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00:00Let's talk about the U.S. labor market right now.
00:03We have had some numbers now indicating some softening over the last two or three months, actually.
00:08How concerned are you or should we be?
00:11Well, actually, we've had softening over even the past year.
00:13If you look at the number of jobs created on average, it was substantially lower last year than in the
00:18previous several years.
00:20How concerned should we be? We should be somewhat concerned.
00:22It's not a great thing, obviously, to have the unemployment rate going up, to have the number of jobs going
00:27down.
00:28None of that can be viewed as good.
00:30Obviously, we still have had, so far anyway, very strong GDP growth.
00:34So that is, in some ways, an even more important indicator.
00:38But, yeah, it's definitely of concern.
00:40As you say, GDP is growing from the numbers we've seen so far for 2.5%, 3%, something like that.
00:45And we are not creating as many jobs.
00:47Is that a shift in the economy about how many jobs we need to have the same output?
00:52Well, obviously, just the simple math is when those two things happen, you get a productivity increase.
00:56And that's a good thing.
00:57And productivity increases are really what makes the economy more prosperous for everybody.
01:02You can't have real incomes go up without productivity growing.
01:06In terms of why is this happening, why is this disconnect happening at this time?
01:09There are obviously a bunch of theories.
01:11One is AI, which we can come back to.
01:13But I think it's absolutely true that companies are battening down the hatches.
01:17They are nervous about the tariffs.
01:20They're nervous about the uncertainty.
01:21There was a huge amount of hiring that went on post-COVID when it was hard to find workers.
01:26People took whoever they could get.
01:27And so they're trying to right-size all that.
01:30So I think that's really what's mostly driving this.
01:34Employers are worried about the tariffs, but also they've had to pay tariffs.
01:38And it's been a difficult thing to pass all along to customers.
01:41So is it possible that tariffs are actually helping on the productivity, ironically?
01:46Helping on the productivity and hurting on the jobs.
01:48Because basically when companies do have these tariffs that they have to pay and then pass on,
01:53they look at other costs and say, what other costs can we cut?
01:55And if people are part of it, then they cut the people.
01:59Some of the job growth we've seen has been in health care.
02:01In fact, a month or two ago, it was all in health care.
02:05What does that tell us about where our economy is headed?
02:07Because we're not really growing jobs almost at all outside of health care.
02:11No.
02:11In fact, manufacturing jobs were down last month.
02:13And they've actually been down pretty consistently over the past year or so.
02:16And, of course, a lot of people worry a lot about manufacturing.
02:20The health care jobs, on the one hand, are perfectly good jobs.
02:23We need people to be everything from nurses to doctors to whatever in the health care system.
02:28But on the other hand, you could make an argument they're not really producing anything.
02:32They're taking care of us as our society gets older and we need more and more health care.
02:38And so we should also want a more balanced job creation picture in which jobs are being created
02:44and all sorts of other things, including manufacturing, including services.
02:48How does immigration factor into the labor market at this point, if at all?
02:52We obviously don't have the same immigration coming in.
02:55And there are some reports that people actually may be leaving the country.
02:57Is that affecting the labor market?
03:00I'm a bit of a contrarian on this.
03:01The narrative is, yes, it's affecting the labor market, and particularly from people who
03:05are pro-immigration.
03:06They say, see, see, we've got to have more immigration.
03:08And I'm in favor of more immigration.
03:10But it's very hard at the moment to see a lack of immigration as the reason here.
03:14You have labor force participation going down.
03:17You have the number of job openings going down.
03:19You have the number of unemployment rate going up.
03:23So you have a whole bunch of other things that suggest that this is just a very loose
03:27jobs market.
03:29And also, when you look at CEOs on their quarterly earnings calls, they're not saying it's hard
03:33to find people.
03:34Nobody is saying that at the moment.
03:36They're, in fact, talking about how many people they're cutting.
03:38You mentioned AI.
03:41Does AI factor in at all yet?
03:44Well, if you look at something like manufacturing, I think pretty obviously it doesn't have anything
03:48to do with why we're losing manufacturing jobs.
03:50I think it is having at least some anticipatory effect in the sense that companies are saying,
03:55we don't need to hire as many engineers this year because we're going to have AI doing more
04:00of this stuff.
04:00We don't need to hire in the financial services world as many new entrants into our staffing
04:07because we're going to have AI doing more of this stuff.
04:09So I do think it's having an anticipatory effect, although I'd be the first to say I don't
04:14think it's actually changing the number of people working at the moment.
04:18As an investor, how do you take into account the labor market?
04:21How does it affect how you position your portfolio?
04:24I don't think the labor market per se is really that much of an issue for us.
04:29I think we would worry about a couple of things.
04:32One, the overall state of the market.
04:34And when you have rising unemployment and rising inflation at the same time, which we
04:40may have, we're going to get a few more reports, then that's getting perilously close to stagflation.
04:46And that is really bad for the market.
04:48The Fed, it's tough for the Fed, it's bad for the market, and so forth.
04:51And then there are certain sectors, particularly software, where the anticipatory effect, again,
04:58of AI seems to be the greatest.
05:00And so it becomes fairly perilous to work your way around the stock market under that circumstance.
05:06Stagflation is a thing that all economists say we have to avoid.
05:09That's really dangerous for us.
05:11What can we do at this point?
05:13By we, I mean the government or private industry, what can we do to really avoid the risk of stagflation?
05:18Getting rid of the tariffs would certainly be a good start in terms of reducing costs for business,
05:23and therefore they don't have to raise prices quite as much.
05:26Beyond that, I'm not sure in the short run there's that much we can do.
05:29In the longer run, you want to have a more flexible economy, you want to deregulate,
05:33you want to try to make it more competitive, things like that.
05:36But in the short run, you sometimes get in this box that we may be heading toward.
05:41What does this mean for the Fed, potentially?
05:43I mean, how do they address this?
05:44We're going through a transition, obviously, with the chair of the Fed.
05:47But how do they address this situation where we do have growth, we may have a softening labor market,
05:51and there's concern about basically inflation at the same time that we have slowing growth?
05:57It's tough for the Fed.
05:58They have a dual mandate, as you know, where they have to focus on both unemployment and on inflation.
06:03And so you can't necessarily do both things at the same time.
06:08There's a Fed meeting in the middle of March.
06:11The anticipation of further rate cuts this year has already dropped a bit,
06:15in part because of the war and the effect on oil prices and how that's going to pass through into
06:20inflation.
06:21And so the Fed's going to have a tough decision.
06:22I think it's highly unlikely, almost implausible, that they would raise rates at this point.
06:27The question is, how much do they cut them?
06:30It had been expected they would cut them twice this year.
06:32I think that may become one.
06:34It may become none before done.
06:36But that's the range of possibilities.
06:39There's some nervousness in the market these days about private credit,
06:43which sort of is an adjunct to the AI investment that we have.
06:48Is it a real problem as you look out at the credit markets?
06:52Do you think there's a real issue there?
06:53I think there's definitely going to be some pain.
06:56I think there were a lot of loans made to particularly software companies,
07:00what we call ARR loans, where they were made annual recurring revenue.
07:04They were made on the basis of revenues as opposed to profits.
07:06Revenues don't necessarily mean you're solvent.
07:09They just mean you have revenues.
07:11And so those kinds of loans, and this happens at every cycle.
07:15I don't mean to be blasé about it, but it happens at every cycle.
07:19So I don't worry too much about private credit.
07:21There's going to be pain, but the system is not as leveraged
07:24and not as sort of badly engineered as it was in 2007, 2008.
07:31You've got investments that you don't get marked to market every single day.
07:34Oh, yeah.
07:35So how do you make sure that you get the right data?
07:37I mean, we see that in all sorts of places, including China.
07:39Sometimes people say, I'm not sure if the data coming out of China is reliable.
07:42How do you know that your risk data is reliable?
07:45We don't necessarily know it on a day-to-day basis,
07:47but we watch the companies carefully.
07:49We have an idea as to what would be good or bad for them.
07:53And we do get quarterly marks, and we get financial statements.
07:56And so we can try to analyze the quarterly marks and see if they're accurate or not.
08:00But given that they're private investments, there's not usually a whole heck of a lot
08:04we can do about it anyway.
08:05And so we just try not to make new mistakes and live with our old ones.
08:09We have a new risk right now, which is the war with Iran.
08:16Has that taught us anything about safe havens?
08:19I mean, if you look what's happened to the dollar and what happened to the U.S. Treasuries,
08:23it's interesting what's happened, actually.
08:25The Treasuries sold off to some extent.
08:27People went to the dollar.
08:28Are the nature of safe havens changing?
08:32That's a great question.
08:34I think the dollar is a safe haven, and most people see it.
08:38And as you said, that's probably what we've been seeing.
08:42I think Treasuries are more complicated because the war creates inflation,
08:46and inflation is bad for Treasuries.
08:48And so you could argue that that's why Treasuries should sell off in this set of circumstances.
08:54But look, it's been an odd situation because gold until recently and silver also until recently
09:01have been so strong that those are normally indicators of a lot of fear out there in the market.
09:06But the market has been pretty stable.
09:08Even with the last week or two of commotion, it's been pretty stable, all things considered.
09:14So it's something people have been puzzling over, which is why, on the one hand,
09:18why people have been going to these things like gold.
09:21But on the other hand, they still appear to be very much invested in stocks.
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