Astrid Stawiarz
Renowned investor and hedge fund manager Michael Burry of Big Short recently stated that he believes office jobs will decline significantly in the coming months and years. He also implied that he believes so The drop in office jobs is likely to be long-lasting, if not permanent:
Michael Berry (twitter)
In this article, we share our take on what this means for the S&P 500 (SPY).
What is the white-collar employment bubble?
In short, the so-called white-collar employment bubble essentially refers to the fact that there is currently a shortage of unskilled and semi-skilled workers, but there are many white-collar workers. In addition, unskilled and semi-skilled workers often work in critical jobs that are less likely to be lost in the current economic downturn than those holding laid-off clerical jobs. As Business Insider recently posited:
A growing number of economists expect at least a mild recession to occur in 2023, and evidence suggests it will resemble the downturn of the early 1990s. That slump left white-collar workers — or high-income office workers — at increased risk of losing their jobs, while those in blue-collar sectors like mining and manufacturing generally fared much better than in previous recessions.
This is simply because there is currently a massive shortage of blue-collar jobs such as truck drivers, hospitality and restaurant workers, and other workers that are required to actually create and deliver the goods and services that consumers want and need on a daily basis.
In contrast, office workers are increasingly being laid off due to two major trends:
(1) Work from home. The work-from-home trend threatens office jobs because it reduces the need for many traditional office functions, such as secretaries and receptionists. Additionally, companies are becoming less attractive to hiring office workers as these employees increasingly demand the ability to work from home, which is beginning to show signs of a decrease in overall productivity.
(2) Increasing automation. While increasing automation is expected to eventually deal a blow to blue-collar jobs as well, many of these technologies aren’t there yet. For example, autonomous trucks are expected to be the death knell for the trucking profession, but this technology is unlikely to be mainstreamed until at least the middle to late of this decade. While restaurant, retail, and even factory workers are expected to all eventually be replaced by robots produced by tech companies like Tesla (TSLA), this technology is still further from widespread adoption, and some are predicting that these machines will not be meaningful by the end of this decade.
In contrast, the increasingly widespread adoption of enterprise software, data analysis, and machine learning is making office jobs increasingly contentious, as much of the traditional number crunching, document processing, and repetitive analysis performed by office professionals is now performed by software.
As a third blow to office job security right now, most companies have already more than fully recovered their office job numbers from before the COVID-19 outbreak. In contrast, labor recruitment continues to lag behind pre-COVID-19 levels. As a result, there is a much smaller margin of safety and less demand for clerks compared to manual workers.
As a result of these trends, the value of many employees is now falling. As companies increasingly look to cut costs and offset inflationary headwinds, cutting employee salaries is likely to be increasingly seen as a great way to improve profitability.
Why might the white-collar job bubble burst?
On the surface, things continue to look good on the US labor market. In fact, the latest unemployment data from the Department of Labor suggests that demand for jobs is still strong and the unemployment rate is low. In fact, the US economy added 350,000 jobs in August, so where’s the concern?
Well, as mentioned earlier, in a recession, companies generally either have to aggressively cut their costs, or at least choose to do so, in order to maintain profitability or even stay afloat. With office jobs depreciating and demand for them largely being met while workers remain scarce, office workers are likely to be hurt more once we enter the phase of the current downturn where companies are looking to cut costs.
While there remains a debate as to whether or not we are currently in a recession, the fact is that on a GDP basis we are not growing much, if at all. Furthermore, with sky-high inflation and the widely expected worsening of economic conditions before they improve, companies are likely already planning layoffs to better position themselves for the economic challenges ahead. In fact, there are already signs that big tech companies are already shedding jobs, which means it’s also mostly white-collar workers.
Last but not least, the US Federal Reserve, with its balance sheet repair and interest rate hike programs, is effectively waging a labor war to combat inflation. Because if interest rates rise, the economy will inevitably slow down. Consumers will reduce spending as it is more expensive to borrow and it pays to save money, businesses will also invest less as capital is now more expensive, and shrinking consumer demand will also result in less incentive to invest to meet this demand. Jobs are then lost as a result, as lower demand and less investment in longer-term projects mean fewer workers are needed and costs need to be cut.
What is the impact on the S&P 500?
Well, the implications aren’t pretty. With an unemployment rate of just 3.7% in August, there is significant scope for job losses from here. This, in turn, means the Federal Reserve is likely to feel it has plenty of leeway in trying to balance fulfillment of its dual mandate of full employment and price stability. As Federal Reserve Chair Jerome Powell said during the recent Jackson Hole Economic Symposium:
[Our policies will bring] Some pain for households and businesses. This is the unfortunate cost of reducing inflation. But a failure to restore price stability would mean far greater pain.
As a result, we can expect the US Federal Reserve to hike interest rates significantly going forward. That means not only will stock prices remain under pressure as higher discount rates are applied to stock valuations, but it also means that a serious economic slowdown is likely to occur. This, in turn, will lead to an accelerated bursting of the office-jobs bubble, which in turn will result in declining revenues and profits for companies, ultimately leading to a vicious cycle commonly referred to as economic contraction. As a result, earnings estimates are likely to be reduced even further, further reducing valuations applied to stocks.
Making matters worse is the simple fact that the SPY doesn’t look particularly cheap right now, despite having a miserable year to date. According to currentmarketvaluation.com, the SPY is overvalued according to the Yield Curve, Buffett Indicator and P/E Ratio models. While interest rate, margin debt and S&P 500 mean reversion models imply that it is fairly valued, these models are unlikely to fully account for the immense distortion and misallocation of capital that has occurred due to the Federal Reserve’s overly dovish stance immediately after COVID-19.
While markets aren’t as euphoric as they were at the start of the year given the bleak economic outlook, the SPY doesn’t look particularly exciting as an investment option right now either.
Investor Takeaway
White-collar jobs have fared fairly well in the wake of the COVID-19 pandemic, while blue-collar jobs have not returned as strongly. Now that many blue-collar positions are desperate for staff to fill them, there’s a built-in safety margin for blue-collar workers in the face of a severe recession. Unfortunately, there is no such safety margin for employees, except for the most in-demand specialized roles.
With the Fed’s increasingly hawkish stance, fueled in large part by the stubbornly low unemployment rate, it seems almost certain that the office jobs bubble will burst in any meaningful way in the coming quarters. As a result, we are also very likely to experience a severe recession, which will weigh on corporate earnings. The likely outcome of this combination of rising interest rates and falling corporate earnings is that the SPY – which is in fact still overvalued based on several highly regarded market valuation models – will struggle to recover from year-to-date losses, and even higher rapid could further lower.
As a result, at High Yield Investor we stay away from large index funds like SPY, instead carefully selecting areas of the markets that are significantly undervalued and best positioned to weather a recession.
