Thursday, April 06, 2006

Three Words You Never Saw in the Same Sentence

U.S. office vacancies fell to 14.1% in the first quarter, the lowest level in five years, allowing landlords to increase rents.

Thus in today’s Wall Street Journal we read that in the first quarter of 2006, office vacancies around the U.S. had the largest percentage drop in seven-plus years, thus allowing the biggest occupancy price increase in over five years.

Later in the same paper we read that steel prices, after spiking in late 2004 and having what chart watchers call a “retracement” that bottomed in mid-2005, are on the rise:

Steel prices are returning to last year’s high levels, as economic growth fuels demand.

Seems that steel makers from Charlotte, North Carolina (Nucor) to Shanghai (Shanghai Baosteel Group) are raising prices on all manner of steel-related products, from the hot-rolled to the cold-rolled to the coated-sheet kind.

Further along in the A-Section, we find that Venezuelan strong-man Hugo Chavez, who nationalized two oil fields this week about as casually as a bartender skims cash during a busy Saturday night shift, is mismanaging the world’s largest crude oil reserves outside Saudi Arabia:

Venezuela is becoming a less-reliable source of crude, due as much to poor management as political choices. Rather than respond to current high prices by boosting output, the country has reduced its oil output since Mr. Chavez took power in 1998....

Most interesting of all in these tales of an emerging global resource squeeze might have been Tuesday’s front page story in the New York Times, the headline of which married three words that I believe have never appeared in the same sentence together: “labor” and “shortage” and “China.”

According to the story, headed “Labor Shortage in China May Lead to Trade Shift”:

The shortage of workers is pushing up wages and swelling the ranks of the country's middle class, and it could make Chinese-made products less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam.

At the Well Brain factory here in one of China's special economic zones, the changes are clear. Over the last year, Well Brain, a midsize producer of small electric appliances like hair rollers, coffee makers and hot plates, has raised salaries, improved benefits and even dispatched a team of recruiters to find workers in the countryside.

That kind of behavior was unheard of as recently as three years ago, when millions of young people were still flooding into booming Shenzhen searching for any type of work.

A few years ago, "people would just show up at the door," said Liang Jian, the human resources manager at Well Brain. "Now we put up an ad looking for five people, and maybe one person shows up."

Those are striking observations from a country whose labor surplus provided sustenance to the bond aficionados who confidently predicted that the “labor arbitrage”—the substitution of high-cost American content with low-cost Chinese content—would last until their ten-year bonds matured. Maybe longer.

Put together, the stories being told by Nucor, office landlords, oil producers recently booted out of Venezuela, and even the Well Brain factory in China, suggest the bond market might see the end of the labor arbitrage well before their ten-years mature.

Maybe, even, before their two years do.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


dkman said...

Great article Jeff. It's amazing to me that all of this is happening in plain sight, yet the stock market seems to be in denial, going higher and higher.

If history is any guide, bonds and stocks tend to move together in an inflationary environment. The bonds have been going down for well over a year now. I am betting stocks will have to follow relatively soon.

whydibuy said...

And you leave out the comment by the Chinese official calling for a reduction in U.S. bond holdings. This time the bond market poo pooed the remark and the bonds rose on that day. Consuming 2/3 of the worlds free capital, it wouldn't require a big shift in China's asset allocation to give us higher rates. But then again, this senario is only hypothetical, it could never REALLY happen.

bubbles said...

I’ve got a friend who has been in China for almost 20 years. He started a fruit juice company which he sold a couple of years ago and is now working for the buyer. I asked him about this “labor shortage” and below is what he said. One note, he lives and works in Tianjin.

“I don't think that labor shortage is an accurate description. In some highly sought positions, such as marketing, sales, etc, getting good people is hard, especially as the drive to localize these positions intensifies among international companies in China. Getting regular production people and even senior people in other professions does not seem to be a big problem. That is not to say that companies are not struggling at times to get the right people -- but they may not be willing to pay the escalating rates that will attract and keep the good people.

That is the view from Northern China. I can't speak for South China, where they have been more of a "slave trade" industry with their hiring practices, bringing in peasants from the countryside and giving them room & board and very little else. Those practices are likely to be under pressure now as more opportunities open up for workers of all descriptions in China.”

Aaron Koral said...

Speaking of labor shortage, you should see the number of help wanted signs out in Tucson, AZ. The labor shortage here is disquieting, to say the least - although, most of the job vacancies are in the retail-food service industries. I wonder whether the labor shortage here in AZ is a continued harbinger of inflation, even if wages do not reflect such a trend (although I could be wrong...) - happy trading!

mehoffer said...

Who here doesn't believe the inflation is everywhere a monetary phenomenon? Anyone care to peruse a 20-year chart of M-3 growth? The nominal amount of "dollars" in our economy has more than doubled since Greenspan took the chair at the Fed in '87--is it any wonder why the current U$D has less than 1/2 the purchasing power of the '87 vintage??( just backwardize using the GDP deflator, if that's conservative enough for you )
In this inflationary environment (like the '70's) Things(read: commodities) are the place to be, along with fixed interest-rate borrowings.....

As always, thoughts, of all types, in response, are appreciated.


Mark E Hoffer.