The Glass Half Full

Following our “muddle through scenario” client letter in January, we had the best quarter in the world equity markets in a long time. Lack of utter disaster translated into quite a market rally, and we were certainly glad for it. Now in April the issue of Spain has reared its ugly head and markets are taking a tumble. It never ends, does it?

Now, turning to Martha Post, our Chief Investment Officer, for a discussion of government statistics and her decision not to be just another Washington bureaucrat…

My first job out of college was as a Budget Analyst for the Bureau of Labor Statistics at the U.S. Department of Labor in Washington, DC. This was in the days of Jimmy Carter’s Zero Based Budgeting (dating myself here), but that’s another subject. I was keeping track of BLS’s money rather than working directly on their programs, but it was impressed upon me, as on everyone else, the importance of keeping the data confidential—no early releases or leaks.

That really hit home a few years later when I started in the investment business and saw how the statistics coming out of BLS moved markets. Case in point: Good Friday’s employment report for March. The market was closed for the holiday, but the S&P 500 was down almost 3% in the two days after the release of the latest numbers, attributed by many to the considerably below-consensus payroll number and job outlook.

Before I left BLS, I was offered the opportunity to move into the Employment program and train as an economist. Not of interest to me, so I turned it down. But there are certainly some interesting numbers coming out of that program these days. Recently reported nonfarm payroll rise of 120,000 jobs was well below estimates of 200,000, and the effect on market psychology was immediate and devastating.1

National Unemployment RateBut how can things be so bad if, at the same time, the unemployment rate (from the household survey) fell a notch, to 8.2% from 8.3%?2 We’re still a long way from 4% unemployment, but things are improving, aren’t they, on the way down from 10%?

Labor Force Participation

Well, a couple of other interesting charts from BLS are not so encouraging. The labor force participation rate, the percent of the population seeking work, peaked around 2000 and shows no sign of an upturn.3

Employment Population Ratio

Likewise, the employment-population ratio, representing the percentage of the population employed, peaked around the same time, declined precipitously over the financial crisis, and has yet to show measurable recovery. The ratio fell from over 62%, where it had been before the crisis, to about 58.5% in 2009 and has stayed there.4 Stuck.

Long-term Unemployment

Another chart shows long-term unemployment, and this time, unlike all the other recoveries, we are stuck.  Unemployed long-term.5

Back to Roger…

We know the arguments and defenses, and we will hear plenty more between now and November, needless to say. But the notion that we have “created x million jobs” and we just need to “keep working at it” is obviously not telling the whole story. We are stuck. Whatever we are doing today is not working to put the older workers back to work. We barely put the new people to work. The older men in particular are not coming back at this point.

Paul Krugman, a former economist and prominent Keynesian, acknowledges this situation. His solution is to spend a lot more government money; in his view it is all about “demand.” Others seriously doubt the efficacy of more government spending and lament the enormous debt being accumulated for future generations. The election in November may well turn on this point—is current government policy helping stave off total disaster, or is it creating disaster? I guess it depends on who you ask.

Apple hits $600 billion in market cap

Apple is now the world’s biggest company and growing rapidly, and though their spectacular success is a very special and unique story, they are not alone in succeeding in these difficult times. The solid business success we are experiencing and the resulting good markets are happening in spite of these problems, although all that could change soon enough (knock on wood). But employment of Americans is stuck in a bad place. Unless something changes, the “New Normal,” as PIMCO’s Bill Gross and Mohammed El-Arian point out, will be a higher structural level of unemployment. Not good.

And about España…

In planning to add a quick update on Spain, we underestimated how much there is to say, sadly enough. 20%-plus unemployment, a bankrupt banking system, a real estate bubble that makes ours look almost trivial by comparison, terrible economic policy that makes every aspect of this chronic… suffice it to say that Spain is a much larger problem than Greece, and will be a big challenge for some time to come. And we will observe our capital markets roiled from time to time by issues related to Spain – we just had such a roiling recently. But don’t lose perspective and give in to despair; Spain’s new government is making changes, embarking on a program of labor reforms, spending cuts and tax increases. The question is whether the impact will be felt soon enough to show up in data to calm Spanish debt holders. This would not turn out to be the first “impossible problem” to yield to a muddle-through outcome. It happens.

An interesting side note to the employment discussion: The biggest structural employment problem in the U.S. is older workers who have been laid off. They have experience but not necessarily the latest technical skills and cost more in salary and benefits than younger workers. Meanwhile, in European countries like Spain the older workers in the private sector are protected by stringent labor laws, and youth unemployment is 50%. Plenty of human suffering in both systems, but from a competitive and fiscal health standpoint Spain has no choice but to head more towards our model, which they are now implementing.

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The Glass Half Full

time to read: 5 min