This week's European government and financial tumult brings me to once again review the position of large US commercial bank CEOs, led by Chase's Jamie Dimon, that their firms should be allowed to take risks, presumably in order to drive high total returns.
At issue currently are two changes which bank managements despise: the Volcker Rule and higher primary equity capital requirements. The former strips large commercial banks of the ability to pursue riskier profits via proprietary trading, while the latter adds capital, which will depress returns on assets.
It's fair to say that, with recent hindsight, on average, the Volcker Rule will minimize societal costs of banks trying, but usually failing, to earn profits on risky trading with their own capital. The recent financial crisis demonstrated that those financial concerns capable of not losing on such risky trades are small in number, and often privately-held, while the larger US commercial banks carry deposit insurance, and, thus, indirectly, are themselves insured by the US federal government. The Dodd-Frank bill has made such insurance of firms explicit.
After several decades of US commercial money center banks cyclically posting large losses on everything from sovereign lending to credit cards, mortgages, and energy lending, requiring higher capital levels doesn't seem so harsh. For example, as I noted in this recent post, fund manager Ron Baron declined to invest in Jon Corzine's now-failed MF Global in part because, with capital constituting only 3% of assets, the risk of total loss of equity from trading positions was too great. Today's US money center banks are fighting to avoid capital levels only a little higher, i.e., going from 7% to 9%. It seems like a lot when seen as a percentage of balance sheet assets. But it's trivial when seen as the potential loss in a trading position. What's another 3, 4 or 5 percentage points of loss once a derivative or badly-hedged asset goes wrong? It's rounding error.
But to CEOs of these companies, that means relegating them to a role much more like energy utilities than like investment banks or faster-growth firms.
Which brings me to the central point about this debate over permissible money center bank activities and their primary capital levels.
My now-deceased mentor at Chase Manhattan Bank, Gerry Weiss, observed decades ago that since banking is a derivative industry, it can't, in total, grow faster over time than the economy which it serves. Thus, shorter-term, faster growth typically comes by taking more risks. Which pays off for management when it works, and leaves shareholders with losses when it doesn't. Only, in reality, those losses now become spread to taxpayers, as well.
So long as a bank is allowed access to taxpayer money for insuring deposits, and is allowed to become sufficiently large that its collapse would create counterparty problems for the nation, it has to be restricted to a role as a financial utility. Much as CEOs like Dimon want to have the latitude to chase total returns that match the US equity market's best, doing so as a money center bank simply isn't in society's interest.
Time and again over the past several decades, US money center banks and their managements have exhibited poor judgement and incompetence at avoiding bank-collapsing risks. When enough commercial bank assets pursue similar risks, which typically occurs, the resulting systemic risk endangers the US economy.
Dimon and his fellow CEOs like Vik Pandit at Citi or Brian Moynihan at BofA may grouse about being shackled and prohibited from pursuing brisk income growth which outstrips that of their markets. But to allow them to talk their way out of both measures- restraint of proprietary trading and higher equity capital requirements- will more quickly and certainly lead to the occasion of another taxpayer-rescue of a US money center bank.
Showing posts with label Growth. Show all posts
Showing posts with label Growth. Show all posts
Friday, November 11, 2011
Wednesday, October 19, 2011
IBM's Revenue Growth
Tuesday's Wall Street Journal reported on IBM's quarterly earnings announcement with the headline Worries Persist for IBM and the subheading Tech Bellwether's Profit up 7%, but Contracts Disappoint.
I've written in prior posts that it seems passe to consider IBM a 'tech bellwether.' Be that as it may, the firms nominal year-on-year revenue growth was only 7.8%.
My proprietary equity performance research found that earnings growth isn't significantly related to changes in total return. Which means that managers will do whatever they must in the near term to make earnings targets, thus making them meaningless as indicators. In this case, doing so led to profit growth which almost matches revenue growth. The latter qualifies for being a high growth rate, unless you're talking about a conventional slow-growth firm. Otherwise, it suggests economic weakness.
But revenues are a different story. And IBM's near-flat revenues growth ought to trouble those who monitor the US economy. If the firm is a bellwether, be concerned.
I've written in prior posts that it seems passe to consider IBM a 'tech bellwether.' Be that as it may, the firms nominal year-on-year revenue growth was only 7.8%.
My proprietary equity performance research found that earnings growth isn't significantly related to changes in total return. Which means that managers will do whatever they must in the near term to make earnings targets, thus making them meaningless as indicators. In this case, doing so led to profit growth which almost matches revenue growth. The latter qualifies for being a high growth rate, unless you're talking about a conventional slow-growth firm. Otherwise, it suggests economic weakness.
But revenues are a different story. And IBM's near-flat revenues growth ought to trouble those who monitor the US economy. If the firm is a bellwether, be concerned.
Monday, August 01, 2011
Friday's GDP Numbers
The much-anticipated US government's formal news release of GDP for Q2 and revised Q1 came with disappointing data:
"Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."
And on prices and spending,
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.
Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first."
Over on Bloomberg television, Tom Keene said he thought the Q1 revision was a typo when he first saw it. The GDP data provided an explanation and, probably, a good reason for the fifth S&P500 down day last week. From 1345.02 the prior Friday to 1292 and change on the last trading day of July, the equity index reflected ongoing US broad economic difficulties.
Recall, if you will, the administration's robust 4% annual GDP wishes-as-forecast. We're a long, long way from that.
While the government debt limit and spending cut drama continues to play out, one would be forgiven for seeing the GDP, price and weakened Q2 spending data as more lasting, deeper reason to doubt whether the US really ever exited from the recession begun in 2007.
Still, this need not mean a plunging S&P500. The larger global US companies comprising the index continue, in the short run, to profit from economic growth elsewhere in the world, with more favorable business conditions abroad than at home.
Not that even this will last indefinitely. But until deleveraging makes more progress in the form of reduced expecatations of government pensions and benefits globally, and subsequent higher personal savings rates and lower consumption, US equities may remain attractive.
"Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent."
And on prices and spending,
"The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.
Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first."
Over on Bloomberg television, Tom Keene said he thought the Q1 revision was a typo when he first saw it. The GDP data provided an explanation and, probably, a good reason for the fifth S&P500 down day last week. From 1345.02 the prior Friday to 1292 and change on the last trading day of July, the equity index reflected ongoing US broad economic difficulties.
Recall, if you will, the administration's robust 4% annual GDP wishes-as-forecast. We're a long, long way from that.
While the government debt limit and spending cut drama continues to play out, one would be forgiven for seeing the GDP, price and weakened Q2 spending data as more lasting, deeper reason to doubt whether the US really ever exited from the recession begun in 2007.
Still, this need not mean a plunging S&P500. The larger global US companies comprising the index continue, in the short run, to profit from economic growth elsewhere in the world, with more favorable business conditions abroad than at home.
Not that even this will last indefinitely. But until deleveraging makes more progress in the form of reduced expecatations of government pensions and benefits globally, and subsequent higher personal savings rates and lower consumption, US equities may remain attractive.
Wednesday, July 20, 2011
Taxes, Economics, Rawls & Nozick
In the current fight between Democrats and Republicans concerning the debt limit increase, one hears the former primarily focus on the notion of 'fairness' of taxation.
That is, the president and his party's members of Congress will take a few favorite elements of the existing tax code, such as existing rates for higher-income earners, reduced under President Bush in his first term, and grudgingly extended last year, or special provisions for private business aircraft, and hold them up as 'unfair' to lower-income earners.
Of course, from a purely objective perspective, the reason for taxes is to raise money to fund governmental operations. As these posts on taxes that I've written discuss, tax policy has consequences on taxpayer behavior, regardless of whether politicians believe it to be so, or the CBO models such affected behavior.
It's common knowledge that the CBO uses what is known as 'static scoring,' wherein simple arithmetic changes are modeled for tax policy changes. That is, an hypothetical change is modeled as ex post on pre-existing incomes, spending, investing, etc., with no assumption that such a change may have, in reality, changed prior behavior.
Along with this myopic scoring goes the misguided concept of 'paying for tax cuts.' This peculiar view assumes that some tax revenue level is due to the government, so any change in tax law that results in the static scoring showing lower total tax revenues must be 'paid for' by either new taxes or higher rates elsewhere.
Of course, any fool who reads that second sentence instantly realizes its idiocy. You get less of what you tax, so trying to raise more tax revenues through higher rates or new taxes is, overall, self-defeating.
This is why, among the 22 tax-related posts I've written, you will find a couple detailing economic research leading to Hauser's Law, wherein, over time, a fairly consistent 18% of US GDP is collected via taxes, regardless of tax rate structures.
Once you understand and accept that relationship, it becomes obvious that the way to increase gross federal tax receipts is to set rates at levels that maximize GDP.
But this assumes one uses tax policy primarily as a means to fund government. And it distinguishes between tax rates, and tax receipts, which may be inversely related.
But many liberal elected federal government officials in Congress and the White House choose to discuss tax policy primarily as a tool to enforce "fairness."
Unfortunately, when you attempt to make a single policy, such as tax policy, serve two objectives, such as raising maximal or sufficient government funding, and enforcing some undefined notion of "fairness," you get, well, a mess. Especially when measures of fairness are not obvious.
Yes, there are various indices of differences between high and low incomes or taxes paid. As with the subject of concentration of market share in sectors, one can design various measures purported to indicate relative uniform distribution or distortions of any variable.
However, the basic notion that there is some "fair" amount of tax receipts, or their income, which "the rich" should pay, doesn't seem to be any sort of bedrock, fundamental Constitutional principle.
In fact, if you read the Constitution, as I did this morning, it was originally written rather vaguely and imprecisely on the subject of taxes. The only thing that was fairly clear about taxes in the original, pre-1912 Constitution, was that taxes were levied on business activity, not people.
Even today, one could choose to replace the income tax with a spending tax, if one so chose. There isn't really anything special, per se, about income-based taxes, except that it appears to penalize those who earn more.
By the way, which should be the subject of fairness- tax rates, or tax revenues, or percentage of toal taxes paid? Or is it subjective, i.e., whichever soaks the rich more is "fairer?"
On that subject, and this one, it so happened that I stumbled upon a discussion of this topic yesterday morning on CNBC. Due to the loss of Erin Burnett to CNN, and Mark Haines to death, the network has switched its co-anchor lineups, replacing Carlos Whathisname in the 6-9AM slot with Andrew Ross Sorkin, a NY Times liberal media darling.
At issue, with Michele Caruso-Cabrera defending the conservative viewpoint, was whether high-income taxpayers are "giving back" to the nation by paying a lot of gross dollars in taxes. Apparently the president recently called out Apple's Steve Jobs, by name, for failing to "give back" sufficiently to America via charity, as his rival, Bill Gates, has done.
This is an excellent example of why it is dangerous to allow government to begin to use concepts such as "fairness" in taxation policy.
Who is to be our arbiter of what is "fair" for anyone to pay in taxes, or charity, to the nation? Why is it necessary that tax rates even rise with income level? Surely, if there were one flat rate of, say, 10%, then a person earning $1MM would already be paying 10 times the amount paid by someone earning only $100K.
Isn't that "fair?"
The Constitution is notably silent through most of its original language on the topic of citizens having direct relationships with the federal government. One surely does not get the idea, when reading it, that the Constitution had as any of its purposes to enshrine a climate of punishing those Americans who either earned high incomes or amassed large amounts of assets.
How odd, now, to hear one party continually beat a drum for all conversations involving government debt, deficits and spending, to immediately become about "the rich" paying "their fair (meaning higher) share" of taxes.
I find it helpful to step back and recall studying, as a graduate student, two well-known Harvard philosophy professors- John Rawls and Robert Nozick.
At the time, being young, I was enamored of Rawls' concepts as stated in A Theory of Justice. Being a good social liberal, Rawls was big on equity of distribution. I thought this was important at the time.
In contrast, Nozick, a libertarian, concentrated on minimalist states which provided the barest necessary levels and tools of government, in order to leave individuals with maximal liberty and responsibility for their own destinies, as he wrote about in Anarchy, State and Utopia.
I suspect because it's easier for most people to grasp the notion of dividing up an existing pie of resources, or tax obligations, they do not pay as much attention to the notion that some tax and government schemes create substantially larger pies of resources, such that either smaller assessments raise as much tax revenues, or equal assessments raise even more.
It seems that our current Democratic office-holders can't grasp the notion that the US economy would grow faster with simpler, lower tax rates, thus providing even more tax revenues than much higher rates which distort economic resource allocation and retard economic growth.
Besides the purely subjective nature of class-warfare style polemics characterizing whatever "the rich" pay in taxes as "insufficient" or "unfair," such approaches ignore the more basic, pressing function of tax policy, i.e., to fund our government.
And nowhere in the Constitution is there any language concerning what is "fair" about treating high income earners or the wealthy differently than anybody else.
That is, the president and his party's members of Congress will take a few favorite elements of the existing tax code, such as existing rates for higher-income earners, reduced under President Bush in his first term, and grudgingly extended last year, or special provisions for private business aircraft, and hold them up as 'unfair' to lower-income earners.
Of course, from a purely objective perspective, the reason for taxes is to raise money to fund governmental operations. As these posts on taxes that I've written discuss, tax policy has consequences on taxpayer behavior, regardless of whether politicians believe it to be so, or the CBO models such affected behavior.
It's common knowledge that the CBO uses what is known as 'static scoring,' wherein simple arithmetic changes are modeled for tax policy changes. That is, an hypothetical change is modeled as ex post on pre-existing incomes, spending, investing, etc., with no assumption that such a change may have, in reality, changed prior behavior.
Along with this myopic scoring goes the misguided concept of 'paying for tax cuts.' This peculiar view assumes that some tax revenue level is due to the government, so any change in tax law that results in the static scoring showing lower total tax revenues must be 'paid for' by either new taxes or higher rates elsewhere.
Of course, any fool who reads that second sentence instantly realizes its idiocy. You get less of what you tax, so trying to raise more tax revenues through higher rates or new taxes is, overall, self-defeating.
This is why, among the 22 tax-related posts I've written, you will find a couple detailing economic research leading to Hauser's Law, wherein, over time, a fairly consistent 18% of US GDP is collected via taxes, regardless of tax rate structures.
Once you understand and accept that relationship, it becomes obvious that the way to increase gross federal tax receipts is to set rates at levels that maximize GDP.
But this assumes one uses tax policy primarily as a means to fund government. And it distinguishes between tax rates, and tax receipts, which may be inversely related.
But many liberal elected federal government officials in Congress and the White House choose to discuss tax policy primarily as a tool to enforce "fairness."
Unfortunately, when you attempt to make a single policy, such as tax policy, serve two objectives, such as raising maximal or sufficient government funding, and enforcing some undefined notion of "fairness," you get, well, a mess. Especially when measures of fairness are not obvious.
Yes, there are various indices of differences between high and low incomes or taxes paid. As with the subject of concentration of market share in sectors, one can design various measures purported to indicate relative uniform distribution or distortions of any variable.
However, the basic notion that there is some "fair" amount of tax receipts, or their income, which "the rich" should pay, doesn't seem to be any sort of bedrock, fundamental Constitutional principle.
In fact, if you read the Constitution, as I did this morning, it was originally written rather vaguely and imprecisely on the subject of taxes. The only thing that was fairly clear about taxes in the original, pre-1912 Constitution, was that taxes were levied on business activity, not people.
Even today, one could choose to replace the income tax with a spending tax, if one so chose. There isn't really anything special, per se, about income-based taxes, except that it appears to penalize those who earn more.
By the way, which should be the subject of fairness- tax rates, or tax revenues, or percentage of toal taxes paid? Or is it subjective, i.e., whichever soaks the rich more is "fairer?"
On that subject, and this one, it so happened that I stumbled upon a discussion of this topic yesterday morning on CNBC. Due to the loss of Erin Burnett to CNN, and Mark Haines to death, the network has switched its co-anchor lineups, replacing Carlos Whathisname in the 6-9AM slot with Andrew Ross Sorkin, a NY Times liberal media darling.
At issue, with Michele Caruso-Cabrera defending the conservative viewpoint, was whether high-income taxpayers are "giving back" to the nation by paying a lot of gross dollars in taxes. Apparently the president recently called out Apple's Steve Jobs, by name, for failing to "give back" sufficiently to America via charity, as his rival, Bill Gates, has done.
This is an excellent example of why it is dangerous to allow government to begin to use concepts such as "fairness" in taxation policy.
Who is to be our arbiter of what is "fair" for anyone to pay in taxes, or charity, to the nation? Why is it necessary that tax rates even rise with income level? Surely, if there were one flat rate of, say, 10%, then a person earning $1MM would already be paying 10 times the amount paid by someone earning only $100K.
Isn't that "fair?"
The Constitution is notably silent through most of its original language on the topic of citizens having direct relationships with the federal government. One surely does not get the idea, when reading it, that the Constitution had as any of its purposes to enshrine a climate of punishing those Americans who either earned high incomes or amassed large amounts of assets.
How odd, now, to hear one party continually beat a drum for all conversations involving government debt, deficits and spending, to immediately become about "the rich" paying "their fair (meaning higher) share" of taxes.
I find it helpful to step back and recall studying, as a graduate student, two well-known Harvard philosophy professors- John Rawls and Robert Nozick.
At the time, being young, I was enamored of Rawls' concepts as stated in A Theory of Justice. Being a good social liberal, Rawls was big on equity of distribution. I thought this was important at the time.
In contrast, Nozick, a libertarian, concentrated on minimalist states which provided the barest necessary levels and tools of government, in order to leave individuals with maximal liberty and responsibility for their own destinies, as he wrote about in Anarchy, State and Utopia.
I suspect because it's easier for most people to grasp the notion of dividing up an existing pie of resources, or tax obligations, they do not pay as much attention to the notion that some tax and government schemes create substantially larger pies of resources, such that either smaller assessments raise as much tax revenues, or equal assessments raise even more.
It seems that our current Democratic office-holders can't grasp the notion that the US economy would grow faster with simpler, lower tax rates, thus providing even more tax revenues than much higher rates which distort economic resource allocation and retard economic growth.
Besides the purely subjective nature of class-warfare style polemics characterizing whatever "the rich" pay in taxes as "insufficient" or "unfair," such approaches ignore the more basic, pressing function of tax policy, i.e., to fund our government.
And nowhere in the Constitution is there any language concerning what is "fair" about treating high income earners or the wealthy differently than anybody else.
Wednesday, June 29, 2011
Jobs, Growth & The US Economy 1939-2011
Michael Spence's recent Wall Street Journal editorial discussing types of jobs, and "Why the Old Jobs Aren't Coming Back," got me to thinking about a much longer cycle of employment and growth in the US economy.
Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.
Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,
"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."
Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.
Spence mentions Germany, which has heavily-unionized labor, limiting
"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."
That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.
Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?
I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.
Consider this view of the US economy from the mid-1930s to the present.
Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,
'billions in debt and the unemployment rate no lower.'
But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,
"Elect a Democrat president and go to war."
Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.
Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.
Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.
From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.
Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.
The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.
However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.
Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,
'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'
That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.
Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.
Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.
While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.
While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.
Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,
"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"
Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'
First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.
For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.
Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Spence wrote, in closing,
"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."
His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.
Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.
This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.
Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.
Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.
Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,
"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."
Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.
Spence mentions Germany, which has heavily-unionized labor, limiting
"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."
That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.
Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?
I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.
Consider this view of the US economy from the mid-1930s to the present.
Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,
'billions in debt and the unemployment rate no lower.'
But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,
"Elect a Democrat president and go to war."
Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.
Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.
Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.
From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.
Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.
The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.
However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.
Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,
'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'
That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.
Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.
Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.
While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.
While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.
Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,
"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"
Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'
First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.
For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.
Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Spence wrote, in closing,
"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."
His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.
Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.
This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.
Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.
Wednesday, March 16, 2011
Kelly Evans On The Fed & Oil Prices
Monday's Wall Street Journal had an Ahead of the Tape column by Kelly Evans entitled The Federal Reserve Faces an Oil Dilemma.
In her piece, Evans offered the pros and cons of the Fed's prospective sterilization of oil's price increases. She dutifully trotted out the usual arguments involving effective taxation, consumer spending consequences, QE2, monetary easing and how all of these effects might relate to US economic growth.
What I found odd was that Evans, who is typically very well-versed in both economics and business, completely missed the obvious point.
That is, the Fed's primary job remains dollar price stability. In reality, it really shouldn't be so overly-concerned with adjusting for oil's price, or the various follow-on effects on the US economy. Rather, by maintaining stable prices, in dollars, given supply and demand forces, and money supply growth in concert with some variant of the Taylor Rule, the Fed can provide at least one fairly consistent, if not constant, in an otherwise rapidly-changing economic landscape.
In truth, the Fed isn't going to 'get it right' if it really tries to solve all the simultaneous equations which are theoretically required to arrive at the correct, perfect economic policy prescription for the US economy.
The fact is, despite the Fed or Congress, the US economy, like all economies, must suffer through cycles. And that includes slowdowns and recessions.
The Fed can mitigate (monetary) inflation, and the US economy may still experience rises in the prices of some goods due to demand-supply imbalances. When I learned economics, we called that a price signal. If prices rise, some demand ebbs, while more supply is coaxed into the market, and others seek to replace the goods, the price rises of which have provided opportunities.
To suggest that the Fed can somehow, with just one monetary lever, sterilize the effects of so many disparate inputs to our economic system is laughable. And wrong.
I'm surprise Evans didn't go that route in her column. It would have been more helpful than writing in such a way as to suggest that the Fed has choices which include actually resolving these conflicting economic forces in some perfect or preferred manner beyond simply maintaining price stability.
In her piece, Evans offered the pros and cons of the Fed's prospective sterilization of oil's price increases. She dutifully trotted out the usual arguments involving effective taxation, consumer spending consequences, QE2, monetary easing and how all of these effects might relate to US economic growth.
What I found odd was that Evans, who is typically very well-versed in both economics and business, completely missed the obvious point.
That is, the Fed's primary job remains dollar price stability. In reality, it really shouldn't be so overly-concerned with adjusting for oil's price, or the various follow-on effects on the US economy. Rather, by maintaining stable prices, in dollars, given supply and demand forces, and money supply growth in concert with some variant of the Taylor Rule, the Fed can provide at least one fairly consistent, if not constant, in an otherwise rapidly-changing economic landscape.
In truth, the Fed isn't going to 'get it right' if it really tries to solve all the simultaneous equations which are theoretically required to arrive at the correct, perfect economic policy prescription for the US economy.
The fact is, despite the Fed or Congress, the US economy, like all economies, must suffer through cycles. And that includes slowdowns and recessions.
The Fed can mitigate (monetary) inflation, and the US economy may still experience rises in the prices of some goods due to demand-supply imbalances. When I learned economics, we called that a price signal. If prices rise, some demand ebbs, while more supply is coaxed into the market, and others seek to replace the goods, the price rises of which have provided opportunities.
To suggest that the Fed can somehow, with just one monetary lever, sterilize the effects of so many disparate inputs to our economic system is laughable. And wrong.
I'm surprise Evans didn't go that route in her column. It would have been more helpful than writing in such a way as to suggest that the Fed has choices which include actually resolving these conflicting economic forces in some perfect or preferred manner beyond simply maintaining price stability.
Wednesday, March 09, 2011
Starbucks Again- Still Trying To Talk Itself Back To Growth
I read Starbucks CEO Howard Schultz' Wall Street Journal interview in the Monday edition and immediately headed for a price chart of the firm and the S&P500 Index. Two, actually.
The first shows the two series for the past five years. The second covers a period from the early 1990s, when Starbucks went public. The two charts provide some interesting perspectives on the firm's recent performance.
In the Journal piece, much is made of revenue and profit growth from 2009, as well as even more recent growth statistics. That's all well and good if you are a prescient market timer. Few investors- even professionals- are successful at that.
What the first chart actually reveals is that Starbucks' performance collapsed much more deeply than the Index during the recent recession. It's pretty clearly become highly correlated with economic activity.
Schultz, in the interview, admits that "we were growing the company with such speed and aggression that we lost sight of the customer experience."
Translation: Starbucks won't be even attempting such levels of growth, apart from riding economic cycles, again.
Over the past five years, owning Starbucks basically got you a return not significantly different from the S&P, but with far more risk.
The second chart provides a larger view of just how volatile the firm's returns have become. Looked at since inception, we see the predictable rocket-like trajectory as the firm grew across the nation, changing coffee consumption habits during some periods of economic growth. But 2005 clearly marked a watershed year.
After that, monotonic share price growth ended. Volatility arrived on an unheard of scale, making the stock a much different type of issue than it had been. Prior price declines were nothing, in retrospect, compared to the cliff off of which the stock price fell for about three years.
Thus, the recent rebounds in fundamentals which have powered a seeming-comeback may mislead investors. Perhaps even Schultz, too.
In the Journal piece, much is made of revenue and profit growth from 2009, as well as even more recent growth statistics. That's all well and good if you are a prescient market timer. Few investors- even professionals- are successful at that.
What the first chart actually reveals is that Starbucks' performance collapsed much more deeply than the Index during the recent recession. It's pretty clearly become highly correlated with economic activity.
Schultz, in the interview, admits that "we were growing the company with such speed and aggression that we lost sight of the customer experience."
Translation: Starbucks won't be even attempting such levels of growth, apart from riding economic cycles, again.
Over the past five years, owning Starbucks basically got you a return not significantly different from the S&P, but with far more risk.
The second chart provides a larger view of just how volatile the firm's returns have become. Looked at since inception, we see the predictable rocket-like trajectory as the firm grew across the nation, changing coffee consumption habits during some periods of economic growth. But 2005 clearly marked a watershed year.
After that, monotonic share price growth ended. Volatility arrived on an unheard of scale, making the stock a much different type of issue than it had been. Prior price declines were nothing, in retrospect, compared to the cliff off of which the stock price fell for about three years.
Thus, the recent rebounds in fundamentals which have powered a seeming-comeback may mislead investors. Perhaps even Schultz, too.
Monday, February 28, 2011
Economic Growth vs. Jobs
Sometimes, well, actually, many times, those without any economic background or education run at the mouth about related topics, getting relationships all wrong.
Such was the case earlier this morning, when I heard the first few minutes of the president's remarks about from where new jobs would come.
So often, we hear people with no economics training whatsoever harp on job growth, as if they can magically wave a wand or fund a program, and paying jobs will appear.
That's just not true. In fact, the whole point of a market economy is for government to enact stable, lasting policies which promote business and capital formation, which leads to economic growth, which then creates jobs.
A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972.
These increases are a direct result of capital investments in productivity-enhancing technology, which last year helped boost output to record levels in industries like computers and semiconductors, medical equipment and supplies, pharmaceuticals and medicine, and oil and natural-gas equipment."
It's the productivity and volume of economic activity that drive further growth. And productivity is enhanced when more capital is provided. Sure, there are eventually diminishing returns. But it's simply wrong to try to force-feed an economy the jobs government thinks ought to exist.
Haven't we learned from Russia's failed 50+ year experiment with a centrally-planned economy that such efforts are pointless?
With capital availability, mobil labor resources and high productivity, and low barriers to new businesses and innovation, an economy is poised to grow, thus leading to new jobs as a consequence.
Jobs aren't the ultimate objective of economic policy, per se. They are important, but follow economic activity. Not vice versa.
Such was the case earlier this morning, when I heard the first few minutes of the president's remarks about from where new jobs would come.
So often, we hear people with no economics training whatsoever harp on job growth, as if they can magically wave a wand or fund a program, and paying jobs will appear.
That's just not true. In fact, the whole point of a market economy is for government to enact stable, lasting policies which promote business and capital formation, which leads to economic growth, which then creates jobs.
A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972.
These increases are a direct result of capital investments in productivity-enhancing technology, which last year helped boost output to record levels in industries like computers and semiconductors, medical equipment and supplies, pharmaceuticals and medicine, and oil and natural-gas equipment."
It's the productivity and volume of economic activity that drive further growth. And productivity is enhanced when more capital is provided. Sure, there are eventually diminishing returns. But it's simply wrong to try to force-feed an economy the jobs government thinks ought to exist.
Haven't we learned from Russia's failed 50+ year experiment with a centrally-planned economy that such efforts are pointless?
With capital availability, mobil labor resources and high productivity, and low barriers to new businesses and innovation, an economy is poised to grow, thus leading to new jobs as a consequence.
Jobs aren't the ultimate objective of economic policy, per se. They are important, but follow economic activity. Not vice versa.
Friday, February 18, 2011
Kelly Evans Gets It Right On US Standards of Living vs. Inflation
Kelly Evans' Ahead Of The Tape column in yesterday's Wall Street Journal contained a concise, distilled read on the US economy over the past 25+ years.
Evans began,
"The threat of inflation is real. It is just a different threat than many realize."
She then reminded readers that much of the price pressure on commodities comes from smaller, faster-growing economies. It's a demand-push phenomenon.
Then she noted that "median income for men was actually higher, in real terms, in 1973 than in 2009."
But the best, punchiest passage was,
"The globalization of the labor force, meanwhile, continues to exert pressure on the U.S. job market even as it pushes up commodity prices by expanding the middle class world-wide.
This vulnerability was highlighted in mid-2008 when oil prices soared and consumer spending promptly tanked. That was before the worst of the recession. Households are hardly better able to handle such a run-up now."
Thus, the more we look backward, protect union jobs at defunct auto makers and such, the more we pour scarce economic resources into the wrong opportunities. And you wonder why the US is a slowing economic power, relative to some other nations?
Evans then delivers an apolitical shot of truth in her last sentence,
"The real risk is that the U.S. faces a poverty cycle rather than an inflationary one."
That word, poverty, should rivet you. It did me. But that's what happens when your economy no longer focuses on ever higher value-adding opportunities, seeking, instead, to subsidize less robust value-adding economic situations.
Evans began,
"The threat of inflation is real. It is just a different threat than many realize."
She then reminded readers that much of the price pressure on commodities comes from smaller, faster-growing economies. It's a demand-push phenomenon.
Then she noted that "median income for men was actually higher, in real terms, in 1973 than in 2009."
But the best, punchiest passage was,
"The globalization of the labor force, meanwhile, continues to exert pressure on the U.S. job market even as it pushes up commodity prices by expanding the middle class world-wide.
This vulnerability was highlighted in mid-2008 when oil prices soared and consumer spending promptly tanked. That was before the worst of the recession. Households are hardly better able to handle such a run-up now."
Thus, the more we look backward, protect union jobs at defunct auto makers and such, the more we pour scarce economic resources into the wrong opportunities. And you wonder why the US is a slowing economic power, relative to some other nations?
Evans then delivers an apolitical shot of truth in her last sentence,
"The real risk is that the U.S. faces a poverty cycle rather than an inflationary one."
That word, poverty, should rivet you. It did me. But that's what happens when your economy no longer focuses on ever higher value-adding opportunities, seeking, instead, to subsidize less robust value-adding economic situations.
Friday, February 11, 2011
The US Economy's Looming Job Creation Challenge
I began to consider risks to a robust US economic recovery in this recent post, in which I noted,
"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.
One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.
However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
An economics professor at the University of Nevada, he wrote, in part,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.
We created that many jobs one time in the last four years (May 2010)."
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.
"But if commodity input costs are rising, that will result in either lower margins and a curtailment of job growth, or higher prices which will cause lower quantity demand by consumers in the face of so much inflation.
One is somehow left feeling that there's considerably more economic turmoil ahead than many pundits would have us believe. We're seeing the first reactions by businesses to known inflation in input costs. How and where those costs, and the actions they have spurred, find their way into consumer prices, and how consumers react with their buying behavior, isn't being widely discussed.
However, with job growth still anemic, and US unemployment still uncomfortably high, will the Fed dare to raise rates? And would that not result in a stalled economy and job growth as higher rates choke demand?"
In an editorial in yesterday's edition of the Wall Street Journal, entitled Doing the Math on a Jobless Recovery, Brad Schiller explored the job growth component of the putative, but weak, US economic recovery.
An economics professor at the University of Nevada, he wrote, in part,
"The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.
At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.
To get back to full employment tomorrow, we could get by with another seven million new jobs. To reach full employment by the end of this year, we would need at least nine million new jobs (some 750,000 a month). There's simply no way we will experience that kind of job creation.
Each year brings another two million-plus workers to the labor force (new workers plus the re-entry of discouraged workers). Thus we would need monthly job gains of 460,000 to achieve full employment in time for the 2012 presidential elections.
We created that many jobs one time in the last four years (May 2010)."
I edited out Schiller's more overtly political conclusions. But what he makes painfully clear is that there's just no prospect of sufficiently robust employment growth anytime soon that will bring unemployment, as dynamically calculated going forward, into a range that would allow the Fed to declare full-employment victory.
If that's true, then it means the Fed might hold rates too low for some time, stoking commodity-based inflation. If not, and the Fed raises rates, then, according to Schiller's calculations, unemployment is likely to remain distressingly high.
Then you have a persistent drag on US economic growth of a significant part of the workforce being unemployed. Will this not affect overall demand? That
Like it or not, we seem to have wandered back into the bad old days of Carter-era economics: high unemployment, prospects of higher inflation, and a need to raise rates in the face of a less-than-robustly-healthy US economy.
Friday, January 28, 2011
Recalling Basic Economics
I had an interesting conversation at my fitness club the other day with an acquaintance who is in the accounting/consulting field. We were discussing the current economic situation, and he asked me, to paraphrase,
'What do you think of the notion being circulated that Bernanke is pursuing QE2 and low rates in order to drive equity market prices up, to make businesses and investors feel better, so to better spark a real economic recovery?'
I replied that, if true, it's a misguided approach. I noted that, for those who recall their basic economics, we're now in a classic Keynesian liquidity trap. Rates aren't driving investment and, if anything, as I've written in some prior posts, are likely to fund marginal, unwise projects, because of the ultra-low rates and their inability to include adequate risk pricing.
We discussed the wasted so-called stimulus spending and added deficits, neither of which have really affected the unemployment rate.
It was then that, in answer to my colleague's question concerning what should have been done, I repeated my belief that banks and other firms, e.g., GM, contrary to auto czar Rattner's contentions, in need of capital should have been allowed to properly enter a formal Chapter 11 process. Profitable operations would have been protected and either spun off or sold. Unprofitable operations would have been liquidated, which is what Citigroup and GM subsequently did. Merging failed banks is no longer a major issue, given FDIC deposit insurance. This myth that large-scale bank failures cripple the economy persist only so long as government and industry officials allow it to perpetuate.
Once you've insured depositors, what's the risk? Loans are transferred or sold. Operations are transferred and merged. Shareholders lose, which is appropriate. Bondholders line up in order of seniority, according to bankruptcy law.
Where's the problem? We're overbanked in the US as it is.
Then I touched on the inequity of government's enforcement of a mortgage foreclosure moratorium. How unfair it has been for existing owners to be given breaks, while equally-deserving buyers at the true, lower market-clearing housing prices are denied the opportunity to do so. Which only delays a true housing recovery.
Anyway, my colleague agreed with my suggestions. But, further, I recalled for both of us some more basic economics, i.e., you can't have recoveries without real recessions. You can't have the release of resources- capital and labor- without the liquidation of failed firms. If firms aren't allowed to fail, resources don't experience the necessary Schumpeterian recycling into new uses.
We can't experience robust economic recoveries without full economic recessions. Despite politically-originated attempts to chop off the downside phases of economic cycles, we can't always be in an expansion. Real capitalistic economies have expansions and contractions.
King Canute couldn't stem the tides, and our government can't rewrite economic laws to eliminate periods of economic contraction.
'What do you think of the notion being circulated that Bernanke is pursuing QE2 and low rates in order to drive equity market prices up, to make businesses and investors feel better, so to better spark a real economic recovery?'
I replied that, if true, it's a misguided approach. I noted that, for those who recall their basic economics, we're now in a classic Keynesian liquidity trap. Rates aren't driving investment and, if anything, as I've written in some prior posts, are likely to fund marginal, unwise projects, because of the ultra-low rates and their inability to include adequate risk pricing.
We discussed the wasted so-called stimulus spending and added deficits, neither of which have really affected the unemployment rate.
It was then that, in answer to my colleague's question concerning what should have been done, I repeated my belief that banks and other firms, e.g., GM, contrary to auto czar Rattner's contentions, in need of capital should have been allowed to properly enter a formal Chapter 11 process. Profitable operations would have been protected and either spun off or sold. Unprofitable operations would have been liquidated, which is what Citigroup and GM subsequently did. Merging failed banks is no longer a major issue, given FDIC deposit insurance. This myth that large-scale bank failures cripple the economy persist only so long as government and industry officials allow it to perpetuate.
Once you've insured depositors, what's the risk? Loans are transferred or sold. Operations are transferred and merged. Shareholders lose, which is appropriate. Bondholders line up in order of seniority, according to bankruptcy law.
Where's the problem? We're overbanked in the US as it is.
Then I touched on the inequity of government's enforcement of a mortgage foreclosure moratorium. How unfair it has been for existing owners to be given breaks, while equally-deserving buyers at the true, lower market-clearing housing prices are denied the opportunity to do so. Which only delays a true housing recovery.
Anyway, my colleague agreed with my suggestions. But, further, I recalled for both of us some more basic economics, i.e., you can't have recoveries without real recessions. You can't have the release of resources- capital and labor- without the liquidation of failed firms. If firms aren't allowed to fail, resources don't experience the necessary Schumpeterian recycling into new uses.
We can't experience robust economic recoveries without full economic recessions. Despite politically-originated attempts to chop off the downside phases of economic cycles, we can't always be in an expansion. Real capitalistic economies have expansions and contractions.
King Canute couldn't stem the tides, and our government can't rewrite economic laws to eliminate periods of economic contraction.
Thursday, January 27, 2011
GE, Morgan Stanley & Sustainable Growth
GE's revenues for the quarter were up 51% from the year-earlier period. The Journal piece noted that the firm,
"posted its first revenue increase in more than two years and its highest level of new orders since 2007."
Morgan Stanley reported a 35% rise in profits versus the fourth quarter of 2009. However, one observer was quoted as saying,
"They need consistent revenue growth. That's where they've let investors down."
Ah, yes. Consistency.
Well, here's a look at the two firms' price charts, along with the S&P500, over the past five years.
Looks quite a bit different, doesn't it?Over that period, the Index easily outperformed the two firms.
What do you suppose are the chances that both firms have suddenly changed the character of their enterprises? That they will continue to consistently report such revenue and income changes in the year ahead?
My guess is that the 51% GE sales growth is a one-time event. Morgan Stanley was lauded as having outperformed Goldman Sachs for the period, but one wonders how likely that will be in the next year.
Elsewhere, some pundits are calling for GE's Immelt to step down from his CEO job if he is to lead the government's new jobs creation initiative. They note that Immelt misled the firm to require a multi-billion dollar capital infusion from the federal government, suggesting he's not exactly a managerial icon.
A Wall Street Journal lead staff editorial on Wednesday charitably excused his mismanagement of the GE Capital unit for seven years, from 2001-08. The piece firmly placed the outsized reliance of the industrial conglomerate on outgoing CEO Jack Welch, but failed to properly hold Immelt accountable for continuing to rely on financial services revenues and incomes to prop up the troubled firm.
Consistency is a curious quality, because you can observe it over time. It isn't created instantaneously. Thus, recent performances notwithstanding, I doubt either Morgan Stanley or GE has suddenly changed its striped and become a new company in the past quarter, or even 12 months.
Friday, January 07, 2011
Regarding Amazon & Growth
This morning's Wall Street Journal's Heard On The Street column is a cautionary note regarding Amazon. Martin Peers warns that Amazon's slipping DVD sales will undermine its stock price performance. The article is filled with all sorts of micro-analysis of media consumption and data on Apple's video downloads.
Like other analysts observing Apple, about which I wrote as an investment in this recent post, I believe Peers is underestimating Amazon.
Back when the online retailer was a profitless favorite of investors, my equity selection process avoided it. As the first price chart for Amazon, Apple and the S&P500 Index, going back to 1998 illustrates, I didn't miss much. Amazon pancaked in the tech bubble crash, then began a much more measured, sustained growth, along with Apple.
However, at present, every equity portfolio selected by my process which is active contains Amazon. It's actually more prevalent than Apple, and outperforming the S&P in every active portfolio in my strategy.
Like other analysts observing Apple, about which I wrote as an investment in this recent post, I believe Peers is underestimating Amazon.
Back when the online retailer was a profitless favorite of investors, my equity selection process avoided it. As the first price chart for Amazon, Apple and the S&P500 Index, going back to 1998 illustrates, I didn't miss much. Amazon pancaked in the tech bubble crash, then began a much more measured, sustained growth, along with Apple.However, at present, every equity portfolio selected by my process which is active contains Amazon. It's actually more prevalent than Apple, and outperforming the S&P in every active portfolio in my strategy.
The second chart focuses on the last five years of performance for the three entities. Amazon and Apple share a very close performance path, both handsomely outpacing the index.
While Peers cites DVD sales growth as the reason to doubt Amazon's continued outperformance, I prefer to see the company's equity in the context of the broader market. While, as I mentioned, my process did not find Amazon acceptable in prior years, lately, it has become one of the most consistent performers in the S&P.
Peers writes,
"But Amazon looks to have lost the music battle......Given Amazon's success elsewhere, losing in video may only reduce its red-hot growth rate by a few percentage points. But given its sky-high valuation, that isn't something investors could ignore."
I guess that's one way to view Amazon.
Here's another. In recent years, the firm's growth rate is the 14th best in the S&P 500, while it's P/E ratio is 19th best. Taken together, the firm's valuation for its growth rate is quite reasonable. Much as Dell's was in 1998, when I owned it, contrary to the advice of most Dell-watchers. As I mentioned in the prior linked post, Dell went on to be one of the S&P's top ten total return performers that year.
As I also noted in the linked post, analysts who get totally focused on the internal mechanics of the companies they follow tend to lose, if they ever had it, perspective on the companies' performances among the broader market.
In this case, Amazon's general management of its businesses has sustained its performance for years. I would suspect that it's going to take a lot more than being an also-ran in just one particular product segment for Amazon's outperformance to end imminently.
Wednesday, July 14, 2010
Bloomberg's Expansion Into Legal Research Business
Last week's Wall Street Journal contained a type of article which I haven't seen in ages. It used to be a staple of the paper, but no longer. Especially not since Murdoch's NewsCorp bought Dow-Jones and turned the WSJ into a set of editorial pages with some shallow business headline stories on the front page.
The piece in question described Bloomberg's entry into the legal research market, challenging Westlaw, LexisNexis and Thomson Reuters.
Citing market share concentrations and sporting a graph arraying revenue growth versus market share, the article did a fabulous job explaining the long shot on which the financial data firm is embarking. By the way, the Big3 share in the industry is over 75%, which alone tells you Bloomberg must be desperate to even attempt entry into this product/market.
The Journal piece quotes Greg Lambert, an apparently well-known blogger in the field and "library and records manager for law firm King & Spalding" as saying that,
"Bloomberg Law will be a flop."
Later, upon being told the service is offered for a flat fee, in contrast to existing competitive services, Lambert upgraded Bloomberg's chances to a "long shot."
Personally, from my own strategy consulting and academic background, I'd go with Lambert's first prediction.
I've seen similar situations in information services business niches before. It's not an uncommon dilemma.
A large, very successful firm has exhausted growth in its original, primary product/market segments. Recall that the firm has branched out into Bloomberg Television and recently bought BusinessWeek from McGraw-Hill.
Such a firm will be faced with a crisis of growth. Total returns typically grow best and longest at growth-oriented firms. Bloomberg isn't in the sorts of businesses which tend to wring out costs and succeed at boosting total returns from low or no revenue growth. For that, think Ruben Mark's old Colgate-Palmolive.
Thus, Bloomberg is turning to product/markets which could leverage one or more of its existing strengths. Electronic distribution is a no-brainer for that, isn't it? They have the database and business management, hardware, software expertise and the pipes.
All they need, so the thinking must have gone, is some new content to pour into their servers, down their pipes, into customer premises.
The firm with which I'm most familiar having done this, and not to great success, was ADP. It's moves out of payroll processing never sustained the firm's original profitable growth.
So, too, will it likely be with Bloomberg.
After all, there are a very few strongly-entrenched, capable existing competitors. The field, law, doesn't really change all that much.
It's an old maxim that to switch buyers from a current vendor with whom they are content or happy, a new entrant typically must offer at least a 15% price/performance improvement. In this case, that's probably going to be heavy on the price aspect. One early customer quoted in the Journal contended that there is at least one performance feature on which the Bloomberg offering is superior- speed of updating docket information. Whether this alone will be sufficient to win significant share remains to be seen.
So Bloomberg is probably going in with lower prices, which will help commoditize the entire sector, and make any victories it achieves that much less profitable.
At best, one senses a Phyrrhic victory for Bloomberg. At worst, an expensive waste of resources.
With existing share concentrations and the nature of the market segment's content, it's a reasonable bet that the truth will be closer to the latter.
The piece in question described Bloomberg's entry into the legal research market, challenging Westlaw, LexisNexis and Thomson Reuters.
Citing market share concentrations and sporting a graph arraying revenue growth versus market share, the article did a fabulous job explaining the long shot on which the financial data firm is embarking. By the way, the Big3 share in the industry is over 75%, which alone tells you Bloomberg must be desperate to even attempt entry into this product/market.
The Journal piece quotes Greg Lambert, an apparently well-known blogger in the field and "library and records manager for law firm King & Spalding" as saying that,
"Bloomberg Law will be a flop."
Later, upon being told the service is offered for a flat fee, in contrast to existing competitive services, Lambert upgraded Bloomberg's chances to a "long shot."
Personally, from my own strategy consulting and academic background, I'd go with Lambert's first prediction.
I've seen similar situations in information services business niches before. It's not an uncommon dilemma.
A large, very successful firm has exhausted growth in its original, primary product/market segments. Recall that the firm has branched out into Bloomberg Television and recently bought BusinessWeek from McGraw-Hill.
Such a firm will be faced with a crisis of growth. Total returns typically grow best and longest at growth-oriented firms. Bloomberg isn't in the sorts of businesses which tend to wring out costs and succeed at boosting total returns from low or no revenue growth. For that, think Ruben Mark's old Colgate-Palmolive.
Thus, Bloomberg is turning to product/markets which could leverage one or more of its existing strengths. Electronic distribution is a no-brainer for that, isn't it? They have the database and business management, hardware, software expertise and the pipes.
All they need, so the thinking must have gone, is some new content to pour into their servers, down their pipes, into customer premises.
The firm with which I'm most familiar having done this, and not to great success, was ADP. It's moves out of payroll processing never sustained the firm's original profitable growth.
So, too, will it likely be with Bloomberg.
After all, there are a very few strongly-entrenched, capable existing competitors. The field, law, doesn't really change all that much.
It's an old maxim that to switch buyers from a current vendor with whom they are content or happy, a new entrant typically must offer at least a 15% price/performance improvement. In this case, that's probably going to be heavy on the price aspect. One early customer quoted in the Journal contended that there is at least one performance feature on which the Bloomberg offering is superior- speed of updating docket information. Whether this alone will be sufficient to win significant share remains to be seen.
So Bloomberg is probably going in with lower prices, which will help commoditize the entire sector, and make any victories it achieves that much less profitable.
At best, one senses a Phyrrhic victory for Bloomberg. At worst, an expensive waste of resources.
With existing share concentrations and the nature of the market segment's content, it's a reasonable bet that the truth will be closer to the latter.
Friday, July 02, 2010
This Morning's Jobs Numbers
Earlier this week, the ADP employment report caused distress with a weak 13,000 net private sector jobs created.
As of 7:20AM, as I'm writing this, the Labor Department's 8:30AM jobs report is considered to be the main driver of equity markets. Everyone is curious about how low net private sector job creation will be. Kelly Evans' Wall Street Journal column suggests that the bar is so low, and has been factored into the market, that a slight upward surprise may ignite equities today.
Yesterday, on CNBC, a poll of expected jobs numbers revealed that 84% of respondents thought today's numbers will be weak. Therefore, claimed the co-anchors, the odds of a positive surprise and consequent sharp upward equity market reaction were very good.
If we were discussing betting on a one-off roulette wheel spin, I guess I'd find all of these sentiments and bets, as it were, believable.
However, just this morning on CNBC, economist Bob Barbera, late of ITG, now with a hedge fund whose name I did not catch, recanted his longtime bullish read on employment numbers of the past six months or so.
I can recall, within the past few months, at least one Friday in which job growth beat expectations, but, within a week, equity markets fell.
Take a step back from the hooplah around market reaction in just over an hour, through futures, and then the 9:30AM US market open.
Instead, think about the longer term implications of even 100,000 net private sector jobs created.
Unlike past recoveries, this one hasn't exhibited robust job growth. Earlier this week, on CNBC, Alan Greenspan noted the real meaning of the rise in average hours worked over the past few months.
In a comment eerily reminiscent of Amity Schlaes' book The Forgotten Man, Greenspan explained that companies are working their existing employees longer, rather than hire more of them. Very much like Shlaes described the Great Depression, in which the common wisdom was,
'If you had a job, you were okay. But getting a new one was next to impossible.'
Now, take a look at the context of this aftermath of recession.
First, rather than see the prior recession as, well, a normal phase of an economic cycle, our government has attempted to criminalize it. Whole sectors have been vilified and demonized for contributing to what is, in reality, a naturally-occurring phase in economic cycles.
In reaction, wholesale legislative restructuring of the US finance and health care sectors have been undertaken, as well as a substantial governmental involvement in autos, through its ownership of GM.
Then you have the expiration of the Bush tax cuts next year, combined with significant tax rate increases, and new taxes, under the guise of the health care 'reform' bill.
Art Laffer has come out swinging, as it were, a la Babe Ruth, and called his shot- US economic collapse in 2011. Why?
Because higher taxes means less consumption and investment.
For businesses, higher consumer payroll taxes mean less disposable income available to buy products. Thus, Laffer's contention that economic growth is good in 2010, as US companies shove as much product out the door while consumers can still afford them.
Then there's investment. When tax rates rise, investment incentive in the marginal economic venture drops, cutting off growth. Since so much growth is in new, often smaller-scale business, not existing S&P500 type entities, it's not clear that surveys of hiring intent can even observe this source of missing new jobs.
The global context isn't exciting, either. China recently recast recent economic growth data to portray a slowdown. European government budgets are tightening, so their voters are rioting in the streets- literally.
I'm getting depressed just writing this post.
But, seriously, does any thinking business person with a grasp of macroeconomics and microeconomics, and some sense of economic history, see the current period and next six months as symptomatic of a healthy, growing economy in the US?
Between global sovereign deficits and money creation, over-regulation in response to a recent economic downturn, and higher tax rates, it's really hard to see a short-term basis for robust private sector expansion in the US and/or consumer demand globally.
Thus, regardless of today's employment numbers and their effects on today's closing, pre-holiday S&P500 index level, it's far more likely that it will be an underwhelming piece of data in the broad, longer term mosaic of global economic data past, present and future.
As of 7:20AM, as I'm writing this, the Labor Department's 8:30AM jobs report is considered to be the main driver of equity markets. Everyone is curious about how low net private sector job creation will be. Kelly Evans' Wall Street Journal column suggests that the bar is so low, and has been factored into the market, that a slight upward surprise may ignite equities today.
Yesterday, on CNBC, a poll of expected jobs numbers revealed that 84% of respondents thought today's numbers will be weak. Therefore, claimed the co-anchors, the odds of a positive surprise and consequent sharp upward equity market reaction were very good.
If we were discussing betting on a one-off roulette wheel spin, I guess I'd find all of these sentiments and bets, as it were, believable.
However, just this morning on CNBC, economist Bob Barbera, late of ITG, now with a hedge fund whose name I did not catch, recanted his longtime bullish read on employment numbers of the past six months or so.
I can recall, within the past few months, at least one Friday in which job growth beat expectations, but, within a week, equity markets fell.
Take a step back from the hooplah around market reaction in just over an hour, through futures, and then the 9:30AM US market open.
Instead, think about the longer term implications of even 100,000 net private sector jobs created.
Unlike past recoveries, this one hasn't exhibited robust job growth. Earlier this week, on CNBC, Alan Greenspan noted the real meaning of the rise in average hours worked over the past few months.
In a comment eerily reminiscent of Amity Schlaes' book The Forgotten Man, Greenspan explained that companies are working their existing employees longer, rather than hire more of them. Very much like Shlaes described the Great Depression, in which the common wisdom was,
'If you had a job, you were okay. But getting a new one was next to impossible.'
Now, take a look at the context of this aftermath of recession.
First, rather than see the prior recession as, well, a normal phase of an economic cycle, our government has attempted to criminalize it. Whole sectors have been vilified and demonized for contributing to what is, in reality, a naturally-occurring phase in economic cycles.
In reaction, wholesale legislative restructuring of the US finance and health care sectors have been undertaken, as well as a substantial governmental involvement in autos, through its ownership of GM.
Then you have the expiration of the Bush tax cuts next year, combined with significant tax rate increases, and new taxes, under the guise of the health care 'reform' bill.
Art Laffer has come out swinging, as it were, a la Babe Ruth, and called his shot- US economic collapse in 2011. Why?
Because higher taxes means less consumption and investment.
For businesses, higher consumer payroll taxes mean less disposable income available to buy products. Thus, Laffer's contention that economic growth is good in 2010, as US companies shove as much product out the door while consumers can still afford them.
Then there's investment. When tax rates rise, investment incentive in the marginal economic venture drops, cutting off growth. Since so much growth is in new, often smaller-scale business, not existing S&P500 type entities, it's not clear that surveys of hiring intent can even observe this source of missing new jobs.
The global context isn't exciting, either. China recently recast recent economic growth data to portray a slowdown. European government budgets are tightening, so their voters are rioting in the streets- literally.
I'm getting depressed just writing this post.
But, seriously, does any thinking business person with a grasp of macroeconomics and microeconomics, and some sense of economic history, see the current period and next six months as symptomatic of a healthy, growing economy in the US?
Between global sovereign deficits and money creation, over-regulation in response to a recent economic downturn, and higher tax rates, it's really hard to see a short-term basis for robust private sector expansion in the US and/or consumer demand globally.
Thus, regardless of today's employment numbers and their effects on today's closing, pre-holiday S&P500 index level, it's far more likely that it will be an underwhelming piece of data in the broad, longer term mosaic of global economic data past, present and future.
Monday, June 21, 2010
New Growth At Starbucks?
Last Monday's Wall Street Journal featured an upbeat article concerning Starbucks.
According to the piece's author, John Jannarone, writing for Heard on the Street, the Seattle-based coffee giant is poised to display strong sales growth in the near future.
Jannarone provided a sketchy analysis to demonstrate that Starbucks has already successfully fought upscale coffee competition from McDonalds. Rereading the evidence, I'm personally not convinced of the conclusions. More likely than stealing Starbucks customers, as Jannarone seems to believe was the point of McDonalds' efforts, I suspect McDonalds is enjoying coffee sales growth that just won't now accrue to Starbucks.
The article concludes by observing that Starbucks has a 19 P/E multiple, which, while judged expensive, is teasingly hinted at being too low considering the potential ahead for Starbucks.
The article concludes by observing that Starbucks has a 19 P/E multiple, which, while judged expensive, is teasingly hinted at being too low considering the potential ahead for Starbucks.
Being inquisitive, I constructed price charts for Starbucks and the S&P500 Index for the past 5 
years and the term of Starbucks' public listing. They appear nearby.
years and the term of Starbucks' public listing. They appear nearby.Not surprisingly, the past five years have been tough on the coffee roaster. Exhibiting more volatility than the index, which isn't news, it ended up about flat with the index for the period. So the recent past doesn't suggest Starbucks is poised for a breakout due to suddenly-inspired management.
I've written a handful of posts since Howard Schultz returned to the firm as its CEO. Overall, he hasn't had much impact on the firm's performance in terms of leading it to consistently superior gains over the index.
Looking at the two price curves from Starbucks' public trading debut in 1993, the recent five years looks even more significant.
Prior to that time, the firm displayed consistent superiority over the index. I personally held it in equity portfolios in the past, so exceptional were the firm's fundamental and technical performances.
Viewing the firm's share price over such a long period, the recent stall looks more telling, at least to me. It fell precipitously during the recent economic turmoil. Weakening in a time of economic trouble is one thing, but Starbucks' share price did much worse than just that.
My own suspicion is that, like other growth firms, such as Dell and Intel, Starbucks has experienced its days of steady, long periods of consistently superior growth. I think investor expectations and competitions have both affected the firm's share price for the foreseeable future.
Being priced so apparently richly for such average recent performance suggests more wishful thinking than good sense. Sort of like those investors that still feel obliged to stuff Microsoft or GE in their portfolios, in the vain hope that, somehow, those aged, overly-diversified firms will somehow recapture the performances of their much earlier years.
Wednesday, June 16, 2010
Gary Kaminsky On ATT
I saw part of the noon time CNBC program featuring David Faber yesterday. The guest was ATT's CEO, Randy Stevenson.
I took a look at ATT's recent income statement. Let me assure you, it's no growth firm. I checked my proprietary analyses of the S&P500 for consistently superior revenue growth. ATT isn't among those firms. Not for at least the last several years. The firm simply does not exhibit the sort of revenue growth that characterizes a growth firm.
Somewhere near the end of the discussion with Stevenson, Gary Kaminsky, the program's co-host, began to rabidly insist that ATT was a growth company which wasn't appreciated as such.
While Stevenson politely attempted to deflect Kaminsky, the latter badgered the CEO about why ATT dividends out so much income, when they should be growing even more rapidly, in necessary, through acquisition.
After Stevenson's departure, Faber tried to talk some sense into Kaminsky by reminding him that ATT wasn't just a wireless firm. That it, for better or worse, still has a long distance unit and substantially more corporate business than merely running a consumer wireless unit which features the iPhone.
I took a look at ATT's recent income statement. Let me assure you, it's no growth firm. I checked my proprietary analyses of the S&P500 for consistently superior revenue growth. ATT isn't among those firms. Not for at least the last several years. The firm simply does not exhibit the sort of revenue growth that characterizes a growth firm.The nearby five year price chart for ATT and the S&P500Index illustrates that the firm certainly isn't valued, over time, as a growth firm. It barely outperforms the index over the past five years. And I'm being generous giving it that, since the difference is microscopic, and doesn't adjust for the risk of holding ATT versus a basket of 500 equities.
I wonder what Gary Kaminsky was drinking or smoking before that program? Because he ought to quit whatever it was.
Tuesday, June 08, 2010
The Jobless Expansion Continues
Friday's payroll numbers helped to tank the US equity markets by day's end, resulting in a 3.4% drop in the S&P500 Index.
After stripping out government-created census jobs, I believe the net private sector jobs created was about 41,000. Positive, but pathetically anemic for this point in a recovery which is allegedly over a year old. For comparison, the same data items for March and April were 158,000 and 218,000, respectively.
The administration hustled out various people, including the president, to excuse, explain and otherwise try to minimize the ugly May payroll numbers.
Is it possible that the coming tax increases are beginning to show their consequence in employment data? Could the cumulation of health care taxes, higher payroll taxes and the inclusion of payroll taxes on dividends and profits which small businesses operating as entities which file through 1040 forms will experience, be causing a drag on hiring?
I guess time will tell. But with each passing month, the gap between the available US labor force and the employment base grows larger. Pundits hopefully suggest that inventory restocking and foreign demand will surely, eventually require more US workers.
Yesterday morning, Morgan Stanley senior executive and economist Stephen Roach admitted, on CNBC, that a double-dip recession could occur. He bluntly said the inventory builds were merely the result of stimulus-fed business spending.
For how long can the US have both expanding business profitability and stagnant or anemic employment growth? And can this combination, in the long run, deliver a healthy US economy?
After stripping out government-created census jobs, I believe the net private sector jobs created was about 41,000. Positive, but pathetically anemic for this point in a recovery which is allegedly over a year old. For comparison, the same data items for March and April were 158,000 and 218,000, respectively.
The administration hustled out various people, including the president, to excuse, explain and otherwise try to minimize the ugly May payroll numbers.
Is it possible that the coming tax increases are beginning to show their consequence in employment data? Could the cumulation of health care taxes, higher payroll taxes and the inclusion of payroll taxes on dividends and profits which small businesses operating as entities which file through 1040 forms will experience, be causing a drag on hiring?
I guess time will tell. But with each passing month, the gap between the available US labor force and the employment base grows larger. Pundits hopefully suggest that inventory restocking and foreign demand will surely, eventually require more US workers.
Yesterday morning, Morgan Stanley senior executive and economist Stephen Roach admitted, on CNBC, that a double-dip recession could occur. He bluntly said the inventory builds were merely the result of stimulus-fed business spending.
For how long can the US have both expanding business profitability and stagnant or anemic employment growth? And can this combination, in the long run, deliver a healthy US economy?
Wednesday, May 12, 2010
The FCC Puts US Communications Technology Growth In Jeopardy
Nothing scares off investment capital like uncertainty. Whether measured by higher required rates of return or lower 'certainty equivalents,' uncertainty of return of capital makes projects less attractive.
Thus, the FCC's recent second attempt to regulate the internet is likely to slow or halt growth of that important communications tool and the economic benefits it would otherwise create.
Having watched Congress rebuff 'net neutrality' earlier this year, the FCC is trying again by unilaterally declaring that the internet may be regulated under the 1996 Telecommunications Act.
Noting the year of that act, one already realizes that the Act came just at the dawn of the internet's rapid growth in the late 1990s. The notorious "dot com" bubble.
So, not only did the Act not even foresee developments only a few years hence, but, now, over ten years later, it is most assuredly out of date, drafted, as it was, with the intent of regulating telephony.
Having worked for ATT years ago, in the early years of my business career, I can attest that the last ten years of growth of internet-related services is beyond all comparison to growth in telephony for the last thirty. Once telephony went to wireless, the rest of the changes were of magnitude, more than type.
Other than that, companies like Verizon have only introduced innovation by expanding outside of voice communications to look more like cable companies.
The FCC's unilateral power play is sure to have very negative consequences for one vibrant sector of the US economy.
Think of how many new initiatives, perhaps along the lines of Facebook, Google, or the thousands of apps for iPhones, will now be choked off by uncertain returns to capital as the FCC clouds the business operating environment for such services.
It's bad enough that our government uses taxpayer money to prop up old, antiquated and unproductive sectors like auto manufacture. To now turn to the other end of the spectrum and move to limit growth in new economic sectors will surely lead to a moribund US economy in the not too distant future.
Thus, the FCC's recent second attempt to regulate the internet is likely to slow or halt growth of that important communications tool and the economic benefits it would otherwise create.
Having watched Congress rebuff 'net neutrality' earlier this year, the FCC is trying again by unilaterally declaring that the internet may be regulated under the 1996 Telecommunications Act.
Noting the year of that act, one already realizes that the Act came just at the dawn of the internet's rapid growth in the late 1990s. The notorious "dot com" bubble.
So, not only did the Act not even foresee developments only a few years hence, but, now, over ten years later, it is most assuredly out of date, drafted, as it was, with the intent of regulating telephony.
Having worked for ATT years ago, in the early years of my business career, I can attest that the last ten years of growth of internet-related services is beyond all comparison to growth in telephony for the last thirty. Once telephony went to wireless, the rest of the changes were of magnitude, more than type.
Other than that, companies like Verizon have only introduced innovation by expanding outside of voice communications to look more like cable companies.
The FCC's unilateral power play is sure to have very negative consequences for one vibrant sector of the US economy.
Think of how many new initiatives, perhaps along the lines of Facebook, Google, or the thousands of apps for iPhones, will now be choked off by uncertain returns to capital as the FCC clouds the business operating environment for such services.
It's bad enough that our government uses taxpayer money to prop up old, antiquated and unproductive sectors like auto manufacture. To now turn to the other end of the spectrum and move to limit growth in new economic sectors will surely lead to a moribund US economy in the not too distant future.
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