You could argue the whole fate of markets--everything from tech stocks to commodities to the dollar to Bitcoin* and Tesla (well, maybe not Tesla, because who knows on that one)--comes down to whether we get pretty serious wage inflation this year.
There are basically two camps. One we'll call the Larry Lindsey camp, which warns that wage pressures will be a big part of inflationary pressures in the months ahead. That scenario would likely force the Fed to tighten its policy stance, and hurt rate-sensitive parts of the market. Aggregate weekly payrolls, Lindsey notes, are already back up to 99.6% of last year's levels with nine million fewer people working. Wow. (And that's from this morning's otherwise lackluster jobs report.)
If the unemployment rate falls by another nearly two points this year--the Fed's own baseline--nominal compensation could shoot up by 6%, warns Lindsey. Why does that matter? Because you can't get sustainable inflation unless you have persistent wage pressures. Think about it: if commodity and input prices surge, as they have been, but the end customer isn't making more money, they can't afford to pay higher prices and firms have to swallow the hit to profit margins instead of passing it along.
Bottom line: if wages do jump this year, the Fed has a headache on its hands. But not everyone thinks they will. The other camp, which we'll call the consensus right now, thinks all of these price pressures will prove fleeting. The supply chain constraints will ease as things normalize, and wages on the whole will be suppressed as people in lower-earning leisure and hospitality jobs return to work.
Jefferies economist Aneta Markowska summarized it this morning: "We are not concerned" about the 0.8% month-on-month wage gain--which translates to almost 10% annualized--that showed up in the December payrolls report, she wrote. "We expect wage inflation to decline sharply in the second half as the service sector reopens."
Their base case is that wage inflation ends the year below 3%, a sharp contrast to the Lindsey camp and a deceleration from the over 5% rate currently.
How will we know which way the winds blow? It all goes back to the pandemic. Ironically, the worse it is, the higher the chance of near-term inflation pressures. Why? Because it will keep lower-wage sectors shut down, worsen supply chain backlogs and shortages, and spur more massive relief packages and stimulus checks from the government.
The best hope, as ever, lies with the reopening. Get those vaccines out. Hope the warmer weather helps tamp things down for good. Get amusement parks and shopping malls and restaurants fully back open. Then you get your Goldilocks scenario: the economic boom without (hopefully) the nasty inflation problems.
See you at 1 p.m., for the last time for awhile!
P.S. You will be treated to a fabulous mix of newsletter guest writers for the next couple months. I'm very excited about it!
*Don't miss Bill Miller on the show today where we'll ask him what to do now that Bitcoin has surged to over $41,000.