There’s a “big mystery” about 2024.
It’s related to the “one question” I posed previously while editorializing around Marko Kolanovic’s solemn outlook for risk assets in the new year.
Here’s the question (it’s actually two questions in one): Will decelerating growth and a softer US labor market be greeted warmly by market participants given the read-through for inflation (cooler) and monetary policy (easier), or will bad news simply be interpreted as evidence to support various recession warnings?
The related mystery is in the somewhat eerie juxtaposition between sure-footed investor confidence in a continuation of the US soft landing narrative during Q1 and the almost opaque ambiguity that sets in past June.
“That’s the big mystery about 2024 — it seems customers have high conviction for ‘Goldilocks’ looking out into Q1, with cash-rich companies buying back stock into an easing Fed with lower inflation and growth that’s slower but not yet contracting, but in that Q2/mid-year period, I’m not hearing a lot of confidence from clients as uncertainty creeps in by then,” Nomura’s Charlie McElligott said. “This back-half 2024 window is where we may start seeing the lagged-and-variable tightening drag, especially on, say, small-cap–type companies with high leverage into substantial refinancing walls and tight credit conditions.”
Charlie mentioned his colleague Jon Cohn, who reminded him that when it comes to employment in America, small businesses matter. And they matter a lot. I always toss out the same statistic: Small businesses comprise nearly half of private sector employees in the US and accounted for 62% of net new job creation since 1995, according to the government.
That’s almost two-thirds of new job creation that doesn’t have the same kind of open-door access to low-cost, fixed-rate financing as the S&P 500 and is instead reliant on short-maturity, variable-rate borrowing — the kind that’s onerous in a rising-rate environment.
In the same note, McElligott managed to capture 2024’s intrigue in one brilliant stroke. The passage excerpted below is perfection, and as such I’ll present it without further comment:
So you tell me, are high yield credit spreads pricing in enough delta for anything outside of a soft landing and/or is SPX 5000 by 1Q24 then too ‘max stretched’ at $250 if the 20x multiple is expanding because rates aren’t just going sharply lower beyond disinflation, but instead due to a sharper growth slowdown, where the consumer can no longer hold up the earnings growth end of the bargain and may in fact be at risk of losing full employment? Labor and the consumer have been the whole thing, with a massive hat-tip to government deficit spending, but if/when labor goes, the jig is up.
Spent the last week in Northeast Ohio. I was shocked, shocked, by the number of HIRING NOW/HELP WANTED signs. Seemingly everywhere: retail, restaurant/hospitality, light manufacturing.
No takers for those part time jobs paying $11.50 per hour?
Here at the end of 2023, I’m thinking most of these jobs pay at least $20. A living wage? No. But better, for sure, than what they were paying pre-pandemic.
I went through the exercise of going to the websites of some of the businesses sporting help wanted signs. Some looked OK, but quite a few were for part time, odd hours and even explicitly split shifts, like opening and closing hour only. Perhaps things have changed?
You have just exposed an economic subtlety most folks pay no attention to. Normally, labor is treated as a variable cost but much of the time it is actually a fixed cost. By definition, a variable cost is one that varies directly with unit revenue. Alternatively, fixed costs vary with the level of capacity and don’t change with sales. Take the person hired for the opening and closing hour or two. If there are few or no customers during those times, that individual is relatively expensive per dollar of revenue — fixed cost. Also, once any individual is scheduled to work their cost is immediately fixed. Take also the three counter people scheduled to work 2-5 in the afternoon at a fast food joint. I have to pay those folks no matter how many customers they serve. Trying to maximize profits in service businesses is very difficult for many types of these firms. What one imagines are variable costs are really fixed costs in disguise.
Great point Dr. Lucky. A few years ago there was a push to make labor more of a variable expense = bringing in labor only when demand called for it and sending folks home when things slowed down. Or even forcing them to take an unscheduled two-hour unpaid break during a day.
The use of just-in-time scheduling software resulted in massive employee push back at companies such as WalMart and Mc’Ds. I even overheard two cashiers at my local supermarket bitterly complaining about it, naming the software by name. It was too cruel in practice because many people have to schedule childcare and plan a weekly budget. Whodathunkit?
Usage was largely fading away before the post-Covid labor shortages made it even more of a liability than benefit to the companies using it.
So now we’ve turned to robotics, process automation and AI to reduce the need for that fixed cost input.
So you inspired me to find he name of that hated software vendor. A broad search, even AI enhanced, proved ineffective. But I remembered that it shared a name with a Canadian weed stock.
So I searched there and found CRONOS SOFTWARE. That was the one the two MAGA-looking cashiers were cursing out by name, in some colorful language to boot.
This is a very micro observation, but some of the daily rhythms of retail business have changed or become arrhythmic, with less defined commute and work hours, which likely makes service labor scheduling harder. The downtown business that used to have predictable morning, lunch, and afternoon business now may see wildly shifting traffic in the dayparts as workers have flexibility to WFH on Mondays, Fridays, when the weather is fine, as school is in/out, etc.
Mr Lucky, you remind me that in March 2020 I took some restaurant models and stripped them down to truly fixed cost. I assumed every restaurant employee would be laid off, save one restaurant manager per location kept at half-pay; took cleaning and maintenance to near-zero; took food cost to zero; marketing zero; assumed 20% of G&A heads and all bonus comp would be eliminated; etc. Basically figured out if you put the company in deep-freeze, and took revenue to zero, how long would cash last, and for whom would it last longest. Did the same for a couple other industries – airlines, hotels, etc. It was a fun, interesting, and useful stockpicking exercise. It is also remarkable to realize that was not merely an academic exercise. What A Long, Strange Trip Its Been.
Sorry John. That’s way off base. There was nothing micro about the country-wide pushback against Cronos and such by employees at national chains.
And the change in retail dynamics was why these “efficiency software” packages were tried out in the first place.
Amazing – If you offer unpredictable hours both weekly and even within a work day, it should be no surprise that even desperate people didn’t find it worth it to stay in those jobs. We’re talking about people here, not some dataset.
Sorry, “micro” referred to my observation rather than yours.
MY mistake, not yours. Thanks.