Investment thesis: A worsening situation in regards to the availability of mid-level professionals, such as truck drivers and welders threatens to exacerbate some already unhealthy macroeconomic trends that are trending within the US economy, but also more broadly through the Western World. The labor skills shortage we are sleepwalking into can undermine our ability to expand our industrial activities or even maintain our current industrial output levels. This in turn could become a contributing trigger for a major shift in global trade, namely a diminishing role for the USD as well as other major Western currencies, as there will be increasingly little output available to back the value of the trillions of Dollars, Euros, British Pounds, and other Western currencies that are used as a means of transaction in global trade. Coupled with other factors, such as growing economic frictions with countries like Russia & China, it has the potential to cause a historical shift in global trade dynamics, with the use of the USD and other Western currencies becoming much diminished. Stagflation, a poor investment environment, global trade disruptions will make it a challenge for investors to at least keep up with inflation in terms of nominal gains. Holding some gold should be considered as a safety measure in case of currency markets become chaotic.
Labor shortage issues are treated and discussed in an overly simplified manner, which misses the specific threat of a labor skills mismatch that is getting worse
Back in the day, I was listening to a lesson on the supply/demand of labor while attending one of my undergrad courses. The professor opted to use a particularly useful example, offering himself as a point of reference, where he argued that if incomes from farming were to double compared with his salary as a professor, he might consider quitting his profession and taking up farming instead. I of course raised my hand and rebuked him. He expected that I would argue he would not because he lacked the skills. Instead, I pointed out to him that monetary compensation was not the only factor that kept him in his position, but also the prestige associated with it. He did not contradict me, but just smiled and moved on.
That exchange helped to cement my own understanding of the labor market, and it is a particularly useful concept that can help to clarify the nature of the problem we are facing today. We are in fact facing a problem of not only a mismatch in pay that is causing young people to take the road of college education instead of learning hands-on skills but also the perhaps more significant problem of social norms, where we associate certain career choices with elite status, while certain other careers can at an extreme relegate some hard-working people to the status of barbarians. Perhaps the best example of it is the comments made by Canada’s Prime Minister, Justin Trudeau, where he highlighted the “plight” of girls & women that have to suffer through an invasion of mostly male construction workers when certain large infrastructure projects go through smaller towns.
Faced with such blunt attacks on the character of any would-be construction worker, or people specialized in other fields like machine operators, truck drivers, and so on, it is no wonder that most parents do not want to guide their children towards such career paths. Most parents push their kids towards the path of prestige, namely a college education. The fact that as many as 42.5% of undergrads are officially considered to be underemployed is not acting as a deterrent. A college degree is seen as a lottery ticket to prestige, as well as affluence.
The saddest part is that there is a great deal of ignorance of the fact that a college degree does not offer an equal opportunity ticket for all who hold that same degree. In many fields of study, a secondary factor tends to pick the winners, namely being well-connected. In other words, the son of a welder from Iowa with a Political Science degree will not have the same opportunities to get a job related to his field of study as the son of a member of Congress, or of a well-connected business person, with the exact same degree. It can be argued that the former’s chances are actually very close to zero, while the chances of the latter are pretty good, while the average rate of underemployment is near 50%. It is of course, not always polite to point out this fact, therefore we do have plenty of young people sucked into the secondary education industry, into fields of study that all but guarantee failure for certain individuals. It benefits the business model of institutions of higher education, to the detriment of young people who can have their adult lives disadvantaged right at the starting line.
Many career paths, mostly paths that involve hands-on work, such as in construction, manufacturing, transport, and so on are not pursued by enough young people. This is why we hear more and more about a truck driver shortage. The lack of interest in the career can be seen not only in the current, immediate shortage issue but also in the fact that the average age of truck drivers tends to be higher than that of the average U.S. worker.
With an average age of 48 and a median age of over 47, truck drivers are about five years older than the median age of the U.S. worker, meaning that far more of them are set to retire in coming years compared with the averages in other industries. So the current shortage is set to get a lot worse.
The same goes with many other industries, where a lack of prestige, and a lack of attractive compensation given the effort, are causing a lack of interest in certain careers. Curiously, unlike many of these career paths, where employers are increasingly finding it hard to attract recruits, there is no shortage of applicants for positions of prestige, such as in academia for instance. Despite there being no shortage of applicants, there seems to be very little downward pressure on wages offered for the lucky few winners of those overcrowded job contests.
I recently had an interesting discussion with a neighbor, who works for a plumbing company. He told me that his company has a hard time getting water heaters delivered, even though the heaters are manufactured in the US. The manufacturing company’s reasoning is that it does not have enough employees to assemble them. Homebuilders have been reporting shortages of all sorts in the past months, ranging from windows to appliances. COVID disruptions have been blamed for much of it, but clearly, there is more to it than that. Labor shortages, that were just making a bit of a nuisance before the pandemic, seem to have worsened. This may be partially due to the pandemic, but I think it is important to understand that it may be only an acceleration of an already worsening problem that we have been largely ignoring.
As I pointed out by referencing the age demographics of truck drivers, many of the professions that are seeing a shortage of interest, thus a shortfall in staffing are currently employing an older demographic cohort on average. What this means is that an outsized proportion of the people who are opting for early retirement are truckers, machine operators, welders, rig operators, miners as well as perhaps many tradespeople working in construction and maintenance.
There may be other reasons why some people are leaving certain occupations. Aside from the low esteem that society tends to perceive certain occupations with, some professions simply do not pay well enough to make it worth being in a profession that often involves being away from home, or in some cases being physically demanding, as it may be the case in a metal shop. That is especially the case now that we have grocery stores, restaurants, and other establishments paying an increasingly decent wage, while the job may be easier, less stressful, or in some cases less harmful to one’s long-term health. I recently heard of lab technicians increasingly opting to quit and get a job at local retail establishments, given that there has been a narrowing in the wage gap, while there is still a huge gap in stress levels involved
The economic activities we may forego if we cannot come up with the labor resources needed to implement new projects
With trade frictions, global supply chain disruptions, and other factors that are contributing to supply shortfalls, there is renewed interest in localizing production activities closer to consumer markets. One might argue that it is an imperative need to do so, given that global supply chains are breaking down. To make this happen, we need a labor force with experience in transport, machine operating, welding, mining, construction, farming, and many other skills that actually make things physically happen. For instance, there is a perceived need to cut America’s reliance on China for rare earth metals. China currently controls most of the global rare earth supplies, with some of its allies such as Russia also contributing a significant amount to global supplies.
A recent bill just introduced in the U.S. Senate seeks to forbid all defense contractors from using rare earth imported from China in their products. Naturally, domestic supplies would be preferred within the current context. That means new mining operations, as well as having to build the facilities needed for the refining of the minerals. This is an example where we see the need to have an ample supply of labor qualified to perform tasks, ranging from welding to driving a truck. Not only do we need to find enough workers with the needed skills for the tasks, but also we need to find enough who are willing to at the very least temporarily relocate. Then, of course, those operations also need permanent staffing, with many tasks also requiring specific skills.
Similar problems arise for any other industrial projects that are being proposed or contemplated going forward, whether it is new microchip production facilities, new EV battery plants, the lithium mines needed to supply the battery plants, green hydrogen production facilities, and so on. These are all economic activities that would be nice to have. It is hard to see how they will be implemented when for instance the average age of welders is currently 55 and it is estimated that by 2024 there will be a shortfall of 400,000 welders. In the absence of our society finding a way to come up with enough people to perform these tasks, we will just have to let others perform all these manufacturing, mining, and other activities.
We already have a tight supply/demand situation in many key commodities at a local or global scale that threatens to push us into a sustained stagflationary environment. The ongoing COVID crisis continues to create disruptions to supply chains. Trade frictions stemming from great power competition that is increasingly taking place in the economic sphere are also taking their toll on global supply chains. I highlighted the fact that we are most likely on the brink of a long-term scarcity economy in a recent article. While much has been made of the “great resignation” in the past few months, very little attention has been paid to the fact that we are sleepwalking into a skills-shortage crisis, on top of a general shortage of labor crisis. It is not a crisis of highly skilled professional elites, such as IT specialists or engineers. It is a shortage crisis of medium-skilled tradespeople. It was a problem before the COVID crisis. It became an even more acute problem since then, and it is likely to get worse going forward.
A shortage of people who can actually do hands-on things that require some skill acquired either through extensive experience or through technical college or apprenticeship programs has the potential to cripple our abilities to build new things and even to cripple existing economic activities if things get bad enough. What this means is that we will gradually lose even more industrial activities than we already lost in the Western World, due to higher labor costs as well as more stringent environmental regulations compared with rising economic powers in Asia and elsewhere. We are in effect going down a path of relegating our economy more and more to a post-industrial state, where we will focus mostly on some innovation, finance, management, and a lot of services such as social work, in line with what we prepared our workforce to perform.
Even as we become more aware of the fact that not producing many of our own industrial goods leaves us heavily dependent on much of the rest of the world, we are faced with no alternative but to accept it, since we lack the workforce needed to do otherwise. Some may be tempted to believe that we can go on indefinitely managing each other’s money, giving each other haircuts, treating each other’s illnesses, selling to each other goods that were increasingly produced by others, while not producing much of anything ourselves. It is thought that we can be alright without a meaningful industrial base because as long as we have a strong global financial footprint and we also lead in innovations, other economic activities such as manufacturing and mining that produce tangible goods can be relegated to being low value-added activities. With finance and innovation activities growing in the developing world, that is no longer the case anymore either. For instance, we have VinFast a domestic Vietnamese auto brand ready to sell EVs on the U.S. market this year. It is unclear to what extent Western financial capital and innovative inputs played a role in that domestic Vietnamese project. It is clear that even a low-income country like Vietnam can now muster the needed capital, innovate and produce goods that we used to think not long ago that we had an insurmountable lead in developing right here in the developed world.
It is also not necessarily true anymore that manufacturing activities will continue to be low value-added endeavors going forward. In the new age of commodities-based scarcities, we seem to be entering this decade, there will no longer be an excess of capacity. For an early view on how it will all play out, we need to look no further than Europe’s recent energy crisis, where fertilizer plants, aluminum and zinc smelters, ceramics manufacturers, are all responding to the high costs of energy by shutting down production. Some of them are doing it temporarily, at least for now but others are considering making it permanent. These cutbacks in industrial activities serve to provide other manufacturers of goods with pricing power, perhaps beyond the levels needed to cover the higher costs of inputs.
Most indicators suggest that industrial production capacity reductions will be most prominently seen in the Western world. The EU is already in the process of deindustrialization.
As we can see, EU industrial activities did not improve much since 2007. Some countries, in particular, like Italy for instance saw industrial production decline by as much as 20% since 2008.
America’s industrial production growth also stagnated in the late 1990s.
While the trend is not as bad as it is in Italy, or even in the EU, it is not a stellar situation either. With the post-COVID recovery in industrial production over, we are now seeing a trend of contraction in the EU again, in part due to issues such as energy prices, in addition to COVID disruptions, as well as other issues, such as chip shortages. While it is not making the headlines, labor shortages in some fields are also contributing. For instance, Germany is currently experiencing a shortage of skilled workers, just as I described it here for the US. Strategies to mitigate the problem, such as taking in migrants have not had the desired effect. The only trend that helped was a massive move of East Europeans to countries like Germany in the past two decades. In other words, a number of Western countries found the cannibalization of labor from fellow Western countries to be the only suitable solution. That solution is now largely exhausted. U.S. industrial production trends are likely to follow a similar path and similarly, there are few reasons to believe that the migrant solution is a viable one. It can help somewhat, but increasing the number of workers does not provide an automatic increase in workers with certain skill sets.
We will see a further downshift in industrial activities in the Western World, for the many reasons I highlighted in my past article on the subject that is set to create an overall environment of global scarcity. The problem is exacerbated in much of the Western World by a workforce that is not necessarily being optimized in terms of skills acquired in a manner that best serves our real long-term needs and goals. This additional factor is perhaps one of the most important ones in determining where the global shrinking in manufacturing capacity will hit the hardest.
As it may often be the case, the markets do not always prove to be a great lead indicator of things to come. The market is great at identifying technological disruption, or even some macroeconomic shifts. It has a much harder time with fundamental shifts, with longer-term global macroeconomic effects, such as the one we seem to be entering into right now, with multiple factors at play. In this respect, it seems that the markets are currently way behind the curve.
Western assets still command a great safety premium over many other assets across the world, mostly based on past historical expectations. We have all seen the repeated tried and tested cycles where global economic or geopolitical uncertainty sent global capital always towards USD or other Western currency-denominated assets. The trend seems to always just automatically happen and take on a life of its own and it tends to benefit Western and other developed nations a great deal. With a further diminishing of our industrial base, it becomes questionable to what extent we can continue to maintain this trend. It is currently assumed that a country like China, Russia, Saudi Arabia, and other major exporters of crucial manufactured goods or commodities will always be willing to accept USD, Euro, UK Pound, or Swiss Franc payments for their goods. The dominance of these currencies in global trade is seen as a self-reinforcing mechanism.
With fewer tangible goods and assets backing our currencies, the likelihood of a breakdown in our monetary dominance of the world is growing. We should keep in mind that the whole point of money is to have something to exchange it for.
It is more than likely that this current trend, coupled with a geopolitical event of some sort will become a sudden trigger that will send the global use of Western currencies in global trade and other transactions into a tailspin. The trigger will most likely be pulled by China, but not for the reasons that are currently assumed. While most have been speculating that such an event is already being planned with China’s growing use of bilateral deals to trade with other countries in their own currencies being an effort to dethrone the use of Western currencies in global trade, it is not exactly like that. Those bilateral deals are indeed meant to be a mechanism for sidestepping the use of the currently dominant Western currencies in trade. It is however not an effort to end the use of those currencies, but rather they are contingency plans.
With China’s 2021 trade numbers out, it makes absolutely no sense for China to do anything to change things at this point in time. It posted a trade surplus of $676.4 billion, on total exports of $3.3 Trillion. It is a new record, thus the current global order is not something that China is far too concerned with toppling. It will not concern itself with it, as long as we continue to make it worth it for them to participate. In other words, instead of us redeeming those fiat volumes floating around the world’s financial system for goods and services that we produce and can sell to the world, the Chinese and others are doing it for us, with their own goods and services.
If for instance, we will engage in a more aggressive effort to contain its economic rise, including the continued attacks on China’s efforts to become more technologically dominant in the world, things may change and they will change rather fast. I do believe that China already has the built-in capacity to unilaterally cut its use of Western currencies in its global trade and as soon as we cross the line and act in a way that will become a threat to its own economic rise, it will deploy those facilities and possibly declare an abrupt end to its willingness to continue using our currencies in its trade.
Given how important trade with China is for most countries around the world, most countries around the world will comply. In the absence of China willing to take our currencies for their goods, the world will turn to us and ask to have us offer them goods, services, or assets that we can competitively sell for that money. With our capacity to produce things being further hollowed out as we are losing the most important ingredient that is needed for us to be able to change course and start producing tangible goods again, assets will become the main target of currency repatriation. In other words, the final act of hollowing out of our economy will begin.
With large swaths of the current Western currency-dominated financial reserves flowing back into our economy, central banks will have no choice but to start selling the bloated balance sheets in order to soak up the extra cash flowing into the economy. Governments will in turn be forced to cut deficits drastically, as the debt markets will become clogged with the debt being pushed back into the markets by central banks as well as other holders of our debt throughout the world. Tax hikes, as well as a reduction in spending, will become inevitable as governments will struggle to fund themselves in the absence of being able to push money and debt onto other economies, or onto the balance sheet of central banks.
Even though a global rush to buy U.S. assets, such as stocks and other things that may be open to investors, such as real estate may seem like a welcome potential development for investors, it may not necessarily be a welcome gift. Inflation rates might actually overtake asset appreciation growth in the event that trillions of dollars that are currently floating around in the global financial system find their way back into the economy. This can become the case, even if all the money flowing back will mostly chase investment assets. The main reason for it is the fact that with so many net sellers of the dollar and dollar-denominated debt, the value of the U.S. dollar would decline significantly relative to other currencies. Import costs would therefore increase significantly and since so much of what we consume is imported, inflation will become inevitable.
It should be understood that a global shift in trading arrangements, in terms of payments facilitation and so on will have a disruptive effect on global trade, amounting to a severe temporary shock, which can trigger a global economic crisis. The investment environment will therefore be rough, with few safe havens available to take refuge in. If we will experience an end to the dominance of Western currencies in global trade emerging markets are set to outperform developed markets, bucking trends set in past decades.
Even though there is a great deal of volatility, with constant geopolitical worries, I personally see Russia as a stable option, in the face of growing global economic volatility. The way I see it, there is no way for importers of oil & gas from Russia to give up on buying, therefore they will find a way to pay for those exports. China & Russia are also in advanced stages of making use of built-up financial instruments meant to facilitate trade between the two countries in their own domestic currencies. China is fast becoming Russia’s main customer for oil, gas, coal, agricultural products as well as other goods. Russia is also one of the most well-insulated countries from external shocks. It is dependent on revenues from its commodities exports, but those are exports that the world cannot currently do without, so there is no risk of losing those revenues. Russia also has very low debt levels, it is a net food exporter, while it also has an industrial base and human capital that are advanced enough for it to produce most things domestically if need be. I currently own RSX (RSX) shares, Gazprom (OTCPK:OGZPY), Lukoil (OTCPK:LUKOY), and also Mechel (MTL).
Asia may suffer somewhat, as a breakdown in global trade could potentially lead to a more permanent push for regional or national self-sufficiency. Asia positioned itself as the world’s factory where most of the manufactured goods we presently buy tend to be produced, but less so as a final consumer. In order to better understand the net effect of what is likely to happen, it is best to think of it as a rebalancing in the wide gap between nominal GDP and PPP that currently exists for many developing nations in Asia. In other words, nations like India & China will start to consume more in line with their PPP economic dimensions, while currency exchange rates will bring their nominal GDP closer in line with their economy measured in PPP terms. This shift in the Asian economic model will have its new winners and losers. It is far too difficult to appreciate how investors might want to position their investments in response. It will be a story that we will be able to react to as it happens, not so much something that we can foresee before it does happen.
Gold is something that I do consider to be a necessary part of everyone’s portfolio for this decade. For the purpose of full disclosure, I do have some physical gold, some GLD (GLD), as well as shares in Barrick Gold (GOLD). With the threat of a massive shift in the role of certain fiat currencies in global trade, there is always a chance that unforeseen consequences can destabilize the entire global fiat currencies system. If that is the case, central banks may resort to providing tangible assets as a backstop to their fiat currency systems, which will most likely include utilizing their gold assets. Once they will do that, central banks will inevitably have to access the market for more gold. This is not a get-rich investment, but rather a safety precaution, in case the current system becomes highly destabilized.
The investment implications of a shift of such magnitude are endless, with many potential scenarios and outcomes that need to be considered. I provided just a few examples, but there are many potential trends that can be identified when looking at such a historical shift in the global economy. The shortfall in mid-level professionals that seems to be a problem that was decades in the making, and is just starting to reach critical levels now, is becoming an extra vulnerability within the wider global economic context. It is a vulnerability that is making itself felt, even as the US, EU, UK, and other Western governments are adopting a more confrontational position in relation to emerging economic and geostrategic competitors such as Russia & China. The combination of the emergence of the extra vulnerability and the more confrontational approach is making it more likely that a fundamental shift in the role of currencies in global trade flows is going to happen. It is important to understand the nature of this risk, as well as the potential investment opportunities, in case it does unfold more or less the way I laid it out.