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Ben Fraser: Welcome back to another Invest Like a Billionaire podcast. I am your co-host, Ben Fraser, joined by fellow co-host, Bob Fraser. Another top of mind episode coming at you. So these are shorter episodes focused on more trending topics, things that we’re seeing in the market and think are relevant to our listeners.

So some other articles we’ve been reading, obviously we had GDP. It was released a few weeks ago and just blockbuster numbers, right? The economy is on fire. Most people were not expecting that, but we’ve been called this for a little while. 

Bob Fraser: I know. Can we just keep tooting our horn forever here?

It’s all these surprises, right? That every single surprise, inflation, surprise, hire for longer, surprise, strengthen the economy. We’ve been talking about this for almost two years now. So our followers are not surprised. 

Ben Fraser: Our followers are not surprised. And one of the other quote unquote surprises is workers and wages continue to go up, right?

And we’ve been talking about this for probably 18 plus months of this being one of the primary things driving inflation, right? Is the labor shortage which causes more pressure on wages to increase which then causes more inflation.

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Bob Fraser: Article just came out from the Wall Street Journal. I’ve heard a subscriber go ahead and just and just Google this article, workers keep getting big raises, just not as much as last year.

And the subtitle is Wages and Benefits Gains Have, Wage and Benefit Gains Have Eased But Remain Elevated As The Fed Tackles High Inflation. And they have a great chart there that shows that all of a sudden at beginning around 2021, wage increases just spiked up to five, five and a half percent gains on a one year basis.

So we’re looking from a year earlier, people are getting more. How much is that still continuing? Today it’s still four and a half percent. So looking back at your post, people are still getting raises, not as much as they were before, but you’re seeing four and a half percent annual raises still happening, on a 12 month basis.

And I look back, trailing a 12 month basis, and it’s pretty significant. And this is exactly what we’ve been saying and, and here’s, so everybody’s looking at inflation and if you look at PCE, which is what the Fed looks at and core PCE. Wages are not really a part of that.

It’s not a component, right? And neither is energy, or it’s only a very small component. And but the, but the reality is, what in our economy does not require wages, right? What part of our economy does not have wages, and what part of our economy does not consume energy, right? A bakery has to, has a delivery truck, right?

A restaurant, Uber. Everybody has energy costs, but it’s not a component. So what happens it ends up being underrepresented in people’s minds in analyst minds, how vast the impact is of wages and energy I’ll call them the mother of all other components, both those things, cause you, everything requires energy or humans. And so when those things go up. You have inflation, which is why we have been predicting higher inflation for longer because these things are not cyclical. What’s happening now is not cyclical. So typically of this market side, this business cycle right up and down, strength.

And that’s normal. What’s happening today, the energy, high oil prices is not cyclical, it’s not based on the business cycle. And same with the wages, the employment costs, it’s not business cycle related right now, it’s structural. Because there are structural problems that are not going away by easing the business cycle, by the business cycle going to the next phase of the business.

That’s not going to change the structural shortage supply deficit in oil right now. And it’s not going to change the fact that the structural shortage in the way, in workers, worker supply and worker shortages. It’s not going to change that because that’s structural. And the structural thing there is that people have exited the workforce as you’re seeing an aging demographic.

And what’s more is a lot of the people that are aging out are the skilled workers. So you’re seeing a skills gap, right? Yep. There’s actually still people unemployed, the job openings are still way higher than the unemployment, and that’s because there’s a skill gap.

So there, there’s maybe people looking for work for their work, but they’re not qualified for the jobs that are out there. And that’s the problem. So we have, and then what’s happening, the retire, the people are retiring are those higher skilled people, right? They have developed those skills over decades or whatever, right?

 So we have a structural problem in underlying inflation and it’s a structural problem that’s masked because it’s not a component. Neither of them are components. Of inflation. They’re just more the foundation, that’s the invisible foundation. And so I had a couple of charts that showed the correlation between oil prices and inflation and it’s just extremely highly correlated more than people are giving it credit for.

So anyhow, here it is. We’re still having the same problem and it says we’re going to continue to have higher inflation. So we’ve been saying this for over a year. 18 months and coming up on two years and we keep looking at the data. We keep waiting for data to change in the energy sector or data to change in the wages sector and we’re not seeing it.

We’re seeing slight easing, 

Ben Fraser: But not enough. Yeah. We just had the Fed’s meeting here in November and they’ve decided to hold the rates and not give any indication of rates going down anytime soon. And I think partly they’re pausing. I feel more comfortable with that because the higher or longer tail of the yield curve has been going up, which means the market is anticipating higher for longer.

And it’s doing the job for them a little bit, but it’s so interesting too. I saw a data point just recently on the labor participation rate, so you over 64, age bracket and has it, it has it, rebounded post COVID, there’s a lot of people in that elderly demographic that kind of took early retirement or just decided, Hey, I’m happy.

I’m good. I’m getting a severance package. I’m calling it a day here and leaving the workforce, but the 15 to 64 age bracket, the labor participation rate has actually gone back up. And so the argument would be we have low unemployment, but that’s not a great measure because people are looking for work.

There are different things to look at when you get more nuanced into unemployment and participation, but we’ve seen that tick back up. So we actually are seeing a more engaged workforce and we’re seeing, 

Bob Fraser: What that means is people are entering the workforce. So the labor participation rate is the percentage of that age group that is considered in the workforce.

That means they’re in it, they have a job or they’re looking for a job. And we’ve seen that tick up the 18 to 64, which is considered, the working age population. 

Ben Fraser: And the reason that’s important is to your earlier point of this being secular, not cyclical, right? The argument could be that as the labor force comes back into the market, that’s going to absorb all these job openings, but we’re still having this huge gap of job openings.

Even with this participation rate going up and again, it comes back to that skilled labor force issue that we’re not going to solve at any time, in a short period of time. Again, 

Bob Fraser: It’s not changing, and here’s another component that no one is thinking about.

Okay. And I, there’s a chart we showed in one of our presentations. I can’t even keep track of them all. But if you remember the number of Americans employed in the manufacturing sector, you remember that? And it’s been dropping since. 1945, and that’s because we’re exporting jobs to China, Mexico, Vietnam, India, right?

And we’ve been doing that since 1945 and then it just stopped and now it’s going sideways and up. So we’re seeing manufacturing employment returning to America. Why? It’s another mega trend we’ve been talking about. The reshoring trend, over a trillion dollars spent by U. S. companies last year to bring manufacturing back to America.

And this is not a one time deal. This is going to continue for 20 to 30 years. We have been globalizing for, what, 80 years. Globalizing? Yeah. 80 years, okay? It’s over. Now the world realizes we have over globalized. Maybe we don’t need to save. 5 percent more to get our little chip from China.

Maybe we’d pay that extra 5 percent and get our chip from Texas. And then we know we can get a chip and that’s, and it’s happening. That’s just an extreme example. It is happening across the United States. It’s going to take humans. Now, a lot of these. A lot of these, this manufacturing resurgent is going to be automated, right?

But okay, you still need people to build the robots and you need people to work the robots and you still need a skilled workforce. And there’s a, we’re not seeing we’re going to see jobs, more jobs needed. We’re actually going to see an increase in demand for jobs. It’s a.

It’s going to continue. It’s going to continue. Yeah. So what does it mean? Do we want to, what does it mean for everybody, Ben? 

Ben Fraser: tHe higher for longer, we’ve been saying this outside of the group, this stays all the time as we’re talking about all the time. And it’s something that I think needs to inform your investment thesis.

Cause if you believe inflation is going to be higher for longer, you want to get on the right side of inflation, right? Inflation is not neutral. And the best way to do that is. Not sitting on idle cash. So you want to have calf reserves. Do you want to make sure you have access to cash or lines of credit, but you don’t want to sit on too much cash because inflation is eroding the value of that over time.

And so getting into assets that track with inflation, and we’ve talked about a lot of those before. Housing is a big one. We believe in this big reshoring trend in industry in another big inflation. Driver is energy. So we’re very bullish on oil prices and 

Bob Fraser: And real estate is perfect for inflation because as NOIs go up, net operating income goes up because rents go up with inflation.

Your income goes up and that increases the value of the property, but also you mostly borrow money and as you point out, it erodes your cash. It also erodes your debt. Yep. Inflation. So it’s a double whammy. You get paid twice and let inflation erode your debt and erode what you owe your bank and let it drive your income.

So we’re just very bullish on all things real estate. Obviously not all things real estate. Let me, because there’s a lot of real estate, we’re staying a long way away from like the plague and the office is an example.

Ben Fraser: But it’s a very simple framework here. It makes sense, right?

So your inflation is higher for longer again, assets that are tracking inflation. By doing that, you’re going to grow your revenue and over time you’re going to grow your net operating income. And even though borrowing costs are higher, it’s more expensive to buy that asset right now.

Rates are going to be higher for longer forever, right? And at some point, we hit a dip in the economic cycle, the Fed’s going to reduce rates again. And… 

Bob Fraser: Okay. And Benny, so if we were to go and refinance, get a Fannie loan on one of our multifamilies, what is the rate we’re going to pay for a good, solid Fannie long term loan?

Ben Fraser: Long term, there’s different programs. You’re probably right now, as we are, talking November of 23, probably the mid sixes. 

Bob Fraser: Okay, so mid sixes, so let’s say six and a quarter for fun the core PCE inflation rate is four and a quarter. So our real rate, what you’re really paying for that debt is two percent real rate.

Okay. And the rest is being eroded out of four, four and a quarter percent per year, right? That the, what you owe is being eroded. So it’s still a, it still makes sense and it really is. Can you buy good solid properties in great locations with good upside and you can buy them cheap and they’re getting cheaper, right?

They’re, the prices are coming down. So yeah, it’s just, it’s going to be a really good time where we’re not, we’re only doing a couple of unicorn multifamily deals right now. As Aspen, we’ve got, we’re gonna, we got our eagle eye out where we’re circling up there looking at, looking at what’s looking for the nice lunch, the multifamily lunch we’re going to be feasting on here shortly.

Ben Fraser: I hope that you enjoyed this episode. If you are, we always appreciate you leaving reviews, sharing with a friend and getting this message out to more investors that need to hear it. So thank you so much for listening. Be sure to tune in next episode. We’ve got a lot more great content for you.