtrend in that light blue line of the

actual and alternative job openings data

so while unfortunately this is moving

down very slowly it gives workers plenty

of an opportunity to sort of reshift to

the job and workplace and in the

environment they actually want to be in

for the long term but this downtrend is

really important to pay attention to

because it is yet the third indicator

that massive wage disinflation is coming

remember disinflation is the decline in

the inflation rate and this massive

disinflation coming and and all three of

these aspects of massive wage

disinflation make it very very clear

that yes even though it's going to take

months to get these declines actually

showing up in real data it's very clear

that three out of three of the

indicators that Goldman Sachs is looking

at for the risk of wage price spiral are

clearly telling us no wages are not

going to cause a wage price spiral

anyone betting on a wage price spiral is

not paying attention to the data they're

paying attention to lagging and

anecdotal reports or massively

seasonally adjusted reports like the

Bureau of Labor Statistics report which

is seriously just looking in the

rearview mirror so this is good news

this is bullish news now it doesn't mean

we want to YOLO and be crazy not bet on

volatility in the short term I've said

it before and I'll say it again I

believe we are in a Nike Swoosh recovery

that is going to be very volatile now

unfortunately when people hear me say

Nike Swoosh recovery they they literally

just think to themselves okay Nike

Swoosh recovery down fast oops down fast

and up slower got it but they're not

listening to me what I say it's going to

be very very volatile and very bumpy I

do think we're going to continue to

Trend up at this point I'm not

absolutely saying we won't hit a lower

leg that's possible I just think it's

unlikely based on the leading data that

we have and the Federal Reserve is not

blind to the leading data as much as

they might seem that way in my opinion

the Federal Reserve is putting on an act

of not paying attention towards the

leading data because they want to keep

the 10-year treasury yield High because

that crushes real estate and by crushing

real estate you crush demand and that's

what they want to do to make sure that

real estate or that Services inflation

inflation in general stays anchored in

inflation expectations stay anchored but

you even have one of the Bears like

Loretta Mester you turning on this idea

that oh yeah we're definitely going for

50 BP

she quickly u-turned on that after

widely being quoted as being interested

in 50 BP she clarified that away so

quickly but very few people are paying

attention to it but I am and I hope

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