Video Update: All You Need to Know About a Potential Wage Price Spiral

We are on the brink of a wage price spiral.

And if you are wondering what that is…

Today, Chief Analyst Adam Galas breaks it all down as he dissects the latest headlines news and shares why some economists think we’ve hit the Main Street sweet spot for American workers.

He also shares why your Fortress Portfolio is prepared for the good, the bad, and the ugly. And breaks down the allocations of the portfolio by sector and how they will hold up in this environment.

Click below to watch the video or scroll down to read the transcript.

Welcome Fortress Portfolio members to another weekly update.

Now, usually I don’t like to get into so much detail, but with this topic in this crazy job market… I just couldn’t help myself.

This is fascinating. And it has important implications for the economy, the stock market, and your Fortress Portfolio.

So today’s update is inspired by the negotiations between the United Auto Workers (UAW) and the big three carmakers.

Now, as you can see below, what the UAW is asking for is audacious.

(Source: Google)

We’re looking at:

In total (including all benefits), this would mean UAW workers would go from making $64 an hour or $128,000 per year – compared to $80,000 for the average American worker – to $300,000 a year or $150 per hour.

Now for context, the average non-union auto worker such as at BMW or Toyota makes $55 in benefits, while the average Tesla worker makes $45.

But keep in mind, Tesla workers make a lot in stock options. And of course, in the last decade, those stock options have minted many a millionaire.

Now, the question of course, is whether or not this strike is going to happen.

This above is simply the opening demand.

But the union is confident that they have 97% support for a strike starting on September 15th if no deal is reached.

So we will see what the automakers do now.

It’s estimated that this package would cost $3 billion for all three automakers who are expected to earn $36 billion in net profit next year.

So this would represent around 8% of those net profits, which of course, the three automakers would prefer to pass on as a price hike to consumers in order to preserve their margins.

Now, I personally am not at all opposed to hard working people getting paid generously.

Look, when I started in this industry in 2013, I was making $500 a month working 80-hour weeks.

That’s how it works with small business owners. Sometimes you have to work your butt off for almost no money at all.

I could barely afford to eat.

Now I work just 50 hours a week and make 50% more than the President of the United States.

So I am personally rooting for the UAW and their rather audacious record setting demands.

But I’m rich enough to be able to afford 8% more for a car.

Not that I am planning to buy a GM, Ford or Chrysler.

But I realize that not everyone can afford such price hikes. And this brings us to what Larry Summers, the former Treasury Secretary, says is the threat of a wage price spiral.

Now, as you can see, unions have done a fantastic job in recent years – receiving great benefit bumps.

(Source: Google)

Last year, there was a 7.5% rate increase in wages.

7% so far this year for a total of about 15% in the last 18 months on average… While inflation was 9% for a total of 6% real wage growth, 4% per year.

Now, that might not sound impressive, but it is actually equal to the boom times for middle class workers in the 1950s and the 1990s.

Now we’ve also seen some very strong contracts from Delta, United Airlines, and American Airlines.

Frontier Airline pilots are getting a 90% wage bump.

And UPS drivers just locked in a $170,000 per year benefits package.

The $300,000 benefits package for UAW workers, of course, would blow all of those out of the water and they’d actually be making more than the pilots.

But are those workers actually three times more productive than Tesla workers?

Well, that’s up for the negotiators to decide.

The question for the economy is, can we afford a 4% real wage growth?

Well, as you can see right now, we can – because productivity has spiked to 7.4%.

(Source: Ycharts)

But long term, according to the Fed, Moody’s, and most economists, it’s expected to be 1.5%.

Now, this matters because inflation is wage growth minus productivity.

So to sustain 4% real wage growth, we would need to see productivity go up 2.5% above current long term expectations.

Now, Goldman Sachs thinks that AI alone could boost that by between 1.5% and 3%, with 1.5% being the base case… And 3% being the best-case scenario.

Now, as you can see right now, overall wage growth for all workers is 5.7%.

(Source: Ycharts)

This is according to the Atlanta Fed’s wage growth tracker, the gold standard for tracking wages… because they track about 3,000 workers (the same 3,000 workers/cohort throughout their life and each economic cycle).

So this is one of the best ways to see what wages are actually doing. You can see it spiked from 3% to around 7.5%.

And now it’s down to about 5.7%.

But recently it has bounced a bit.

So it is currently the tightest job market in 54 years, a golden age for all workers looking for higher wages.

At the moment, real wages are running at a level consistent with 4% or even 5% long term inflation.

Now, you might be wondering what’s the worst that could happen if Main Street is thriving? And workers are finally getting paid, what they’re worth?

Why can’t we just let inflation run 4% to 5%? What’s the worst that could happen?

Well, economists do point out that historically between 4% and 5% inflation is the best time for Main Street Americans.

But, here is the problem.

As you can see, the national debt is expected to hit almost 200% in the next 30 years.

(Source: Daily Shot)

And this, according to the Congressional Budget Office, assumes 2.6% average borrowing costs.

Well, if inflation is 4% to 5%… according to Moody’s, government borrowing costs will be closer to 6%, 7% or even 8%.

So you can imagine that things would look much, much worse. Now, this brings us to the stock market.

As you can see, this is the doomsday 1970s style double wave inflation scenario. This is what haunts the dreams of the Fed.

(Source: Daily Shot)

This is why they’ve embarked on the fastest rate hike cycle in the last 42 years.

If we get a wage price spiral and people get so inspired by UAW workers making $300,000 that we all start asking for 5% or even 10% wage growth each year… then we could end up with around 11% or 12% inflation by the year 2028.

And for the Fed to stamp that out, you’re looking at 12%, 13%, 14%, maybe even 15% interest rates.

The last time we had this kind of a spiral was, of course, the 1970s.

And in order to beat that, Paul Volcker had to hike rates to 20%.

We had 18% mortgage rates. Unemployment soared to 11%. We had a 54% stock market crash.

And the Dow, not counting dividends, was flat for 16 years.

Now, for context, 11% unemployment today would be the same as 12.5 million Americans losing their jobs, 50% more than the number of those who lost their jobs in the Great Recession.

So that is the hell that the Fed is trying to prevent, a 70s style stagflation hell that would make 2022’s 28% bear market look like a picnic.

So this brings us to Fortress Portfolio and how it can protect you.

As you can see here, this is the duration of sectors.

(Source: Daily Shot)

This means if we were to think of stocks as bonds – now they’re not bonds of course because they have earnings that grow and companies that adapt over time – this chart shows you each sector’s interest rate sensitivity.

Energy, utilities, materials, financials, and companies that generate cash today and pay it out as dividends tend to be the least interest rate sensitive.

Faster growth such as technology can have much higher duration, almost 20.

Basically, this means if interest rates go up about 1%, tech falls by 20% compared to roughly half that much of a decline for these other sectors.

Now, Fortress is currently made up of 43% energy, 40% finance, and 7% utilities because we’re looking for the safest ultra-high yielding blue chips with consistent dividend growth.

Now, I want to point out another important chart that could change your life.

(Source: Daily Shot)

This shows this ratio of value to growth in terms of forward price-to-earnings (P/E).

Now, the key thing to notice is that right now, value compared to growth is the third most undervalued it’s ever been in history. Only in the 1920s and 1990s did growth become more undervalued.

And of course, the last time this happened was at the end of the tech bubble when the S&P was 50% overvalued and we had some tech stocks trading at 500 times earnings.

Since then value has had an exceptional performance even with the recent bear market.

(Source: Portfolio Visualizer Premium)

You can see the S&P is up about 5-fold since March of 2000, while Altria is up 36-fold.

Enterprise Products Partners is up 24- fold. And ONEOK is up almost 40 times.

And take a look at these 15-year average rolling returns, 16% for Altria, 12% for Enterprise, ONEOK at 16%… And the S&P very consistently at 8% returns.

(Source: Fortress Portfolio Rolling Returns)

Today, analysts are expecting these highly undervalued, ultra SWAN (sleep well at night), blue chips to deliver similar returns of about 12% to 16% in the future.

They’re basically coiled springs that are averaging a 7% yield.

That’s the yield for the overall Fortress Portfolio. And this portfolio of stocks has grown its dividends by 8% per year over the last five years. That’s twice the rate of inflation – during the highest inflation we’ve had in 42 years.

Now, value versus growth, this is a cycle that’s been going on for the last 100 years.

100 years of investor FOMO (fear of missing out), speculative manias, investors falling in and out of love with dividend stocks.

I cannot tell you exactly when the next great value rally will begin. But I can tell you at some point it will. And in the meantime, we’re earning a very safe 7%. So we are growing about 8% per year while we wait for the next great cycle to happen.

This is what Fortress is all about, helping you sleep well at night, living rich on those dividends and ultimately getting paid to get rich.

That is the ultimate luxury.

We have one comment from a new subscriber.

Bradley R. saying up he appreciates all the work we do. And thanks us for our depth and clarity of analysis as well.

Thank you so much, Bradley.

It is a pleasure and an honor to serve you and other Fortress members to help you achieve your financial dreams in the lowest risk way possible with the world’s best dividend blue chips.

Please remember to send us your questions and feedback so I can respond to them in these videos and/or our next monthly issue.

Just a reminder, I cannot provide personalized investment advice.

I hope you join us next week when we cover other important topics pertaining to Wall Street and most importantly, your Fortress Portfolio.

Until then, this is Adam Galas, wishing you and your family safe investing and a healthy and relaxing weekend.