Feb 27/15 – Exactly how much does a llama cowboy make anyway?

2015-02-27 10am EDT  |  #ECO surprise #inflation #llama #wages #Walmart

For those not sitting on North American trading desks, you probably missed yesterday’s highly entertaining llama chase. I have to admit that watching the enfolding llama drama was the most fun I have had in ages.

Yesterday in Arizona, some animals were brought to an assisted living facility to visit an ex-llama rancher as a form of therapy. Two of the llamas escaped and spent more than an hour evading capture as they galloped through town, followed by an ABC helicopter that live broadcast the whole affair.

I was rooting for the two escapees. The white guy was especially shrewd and a little part of me was disappointed when they finally lassoed him.

I am not sure where the cowboy riding in the back of a pickup truck came from. Does every town in Arizona have one of these guys on standby? And what do they pay him for that service?

Whatever they pay him, I am sure it is probably going up.

But it isn’t just llama cowboy rates that are increasing lately. Although many investors are still dismissing it as temporary, there are more and more signs that the Fed’s much anticipated wage inflation is finally taking root.

We are all aware of the much publicized Walmart employee pay raise. Walmart recently said they would increase worker pay by more than $1 billion dollars this year. This is a big deal. I know that many commentators are quick to dismiss it, but they are missing the big picture. Walmart is the biggest private sector employer in the United States:

The increase is putting pressure on other companies to follow suit. From Yahoo! Finance:

NEW YORK (AP) — The owner of T.J. Maxx, Marshalls and HomeGoods stores became the latest retailer to boost pay for its U.S. workers, putting pressure on other chains to do the same.

TJX Cos. said Wednesday that it will increase pay for its U.S. workers to at least $9 an hour starting in June. The announcement came a week after Wal-Mart Stores Inc. said it would increase starting wages for its U.S. employees to at least $9 per hour by April and by at least $10 by Feb. 2016. Home furnishings retailer IKEA and Gap clothing chain also have raised pay recently.

John Challenger, CEO of global outplacement firm Challenger, Gray & Christmas Inc., said the moves could create a domino effect in which other companies follow suit in order to compete for top talent.

“Other retailers may have no other choice but to follow,” he said. “The pool of available labor is starting to shrink and it will take more than a store discount to attract the best of available candidates.

This is on top of the increases in minimum wage that I have been harking about.

Yet it should be no surprise we are finally getting increases in wages. There have been lots of signs.

The Job Openings have hit a new high, eclipsing the previous high from the 2007 cycle.

After spiking to scary levels during the 20078 credit crisis, initial claims have retreated down to previous lows.

And the forward looking indicators, such as the NFIB survey about companies plans to raise wages are reflecting this tightness:

Even with all this evidence, when I broach the subject of rising inflation spearheaded by employee cost push inflation, I am continually (and uniformly) met with push back.

“We haven’t had worker inflation in ages… It ain’t going to happen.”

“Yeah sure, then companies will just outsource the jobs to China.”

“Inflation? Are you kidding me? People are just happy to have jobs – forget about raises.”

These are the sorts of responses I get. Even with the largest employer in the world raising wages, investors are still making excuses why we aren’t going to get wage inflation.

Maybe they are right. Maybe this will prove to be a one time affair that is quickly met with an economic swoon that results in tons of layoffs. Maybe the global economic dip will overwhelm any sort of good news in the United States. Maybe this is the final piece of good news before the coming collapse.

But what happens if these pessimistic predictions don’t come to be? What will happen if the global economy manages to stop going down, and even maybe, heads higher?

I know all the bearish arguments – I hear them every day. And they well might prove correct.

Yet I can’t help but think about Bob Farrell’s famous rule:

When all the experts and forecasts agree - something else is going to happen.

Have a look at the histogram of forecasted CPI for 2015 from the leading economists:

Out of the 76 economists tracked by Bloomberg, the median forecast for 2015 CPI is 0.45%. In a truly stunning testimony to the pessimism that is baked into this market, 13 of these economists think that we will actually have deflation this year! Only 2 of the economists think that the Fed will be able to reach their 2% target.

I might be wrong with my optimism about wage inflation. But if I am wrong, it probably won’t cost me much because it is already fully reflected in the market.

However, if I am right, then there is going to be some massive re-pricings. The market is ignoring all the good news about wage inflation that is staring them in the face. It has been so long that everyone has forgotten what it looks like.

Wage inflation would be as surprising to the markets as if the llamas had hailed a taxi and escaped by car…

Don’t forget we are approaching the March turnaround

As February winds down, I just want to remind you of my theory that March often marks the turning point in macro economic data.

Since my last post, the economic data has continued to come in lower than expected. However, I think that we are about to make a turn.

I don’t know if the start of the ECB QE program next month will be the catalyst, or if China will finally make some bold move to restart growth. Or maybe we have just hit a point of maximum pessimism.

But either way, I am looking for the economy to perform above expectations in the coming months.