The Days Ahead:

  • Payrolls and job openings.

This Week:

  • We look at the truck driver shortage and find…
  • There isn’t one; it’s just a very fragmented industry.
  • Higher real rates and stock market valuations…it’s a weak relationship.
  • Who’s going to buy all those treasuries?
  • Households are better bond investors than banks.
  • Household net worth at record highs
  • Why higher oil prices probably won’t be inflationary.
  • There’s a Shortage of Truck Drivers

Everyone knows there’s a national shortage of truck drivers and that it’s getting worse. Read almost any article on the subject and it comes back with a shortage of around 80,000 drivers. The reasons are nearly all the same. Truck drivers are aging, it’s dangerous, with fatalities increasing 52% from 2009 to 2019, it has the highest injury rate of any industry, the hours are unsociable, the pay’s not great and the demand for short-haul express delivery drivers will mean a constant shortage of heavy truck drivers.

In the Covid-19 period, when home shopping took off, the number of job openings in the transportation industry, which is a very broad category and includes all transportation and utility workers, increased from 1,454,000 to 2,000,000 in less than a year. Today the number of openings is around 15% higher than pre-Covid-19 levels. The number of openings for heavy, tractor-trailer drivers is around 240,000 out of a total of 900,000.

It takes around two to four months to earn a fully licensed Class C Commercial Driving License (CDL), where you can haul hazardous stuff of up to 80,000 pounds. Training costs are around $5,000 to $7,000. That doesn’t sound too bad for a job where the median pay is $50,000 and the upper quartile pay is around $75,000. But the employee turnover rate is high, with some citing it as high as 91%.  No wonder electric and autonomous trucks are coming. Tesla announced in 2019 that it would build 100,000 of them by 2022. But this being Tesla, the first one was not delivered until December 2022 and it seems less than 50 have been built.

The number of employees in the truck transportation sector rose 6% from pre-Covid-19 levels and 11% from the Covid-19 lows. Here’s the data from the Bureau of Labor Statistics or BLS. The August dip (blue line) was because of the closure and bankruptcy of Yellow Corporation, which resulted in the loss of 37,000 jobs. More on that.

1 Truck Drivers 2
Source: FactSet

The blue line is average weekly pay which rose rapidly in 2021 and remains high. In nominal terms, wages are 35% higher than 2016 and in real terms they’re up about 8%. Not bad.

So, jobs and wages are up. Why the shortage?

It turns out there isn’t one.

First, the oft cited 91% turnover rate measures drivers leaving trucking companies. But in many cases, all they’re doing is switching carriers or moving to industries where a CDL is also required, like warehousing or construction. So, it’s industry churn not attrition.

Second, fleets offered some hefty pay and bonus incentives, especially in 2021 and 2022. At one point some major fleet carriers were offering all-in cash packages of $150,000. The more drivers switched to higher paid positions, the more that turnover rate rose. Carriers that could not compete complained of driver shortages but those turned out to be shortages for drivers willing to work at non competitive wages. That’s a different thing altogether.

Third, the trucking industry is becoming more fragmented, not less. This is because of the rise of brokers. It used to be that an integrated firm like J.B. Hunt owned the trucks, the trailers, the customers and the routes. No more. Brokers with new automation and technology grew from managing around 6% of all truck freight, and often as a “last resort” when a driver was desperate for a load, to around 30%. Even a company like J.B. Hunt has its own brokerage subsidiary.

If you’re a driver with access to a broker, who can provide routes, prices, times, a tendering system and billing, then you don’t need the support of a carrier. You can become an owner-operator. And that’s what happened. The number of trucking fleets grew from 50,000 in 2010 to 260,000 today. Much of that growth comes from fleets with only one to five trucks, with the number of trucks growing 300%. Meanwhile the number of fleets with 100 to 1,000 trucks grew only 30% and the larger, over 1,000 truck companies grew 15%. The chances are that a good chunk of the 37,000 job losses at Yellow Corporation will end up employed elsewhere or dive into the owner-operator pool.  

Owner-operators can buy a brand-new Class 8 tractor-sleeper, which is the biggest you’ll see on the road, for around $170,000 or $60,000 for one that’s five years old. Prices are down around 6% for new trucks and 25% for old ones from a year ago.

This absolute unit below will cost around $175,000 which includes the trailer. ‘Cmon, you know you want one. It sleeps three.

semi truck

This is clearly an industry where consolidation isn’t happening and isn’t needed. The average salary for an owner-operator is around $320,000 or $2.94 per mile, although they have to cover more costs like fuel and insurance. Still, the average company driver compensation is $0.72 a mile.

Even with the cost of ownership, owner-operator and small fleets are growing. The industry does not have a shortage, it just has a lot more competition and new entrants. The only downside is that the boom/bust cycles are likely to become more pronounced and extreme. Meanwhile, however, the chronic storage that we thought was happening, is no more than another industry going through some big changes, which should bring relief to freight, haulage and transport costs.

High Real Rates and the Stock Market

We don’t write too often about stock market valuations. There are just too many of them. There are the simple ones, like the price earnings (PE) multiple, which measures the price of a stock divided by its annual earnings and tells you how many years it would take for the company to earn back the price you paid for it. It’s probably the most widely understood valuation model and one we’re more than comfortable to use. There are many others! But there is no single infallible model and if there was, we’d all be using it. After all stock markets are thoroughly studied to extract all possible inconsistencies and arbitrage opportunities.

But there are two things that matter.

One is interest rates. The price of a zero-coupon bond today maturing in 20 years in a 2% interest rate world is worth $67. In a 10% world it’s $15. That’s why you will hear that a higher rate environment is bad for stocks. It’s simply that you’re discounting earnings with a higher interest rate which means a lower current price.

The other is inflation. If inflation is 2% and companies are growing earnings by 10% then you are both preserving and growing your purchasing power. But if inflation is 10% and companies are growing at 10% too, then your purchasing power is just staying still. You’d pay more for the stock in a low inflation world than a high inflation world.

Again, we’re simplifying this but inflation is the reason why in Japan and Switzerland, where inflation is around 2%, stocks trade at around 16 to 18 times earnings. In Argentina and Turkey, where inflation is over 50%, stocks trade between six times and eight times earnings. In Russia, a historically high inflation country, stocks trade at 2.2 times earnings but sanctions mean there are no buyers.

Anyway, last week the Fed pointed to higher real rates in its projections. In this case the “real” rate is merely the Fed’s projections of the fed funds rate less its projection for the Personal Consumption Expenditure (PCE) inflation rate. For 2024 and 2025, they raised the forecast to 2.6% and 1.6%. This is how it compares to recent history.

3 Fed Funds and PCE 2
Source: FactSet

For much of the last 20 years, the rate has hovered around 0%. The exceptions were the big drop in inflation during the 2008 financial crisis with rates higher than inflation, and the big increase in 2022 when rates were at the zero bound. For much of the last 22 years we’ve been in a world of zero or negative real rates, at least using the Fed definitions. We’re now at 2.2% and projected to stay there for the next year or so.

So, how does that affect stock market valuations? There’s been much recent talk that in a higher real rate world, stock market valuations should fall. The idea behind it is that if you’re getting a real rate of, say, 2% on a bond, then stocks, which are typically good inflation hedges, should become cheaper.

Well, here’s a long-term chart going all the way back to 1914:

4 SPX and Shiller
Source: FactSet

It shows the stock market PE multiple in blue and the real 10-year U.S. Treasury rate in green. The data is from the Shiller studies and they use a different accounting system than Standard and Poor’s to create the “earnings” side of the ratio, resulting in a higher valuation than the market actually is. But the relationship between PEs and real rates is the same if we use Treasury Inflation Protected Securities for our inflation and S&P 500 for earnings.

Anyway, the question is “Do higher real rates mean lower stock market valuations?” It’s the question of the day. Here’s an example:

“As the quarter comes to a close, equity investors are apparently unwilling to push valuations higher – a dynamic that can surely track part of its foundation to the elevated level of yields.”

Looking back at 109 years, the relationship is, well… there isn’t one. You can make the case that high valuations from 2003 to 2019 were matched with very low interest rates. You could also make the case that the recent spike in real rates has led to lower valuations. But after that it gets very blurry. We had high real rates in the 1990s but valuations and stocks soared. We had low real rates in the 1970s and valuations plummeted. Prior to that, it’s a matter of torturing the data until it confesses to what you’re looking for.

Low rates, high valuations? Sure 1937. High rates, high valuations? Most of the 1960s.

Our take is that there are a heck of a lot more variables than real rates that drive market valuations. Growth, confidence, sentiment, financial conditions, and employment come to mind. Put a few more investors in a room and you’ll come up with a legion of indicators. In talking to colleagues and in particular Jim Lebenthal, our Chief Equity Strategist, we’d put it this way.

The direction of interest rates matters. They may stick at current levels for a while but they’re not increasing. The Chief Executive Officers of S&P 500 companies are cautious but optimistic. There are no companies going to the wall. Or mass layoffs. The labor market is very strong. Weekly jobless claims have rarely been lower and at 0.1% of the workforce, are the lowest ever outside the Covid-19 era. The long-term average is 0.3%. The Atlanta Fed GDP Now measure shows growth of 4.9% for Q3 2023. Yes, it’s always revised down but it’s the highest since January 2022 and higher than any level in the five years to the start of preCovid-19. Durable goods orders are up.

And put all that together, and we’d answer, “Yes they matter but so do many other measures; don’t get too hung up on it.” We think history is on our side.  

Who’s Going to Buy All Those Treasuries?

Households. After the debt ceiling, there were concerns that the Treasury would be issuing a lot more debt to make up for four months of non-issuance, a drop in the Treasury General Account and the run off from the Fed’s balance sheet. The Treasury had also issued a lot of short-term debt and wanted to replace it with longer dated debt.

When the debt ceiling was resolved in June, the Treasury announced borrowing needs of $1,859 billion for the rest of the year, up $274 billion from the previous estimate in May. The Treasury General Account, which is like the government’s checking account at the Fed, also needed replenishment after it fell to just $23 billion on the eve of the debt ceiling resolution, from $567 billion in January of 2023. The Treasury announced it would like to increase it to $450 billion. It’s at $700 billion today. It turned out there was no refunding problem at all and the Treasury has been able to auction off new debt without much pushback.

One of the reasons is that households took to buying Treasuries. The Fed’s Flow of Funds report was published a week or two ago. It’s basically a huge summary of where and how Americans’ save and it usually holds some surprises.

First off was that household net worth hit a new record of $154,282 billion, which is up 5% on the year and up 32% since pre-Covid-19 days.

5 HHNW % GDP 923
Source: FactSet

The numbers are nominal so inflation helps push the number up. It’s also down from its mid-stimulus high of over 600% of GDP to 575%. It’s not evenly distributed, of course. The top 1% own around 31% of the wealth, up from 22% 30 years ago and the top 1% tend not to consume as much of their assets or income. But the total number is up and steady.

One of the biggest changes is how households increased their Treasury holdings (blue line).

6 HH treasuries owns 923
Source: FactSet

At the end of 2021, households owned only $611 billion of Treasuries or around 2% of all public Treasury debt. By June of this year, it had grown to $2,307 billion or a rise of nearly four times and at a level of 9% of all debt.

Since 2021, the amount of Treasuries outstanding, excluding those held by the Fed, rose $2,514 billion. That means households bought nearly 67% of all Treasuries issued to the public from December 2021 to June 2023. And that excludes purchases of Treasury mutual funds and money market funds. The level of Treasuries held by households is also at 8.6% of GDP, its highest since December 1998.

There may be no mystery to this. Show a decent rate to savers and they’ll take it. Since December 2021 the 10-year Treasury rate has risen from 1.5% to 4.6% and the 2-year Treasury rate from 0.7% to 5.2%.

The rise in rates means extra costs for borrowers. For savers, it means extra income. The level of interest income for households has risen $171 billion in the last year and a half. Demand for Treasuries is likely to remain strong, which is one more reason why rates may not rise much. Every time they do, it seems households want more. (h/t Cameron Crise).

The Bottom Line

Much of the week was bond and equity markets reacting to last week’s “higher for longer real rates” message from the Fed. We’d also not discount the fact that September is often a strange month for capital markets and no one wants to make big position bets going into a quarter end. The main story was the gradual rise in the 10-year Treasury rate which pushed through a trading barrier of 4.50% and up to 4.65%. Meanwhile the 2-year Treasury reached 5.16%, its highest since 2007.

The other story was the steady increase in the oil price from around $67 a few months ago to $92. This seems a lot but it’s not nearly as inflationary as it sounds.

First, much of Russia’s 11 million barrels per day of crude production sells in world markets at $60 a barrel because of EU sanctions.

Second, oil supplies at the Cushing, Oklahoma facility, are well down. We wrote about Cushing when there was a big oil short squeeze in 2021. Basically, it’s a huge storage facility where oil companies ship crude if they don’t pipe, ship or transport directly to refineries or private storage. In recent weeks, the Cushing stores have dropped by a half and operating at around 22% of capacity. The futures price of oil has thus increased in anticipation of replenishment. Once that’s out of the way, the price should ease.

We’d also note that the inflationary impact of higher oil prices is likely to be low. Gasoline prices have barely moved and are no higher than a year ago.

Equities have had a tougher time and are down 6% from the July 52-week highs of which 5% was in the last two weeks. But we’d also note that there is an extraordinary amount of option activity that expires in September. In the last week we saw put prices with strikes at around 1% below current prices, collapse to zero. That’s normal. After all options expire worthless if they’re out of the money. But the volumes were high and we’re aware of one large hedge fund that had very aggressive put positions. Translated: option activity is short lived. Fundamentals should reassert themselves.

The economic news was good. Claims were low, and durable goods up. The Bureau of Economic Analysis released its quinquennial update on the national accounts. We’ll dig into them more but one headless was that growth was revised up for the 2017 to 2020 period and down for the 2021 to 2022, but not by as much. So, one less thing to worry about.

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Art: Jylian Gustlin (b 1960)

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