The Train is Coming

It’s no debate that jobs are highly important in every functional society. Without jobs, namely specialization, we would still be growing our own food and building our own shelter. There would be no society.

Specialization of labor is what gives us freedom to do other things. You can be a really good engineer, financial advisor, carpenter, etc. and pay someone else to do other things in your life. You get really good at one thing and so does everyone else.

But what happens when there is no opportunity in that one thing you are really good at. The housing market enters recession and no one is building homes, not great for carpenters. A financial crisis occurs and financial advisors lose 50% of their assets and go bust. Engineers get fired in cost cutting measures because their company feels like the product they have now will suffice until the next economic boom.

It takes away our ability to pay for other people to do things for us, reducing demand and GDP in an economy.

This is how jobs affect the economy.

We are exiting a time where jobs were so abundant that you’d suspect people’s dogs had employees. At the peak there were over 12 million open jobs available and only 5.5 million people to service that demand, leaving the economy with over 2 jobs for every job seeker. Not great when you think of employee leverage, and its effect on inflation.

When employees have that much leverage over employers they can demand that they make 20% more and can work from home. Given that the company employing can’t find more workers they agree and move on.

Going back to what I said earlier, specialization of labor gives us the ability to pay others for services we can’t do ourselves. More money in the hands of the specialized incentivizes more spending on services we can’t do ourselves. More construction, more leisure, more purchasing. Demand for goods goes up and so do the prices.

Those open jobs, and those unemployed persons, are falling and rising, respectively. Open jobs have come down from over 12 million to under 10 million, still high historically (but it’s the direction that matters), and unemployed persons have climbed to around 6 million.

The tool the Fed uses to enact this is interest rates. Now interest rates are complicated, all you need to know is that the higher the interest rate the tighter the financial conditions. Companies won’t borrow as much which means they can’t employ people, buy equipment, grow their business.

Interest rates are like a train trying to stop, they take forever to do it, but then all of a sudden there is a car on the tracks that gets hit, which stops people from driving leading to less demand for road usage. Kind of a terrible analogy but the train is interest rates, the car is the economy, and the people are the people. When people are scared they don’t spend, which is a self fulfilling prophecy of declining prices and recession. The only way to stop this is to get ease financial conditions by taking that car that got hit back to the mechanic shop and getting it fix, by reducing interest rates.

I believe the train is coming, if it hasn’t hit already with the banks. When you see a company like Walmart laying off fulfillment staff, that’s when you get nervous. Right now we are in a sentiment rally, markets have rallied on the offering of potential rate cuts, but it seems to be forgetting the fact the economy is still on downward trajectory and could be in the tracks waiting for the train. Who knows asset prices may be fine, but who know asset prices may suffer. Be nimble, be cautious.

Anyways, here’s everything I read and wrote this week.

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