Industrial Jobs Returning Via Deficit Spending

We are now seeing a trend, assuming the forecast is correct: Manufacturing in U.S. Probably Grew for Sixth Straight Month. Here are excerpts:

Factories are stepping up production as stimulus-fueled gains in demand and record cutbacks in inventory boost orders. . .

Government stimulus helped spark rebounds in the housing and automobile industries, two of the most depressed areas during the recession . . .

Production gains are starting to encourage the hiring needed to ensure the recovery is sustained. . .

General Electric Co. is hiring workers in energy, health care and rail transportation, in part because governments’ economic-stimulus plans have helped lift demand.

GE, whose power-plant equipment generates one-third of the world’s electricity, is bidding to supply new passenger locomotives for Amtrak and in November announced a joint venture in China that would make high-speed rail locomotives that may add 200 U.S. jobs.

“We will create jobs in the United States that could not have been created any other way,” John Rice, chief executive officer of GE Technology Infrastructure, said of the rail programs in a Jan. 28 Bloomberg Television interview.

Please consider the quote from Mr. Rice. These jobs were only created from taxpayer funds. I do not know if they are for worthwhile projects, but it appears clear that socialist-style industrial policy is in effect here. Worse, it is incorrect to say that industrial hiring will "ensure the recovery is sustained". After all, there was a depression in 1920-21. Then there was hiring. There were 3 more recessions/depressions in the remainder of the 1920s. Similarly, the severe recession of 1958 ended with hiring by private industry. Yet there was a (mild) recession in 1960 that helped elect John F. Kennedy. If indeed Mr. Rice is correct and these jobs could only be created by government, that means they do not meet a need of the free market. All industrial jobs are cyclical, but those created by a heavily indebted government are at extra risk.

Meanwhile, unsaid in this cheerleader article is the fact that only about one-sixth of jobs in the U. S. are industrial. The length and depth of job losses shows that reviving industrial jobs, via money-printing and other budgetary gimmicks, does not ensure even an exit from the Great Recession/depression.

But rest assured, larger deficits are on the way, it appears. The government is pulling out all the stops. It is doubling down by making sure that its debt increases faster than private debt shrinks. Plus it is encouraging yet more municipal debt by planning to expand the Federally-subsidized Build America Bonds program.

All this debt is dangerous and ultimately creates more instability.

A few extra jobs at GE don't merit all this.

Copyright (C) Long Lake LLC 2010

Goldman Says: "The Roots of the Economy Are Dead and Dry"

From James Pethokoukis: 12 reasons the job market is worse than you think . . .

#12 quotes from a column from what looks like a blog by a columnist for the Asia Times (online edition); Mr. Pethokoukis craftily makes you think it is from Goldman, Sachs (as did I in the title to this post):

12. It is tough to top Goldman’s analysis:

The level of un- and underemployment is so huge by historical standards as to make the usual sort of measurement questionable. With nearly 20% of the population unable to find proper work, there is a different sort of workforce. The vast majority of job creation in the US during the past two generations came from small businesses, which display only vaguely on the radar of government agencies as well as the bigger private surveys. The financial crisis killed small entrepreneurs as surely as Joseph Stalin killed the kulaks, and the roots of the economy are dead and dry.

Clicking on "Goldman" gets you to Dave Goldman's column, not GS commentary. Some is quite similar to the Pethokoukis column. But it's concise and worth a read.

Now, the Onion has, I believe, satirized the jobs situation by turning it on its head and pointing out how favorable the labor supply is for employers: lots of relatively cheap labor is available.

Indeed, almost all the financial oxygen has been administered to Big Finance, and today it is looking likely that Big Insurance is going to join Big Pharma in getting big benefits from a big health bill-- with large taxes coming for several years before the subsidies come in.

What are the investment consequences of all this?

1. A Potemkin economy, where IBM can show large profit gains even as sales almost literally collapse;

2. Massive speculation given that cash is perceived as trash;

3. Unpredictable but almost certain major trend changes.

What are these trend changes?

Think back to Volckerism/monetarism. The price of financial assets--claims on the real economy--dropped to very low levels relative to the real assets. Thus, stocks and bonds were set for many years of revaluation upwards as the real economy moved forward. This ended in farce in 1999-2000, where stocks reached historical overvaluation levels and gold provided a hugely negative return from its 1979-1980 peak adjusted for inflation and lack of dividends.

Gold then started up in 2001/2 but even this year traded below its 1980 peak price.

Treasury bonds continued on their bull run into last December and remain in their multi-decade descending channel (rates descending, prices of the bonds ascending). T-bills now yield assentially nothing. But the rest of the bond market, including munis, collapsed last year. This smells like the canary in the coal mine. While Treasuries soared in price, those bonds collapsed.
Treasuries could be next--some day or some decade. (Japan, anyone?)

What is the government doing about the economy?

Well, it's supporting the real estate economy--those troubled giants such as Fannie and Freddie.

But this is pushing on a string.

The Fed is "printing" money and the President is re-stimulating (stimulus #3).

The Gallup.com hiring/not-hiring index remains around zero, a level it first hit about a year ago.

So it would look as though the current economic cycle is similar to the 2001-7 cycle: the tragedy of the housing bubble now turned farce; even lower short-term interest rates reflecting a more severe economic downturn; continued support for Big Finance just as in Japan; continued war in Muslim countries draining our resources.

While stocks are more reasonably valued than in 2000, there are many fewer bargains now than in 2002/3. And the S&P 500 yields 2% or less, which is less than even 5-year T-notes and thus is a historically poor yield.

I suspect that one of these cycles, investors will see a 5-6% handle on dividends. This would imply a long period of stagnation for stock prices at best. Thus the major trend change of poor returns from common stocks may reasonably be expected to continue, though self-financing companies selling necessities may do quite well.

In the meantime, the businessman's risk here is that gold will not pull a Lehman and disappear from the financial world. In theory it could, but with all the money-printing that policy-makers have adopted to "support" the economy (remember, ZIRP exists to bail out Big Finance), and the strong chart, the guess here is that gold remains a very sensible asset class to own a significant amount of, with silver and platinum along with (probably) oil as ways to participate in what may be a False Recovery in a near zero short-term interest-rate world.

Copyright (C) Long Lake LLC 2009

ECRI Longer-Term More Bearish than Bullish; Implications for Asset Classes

In Unemployment Is Down, But Business Cycles Are Key , the chiefs at the Economic Cycle Research Institute make the case that the likely path of the U. S. economy for the intermediate term is one of more frequent economic ups and down than that envisioned by the proponents of the "Great Moderation". Here is an excerpt; please read the entire article:

Since World War II, there has been a clear easing pattern in the trend rate of economic growth during expansions, culminating in the 2001-07 expansion, which showed the slowest trend rate of growth on record — especially in terms of jobs. Ominously, during expansions following the initial year of revival, growth in non-manufacturing employment has been falling in a parabolic fashion since the 1970s. A continuation of this pattern would lead a much worse job market than almost anyone expects.

The "great moderation" of business cycles once extolled by many economists, including Chairman Bernanke, is history. The trend rate of growth is shriveling. In other words, business cycles are back with a vengeance.

I would ascribe much of the decreased growth rate to demographics. My parents are shrinking; if I live long enough, I will too. My grandparents were deceased at my parents' ages. Japan, here we come?

In any case, rather than accept that decreased economic growth may be as much of a blessing as a curse, and considering that leisure time and time for different forms of work is a positive, the current powers that be are likely to also follow the Japan model and try to "stimulate" the unstimulatable.

Thus we see just today the sudden news that not all of TARP is needed, therefore the deficit is not so bad, therefore there is money for a jobs program, etc. Anyone with a decent memory will, however, remember that when the deficit projections were made many months ago by Team O, a large fudge factor for TARP was put in, with the overt statement that much of it may well not be needed.

In any case, the case for gold is that jobs trump sound money whether you are a statist or free markets President.

In that vein, the MSM is in full-throated cry with a truly idiotic and unfair Bloomberg.com article this morning titled Gold Can’t Beat Checking Accounts 30 Years After Peak.

Its premise is that the few bars of gold that traded at $850 per ounce in Jan. 1980 should be compared with what may or may not be a current major peak around $1200. The fact that taxable cash beat non-taxable holdings of gold by only double is highly unimpressive. More impressive is that gold went from $42 per ounce in 1971 to a current $1150 or so in 38 years. This is a 9% yearly return. This is almost a 30-bagger. And you never had to trade, pay taxes or whatever. The article asserts that the S&P 500 gave a 22X return since 1980, and we know how well it did between 1971 and 1980! But the S&P index is theoretical, ignoring transaction costs, taxes, etc. With gold, buy it once and put it in a bank safe, bury it under a tree in the back yard, etc; and let paper money depreciate. An ounce of gold bought a nice men's suit in 1920, and it does so today (but fiat money must be used to pay for it in America, though perhaps not in Hong Kong).

With all the enthusiasm for gold recently, it is refreshing to see that the real powers that be-- meaning the publication of the financier who has been reinstalled as Mayor in large part to see that New York stays on top of the financial heap--want the public to accept stupid debating points to keep on believing in stocks and bonds.

Copyright (C) Long Lake LLC 2009

Government-Run Economy?

In Obama’s to Fix op-ed in today's NYT, Charles Blow says that the current President needs to fix the jobs problem.

This view is all over the media.

What I wonder is whether the American people really believe that the Federal Government really can, or more importantly, should "fix" the jobs problem.

The proximate cause of the miserable jobs market is that government and its allies in Big Finance and subsidiaries such as homebuilders did not respond to any market forces and instead created an unbalanced economy and speculative financial companies. The simple solution is for Government to fix this financial mess while at all levels of government helping to support the truly needy. Force banks to do only banking and let gamblers gamble and win or lose without any claim on the public purse. Unfortunately, the Obama administration appears to be proposing things that move in the other direction. For example, you and I are now on the hook for huge quantities of FHA loans to subprime borrowers. Why? There's nothing wrong with renting.

Even an administration that fought against Wall Street scams, FDR's, did not really make a dent in unemployment.

In this rich country, which produces more than enough food, clean water and the like for all residents, and which contains a housing stock that can already house far more than the current 300+ million residents, and where the great majority of consumer products have 90%+ gross profit margins (meaning that companies don't really need all their employees just to get the goods out the door), the question of the need for "growth" at the expense of risk and stability of the system, the external environment, fairness, etc., must be discussed. The faster you drive a car, the greater the chance of an accident AND the greater the harm from said accident.
That's exactly what happened last year when a garden-variety recession transformed almost overnight into a jobs depression. Growth is not always good.

Putting jobs in perspective, let us say that the latest jobs number show 1 in 5 workers are unemployed or underemployed. Let us also say that the average worker works 2000 hours per year, counting commuting time. Why couldn't we get to full employment and have the average worker work 1600 hours per year, have more time off, and thus enjoy life more?

Now, I'm not specifically advocating for or against this outcome, but the underlying point is that the country must think through how it wants to allocate its human and physical resources. Does government at all levels have a necessary role in this process? Obviously. In a capitalist democracy, is it government's responsibility to decide on how hard people should work, how many motor vehicles should be in existence, how many homes of what square footage there should be and whether they should be rentals or "owned"? No. Especially when nowadays "ownership" means having little or no equity in the home. Sounds like renting under another name to me.

Public-private partnership re the economy? Yes, that's the way America grew. But a cursory review of the Declaration of Independence shows that governments are instituted among men to secure individual benefits, and the Constitution begins with "We, the people". Power emanates from the people. Government should be the servant and not the master. Thus Mr. Blow's op-ed has it backwards. The Feds need to do a better job regulating and improving the mess they helped create. The private sector in conjunction with more local governmental entities will work as hard as it wants doing work that it wishes to do to serve the real needs and desires of the people.

Copyright (C) Long Lake LLC 2009

A Prescription for Health Care as a Source of Job Growth in America

The twin foci of the Obama Administration have been the economy and health care.

It is proposed herein that the latter provides an important part of the solution for the former.

Rather than treating health care costs as a "bad thing" that need to be reined in, why not accept that there is a reason that they are estimated at 15% of GDP or greater and increasing? The reason is that the provision of health care is good for the provider, good for the recipient, and good for society at large. (It's also good for the insurer!) On the other hand, the sale of revolving credit to a credit junkie is good for the seller but bad for the recipient, and probably bad for society as a whole. The promotion of junk foods by supermarkets via prominent placement at the ends of aisles and at check-out counters is good for the market, bad for the shopper and the shopper's family, and bad for society. In the middle are things such as seeing a movie, which is presumably good for the movie industry and the viewer but neutral for society as a whole.

Due to a combination of public health improvements over the past decades and even centuries, and improved medical care, we have an aging society. This is so in Europe, Japan and China. Who will care for the old? No matter what health care bill may or may not pass this year, a failure to train more physicians, nurses and other allied health professionals, and even nurse's aides, will lead to rationing of care one way or another.

The United States is the world leader in medical technology, both devices and biotech. This could be a major growth export industry for the indefinite future.

As part of any health care bill or as stand-alone legislation, increased investment in the education of health care workers is needed; and instead of wasting money subsidizing a home purchase by a buyer who most likely would have purchased the home anyway or subsidizing auto sales often to buyers who didn't really mean to take on all that new debt, the country should double down on its strengths and grow its medical technology industry.

Think the song "Sunrise, Sunset". What are the sunrise and sunset industries for jobs for Americans?

Promotion of good health, and prevention and treatment of disease, provide a path toward a better and more prosperous America. And, by the way, one with plenty of good, clean jobs.

Copyright (C) Long Lake LLC 2009

Can Losing Jobs Be a "Good Thing"?

As Labor Day approaches and the media try to spin or ignore the fact that of the two surveys on employment reported yesterday by the BLS, the "establishment" survey that gave the better results was still 400,000 jobs short of what is necessary merely to maintain the unemployment rate stable. With that in mind, and the S&P 500 index up 50% in 6 months as millions of jobs have been lost and as GDP is lower now than 6 months ago, consider the following headline:

U.S. Recovery Leaving Workers Jobless May Spur Company Profits.

Orwell's 1984 put it well:

"From where Winston stood it was just possible to read, picked out on its white face in elegant lettering, the three slogans of the Party:

WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH."

The title also recalls Dr. Pangloss of "Candide" that "all is for the best" and that we live in the "best of all possible worlds".

After all, if the S&P can get to 1000 with 10% unemployment with surging profits (allegedly), then why not project S&P 1100 with 11% unemployment and a record S&P 1600 with 16% unemployment? Why should anyone ever answer a phone anymore in corporate America, anyway? Voice systems will do. We can have a virtuous cycle of unending prosperity as unemployment rises. Fewer commuters mean less demand for gasoline, less wear and tear on the roads, less time lost in traffic, etc. There will more time to shop, and the government can print as much money as needed to allow these non-workers to keep the engines of profitability working. Plus as people sit around with little to do, they can spend more time eating, thus enriching drug manufacturers, manufacturers of prosthetic hips, and the medical establishment.

Meanwhile . . . as Woody Allen said to Christopher Walken's semi-psychotic character in "Annie Hall": back on Planet Earth . . .

The news out of Gallup matches that out of Discover Financial (see EBR's People More Hopeful But Can't Spend the Hope) from August. Click HERE for Gallup's latest 3-day moving average poll of people as to whether their employer is hiring, firing or standing pat. Click HERE for what they are spending (3-day and 14-day moving average data; the 3-day data is skewed by extra spending on weekends). EBR to Earth: there has been no real recovery in the real world of real people. These results are back to levels of S&P 700, not 1000.

In other words, this has been a faith-based stock rally. The economy is sick. The bearish economists got the economy right. The P/E ratio ("profit-to-earnings" per the President!) from Fed money-printing and Governmental gimmicks such as cash-clunkers or $43,000 per first-time home buyer is minimal.

It's time for a change. The change that is needed as Labor Day approaches is the creation of jobs that fulfill a legitimate economic function. The resurgence of profits at Big Finance is the wrong trend. Better that Vegas boom again. At least Vegas didn't put the world into the "Great Recession" the way the Big Finance gamblers did.

One thing that can be stated with certainty is that an 8% "health insurance" tax on all labor will inhibit both hiring and creation of small businesses.

EBR believes that the President needs to settle for bipartisan health insurance reform, hope to do well in the midterm elections, and then, with the economy presumably stronger in 2 years, "do healthcare" in a more sweeping fashion.

Copyright (C) Long Lake LLC 2009

New Hires and the Stock Market

From the Bureau of Labor Statistics, a chart showing new hires as a percentage of the employed population (from the Job Openings and Labor Turnover Survey).

(Click on chart for more detail.)

There is a correlation with the stock market up-move in early 2002 and then the final bottom for that cycle in early 2003. Again, the chart correlates well with the market top in late 2007. The fall from March 2009 in this ratio does not correlate with the strong stock market move up since March.

Will this relationship reassert itself, either by vigorous new hiring in excess of the stock market moving higher, or by the stock market moving down to catch up with the continuing deterioration in new hires, or by some of each?

For what little it's worth, I'm still hearing of layoffs for efficiency reasons, except for health care.

Copyright (C) Long Lake LLC 2009

Pangloss at the Times: There Are Plenty of Jobs, But They Are Just Not Plentiful Enough!

The mainstream media has outdone itself with lipsticking the pig with the NY Times article, Bright Spot in Downturn: New Hiring Is Robust. Sounds promising, eh? Let's see what the Times actually reports:

So, while 4.8 million workers were laid off or chose to leave their jobs in February, employers across the country hired 4.3 million workers that month, according to the Bureau of Labor Statistics.

DoctoRx here: Simply astounding. News you can use. Or something.

“The best thing you can say about these numbers is it speaks to the dynamism of the U.S. economy, and the net negative number that we all traffic in masks that,” said Robert J. Barbera, chief economist at ITG, a research and trading firm. “Ninety out of 100 people who know the number — 650,000 were lost in February — think that means no one was hired and 650,000 were fired.”

DoctoRx here. Did Dr. Barbera actually use the term "dynamism" to describe the U.S. economy??? I would think that "dynamiting" is more appropriate. Back to the whitewash of the greatest economic banana in quite some time:

Zachary Schaefer has hired 72 people since February for the Culver’s hamburger and frozen custard restaurant that he and several partners just opened in Surprise, Ariz.

“The amount of applicants who are qualified is definitely up,” he said. “Whereas before we were counting on a lot of high school applicants, now there are a lot more middle-age people applying.”

Eddie Hamm, a former construction worker, was unemployed for five months when he drove by the site where the Culver’s was under construction. Mr. Hamm, 29, applied for a job there, and now he’s a “fry guy.”

“I’m just happy I got hired — I didn’t want to stay home, not doing anything,” he said, hardly complaining that he is earning half the $15 an hour he made in construction. “I don’t look at it like I’m making $7.50. I look at it — I’m having a job in a down time, and it’s a job where I can move up.”

Economists and job counselors advise the unemployed that there are definitely jobs to be had, even if there aren’t nearly enough to go around. With 13.2 million people out of work, there are 4 1/3 unemployed Americans for every job opening.

DoctoRx here. Please reread that last paragraph: there are definitely jobs to be had, it's just that there aren't enough of them! I ask you: how can the Times possibly say that hiring is currently "robust"? Either they have gone insane over there, or they are spinning so furiously to put people in a good mood, especially those who glance at the headline without bothering to read the article, that they have gone way over the top. (I favor the latter option.)

In the meantime, if you want to get an opinion from one of the truly leading, sane, calm experts on financial crises, read the Bloomberg.com article on Dr. Ken Rogoff's views. He predicts that the economy will be so weak that another round of "stimulus", AKA deficit spending, AKA printing money, will be undertaken.


Copyright (C) Long Lake LLC 2009