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The US Auto Strikes are Starting to Look Like the Very Thing America Needs to Avoid

Recession is not the worst-case scenario

The UAW strike is arguably the biggest business news right now. And it is very important to investors because it goes deep into the fabric of the current state of the financial system. Let me show you the connection.

The Cause

The UAW is the union of workers that work in 3 big American auto manufacturers - Ford, General Motors, and Stellantis. Now, I heard that some other auto workers (for other companies) who are not part of this union have also started a strike action on the heels of the UAW strike.

Here is the basis for the strike. When the US economy was on the brink of collapse in 2008, the US government came to save the day. You will remember that they bailed out the banks. But it wasn't just the banks.

These auto manufacturers were bailed out too. They were on the brink. And during their periods of struggle, they stripped away many of the benefits that they gave workers. And it was understandable. It is not in the worker's best interest for the company to go down.

But the tide soon turned. And gradually, business was booming in the US again. Interest rates were at zero and there was money everywhere. The companies made record gains, but they didn't share that with the workers. They continued with the deal they made with the unions at the time of crisis.

And no one could really complain. Life was good. So, no one paid serious attention. Then, the lockdowns happened. And that triggered a surge in inflation like the world has never seen before. Now, everybody feels the austerity. The central bank raised the interest rates to record highs, inflation is at record highs, and people can feel those changes. The auto workers felt it.

(The interest rate is the cost of borrowing money from banks or financial institutions. This also affects credit cards, mortgages, etc. If you take any kind of loan, the percentage of interest you are charged is known as the interest rate. As an example, a higher interest rate means that monthly mortgage payments that used to be $2500 can go up to $3750 because of the percentage increase).

Now, the auto workers saw that they had been shortchanged. When the times were bad, they took the L with their companies. When times got good again, the companies didn't look in their direction. Now, times have gotten difficult again.

And there is a second punch to this. Governments all over the world have been encouraging the transition to EVs (electric vehicles) from auto manufacturers. The problem is that electric vehicles are not cheap. They are very expensive. They want to force everybody to switch to EVs soon and are heavily incentivizing auto companies to make EVs. This will dramatically change the workforce of those auto companies significantly.

Meanwhile, China is making cheaper EVs and shipping them all over the world. This significantly squeezes the market for these US auto manufacturers. And the workers are not stupid. They can see the change that is coming.

Many of them will face job loss as these auto manufacturers fully move into manufacturing EVs. So, this is their last-gasp effort to get the best deal from the auto companies.

The Argument

The salary of the CEOs has increased 40% over the last 4 years while the salaries of the average worker only went up by 6%. This is the argument of the auto unions. This matters more than ever because people are seeing inflation eat their incomes away.

Each time they go to the store, they money can buy less and less. So, they have been pushed to the wall on every front.

Anyone who tells you things are fine in the world economy is not speaking honestly. Well, you could say there was always something at every point in time. But not like this.

Now, Europe is facing a stagflation. This means low economic growth combined with high inflation. And it will soon hit the US. The resilience of the US economy is hailed right now but when things break, it is going to be dirty.

Hollywood is also on strike too - actors and writers. And this is setting the stage for the worst-case scenario.

The worst-case scenario is not a recession, depression, or even stagflation. The worst-case scenario is crazy wealth inequality. There is a level where it can be managed, but we are getting close to where it can't be managed.

People are finally waking up and they are hellbent on not being the ones to take the L this time, unlike in 2008. And I agree with that sentiment.

So, my prediction is that businesses are going to get squeezed like never before. On one hand, they have high interest rates which is putting a barrier (or cap) on how much money they can borrow. On the other hand, they have workers demanding higher wages.

Roughly speaking, the big companies and small companies will be fine. But a lot of mid-cap companies will suffer. Companies with unhealthy amounts of debt will suffer or maybe go out of business. The big ones can be bailed out and the small ones can always start over.

It is going to be a testing time for a lot of businesses. People who don't know how to run a healthy business balance sheet will have a tough time.

The Economic Impact

I'm guessing this wave from workers will not go down soon. Inflation will continue to be high for now. So people have all the motivation in the world to demand higher wages.

This will probably make inflation even higher. But I am willing to bet that the correlation between wage growth and inflation is weaker than ever.

Wage growth is a trend we will keep seeing. Inflation will stay high. Interest rates will be higher for longer.

If we do not see wage growth trend higher, then it will lead to a lot of unrest. And that can have nasty consequences. I don't even want to talk about it. That is the worst-case scenario.

My biggest concern is that nobody is talking about the way to fix this problem yet. I guess the PM of Britain shifting the EV deadline away from 2030 is one step.

This problem was caused by bad government policies and decisions. Central banks cannot fix it. Only better decisions can fix it. You cannot legislate your way to innovation. The "green" transition rush is a big mistake. The lockdown was a big mistake. The 2008 crisis bailout was a mistake.

Now, we live with the consequences.

I rest my case.

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