In this episode, Peter Mallouk and Jonathan Clements discuss why our current economic environment is not a throwback to OPEC and disco, offer their opinions about how increasing legal immigration could alleviate the shortage of workers in many industries, and why the evolving tax and legislative landscape means you may want to talk with your wealth manager before year-end.
Hear more about inflation and the labor market: https://creativeplanning.com/podcast/pumpkin-spice-economics-breaking-down-what-youre-seeing-with-labor-markets-and-inflation/
Hear even more about inflation: https://creativeplanning.com/podcast/inflation-still-heating-up/
Read more about different types of inflation: https://creativeplanning.com/insights/inflation/
Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Jonathan Clements: Hello, this is Jonathan Clements, Director of Financial Education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, President of the firm, and we are Down the Middle. For those of us who followed the financial markets and the economy for many years, there’re certain words and phrases that seem to capitulate each period in time. So, what do we have in 2021? Well, first people are talking about the “Great Resignation,” how the pandemic has caused many people to rethink their lives, priorities, and not to leave the workforce.
Then there are all these references to hyperinflation. This one seems like a bit of a stretch when the inflation rate is just 5.4%. We were at that level back in the early 1990s, not as exactly in decade associated with economic catastrophe. And finally, we have talk these days of stagflation, some combination of high inflation and a stagnant economy. This one, too, seems like a bit of a stretch.
Back in the 1970s and early 1980s, commentators used to refer “Misery Index,” which you get by adding together the inflation rate and the unemployment rate. Back then, the misery index top 20. Today, with a 5.4% inflation rate and a 4.8% unemployment rate, we’re barely breaking 10. So, Peter, what do you make of all this stagflation talk? Should people be worried?
Peter Mallouk: To me, this stagflation conversation is really fascinating. It shows how much we’ll go out of our way to worry about something. We are dealing with the greatest labor shortage in the history of the United States. And stagflation is basically of high inflation, so I understand that part of the equation, but coupled with high unemployment. And so, when we’re dealing with the biggest labor shortage in the history of the United States, where there’s more job openings today than there are people looking for work. You really have to go out of your way to look for stagflation as an issue.
And I think when people think of stagflation, one period of time they think of is during the Carter administration when we had OPEC colluding together, that’s what OPEC was basically, a cartel, but colluding to keep prices high because of political tensions and basically geopolitical issues. We already had high unemployment and we had oil prices artificially high, and that caused the stagflation we experienced at the time.
We don’t have anything like that today, even with energy prices today having rebounded enormously from last year. The reality is, we don’t have to worry about energy as an asset class the way we used to. It’s very hard to come up with that scenario in this space at this time.
Jonathan: Yeah. It’s really interesting what you start out by saying, Peter, about how people are always looking for something to worry about. It does seem that there are a group of people out there, who always want to worry about the economy, who always want to find a reason to complain about the political atmosphere, and want to find a reason not to invest in the stock market.
And the stagflation story seems to be yet another excuse not to do anything with your investments. To take no investment risk and yet, as we know, taking no investment risk is the surest way to end up losing money in the long term. Because you end up sitting in cash and falling behind inflation and taxes. But anyway, let’s stay with this stagflation theme and try to break it down.
So, there are two parts to this. The first part, inflation, the ongoing debate seems to be whether the pickup and the inflation rate is “transitory,” to use the Federal Reserve’s phrase. The results of supply chain disruptions, or has there been a permanent sea change? What’s your take on this, Peter?
Peter: Well, it’s interesting, we’re getting a lot more data in now about what’s going on. So we know some of this stuff was obvious. The supply chain’s a little out of whack, there are containers in China that should be here, and so on. We know a lot of people are getting supplemental income and there’s no reason for them to go to work while they’re getting that income. We had a little bit of this information. We’ve talked about it on previous podcasts.
But what we’re seeing now is a lot of data coming out of what’s going on. Right now, we have 8 million job openings. So, it’s just unprecedented what we have available today. And we’re trying to find out, well, where are the workers? And some of the research, it’s really fascinating.
So, I think one of the things that we’re found is that many more people than we thought retired early, and my dad’s a great example of this. He was a doctor, he was going to work four more years, had him working from home, doing Zoom for a year. And he said, “You know what? I’m not going to go back. I’m going to retire early.”
So, you have several million people that were going to be in the workforce that just accelerated retirement a little bit. Of course, that works itself out, but it takes a few years. Second, and I think this was is interesting is, immigration’s at an all-time low. And it’s not just what we hear about the border and illegal immigration and whether people should be granted asylum. I’m talking about legal immigration. Legal immigration is at the lowest levels it’s been in decades.
Traditionally, when we have a shortage of anything, we say, “Hey, we need these things and there’s people in line to do it.” My parents went to the U.S. embassy, and they said, “Hey, we’re only taking doctors, teachers, and engineers.” And thankfully, my dad was a doctor, my mom was a teacher, and 30 days later, they were in the United States.
Well, the United States, isn’t doing that today. And under Trump, they weren’t doing it for constrained reasons. Then COVID, they weren’t doing it for healthcare reasons. And then, under Biden, there’s some tension around should he be letting people in the border first. And so there’s all these reasons why it’s not happening, but it’s responsible for several million people of shortage. We look where the shortage mainly is, it’s in the industry that would be most easily met by allowing some legal immigration.
And then, we are seeing a trend now, there’s at least a million people that have moved to self-employment. When you have a low employment environment, it actually feeds self-employment because people are more able to leave the workforce and make a reasonable living quicker in a tighter economy, whether it’s as a real estate agent or mortgage broker or whatever.
And then we already had the natural cause of the population aging. So, we’re already seeing a rotation in the workforce because of the Boomers. And I think the most fascinating piece is what we’re seeing the data about people that were getting income. So, we know that under Trump and Biden, people were getting checks because they were home and they couldn’t work. And then that got extended even after people could go to work. And there was this thought that, “Hey, this ends in September and the second that ends, everyone’s going to go back to work.”
But what we know now is that people have in their checking account today, double what they had a year ago. So, all those dollars have not been spent. And so, it’s not like they stopped getting the check and everyone’s got to go back to work. It could take months to wind through that. And at the same time, a lot of these were receiving duplicative benefits. So a disproportionate amount of the population receiving that monthly income also, had mortgage forbearance, or also, had student loan forgiveness.
These are the sorts of things that over time, work themselves out, via people eventually have to come back to the workforce, there will eventually be things that change the game here. But looking at the breakout of what’s resulting in the shortage, there are so many pieces that are on that stack against all of these openings. It’s just going to take a while to wind through all of them. But it also goes back to what we were talking about originally, for stagflation, we need high unemployment. It’s very hard to paint that picture with all the data we have today.
Jonathan: So I’m just going to make a quick digression here because you brought up one of my favorite hobby horses, which is immigration. I mean, I’m an immigrant, you Peter are the son of an immigrant and whatever your political views on it, whatever your thoughts about having people from foreign countries come here, people should realize having immigrants is an engine of economic growth and a potential at least partial solution to the demographic crisis that we have and Japan has, and parts of Europe have. And to the extent that we embrace immigration, we’re going to have more workers.
That means that the number of paying for benefits like social security and Medicare is going to come that much easier because it’ll have a larger workforce paying those taxes and supporting this group of retirees. This is not a political point, it’s just a basic economic point. And it also brings back a memory of a book written by John Kenneth Galbraith many decades ago in talking about the British car industry, which really doesn’t exist anymore.
And there is a firm that probably nobody remembers called British Leyland. That at one point was originally well respected manufacturer of automobiles. And as John Kenneth Galbraith pointed out in his book, big mistake that the British made was trying to build cars using Brits. If they tried to build cars using foreigners, it would’ve been a whole lot more successful. But instead they were trying to build them with local laborers who were demanding high wages and unionized and went on strike and so on. And the end result was the collapse of the British auto industry.
Having immigrants who want to work, who are hungry to get ahead, is a recipe for financial success and it’s good for the entire society.
Peter: Well, so I would just say, I’ve not met anybody that is not for legal immigration, which is what we’re talking about here. There’s millions of people standing in line, legally trying to get into the United States. And so, to me, when I look at a labor shortage, if it really doesn’t solve itself, this is the one country in the world that can solve it overnight. Like if China had this problem and they said, okay, our doors are open, no one would come, legal or illegal.
If the United States has this problem and we say, we’re going to let in 2 million people that have these qualifications that we background checked or whatever we have to do, you’re going to get those 2 million people faster than you can process them. And so, it’s the ultimate safety hatch, I’m sure they’ll get legal immigration figured out at some point. I don’t know that it’s even going to come to that with all of the other things that’ll work themselves out over time.
I do think also, one solid stock market correction, one minor economic pullback will really shake the tree here, I think, and really accelerate normalization.
Jonathan: All right, Peter. The end of our podcast, it’s time for the tip of the month. So what have you got us this month Peter?
Peter: I spend most of my career telling people to ignore most of the financial media, but I would say that, because most of its noise, but I would say Congress has really just stunning in its lack of consideration for the American people now, as they constantly come out with new bills and new proposals of how they’re going to tax everybody in a very short period of time. And look, I understand taxes go up, they go down, capital gains change, income change, state taxes change, but people are trying to operate. And it’s hard to just go about your business when all of the rules might change retroactively or in two weeks or on December 31st. And I think unfortunately that’s probably what we’re dealing with here.
And so I think, you are going to have to have a conversation with your CPA or your financial advisor before the end of the year, because it’s very likely that the rules of the game will change between now and then. So this is one of those instances where, if you don’t have a financial advisor or CPA pay attention on your own to what’s going to happen between now and year end so that your position correctly.
You might have a portfolio that’s tax sensitive in one way and it won’t apply anymore. You might need to manage it in a little bit different way. And so, that’s the kind of thing I think people might need to pay attention to between now and year end.
Jonathan: So the other thing that a lot of people are going to have to pay attention to between now and year end is picking their health insurance for 2022. This is something I’ve mentioned before, but I’m going to mention it again. Picking health insurance can be very confusing, but I would encourage listeners to focus on two numbers. And those two numbers are, your minimum cost for 2022 and your maximum cost for 2022.
So your minimum cost will be simply how much you’re going to pay in health insurance premiums next year. Just take that number, whatever the monthly number is and multiply it by 12. And that’ll tell you what the minimum is that you’re going to pay in 2022. Then I would take that number and I would add the out of pocket maximum, almost all health insurance with the exception Medicare, almost all health insurance these days has an out of pocket maximum.
So if you take that out pocket maximum for 2022, add it to your premiums, you’ll know what the maximum is that you’re going to end up spending next year. And that should among other things, drive the size of your emergency fund. By some misfortune you have a major medical emergency. If you know what that total number is, you’ll know what you need set aside in cash investments in order to carry through a rough year.
So anyway Peter, that’s it for this month’s episode. This is Jonathan Clements at Creative Planning, with me is Peter Mallouk, President of the firm. And we are Down the Middle.