Labor vs. Capital Pendulum
So there I was, my first time at PIMCO’s HQ, looking very much like a character out of Office Space in my circa 2003 khakis and button down full sleeve blue shirt. I was there as part of a client due diligence visit – or as I would learn years later when I became a fund manager myself, a typical client dog and pony show where the big wigs would come and bless clients with their presence. I got to meet Bill Gross, in his prime as the rising Bond king of the world. I met Mohammad El-Erian and had a great debate with him on EM Debt.
But the one talk I will never forget was the one with Paul McCully. The mustachioed, slightly portly, ‘I’m your wise uncle’ Paul McCully – before the slimmed down and tanned with 10 figures in the bank, mid-life crisis Paul.
That day, he stood in front of us PIMCO fanboys and wrote Labor vs. Capital on the green chalkboard in white chalk. He then proceeded to with describing a framework that, while not uniquely his concept, left a lasting impression on me.
Capital and labor continue to vie for the upper hand in their symbiotic but perennially contentious relationship in cycles that last multiple decades. This is a pendulum of power that swings back and forth in each cycle. A balance of power between the two is good for the health of society and of the democratic principles of our country. But just as in any natural system there is a push and pull of force on both ends. However, eventually the power gain from one side becomes too significant and one side begins to squeeze the other so much that the health of the overall system becomes at risk.
“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains.”
The last time labor began to gain momentum and strength was during the Great Depression through unions. While this momentum was disrupted by WWII and the ensuing post-war prosperity of the 1950s, it continued to gain power in the 1960s and reached its high point in 1979. At that point excessive regulation and union power coupled with economic stagflation was squeezing profits out of corporations.
Then starting in 1980, as we know, Paul Volker’s war on inflation and Ronald Reagan’s pushback against unions and deregulation began an era of increasing corporate strength that has steadily continued since. Since then, businesses have continued to keep a greater share of their profits with labor getting a shrinking share through automation, de-unionization, and offshoring. We are now at a point where this balance of power has shifted to such an advantage for business that the system is threatening the system – even for an ardent capitalist like me.
My friend Ben Hunt refers to it as the Golden Age of corporate grift and fraud. And while most corporations aren’t involved in the crap that Noble, Valeant or Kodak has pulled, most others are clearly engaged in unethical (illegal?) self dealing of gargantuan proportions.
We may not see it yet, but I think the pendulum has stopped swinging in favor of business and is at its maximum point before starting the move back towards labor. You can see that in the rising voices against the corporate shenanigans in favor of sharing their spoils with labor. The Coronavirus has not only laid bare this extreme, but will also usher in the response to it. This sharing of the wealth will not be good for risk assets like stocks or corporate bonds. It will lead to increasing inflation and will be like the late sixties and early seventies. If you don’t believe me now, then you’ll regret it when gold and other real assets will be the only ones holding their value.
