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.