Pro Perspectives 5/8/20

May 8, 2020

No one should have been surprised by the magnitude of the losses in the jobs report this morning. 

In fact, the numbers are even worse.  There are states that haven’t processed applications that have been sitting with them for a full month now.   

That said, about 70% of the unemployed represent furloughed workers, which remain attached to employers.  By design, that makes for a quick and seamless return to employment, which would make the bounceback in the data as historic as the decline.

Now, the one spot we discussed yesterday to keep your eye on (wage inflation), did indeed deliver.  When I say deliver, I mean delivered a warning shot. 

The market was looking for 3.3% wage growth (already among the hottest number we’ve seen since pre-Global Financial Crisis days — i.e. more than a decade), but as I said, the high estimate of those surveyed in the Reuters poll was +7.9%.  That was the number — up 7.9% (year over year). 

So everyone will be looking at the spike in joblessness today and over the weekend (which will rapidly adjust with the opening of the economy), but they should be looking at this chart.   

Again, the crisis-time wage increases won’t be temporary.  It will be very difficult to take back pay increases given to essential workers.  And for those in the lower wage range that have been collecting unemployment, they have been sent a message by the government (through the federal subsidy) that a living wage is higher than they’ve been earning.   

With that, this chart from the Economic Policy Institute comes to mind …

You can see in the chart when productivity and hourly compensation decoupled leading to four decades of wage stagnation.  Productivity has grown 6x more than pay since 1979. 

The question is, will there be REAL wage growth, or just nominal?

Mostly nominal – meaning a reset of wages against a reset of prices.  As we’ve discussed, the brew for inflation is here.  We have a deluge of money flooding the world from global policymakers, and pent-up demand beginning to enter an opening economy, with a supply chain that will take a while to catch up. 

With this inflation picture, commodities were the movers of the week.  Of course gold continues to look good, as the historic inflation hedge.  And hedge fund legend, Paul Tudor Jones, was said to be buying Bitcoin this week as an inflation hedge.

What’s the commodity most levered to rising inflation?  Copper.  That looks like it’s breaking out.