Inflation, energy crisis, strikes – have we gone back to the 1970s?
Merryn and John talk about rising prices, productivity and the state of the labour market, plus are bond investors really the adults in the room, and should you buy more houses?
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Transcript
Merryn Somerset Webb: Hello and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine, and today’s special treat I have John with me. John and I don't do nearly enough podcasts together, do we John?
John Stepek: No.
Merryn: Every now and then we get to do one and today is one of those happy days. Hello John.
John: Hello. Can you hear me?
Merryn: No, I can hear you. That was just a friendly hello, not a “the tech is broken again” hello.
John: Just for a little bit of background, Merryn and I spent something like the past half hour trying to get this thing to work, which also may explain to the many of you that keep gently hinting that perhaps we could improve our technical skills and equipment, that’s why.
Merryn: We're just not very good at it, but we are trying. I hope you will notice this – I have a new microphone. One of you very kind, gentle listeners sent in a suggestion of a particular microphone that I should get. I have bought this microphone. It was quite expensive, but MoneyWeek doesn't mind. Anything to improve the audio quality. I hope that it works. I can't do anything about John because he’s 350 miles away.
Speaking of my expensive microphone, if you were to have gone to sleep for three years and you woke up in the UK this morning, you might think that you had suddenly woken up in the 1970s. Inflation all around you, an energy crisis, some muttering in the newspaper this morning about a huge truck drivers’ strike to destroy Christmas. Look around the world and you can see inflation numbers rising absolutely everywhere.
Even in Germany, CPI inflation is 4.1%, that is the highest since 1993. In the US inflation is running at 5.4% at the moment. PPI inflation at 8.6%, which is kind of high. Everyone is talking about rising prices. We're told that the owner of Bernard Matthews the other day explained that food is much too cheap, food prices are going to go up 10%. We know the labour market is very tight. Here we are, John, 1970s. I remember the 1970s, they weren't all that. I don’t want to go back there.
John: I don’t really remember them that well.
Merryn: You're a bit younger than I am.
John: I have heard the stories.
Merryn: Just to be clear, I was a small child in the 1970s.
John: Yes, of course. I remember all the stories about doing homework by candlelight and all that. We're not quite at 1970s levels yet, but I don't think that it can be entirely discounted. It's a very different set of things that are happening now. Stephen Roach was writing about this in the FT this morning. It's a pretty obvious point. Back in the 1970s all of the things that were causing inflation to go up looked transitory at the time, which is what central banks keep saying now.
There was a lot of logic to that as well. It's like what can raising interest rates, for example, do to curb high oil prices if it's because the people who produce oil are just not exporting it to you? There was a certain logic to the idea that this is either going to be short-term or it's not going to take off. But it did. It took off anyway. There's that blind spot, both in central banks and in markets, that just because you can make a logical argument that this shouldn’t be long-term and it should shake itself out when supply chains start working again, doesn't mean that that’s what's going to happen.
It doesn't mean that we aren't going to get inflation taking off and staying this high for a long time, even before you start thinking about all the long-term reasons why it might do.
Merryn: When you look at it, inflation does create itself. Someone was pointing out to me yesterday about how as a result of COVID you have this trouble in the supply chain. There's hold-ups all over the place. People think to themselves, gosh, I've got to build some resilience into my personal supply chain for my business, so I'm going to over order a little bit. So they order slightly too much, so they have some slack or feel they have some slack, and next thing you know there's even more stuff stuck in the supply chain.
There's more ships all over the place, more shipping containers all over the place. Then, when the stuff arrives, everyone needs more warehouse space than they would have otherwise, at a time when warehouse space is already at a premium because of the pandemic and us going to online shopping, etc. Then the price of warehousing goes up. I saw in the newspapers this morning in The Times, thank you very much for that statistic, a square foot of top quality shed around the M25, this time last year was £16.50 and now it’s £18. Now that’s actually quite a rise.
John: Yes, that’s quite a big chunk.
Merryn: That kind of price rise filters through to everything. You can say, fine, for inflation to keep going it has to go up again next year. Maybe it's just going to go up once and that’s where we get transient from. But if it keeps feeding on itself, and this is something that you always talk about, in particular if it feeds through to higher wages and they keep going, then we're in trouble.
We already have a lot of noise from the unions in general. The unions have started saying that this rising inflation means that we need to see a big rise in wages and of course we’re hearing that as well, and the employment market is behaving very strangely, right?
John: The employment market is weird. Before we go into that the other point with inflation is that people want to raise their prices if they feel they can get away with it. That's often slightly overlooked. I've been hearing this thing about how we all need to pay more for our food for about 20 years. Now that there's an opportunity you jack up the prices. I can't help but think that they’ll go up a bit more than they need to. Everybody wants higher wages. Everybody wants higher prices for what they sell.
Merryn: That makes sense. In a period of inflation obviously you're going to use that as cover if you can raise your prices. By the way, everyone should expect the price of their MoneyWeek magazine to go up. How much do you think we can get away with?
John: 20%, given what the market’s done as well.
Merryn: 20-odd percent. We’re saying it now. It's inflation, there's nothing we can do about it. Cost rises feeding through. Everyone’s being paid more.
John: Everyone wants us to get better microphones for the podcast.
Merryn: Yes, this stuff is not cheap. 20% minimum.
John: You're lacking in ambition there.
Merryn: John and I are demanding higher wages as well by the way.
John: Obviously.
Merryn: Obviously. We're going to start this wage for ourselves. It begins here. Anyway, the employment market is behaving weirdly, isn't it?
John: It is. We've got the statistics. The latest statistics from the UK say there are now more people employed than there were before the pandemic, which does start to make you think how that can be the case. It's not that the unemployment rate is lower than it was before the pandemic because there's more people around, but there's more people in PAYE jobs than there were, which is very striking indeed. Why do we suddenly need more people than we did when everything was running smoothly in 2019? I don’t know.
You and I have been knocking around a few ideas about why that may be. One is probably a minor issue, but it will be interesting to see the stats post furlough. It could be that the furlough fraud has created a certain number of phantom employees. That will go away once the furloughs end, so that would come out of the stats in the next few months.
Merryn: Also the fact that people on furlough have another job as well, which is perfectly legal.
John: Yes, that is true.
Merryn: So you’ve got phantom jobs, effectively, that aren't fraudulent. You've got all the furloughed jobs sitting there still existing, even though they don’t exist because the work isn't there to be done, and you’ve got people on furlough doing other jobs, so that adds in to the stats as well.
John: It does. You would think the ONS would at least try to accommodate that in some way. They're quite capable at wages. The wages are not actually like this because of base effects and all the rest of it. The other big point is the black/grey economy possibly shrinking. That would tie in quite well with the fact that we keep hearing about how lots of immigrants moved back to the EU and didn't return. There's possibly an element where a certain volume of jobs that weren’t on the books have been replaced by jobs that are on the books. Potentially that might be a factor.
Merryn: There's also this idea that the support to workers during the pandemic has been so huge and that there has been no support to workers who are working on the black. It makes sense to people now to think, hang on, there may be more of this coming. It may be we're going to have another terrible winter, more lockdowns, probably this, probably that. Why would I stay in the informal economy when all the protections are in the formal economy?
It may be worth entering the formal economy for this. That may also explain a shift in people from being self-employed to being employed because there's more protection from the government in the employed as opposed to the self-employed sector. I'm guessing here, but these are reasons to move into the formal sector and into the employee sector, right?
John: Yes. A lot of that was around specifically the HGV driver stuff as well because they changed the IR35 rules as well last April. That created quite a shortage of HGV drivers even at the time. There's a lot of interesting factors happening, but still…
Merryn: There's one more as well, which is COVID itself. When we asked about this on Twitter we got hordes of people saying it's all the extra people cleaning this and cleaning that and pointlessly spraying you with detergent all the time when we already know that you can't get COVID from surfaces.
But nonetheless people are still hiring extra people to constantly clean surfaces that make no difference to the COVID transmission statistics. People putting up plastic barriers and taking down plastic barriers and making all the stuff we need to carry on with our COVID displays, so that may be part of it. There may also be – controversial comment coming up...
John: Another one?
Merryn: What? Did I do one already? No, I don't think so. It may be that people working from home are not as productive as people in offices.
John: How very dare you?
Merryn: I know. I was thinking this yesterday when I was calling a call centre. The recorded line said because of COVID we can't answer your call as quickly as we could before. I'm like, hang on, we're nearly two years into this now. If the call centre has everyone still at home, if they can work as productively from home as they can in an office, why can't they answer the phone because of COVID? It doesn't make any sense at all. That very message tells me that that company believes people are less productive at home than they are in the office.
Or not? What am I missing here?
John: I don’t think you're missing anything. It's also been an epic excuse for lots of companies to manage expectations down in a way. Oh, I see, that’s an inflation thing. We’ll get back to that in a minute. The productivity stuff I'm wondering about because I haven't kept an eye on the productivity statistics, but presumably this would all start to show up in those if productivity is collapsing at the same as wages are going up and employment is going up.
Merryn: Let's go back to that very briefly. Let’s talk about us, John, the 40 minutes we spent trying to set this up. If we’d been in an office with tech support people that would have been dealt with in five. And then let's not forget that we wasted another ten minutes before we started this because I'm at home and a DHL driver rang me and said we’re coming with your parcel, we’re a bit late, and I answered the phone because I'm just talking to you, fond as I am, I answered the phone.
If I'd been in the office would I have answered the phone? Of course not. Then when I got a message two minutes later, when you and I were still gossiping, saying that the DHL driver was sorry I wasn't in, I wouldn't have had time to have a temper tantrum and run down the street after him and get my package. Basically we have been stunningly unproductive, largely my fault, for the last hour.
John: It's true.
Merryn: While we wait to start our podcast. There is no way that you and I could say to our employers that we have been behaving productively while we worked from home over the last hour at least. Is that fair?
John: That’s fair.
Merryn: If you and I aren't productive working from home is anybody else? Are we that much worse than other people?
John: To be fair we probably are a bit there.
Merryn: Hang on, John, I can't talk. I've just got to get the laundry out. Oh, there's someone at the door.
John: Is this your way of saying that you're moving back to London and coming back to the office? I'm sure the boss will be very happy to hear that.
Merryn: I am definitely going to spend more time in the office than I have been. I really am. As maybe everyone can tell I'm going slightly stir crazy. I need to be in the office. Sorry team, I'm coming back.
John: About inflation and services and people, I read a really interesting blog the other day, Full Stack Economics. The chap who writes it touched on this a couple of times, but it's this idea that it's like a version of shrinkflation, but not for goods, for services. Talking about how if you go to a hotel, for example, then your room’s not going to be cleaned as often.
The call centre example is a good one. Your phone is not going to be picked up as quickly. In fact I think he talked about that specifically. People in America were having to wait for much longer for phones to be answered whenever they were calling up shops and things. You might say that’s all minor, but the point is that if you adjusted for services hedonically in the way that when beef’s not valuable they put chicken in instead.
For the inflation statistics inflation would be a lot higher because the quality of the services we're getting has deteriorated as a result of COVID. I thought it was a really interesting point. You do wonder how much of that is behind the rise in employment stats. What does that mean in the longer run for productivity? We've got more people going less, which is the opposite direction from where we need to be going.
Merryn: It's also completely the opposite of what we expected. There is a big discussion in the US about the extent to which people will continue to do less. You’ve noticed I'm sure the participation rate is the US, the percent of the population who are prepared to be in the workforce has fallen. People keep saying, why is this? Partly because older people have retired earlier, as a result of COVID they're like, sod this, they're not going to do it anymore. As the stock market has gone up they go, well, if I can afford not to do this anymore, so you’ve got people leaving the workforce early.
You’ve got COVID fear keeping people at home, childcare issues, etc. But also crucially you've got this idea the young don’t want to commit to long hours following other people's rules anymore. They just don’t want to and they don’t have to because they can be part of the gig economy and earn a bit of money here and there. They can accept a completely different lifestyle.
We‘re beginning to think there's a large group of people who aren't necessarily wedded to the lifestyle that we think they're wedded to and that changes the make-up of the workforce completely. People are prepared in ways that we didn't understand maybe a couple of years ago to do not that much work and get paid quite a lot less and live in a different way.
John: In a weird way it is the promise of not necessarily the gig economy, but the digital economy, where there's more autonomy for the individuals. I do think that working from home and COVID have accelerated that. I was thinking about this the other day, something basically unconnected, but if everyone’s working from home then whatever else that does, it flattens hierarchies and traditional corporate hierarchies in quite a significant if informal way.
It's just not the same level of a rigid sense of structure. There's also not the same level of the sense that someone is hovering over you telling you what to do all the time. That can be both a good thing and a bad thing. But it's also quite hard for people who have got used to that environment to then go back to a more hierarchical structure in the office.
I do think it's one of these things that COVIDs accelerated rather than created. But in this case I really do think that we've moved at least five or six years faster than we would have towards the vision of the digital economy than we would have thought in 2019. Maybe people also want more leisure. The problem is these two things don’t match up terribly well. Asset prices are very high, and very specifically house prices are very high, so you do still need to earn a decent amount of money if you want to graduate to doing the things that an adult tends to do, like owning a house and having kids.
But then that probably explains why 20-somethings are having such extended adolescences relative to even our generation.
Merryn: In a way they don’t have to worry that much because the working age population is falling all over the world. The supply demand equation is very much working in their favour.
John: That’s true.
Merryn: People in their teens and 20s today. Maybe they can delay entering the high earning workforce for much longer than we felt we were able to in our generation. The working age population is falling in China, been falling in Japan forever, falling in much of Europe. Not so much in the UK or the US, but certainly not rising very fast.
John: That explains fertility rates falling off, which has been a big…
Merryn: There was a shocking article in The Spectator today. This is moving from podcast to gossip isn't it? A shocking article in The Spectator today written by a young man whose climate anxiety is so intense that he feels unable to ever have children.
John: I've heard that, quite a few of those. You're right, its gossip and you don’t try and tread on anything else, but that kind of thing is more of an excuse for something that’s dictated by something with a more practical route.
Merryn: Oh, you think this guy doesn't want to get married and have kids?
John: Not even that.
Merryn: Do you think he's trying to find a way to get out of it?
John: It's quite possible. Although I don’t know if he's got a partner or anything like that that he's trying to convince. That’s definitely possible. Men have done more significant things than writing an article in The Spectator to get out of commitment. The thing of not being able, you feel you've got the quality of life that you were brought up with does seem to be a bigger thing now. Again, that’s just down to house prices. There was that whole thing about millennials being the rental generation. We don’t own things anymore, we just want to rent them.
Merryn: But they do.
John: They do. It's because they can't afford them, or they think they can't afford them. I do think if we dealt with house prices, so much of this stuff would go away.
Merryn: But then you'd be really sad if suddenly your house was worth half of what you paid for it.
John: Honestly, I increasingly feel like....
Merryn: Yes, you would.
John: At this point I could take the hit if I know it would be cheaper for my kids to buy a house. Its swings and roundabouts in a funny way.
Merryn: It is. Absolutely, you're right. We’d be able to get houses for our kids, or our kids would be able to afford to buy houses for themselves. Let's put it that way around. Here we go. We've got an inflation rate environment. We are fairly unconvinced that it's transitory. Of course we could be wrong, but then what is transitory? One year? Two years? Five years? Ten years? You could say that the inflation in the 1970s was indeed transitory because it was over sometime in the 80s.
John: The reason it’s not is because [unclear] had to give the economy the kicking of its life to get inflation out of the system. That's probably the difference between transitory and not transitory.
Merryn: In the editor’s letter this week I talk about how the interesting thing here is going to be we are going to find out the extent to which the valuation of our big growth stocks, particularly the big techs in the US, are based on very low interest rates, and the extent to which they are independent from very low interest rates. Because there's been a view over the last few years that the lower interest rates go, the higher tech stock prices can go because the discount of future cash flow is different.
What happens? Our expectation is that as rates rise, the share prices of particularly the companies that don’t have much in the way of cash flows at the moment, so I'm afraid we always come back to Tesla here, that kind of company will see its share piece fall, and that the place to be invested is in various deep value or value-related areas, because those are the areas that offer you some automatic protection from inflation.
John: That makes perfect sense. Whether it happens is a different matter. It makes sense. It's logical. The interesting thing now is bond yields, because the bond market is still acting as if inflation is not going to be an issue. One obvious elephant in the room there because people tend to assume that markets are efficient, but we’d still have central banks buying a lot of bonds. So I do think it's difficult to say that the bond market is 100% rational when you’ve got an entirely pricing sensitive buyer still hanging about at the margins.
Also even if they're not buying there's always the sense that if something happens they will jump in and buy.
Merryn: They could.
John: There is a psychological cap on yields that’s got barely anything to do with inflation. I don’t think that’s acknowledged enough. Bond markets have got a reputation of being the adults in the room compared to flaky, hysterical equity markets. It will be interesting to see what happens if and when that finally cracks. That could be quite scary.
Merryn: What you're saying here, John, let me paraphrase for you, is that you expect real yield and real interest rates to remain negative for some time to come, therefore everyone should buy more houses.
John: Houses and gold.
Merryn: Miserable times. Houses, there you go, our poor children.
John: Buy houses for your children.
Merryn: Buy houses for your children if you can conceivably afford it. Read this week’s magazine, everybody, please. It's got lots of interesting things in it. I found one of the most interesting things in it was a piece by a deep value investor called Henry Hunt on the energy services sector. More from him next week.
John: I'm doing a separate podcast with him on his ideas around that which you can listen to next week, possibly the week after. What is your most interesting piece in the magazine this week John?
John: I must admit I really liked that one, but also because I'm quite sensitive about fossil fuels. On the other side the ledger there was Dominic Frisby’s piece, which took from a recent [unclear], which was about small modular nuclear reactors. If you want to invest in green stuff that is still reputationally toxic then you can buy nuclear reactors as well as fossil fuels.
Merryn: I have a horrible feeling the magazine’s about to be boycotted. We’d better leave it there.
John: There is one thing you need to mention.
Merryn: What?
John: The Wealth Summit. The early bird tickets are nearly up, so if you're not already a subscriber in MoneyWeek, in which case you will get the Wealth Summit at a massive discount anyway, then you should be a subscriber in MoneyWeek. But if you're not, you've got till Monday the 18th of October to buy your Wealth Summit ticket or else the price will go up, so go and do it.
Merryn: I would definitely do that. We have some really brilliant guests this year. We always have brilliant guests, don’t get me wrong, but some really good guests this year. It is all online so you don't even have to come to London to see us. It will be a good one. You can do that at moneyweek.com, right John?
John: You can. Let me get the exact web setup for you… moneyweekwealthsummit.co.uk. We’ve got a separate website for buying the tickets. Go to moneyweekwealthsummit.co.uk before Monday and get your ticket.
Merryn: Do that. For anything else from us go to moneyweek.com to sign up for the newsletter mainly written by John. You can get it there: Money Morning. You can follow the magazine on Twitter and Instagram. You can find John and me both on Twitter as well. Although John is not on Instagram, are you John?
John: I am but it's like pictures of plants and stuff like that.
Merryn: Yes, don’t follow that anybody, no.
John: Some of my whimsical poetic stuff. Ignore it. Well, I've got to have some outlet.
Merryn: We have to leave it there. Thank you very much everybody. We’ll talk to you again next week.