40% pay increase please

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Damage

As a demonstration of the damage inflation can do, I can think of no better example than this from the United Auto Workers union in the US who are currently on strike.

These demands have been universally condemned as outrageous. On closer inspection; are they?

40% over 4 years

That is 8.7% per annum. It’s a lot, but less than inflation in food and shelter and no doubt compensates somewhat for the 2% pay rise they got when inflation was 10%. In real terms, if this increase were granted, then by 2027 auto-workers would still be behind where they were 5 years earlier. It’s not outrageous.

Reduced 4 day, 32 hour workweek

Depends on your view here. Factory workers will see how much of the rest of the world is now working from home, clearly they would like to spend more time there too. Given they are hourly paid, one imagines this will involve the sacrifice of pay. In which case I would say, not outrageous. As automation grows, at what point will the whole five day insistence cease?

Faster path to top pay

Whatever. Sure.

Shift back to defined benefit pension

Maybe this one is outrageous. The only people getting these are government employees and CEOs at Qantas. I accept the point though that inflation is now so aggressive that the appeal of the defined benefit is much higher than it was, not really surprising to see it back on the list.

Cost of living adjustments

No comment. Simply another consequence of inflation.

5 weeks vacation

A US issue with their bizarre no holiday obsession.

Ford responded to this request by pointing out, perhaps unhelpfully, that had this been in effect they would have lost $14.4 billion over the last four years instead of recording nearly $30 billion in profits. I believe them, I also believe these demands will scare them. They will pursue automation even harder; the price of their cars will have to fall, not rise and the only way they can do it is by improving the efficiency of their manufacturing.

That is the issue with inflation. Nobody really knows where they stand. Is their time being properly rewarded in terms of the cost of everything else? For the employer there is not only the cost of keeping employees in jobs that pay sufficiently well but more importantly, there is a huge time cost in dealing with the issue. That does not happen with machines. Nearly every business would be a better business with more machines and fewer people; it sounds awful to say but I believe it to be true.

Still, I hope the Auto Workers of the American West are successful. At some point there is a line at which you must insist the returns to labour are respected. Returns to labour have done nothing but fall for decades. The issue will be that if they are successful there will be half as many workers in five years as there are now. I don’t see any way around that. Those that remain will be highly paid, they will also be the ones that can program robots and embrace technology.

Everywhere we see this, returns to pure labour falling but returns to man + machine rising.

It is another reminder that preserving value and real returns to the factors of production in an inflationary world is incredibly hard.

Just like the placard says “Every Auto Job a Good Job”. Thanks to machines they will be. Less arduous, higher paid, more technical and much higher yield.

Be careful what you wish for though. Your best bet is to embrace technology, its pace is not about to slow.

KanaDa

Something’s off in Canada. I found this video a bit disturbing:

It’s Trudeau insisting that large Canadian supermarkets be dragged in front of parliament to explain “the rising cost of food”. Apparently they are making ‘record profits’.

“If their plan doesn’t provide real relief for the middle class and people working hard to join it; then we will take further action and we aren’t ruling anything out”

He was most emphatic about ‘anything’ too. Perhaps I am reading too much into this but the grocers are private companies. If they overcharge, people will simply buy the product elsewhere. For Trudeau to openly threaten like this looks flat out dictatorial. He is single-handedly responsible for the rise in input costs in Canada because of his generally crazy policies towards anything that isn’t Davos approved. On his watch since 2020, the money supply has trebled in Canada.

He has two years left to turn things around but it does appear Canada is becoming another European Union, where the first reaction is to tax or ban.

The whole thing caused me to rewatch the video where Xi gives him a dressing down at the G20. Watching Trudeau spew some made up nonsense about free speech and then get cut in half by Xi. If you haven’t seen it, it's funny.

I don’t see Trudeau’s behaviour as isolated though. As governments get stressed they will become increasingly aggressive. The “if you don’t behave I will tax you” happens in Australia too. Victoria’s land tax on second homes springs to mind. It’s serious money that was effectively seized without warning in response to rising rents.

As in Canada, it is likely that profit and wealth will once again be demonised as it was with banks after 2008.

Now food prices are rising and supermarkets are to blame? Do we blame petrol stations for oil prices?

Shifting sands

I found this shocking. It is a huge shift in global trade with Mexico supplanting China as the United State’s largest trading partner. The Americans have been absolutely intent on reshoring some of their manufacturing but I certainly had not appreciated the scale of the move. There must be consequences inside the Chinese economy of a shift like this.

A couple of months back I mocked the EU for their investment in semiconductor manufacture. I remain of the view that the EU will fail at anything meaningful in that area. On the other hand I am now less inclined to bet against the Americans. Having seen the sheer scale of the pivot away from China, is it possible they could replicate the chip foundries and specialist manufacture that TSCM has in Taiwan?

There is a nice story here on the new Fabs being built in the US. Building them is one thing, replicating the necessary environment and technology to build the chips themselves is difficult. The 3nm chip process is really, really hard. If America manages it, we should be seriously impressed and it will be a good thing for the world that Taiwan isn’t the only place serving them up.

The history of TSMC chip design is summarised on their site.

The sheer amount of embedded IP in that company is incredible. Can America replicate it?

Accounting … again

In discussing the proposed change to bitcoin accounting last week, I was reminded by someone that exactly the opposite treatment is true for bonds. Banks holding bonds are (in most circumstances) not required to adjust the valuations of their holdings based on market prices.

I see lots of reasons why this is perfectly reasonable, mostly along the lines of if you hold it for long enough the bond will mature and you will get your money back.

Still, the scale of losses at present is like something we have not seen before.

You all know what I think of bonds as investment, but if I had to make an argument for them it would be that they are a very highly preferenced asset class.

• Accounting treatment so you don’t book losses; tick

• Ability to hand them back to the Fed at par if you get into liquidity trouble; tick

• Have the world's most powerful government bend over backwards to pay your interest; tick

When it comes to getting favours from big brother there simply is no investment like bonds . Even then though, the question nags me, why would such a ‘high quality’ investment need so much help?

Euro-Trash

Another meeting, another rise in interest rates in the EU. All against the backdrop of very ordinary economic projections. Obviously, no recession is forecast, but growth of 0.7%, 1.0% and 1.5%. It’s very unusual to be raising rates into such miserable forecasts. I think this is the ECB’s last increase.

The sorry numbers leave the EU economy only 3.2% bigger by the end of 2025.

Lagarde revived her insistence that she has only one task, that of price stability. Of course, she only says this when it suits her and ignores it when she’s in Davos.

In November, Christine will be half way through her 8 year term. The first half’s failures will be blamed on Covid and Russia. I dread to think of the damage that will be wrought on Europe in the second half of her deeply political term. I know only this, irrespective of what happens, when she leaves she will be lauded as the saviour of the Euro, or the Greek economy or whatever crisis is summoned up before 2027. She’ll be there to give away other people’s money and then collect an award for it.

I'm not sure I mentioned that in 2013 Christine was made a Grand Officer of the National Order of the Ivory Coast. It is their highest honour. Here’s an unrelated news article:

Anyway, on the growth rates themselves we could draw a contrast with India. Growing at 7% this year and 6% in the following two leaving it 21% larger by the end of 2025 compared to Europe’s 3%. They will likely surpass the EU in one generation.

Why is there no challenge at all to the maddening insistence on regulation and the slow down of technological advancement in Europe? Why windmills and not nuclear? Why blackboards and not artificial intelligence? Why do people lack confidence and resources so much that the birth rate is 1.53?

I love to dunk in Europe, but it's not a joke. Who is this woman who believes her sole task is to make more people unemployed so she can hit her totally made up 2% number that she will miss anyway? The whole continent is in an existential crisis entirely manufactured by bad policy. Half the reason, I believe, is that the political class is so detached from the people they serve.

In Europe only about 5% of people can name the MEP that purports to represent them. When I lived there I had no idea who it was either.

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