The Economy

It shouldn't be a matter of whether you are for unions or for railroad companies. In the statement from the White House, they said, "a win for tens of thousands of rail workers who worked tirelessly through the pandemic to ensure that America's families and communities got deliveries of what have kept us going during these difficult years."

I get the pandering, as dumb as it is. But presumably CSX doesn't agree to a deal unless they see it as beneficial to their business, too. That is how negotiations work. Each side walks away happy and unhappy.

The idea that people cast this in terms of winners and losers is how we really steer ourselves wrong as a country. This will amount to a 24 percent wage increase in wages over the next two years. There is no way that happens without the cost of transporting things by rail going up to offset the higher wages -- and in an inflationary environment as bad as the one we are in, it is symptomatic of a wage/price spiral that has made prices rise so fast that a lot of low wage earners are really suffering. Are they the "losers" then, if this has a predictable further inflationary effect on prices moving forward? Would Joe Biden ever put it that way?

If it just creates a self-fulfilling inflationary prophecy, it is not unlikely that the net effect is going to be: 1) They get a "win" of the wage increase, 2) It filters through to the cost of just about everything because rails are so vital to the supply chain, 3 ) those workers actually feel a disproportionate effect of those increasing prices, because consumer staples are a dispoportionate percentage of their total spending at their salary levels, 4) their "win" translates to their standards of living decreasing.

When I point that out, it's not that I am all for unions or all for rail companies. We should all simply be for people using whatever natural leverage they have to negotiate for their own benefit. But in general, rising costs (including the cost of labor) come with an offset. When people cast it as "unions" vs. "companies," or they want Joe Biden (or Donald Trump, or anyone other politician) with his hand in it trying to create a "win" for the constituency he is pandering to, they are always clueless to the likely real effects of the "win."

 

The Fed just raised another 75 basis points. That part wasn't a surprise, but all along the way of these rate hikes, markets have been assuming they would turn tail at the slightest sign of economic pain -- the way they have continually for the last 13 years. And the statement just now (waiting for the press confrence) was pretty hawkish and their "dot plot" is projecting that they will still higher for longer.

I'm a bit surprised they are following through to the degree they are. The dot plot is meaningless, because they can do whatever they want. But they are just beginning to let maturities expire on some of the bonds on their balance sheet, and that is where the real liquidity / money printing occurred. There is no way something doesn't break, probably sooner rather than later.

I don't think the fragile economy they created can handle rates this high (the 2 year is above 4 percent for the first time since 2004), and I am sure something is going to break -- the amount of overleverage, especially in corporate bonds, is way greater than it was in the bubbles that popped in 2000 and 2008. We'll see. The first thing to go could be in so many places. Emerging market debt, with the dollar is strong relative to everything else, are another candidate. Housing is another.

I'll say this: The severe pain that is going to hit the American economy (and the world) is of their making. But markets have been so conditioned to them putting a Fed put under risk assets that nobody was taking them seriously. And Powell is talking tough and following through. ... for now. He realizes that unless he can pop some of the asset bubble, he can't get to the broader price inflation. So good on him for actually following through so far. But when this gets messy people -- if they continue on this path -- people are going to freak out.

 

Some nice, fresh red meat for Ragu.