August Rush

The UPS human resources department can’t keep up with the influx of applications. It’s not Christmas or even Black Friday. “We’re in August!” the team lead fumes, her Starbucks latte left forgotten on the windowsill. Why the increase? It’s simple. USD 170,000 per annum is the newly agreed average pay for a UPS driver, reveals CEO Carol Tomé – buckling to the demands of Teamsters Union, and slashing her company’s full year revenue forecasts as payroll skyrockets. Driving a doorless, big, brown, van, sidestepping dogs while carrying boxes (in the rain), is a field where the shots are still called by Popeye, not Ay-eye.

There’s no such thing as a free lunch. Milton Friedman understood this, but we live in a world where the opposite is not the case. A meal-free lunch isn’t free. Novo Nordisk sells Wegovy to help consumers supress their appetite to lose weight. So, you pay for not eating. We suspect the intergenerational diet programme is kicking off alongside a recalibration of the labour landscape. Working off excess debt in that environment will not happen overnight. The World is going to have to pay, not to eat.

Over decades, the mechanisation of agriculture, automation of assembly lines and the competitive pursuit of higher education has shrunk the blue-collar labour force in exchange for millions too many graduate diplomas. A generation or two ago, a college degree was a means to distinguish oneself from the crowd, synonymous with hard work and having the brains to back it. Not anymore.

Student Loan Asset Backed Securities (or “SLABS”, heavy slabs) are like mortgage-backed securities. A loan is made by a financial institution and packaged as securities that investors are able buy. US student loans peaked at around USD 1.8 trillion in the first quarter of this year. That is USD 1 trillion more than it was at the start of 2010. Doesn’t sound like much? Well, if you were to stack one trillion 1 Dollar bills on top of each other – it would circle the earth. Nearly three times.

Chinese urban youth unemployment reached a record high of 21% this year. Commentators point to a lack of job openings for college educated graduates. Young people, whose parents amassed great wealth in the property boom, often continue living at home which further diminishes the urgency to find a job. Sometimes referred to as “professional children”, these highly educated young adults couldn’t afford a roof over their head even if they were able to find a job. The price of real estate is both their blessing and curse. Authorities encourage young people to “eat bitterness”.

On either side of the pacific, the world’s two largest economies are facing an intergenerational divide. It is no coincidence that the explosion of national debts the world over has accompanied prolonged economic growth and wealth accumulation for those nearing retirement. It’s a virtuous circle. Credit expansion allows consumption, which stimulates employment, which improves creditworthiness and triggers further credit creation. The trick on a merry-go-round, as any parent knows, is getting off before you get sick. The next generation is unlikely to see as sharp a rise in consumption through debt expansion. The young are left going in circles. Highly educated, deeply indebted, and unemployed. Fortunately, the merry-go-round will eventually slow down, and the kids will get off. It might be a winding walk to the next ride, but as The Beatles reminds us, “‘Ob la di, Ob la da”.

A period of transition, such as the one described above, is often accompanied by a changing investment landscape. We see this environment as particularly attractive for two reasons. Firstly, because out of favour investment opportunities re-emerge due to an underappreciation for the change in tide. Secondly, new prospects arise in regions or sectors that had not been uncovered and are likely to benefit materially from the shift.

Parents in the auditorium are stunned. Eyebrows raised, mouths hanging open, staring at each other in disbelief. Some however can’t take their eyes off David’s thirteen-year-old fingers dancing across the grand piano. A truly rare sight, labour and capital – in symphonic harmony. After a standing ovation, attendees swarm around him for photos as his mom quietly disappears into the background. I walk over to congratulate her on investing in his talent at an early age. Much like in August Rush, one generation needs the other, no matter how gifted they are.