Howard Marks, the Chairman of Oaktree Capital Management, wrote a piece today that I totally agree with.  He wrote about our political problems.  Here’s a summary of his key points:

1. We have long term problems – deficits, debt level, healthcare costs, Social Security and Medicare.  We must address them as soon as possible.






2. The pain of fixing the problems will be felt in the short-term; the benefit will be long-term.  Unfortunately, politicians are concerned with the short-term as they want to be re-elected.






3. Both the NY Times (which some people consider Democratic) and the WSJ (which some people consider Republican) recently ran editorials stating that politics appear more toxic – there is no room for compromise.






4. One of today’s greatest stumbling blocks is the lack of bipartisanship.  Marks said that the party that has control feels like they have a mandate and “bipartisan” means that the other party should give in.  The party that is out of office feels that it is their duty to use all possible procedures to protect their rights.






5. When power is split, both sides feel some responsibility to solve problems.  When one party has all the power (like today), neither party feels any obligation to compromise.






6. It’s hard to believe that either side is arguing out of principle.  Rather they seem to be fighting to win elections.  There also seems to be a desire to vote against anything which would allow the other side to claim any accomplishment.






7. At this point, both sides seem unyielding.  Conservative Republicans want politicians to stick to a “no-tax” pledge; liberal Democrats want their politicians to prevent any spending cuts for domestic programs.






8. This is like a situation where a seller says that he’ll never sell for less than $20 and a buyer says that he’ll never buy for more than $18.  Principles are great, but we might all be better off if the deal was done at $19.






9. It’s hard to see how the deficit is going to be narrowed when we can’t raise taxes or cut spending.  Same with Social Security…if we can’t raise taxes or delay benefits, it’s unlikely to be solved.  Similar situations exist at the state level with underfunded pensions.

10. This isn’t about parties.  The Republicans are frustrating the Democrats now.  When the Republicans eventually return to power, there’s little doubt that the Democrats will do the same to them.




11. An important part of leadership is compromise, finding solutions and explaining to the voters why compromise is necessary.




12. The fact that you don’t have to speak for hours in order to filibuster means that you now have to have 60 votes in order to move forward.




13. If getting re-elected is what matters, politicians will never do the right thing – because these aren’t easy decisions.




14. We need to elect moderates.




15. Marks quoted Hank Paulson who recently said that at the family level, we’re working to leave the next generation better off than we are; but at the national level, we’re living for the present and we’re ignoring the problems which will saddle the next generation.




Part 2: Follow Up on Some Stories




People are crazy. Here are some numbers from a Rasmussen survey that describe how people react to the recession:

48% have decreased the amount they are saving for retirement!  (I don’t know if they have given up on retirement or they are making less.)

12% have increased the amount they are saving

35% are saving the same amount




53% say that the economic conditions will result in delaying retirement; of those people, 64% say the delay will be more than three years




41% say they have moved their money into less risky investments as a result of the recessions




30% of Americans believe that it is possible for a middle-income family to save for a secure retirement




Greece to leave EU?

Harvard Professor Martin Feldstein suggested that Greece’s austerity plan will fail and the country may need to leave the EU in order to solve their crisis. (If Greece left the EU, they could devalue their currency.)  Greece has promised to cut its deficit down to 3% of GDP by 2012.  The European Central Bank President (Jean-Claude Trichet) said Greece’s strategy is convincing and it’s absurd to speculate that Greece may leave the EU.  Who are you going to trust…a Harvard professor or a French guy that hyphenates his name?

S&P affirmed its BBB+ credit rating of Greece, although the longer term outlook remained negative. This move increased confidence that Greece can raise $27 billion in the next two months.




Fed Almost Done Buying MBS

The Fed will end its purchases of $1.25 trillion of mortgage backed securities.  Currently, 30 year fixed rates are around 5.05%.  Interestingly, mortgage demand is very low.  No one knows what the impact will be when the Fed stops their purchases.




China’s Currency

The World Bank recommended higher interest rates and a stronger currency for China.  The IMF director also said that the Chinese currency was valued too low.
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1. We’re running a deficit that is greater than 10% of GDP.
2. Our publicly held debt is going to easily double in the next ten years (and GDP won’t).  As rough numbers, our debt held by public investors is approximately $8 trillion and will easily head toward $18 trillion in the next ten years.  We are also borrowing money (~$4.5 trillion) from Social Security.
3. Interest rates are being kept low by a series of factors (such as a low Fed funds rate which allows banks to borrow for close to nothing and buy Treasuries; direct purchases of Treasuries by the Fed; a misguided belief that Treasuries are a safe long-term investment; a slow economy which has resulted in low inflation) which will eventually change.
4. We have an off-balance sheet unfunded liability that the US government has just estimated at ~$46 – $52 trillion for Social Security, Medicare / Medicaid, Veteran’s Affairs and the Black Lung fund.

The point is that our debt is going to become a much larger percentage of GDP.  Investors tend to worry about debt when it approaches 90 – 100% of GDP.  If you believe that our unfunded liabilities are truly debt, our debt is 400 – 500% of GDP.  (Apparently, this is AAA in the eyes of the credit ratings agencies.)




Of course, not only will our debt rise, but our interest payments are going to eventually increase (unless you believe that the Fed will maintain a 0% Fed funds rate forever and that we will have a slow economy forever).  When interest rates rise, our interest payments are going to become a much larger percentage of our tax revenues.  (They are currently 8%; the credit ratings agencies tend to worry when they are over 10%.)




We’re going to have tremendous political problems – problems which will dwarf the current fighting.  Here’s the important line of what Moody’s said.  Moody’s said that “preserving debt affordability (the ratio of interest payments to government revenue) at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.  This means that we’re going to have to cut spending or increase taxes.  In addition, this means that we’re going to have to do something about our unfunded liabilities.




Changing our spending is easier said than done.  According to CNN, Moody’s said that cutting back on spending too soon will result in a possible double-dip recession.  But, leaving stimulus in place for too long could lead to a sharp rise in interest rates with more abrupt rating consequences a possibility.




Changing our social insurance program will be even more problematic. As I showed yesterday, people have not save enough to pay for their retirement or healthcare – they are relying on Social Security and Medicare / Medicaid.  In my opinion, it’s a total joke to believe that we can easily solve those problems.  You should question people who want you to believe that eliminating a $52 trillion liability will just require a few easy adjustments.  Few people can work past 65, we don’t have the jobs to allow them to work and people can’t afford private health care insurance during retirement.  Most importantly, even if there are some solutions, we don’t have the political will to implement them.




Eventually, there will be a downgrade.  Among the impacts will be:

1. higher interest rates for the US – which would perpetuate our deficit
2. tarnishing the US image
3. higher rates for all other loans

If you want to hear the other side of the argument, look to Tim Geithner.  Our fearless Treasury Secretary laughs in the face of danger.  Geithner said that there’s no chance that the US will be downgraded.  I would agree that there’s little chance of an immediate downgrade.  Things aren’t desperate yet and we all know that credit ratings agencies are slow to act.  But, I would love to know what Geithner would have said if we had asked him three years ago about the chance of Bear Stearns, Lehman, AIG, Merrill and Washington Mutual being gone.  My guess is that he would have also said that there was no chance of this.  I’d say that the US problems are much more obvious than the ones I just mentioned.




All of this news really impacts our debt market.  As a result, there have been some other important stories which tie into this issue:

1. From 2012 – 2014, we’re going to have approximately $700 billion of junk bonds and CMBS that need to be refinanced plus approximately $4.5 trillion of Treasuries issued (this is new US debt plus refinancings).  Investment grade companies will have to refinance $1.2 trillion during that three year period.
2. States also have a $1 – $3.35 trillion gap for their pension and health care plans.  It is estimated that 41 states have pension programs that are less than 10% funded.  (This makes my retirement account look good!)  Only 5% of the $587 billion liability for current and future retiree health care  benefits is funded.  Hedgeye (a research firm) estimates that the six states in the most trouble are California, Arizona, Michigan, Nevada, Florida and Illinios.

I think that the corporate issuers will refinance ahead of time (if they can), as rates are currently low.  As a result, that doesn’t worry me.  But, the amount of Treasury debt is huge and our balance sheet could look much worse by then.  These problems are all huge.  This is the issue that we should all be thinking about and this is the issue that should be driving our voting decision in the fall.
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http://www.mccombs.utexas.edu/alumni/conference/




Now, here’s a summary of what I’ve read about the issue of the day – the Chinese currency issue and China’s desire to stall any currency appreciation…




The rhetoric is heating up between the US and China.  Since the US has the world’s largest GDP and China will soon pass Japan to become number two (although China is much smaller on a per-capita basis), these are important issues and everyone is watching.




Part 1: Here’s a quick summary of events:

1. In the past few months, tensions between China and the US have risen. In particular, China is upset that we have sold arms to Taiwan and that the President met with the Dalai Lama.  China’s Prime Minister (Wen Jiabao) said “these moves have violated China’s territorial integrity.”  (Personally, I find it amusing anytime that anyone connected to the Chinese government uses the word “integrity”, but that’s me.)




2. Last week, President Obama called on China to let their currency appreciate and to move toward a more market-based currency.  The Peterson Institute for International Economics said that the yuan should appreciate by approximately 40%!  Some IMF insiders have indicated that the IMF believes that the currency is undervalued by 20%.




3. China sells renminbi (yuan) and buys foreign currency (in order to keep their currency weak).  They now have $2.4 trillion of reserves (this is the combined value of all currencies that they hold).  In the last 18 months, their foreign reserves have increased by approximately $590 billion.  Some economists view this increase as the greatest reflection of China’s pursuit of a weak currency.




4. On Sunday, Chinese Prime Minister Wen Jiabao said that China would keep its currency (the renminbi) stable.  He said that it was not undervalued.




5. The Prime Minister also said that the US was failing to rebuild our economy and that we should maintain the value of the dollar as a matter of credibility.  He said that “it is not only in the interests of the investors but also the United States itself.”




6. He accused the US of simply wanting to improve our exports at the expense of China.  He said, “but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose of increasing their own exports.  He said that this is protectionism and warned that all countries should be alarmed by such developments.




7. On Monday, a bipartisan group of 130 US Congressmen signed a letter urging Treasury Secretary Geithner and Commerce Secretary Gary Locke to label China a “currency manipulator” in the upcoming (mid-April) report on Foreign exchange.  No Administration has been willing to do this in the past fifteen years. If they are so designated, it would lead to negotians and possible economic sanctions if the US took a case before the WTO (World Trade Organization).

Also on Monday, four senators sent the President a letter urging him to not go along with giving China special treatment when considering sanctions on Iran that Congress is currently debating.  If we exempt China, any legislation is basically worthless.  The letter was sent by two Democrats and two Republicans.




8. While all of this is going on, some believe that China may be signaling their desire to ease tensions.  They allowed five US warships to dock in Hong Kong.  They also announced the smallest increase in military spending in twenty years.








Part 2: My Thoughts on This Issue

1. I am the resident populist.  I believe that China’s refusal to allow their currency to appreciate results in a tremendous trade advantage for China.  This means that jobs go to China at the expense of other countries.  In addition to hurting the US, this is also hurting many third world countries.  In effect, China is creating jobs at the expense of all other nations.  We need more nations to stand up with us against China. It is sometimes difficult to stand up to a bully alone.  It’s easy to do it in unison.




2. The irony of China calling the US protectionist is lost on no one. It’s like when I said to Jenny, “we should do more stuff as a family; lets talk about it when I get home from the gentleman’s club.”  Is China serious?  Countries complain about protectionist policy when another countries taxes imports or give subsidies to their own industries that export.  Of course, by keeping their currency devalued, China is effectively doing that for all products.




3. China is very aggressive in labeling other countries as “protectionist.” The New York Times reported that while China ran a $198 billion trade surplus in 2009, they filed more trade disputes with the WTO than any other country.  At the same time, they’ve worked to suppress an IMF report that argues that the Chinese currency is undervalued.




4. One of the other great ironies (that some commentators have pointed out) is that if China allowed their currency to appreciate, it may help curb inflation.  (Many expect China to increase their bank reserve requirements this week.)  With that said, I’m a little skeptical of this argument, as much of China’s inflation is the result of a possible asset bubble (and would not necessarily be remedied by a stronger currency).




5. We’re never going to jawbone China into doing what we want – we need another methodology.  Public speeches and threats don’t work with China.  With that said, subtle diplomacy has not worked either.  We need to understand the ramifications of our policies and either decide to stand up to the bully or decide that we’re going to appease them.  But it’s pointless to threaten the bully from inside our house and refuse while refusing to go outside and fight him.




6. Some people argue that a weaker dollar will hurt China because they hold approximately $900 billion of Treasuries.  I don’t think that’s the issue at all (to China).  I think that they are worried about keeping jobs.




7. One other irony is that all this talk may push up the dollar (against other currencies) as it spooks the market and investors see the dollar as the safe currency.  In effect, we’re hurting our trade deficit as a result of our attempt to alleviate the problem.




8. For politicians, this is the perfect time to bash China.  (For me, it’s always a perfect time.)  We have high unemployment and there are few Americans who have good feelings about the Chinese government.  As a result, President Obama is going to be in a tough position.  It’s hard to understand how he can avoid taking action.  Politically, he is going to be hard-pressed to express concern about jobs while maintaining past Administrations’ policies of kowtowing to China.




9. It’s going to really be fascinating to watch whether the Administration labels China a “currency manipulator” under the Omnibus Trade and Competitiveness Act of 1988.  This really carries no explicit penalties.  But, it would infuriate China and would result in giving Congress the “moral authority” to take action.  We’ll find out in April…




One last unrelated note about China…

China’s accounting transparency was under fire today as they didn’t include cash payments (as part of their deficit) that were paid with funds “carried over from last year” – and this effectively reduced their deficit from 3.5% of GDP to 2.8%.  They seem to want to keep their deficit below 3% (similar to the goals of the EU).  Most countries use cash accounting and China’s deficit would have been 3.5% if they had done this.

Interestingly, the International Budget Partnership rated the 2008 transparency of public finances and gave the UK and 88, the US and 82 and China a 14.  If you want a real feel for how bad that is, realize that Nigeria got a 19 and most of their funding comes from email scams.
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Sorry for this spam email.  I’m having a bit of trouble with my technology.  As a result, I am posting this blog to see if it goes out. I am having a problem with my feed and I need to figure this out before I work on a blog for tomorrow.

There is no need to email me back.  I will know if it reaches you.

Thanks.

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http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=4488




Today’s blog is a summary of some of the key points I read in this document.  Sometimes, when I summarize a document, I feel like I am able to include every important point from the source document in my summary.  This time, I feel different.  I’m giving you a lot of key points, but the source document is great.  It’s a survey of workers and retirees.  If you’re interested, take the time to pull it up.  It has great info and great charts.




Before I tell share the data that I consider to be so important, I want to give you a few things to think about when you read my summary:

1. Many people argue that we need to simply increase the age requirement for social security.  I would argue that it’s not that easy.  Many people are not healthy enough to work at age 65 (or have a sick family member that they must take care of).  In addition, many people do not have current skills and some employers prefer to get rid of older employees.  From a macro perspective, if more people are working, that means we need more jobs.  Good luck on that one.
2. Most people save very little for retirement.  As a result, they rely on Social Security – so it’s an important issue.
3. Most people will struggle simply paying for Medicare.

Now, on to their data…




Confidence is Low

Only 16% say they are very confident that they will have enough money to live comfortably throughout their retirement years.  22% say they are not at all confident.




Only 12% are very confident that they will have enough money to pay for medical expenses during retirement.  26% say that they are not at all confident.




Only 10% are very confident that they will have enough money to pay for long-term care expenses in retirement.  31% say that they are not at all confident.




Not Everyone is Saving

69% of workers say that they have saved money for retirement.




71% of retirees say that either they or their spouse have saved for retirement.




60% of workers say that they are currently saving for retirement.




29% of Americans age 25-and-older say that they have not saved any money for retirement.  Of these people, 79% of workers and 60% of retirees say that this is because they could not afford to save.




The Amount People Have Saved is Too Low

The total savings and investments reported by workers (not including value of primary residence or defined benefits plan):

Less than $1000 – 27%

$1000 – $9,999 – 16%

$10,000 – $24,999 – 11%

$25,000 – $49,999 – 12%

$50,000 – $99,999 – 11%

$100,000 – $249,999 – 11%

$250,000+   — 11%




In other words, 66% of people have less than $50K.   Granted, the survey group is 25 and older (so some young people still have loads of time), but there are not many people near the high end.




Approximately 73% of employed workers are offered a retirement plan.  Of those, 81% contribute to the plan.  People who participate in these plans are almost 3X as likely to have savings and investments of at least $50K (56% vs 19%).




Interestingly, retirees have similar numbers:

Less than $1000 – 27%

$1000 – $9,999 – 15%

$10,000 – $24,999 – 14%

$25,000 – $49,999 – 11%

$50,000 – $99,999 – 6%

$100,000 – $249,999 – 15%

$250,000+   — 12%




In 2007, the Fed’s Survey of Consumer Finances found that the median level of household assets was $221,500.  This includes primary residences.  Houses are worth less today.  Retirees are not going to be able to take equity out of their house.




Burying Your Head in the Sand

46% of workers (or their spouse) have tried to calculate how much money they need to save for a comfortable retirement.




For people who make $75K or more, the amount that they think they will need for retirement is:

<$250K – 13%

$250K – $499,999 – 16%

$500K – $999,999 – 30%

$1MM – $1.499MM – 13%

> $1.5MM – 20%

Don’t Know / Don’t Remember – 8%




People who have done a calculation estimate that they need more than people who have not done the calculation.  Of course, it’s possible that people who are not saving much do not want to do the calculation.




For people who have done the calculation, their confidence in their ability to reach their number is:

Very Confident – 25%

Somewhat Confident – 40%

Not Too Confident – 19%

Not at All Confident – 15%

For people who have done the calculation, they report making the following changes:

Started saving or investing more – 59%

Changing their investment mix – 20%

Reducing debt or spending – 7%

Enrolling in a retirement savings plan at work – 5%

Deciding to work longer – 3%

Researching other ways to save for retirement – 3%




People Get Advice All Over the Place

Where do workers (not retirees) get investment advice?

33% — professional financial advisor

27% — family, friends or co-workers

10% — newspapers or magazines

10% — internet

9% — their employer or former employer

8% — bank or credit union

7% — company managing their employer-sponsored retirement plan




Lowering Expectations

In 2009 and 2010, 25% and 24% of workers reported that they postponed their expected retirement age during the past 12 months.  The reasons (for the 2010 survey) are:

29% — the poor economy

22% — a change in employment situation

16% — inadequate finances or can’t afford to retire

12% — need to make up for stock market losses

7% — lack of faith in social security or government

7% — cost of living in retirement will be higher than expected

6% — needing to pay current expenses first

6% — wanting to make sure that they have enough money to retire comfortably




Note: 2% of all workers report that they will retire sooner than they had planned.  (My suspicion is that these people want to tap into social security while it’s still there.  Seriously, most of these people attribute early retirement to poor health or disability.)




People Actually Retire Earlier Than Expected

Back in 1991, 11% of workers thought that they would work past 65.  In 2010, this is 33%!  But, the median has stayed constant at 65.




What actually happens is a little different.  More people retire earlier than expected.

41% of retirees leave the work force earlier than expected.  Of those, 95% cite negative reasons and of that group, the negative reasons are:

54% cite health problems or disability

26% downsizing or closure

19% having to care for spouse or other family member

16% say change in skills required for job

11% — other work-related reasons




People Kid Themselves That They Will Work During Retirement

70% of workers plan to work for pay during retirement.  But only 23% of retirees actually work for pay in retirement.  Of those who work, many attributed it to non-financial reasons (such as staying active or enjoying work), but 90% had at least one financial answer as part of their reason for working during retirement.




People Don’t Save Enough for Healthcare

A study by the Employee Benefit Research Institute found that a 65 year old man who retired in 2009 will need between $68K and $173K to cover health insurance premiums and out-of-pocket expenses in retirement if they want a 50% chance of having enough money.  If they have $134K – $378K, they will have a 90% chance.  Women will need more (because they have greater longevity).




Have You Saved Enough to Maintain Your Spending?

In 2010, retirees said that their spending during retirement (compared to pre-retirement spending) was:

7% — much higher

6% –  a little higher

37% — about the same

26% — a little lower

23% — much lower




Counting on Social Security?

32% of workers say that Social Security will be a major source of income.  But, if you talk to actual retirees, 68% say that it’s a major source.




56% of workers expect to receive benefits from a defined benefit plan.  Yet, only 37% report that they or their spouse currently have such a benefit with a current or previous employer.




The amount of employees who feel confident that social security will continue to provide benefits of at least equal value to benefits received by retirees today:

7% — very confident

23% — somewhat confident

33% — not too confident

37% — not at all confident
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Now, on to what I read today…

Today, I want to address a long-term issue that everyone should be thinking about – whether you’re an investor or you’re running a business.  The issue is the effect of government debt on GDP growth.  Many of you enjoyed Wednesday’s blog (about the Harvard historian).  This is different.  You don’t have to believe that we’re headed for Armageddon.  Even if you believe that everything is going to be okay, you have to ask yourself about whether our increased debt level is going to impact our economic growth.




I spent some time reading a paper, “Growth in a Time of Debt,” by Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard).  They wrote a paper (January 2010) that addresses this very issue.  Here is a summary of their paper:




1.      Authors studied 44 countries over 200 years.




2.      Found that when debt reaches a level that is equivalent to 90% of GDP, the median GDP growth rate drops by 1%.  (In other words, countries with high debt levels have lower GDP than countries that don’t have high debt.)




3.      The average growth rate drops much more – 4% (implying that sometimes there is a real disaster).




4.      When the debt is less than 90% of GDP, there is not much correlation between the debt level and GDP.  In other words, debt basically doesn’t matter until it reaches a high level.




5.      The authors attribute the 90% cutoff as important because of “debt intolerance.”  As debt levels reach historic levels, the cost of debt rises.  Governments then tend to tighten fiscal policy.  (In addition, countries which rely on short term debt can face a sudden loss of confidence.)




6.      In a separate study by the same authors (which I discussed in a blog last year), they found that financial crises tend to result in government debt rising by 86%.




7.      Debt increases after a financial crisis because of bail-out costs, stimulus packages to deal with recession and lower tax revenue.  If you look at countries that have had significant crises (Iceland, Ireland, Spain, UK and the US), the average debt level is already up 75%!  Interestingly, the US has added the least debt (on a percentage basis) of the five countries, but we have the highest debt (as a percentage of GDP).




8.      Increasing taxes or reducing government spending will result in less output.  Simply think about an individual – if they allocate more to taxes, less money is spent buying goods and the result is that there is less demand.  Similarly, if the government demands less, GDP also drops.




9.      If there is inflation (think of the government printing money), we can reduce the “real cost” of our debt (i.e., we pay back our debt with cheaper dollars).  But this really only works if your debt is long-term debt.  If it is short term debt, the country will immediately be refinancing at significantly higher rates.




10.      It’s not fair to compare all debt build-ups.  If you build up debt because of a war, it’s probably not as bad.  That spending will go away and you will have significant manpower (and purchasing power) return to the economy.  If you look at the current build-up, nothing is going to get better on its own.




11.      In emerging markets, high debt levels also lead to lower growth.  In addition, high debt often leads to inflation in emerging markets (but not necessarily in advanced economies).

Some Thoughts About This Paper

Our 2009 – 2010 fiscal year deficit is expected to be approximately 11% of GDP.  That means that our debt (as a percentage of GDP) will increase by a similar amount.  As we plan on doing this for several years, this problem will get worse.




When debt equals GDP, you can simply think of the interest rate as the percentage of GDP that the government is paying in interest.  While you can’t think of this as a direct reduction of GDP, this is a huge burden that will hold back our economy.




The average maturity of our debt is approximately four years.  We probably made a mistake in not issuing longer term debt.  While short term debt lowered our cost – it will actually increase the cost of our debt if we have inflation.  In other words, if inflation jumped to 10%, you would rather have locked in money for 30 years, rather than four years (at which point you’ll have to refinance at higher rates).




While our unfunded liabilities don’t have a financing cost, they should be considered in this analysis.




If you believe that this is correct and growth will be slow, it’s hard to believe that we’re going to create three million jobs per year – the amount of jobs necessary to lower unemployment by 1% per year.

Part 2: Mohamed El-Erian’s Op-Ed Piece

Mohamed El-Erian is CEO of PIMCO.  (He basically runs PIMCO with Bill Gross.)  This week, he wrote a piece in The Financial Times.  Here’s a summary of what he said:




1. Every once in a while, the world faces an economic development that they don’t understand and they consider irrelevant.




2. Examples include China’s influence on growth and prices, as well as the growth and collapse of housing and shadow banking.




3. Now, we should be paying attention to the deterioration of public finances of many advanced economies.  This will have long term effects (it’s much more than just Greece!).




4. The US debt to GDP has grown 20% in two years!  This will continue to increase over the next ten years.




5. Approximately 40% of global GDP is coming from countries running deficits that are 10% or higher.




6. It’s probably no longer appropriate to think about advanced vs. emerging economies.  Many advanced economies are more vulnerable.




7. Governments will certainly adjust.  The question is whether the adjustment will be orderly, when will it happen and what will the collateral impact be.




8. Governments normally try to solve the debt problem with growth and convincing the private sector to hold more debt.  This will be hard with high unemployment, lower growth and persistent deficits.




9. Governments will have to decide between heavier taxation or lower spending.  If we don’t mess with this immediately, we will have to inflate our way out or default.




10. The situation is more complex because we don’t know what other countries will do.




11. We can’t dismiss this balance sheet shock as isolated, temporary and reversible.  People need to recognize this problem AND we need to figure out the CORRECT solution.




Have a good weekend.
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The huge deficit. Through February, the US deficit is $651.6 billion.  The deficit is 10.5% higher than last year (at this time).  February’s deficit ($221 billion) was the larget monthly deficit ever.  (I remember when that was our annual deficit!)  This was the 17^th consecutive month of deficit.

LA could use some help. Los Angeles is asking the government to help them borrow $9 billion to speed construction of 12 new mass-transit rail lines.

Illinois needs a lot of help. Illinois’ Governor said that state income taxes must increase 1%.  Otherwise, payments to public schools will fall 17%.  The state faces a $13 billion deficit for the next year.  Even with the tax increase, there will be a $4.7 billion deficit.

Employment

Unemployment has peaked? One economist said that we’ve never seen unemployment drop .4% and then go on and hit new highs.  In other words, he argued that since unemployment has come down from 10.1% to 9.7%, unemployment has peaked.

Forecasts for a big jobs report in a few weeks. Some economists are predicting that the March employment report (which we will get in early April) could be a one time blip on the positive side (in the range of +300K jobs).

Municipalities can’t hire. State and local governments are the biggest employer in the US (15X as many employees as Wal-Mart).  But, state tax revenue dropped 11% for the year that ended in September.  So, don’t expect hiring.

We’re going to solve the unemployment problem by hiring every American to count every other American. In Texas, the Census is still looking for 25,000 applicants from “hard-to-count” communities.  These are populations with language or cultural barriers.  They expect to have a total of 100K workers in Texas at the peak.

No summer jobs. In 2000, 45% of 16 – 19 year-olds had summer jobs.  That number is expected to be 28.5% this year.




Credit Markets

Big debt issuance. In 2010, US companies have already issued $195.2 billion of debt.  Last year, companies had issued $166.8 billion by this point.

Narrow spreads – it’s all backed by the US government. Spreads between Fannie and Freddie bonds and Treasuries narrowed to the smallest spread ever (61 bps).

Credit default swaps. There is approximately $25 trillion of credit default swap exposure outstanding.  There is approximately $80 trillion of debt outstanding in the world.

Greece is paying more than they expected. Greece is paying 6.25% on its recently issued debt.  If rates remain at that level, Greece will pay approximately $1 billion more in interest than expected.




China

China property bubble. China’s property prices are 10.7% higher than a year ago.  Their CPI is 2.7% higher.  Sales of residential properties have increased 37% in the first two months, but that is less than the 50% rate of last year.

China trying to slow speculation. In China, buyers must now put 40% down on second homes.  First time buyers must put 30% down.

China is an export machine. China’s February exports increased 45.7% YOY.  Imports grew 44.7%.




Random

Fewer VC firms. The number of active venture-capital firms was 1,023 in 2005.  It has dropped to 794 at the end of 2009.  I would like to see more stats on this…it wouldn’t surprise me to just see that the existing firms are bigger.

Fraud alert!!! There are 5MM households behind on their mortgage payments.  The government has a new plan where lenders must accept short sales (based on real estate agents information on the minimum acceptable level!!!).  The government will pay people $1,500 to walk away from their homes and will give $1000 to the lender.  Get ready to hear stories about insane amounts of fraud in the next year.

I think politicians should have to register with the police; I’d want to know if one was moving into my neighborhood. I hadn’t kept up with the Eric Massa story.  Apparently, he resigned from Congress.  He was accused of sexual harassment – groping some of his staffers.  At one point, he said he tickled one of his male aides until he couldn’t breathe.  Now that I know that’s not allowed, I will also stop tickling my male students.




PART 2: My Blog Supporting the Alumni Business Conference

http://blogs.mccombs.utexas.edu/alumni-news/2010/03/09/a-message-from-mr-manners/

A Message From Mr. Manners

Well, another year has passed and it’s time for the 5th Annual Alumni Business Conference.  As you will see when you arrive, Jim Nolen and I still look marvelous. I don’t know how we do it. (As my wife said to me recently, “you look the same as you looked in college; and that explains why you didn’t get married until you were in your 30s.’)

I want to tell you a little bit about what I’m going to speak about this year. In 2007, I taught you how you too could make money in real estate with no money down. In 2008, I showed you how to get rich by investing in Lehman Brothers. My March 2009 tip was to buy Greece. So I understand that there are a few of you who might not be able to afford this year’s seminar.  But for those of you who didn’t take that advice (or even better, did opposite), I think we’ve got a really useful lecture for you.

I decided that I’ve already made you enough money in past years. I’ve also come to realize that not all of our attendees care about money. So, I’m going to teach you about something that will allow everyone to succeed: manners.

Most importantly, there are going to be important, practical takeaways.  You’re going to leave my session being able to:

1. Look a banker in the eye and appear sincere when you say, “you deserve your bonus; I’m happy you got it. And for what it’s worth, I was shocked that the AOL / Time Warner deal didn’t work out.”
2. Have a smile on your face when you tell your friends at Goldman, “you really do do God’s work. How can I join the Church of the Rich?”
3. Learn how to outsource, so that you can take certain burdens off of your spouse (special guest speaker: Tiger Woods).
4. Politely make your point to family and co-workers who are self-centered and can’t balance their checkbooks by smiling and referring to them as “Congressmen.”
5. Smile without laughing when young people say that they plan to rely on Social Security.

Normally, you’d pay hundreds of dollars for lessons like this. But, we’re offering all of this for much less.  Before I tell you the price, I’m going to throw in one added extra. As an educator, I’m going to show you how I completely eliminated that college tuition liability that was destroying my personal balance sheet. As a result, while many of you foolishly set aside hard-earned money each month saving for your kids’ education and living with less luxury than you deserve, I am able to spend everything I make.

How do I do it, you ask? Once a week, sometimes twice if I feel like it, I let my kids know that they’re really not college material. I point out mistakes they’ve made and things that they don’t know. When my children ask where I work, I tell them “at a University, but you don’t need to worry about that; it’s only for smart kids.” It really only takes about six weeks (on average) for kids to lose their confidence. You’ll start to see results in even less time. (My kids stopped making eye contact after about three weeks.)

Look, I’ve probably just saved you hundreds of thousands of dollars. The least you can do at this point is write a small check to the Business School and pick up a few more tips like this. Practical education my friends…that’s what it’s all about.

I hope to see you on March 25th and 26th at the Alumni Business Conference. It only costs $130 and we’ll have lots of fun. My actual topic will be “You Can’t Handle the Truth!”
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Farrell\'s Article Link




Don’t read my writing as an endorsement of this.  Rather, my view is that there is a low probability / high impact event out there and you should think about it and assess what the probability is.  If you want to think about a low probability / high impact event, lets imagine that it was March 2007…would you have believed that in the next 18 months, Bear Stearns and Lehman would be gone, and Merrill would be part of Bank of America?




Farrell’s article is actually a description of a paper written by Harvard’s Niall Ferguson, a leading financial historian who says that imperial collapse can happen much more suddenly than historians imagine.  He’s quoted as saying, “A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.”




Ferguson’s article was just published in Foreign Affairs.  So Farrell’s brief piece got me interested in reading the source document.  (You can buy a pdf of Ferguson’s paper for 99 cents online.  I don’t like to flaunt my wealth, but I went ahead and bought it.  I figured that if the US is coming to an end, I wouldn’t miss the 99 cents.  If the world doesn’t end, Jenny will get one less Christmas present next year.)




Now, having read the actual source document, I’m not sure that Farrell’s piece actually does it justice.  But, Farrell brought it to our attention and got people thinking about it, so that’s good.




Here are some of the important thoughts from Ferguson’s paper:

1. All empires, no matter how magnificent, are condemned to decline and fall.

2. Historians believe that civilizations reach their demise gradually.  It is often the result of their attempt to defeat other civilizations (sometimes for commerce).  Most historians believe that it is part of a natural (albeit slow moving) cycle.  In addition to imperialism, other causes could include abusing their natural environments.  For example, civilization can grow beyond its agricultural supply and civil war can ensue.

3. Leaders (politicians) have little incentive to address long-term problems.  Many times, problems won’t manifest themselves for a hundred years.  Thus, the demise of civilizations often take quite some time.

4. The US has long-term threats.  The CBO suggests that public debt could rise from 44% (before the crisis) to 716% by 2080 given likely changes.  If current policies remain the same, the debt will be 280%.  Regardless, we don’t have the political will to make changes (cut entitlements or increase taxes).   China’s GDP is expected to overtake the US sometime between 2027 and 2040.

5. Ferguson asks…but what if this is not a slow cycle, but something capable of sudden acceleration (maybe we could call this “the Toyota view of the world”).

6. Great civilizations are complex systems that have many interacting parts.  These parts operate “on the edge of chaos” – where they are stable for long periods of time.  Then, some small trigger can set it off.  After it gets set off, historians arrive and tell a story about the event and how there were “long term causes.”  Often times, the historian misunderstands the complexity, but the story is satisfying.

7. More often than not, the calamity is actually caused by something very proximate in time.  They are not culminations of long stories.  They are breakdowns of complex systems.

8. A small input to a complex system can have an effect that is amplified.  As an example, you can give too much of a vaccine to a patient and you can kill him.  Some people who study complexity believe that it’s impossible to make predictions about future behavior (because of all of the possible outcomes of a complex system).   (The size of the system’s breakdown is often hard to predict.  You don’t know how much damage will occur with a forest fire.)

9. There are countless empires that collapsed very quickly.  The most recent example is the Soviet Union.

10. Now, turn your attention to the United States.  You should be scared of a precipitous decline (don’t try to think of the stages).  Most collapses are associated with financial crises.

11. We are currently running a huge deficit and our publicly held debt is going to double within the decade.  Interest payments will increase from 8% of revenue to 17%.

12. These numbers could weaken the worldwide confidence that the US can withstand any crisis.

13. Most likely, there will be some event that happens that changes the thoughts of the world.  The common belief will no longer be in US viability.

14. It may be that the public will suddenly reassess the credibility of our fiscal and monetary policy.  If investors suddenly question our solvency, interest rates will rise and our interest payments will become tremendous.

15. If this happens, the US will no longer have the money to finance our military programs.

If all this happens, historians will enter the picture and tell us a story.  But in reality, things will have happened very suddenly.




My Thoughts on This

This is a scary story and it always scares me more when I hear a story like this from someone smart.  For those of you who have heard me speak in the last couple of months, you’ve heard my description that I believe that we are headed (in the long-term) for a financial crisis of epic proportion – similar to what third-world countries have faced in the past.  I don’t think that this will happen immediately, but I describe it as something that will certainly occur in our children’s lifetime.  I always laugh at the complacency with which listeners respond.  Most frequently they ask, “so how should I position my portfolio?”




I do have certain disagreements with Ferguson’s theories.  He blames the current crisis solely on the mismanagement of monetary policy (I think that there’s much more to it).  I also think that our crisis is a story that has been a long story – when you look at Social Security and Medicare / Medicaid.




Unfortunately, I really disagree with Ferguson’s description of our debt.  Our problems are MUCH WORSE than he described.  About ten days ago, the Treasury Department put out their annual report which estimates the present value of the unfunded liability for Social Security, Medicare / Medicaid and Veterans’ Affairs.  The amount is $52 trillion.  I’ll talk more about this amount in future blogs.  But the bottom line is that this just a disaster and there’s really no solution.  It would be no different than you or I having $10 million of debt.  For most of us, working harder, saving more and cutting our expenses won’t solve the problem.  It’s too late.




This all really scares me.  I think that the educated people of our civilization have a duty to start learning more about our fiscal issues.  It’s the only way that we’re going to have a chance of affecting the outcome.




Finally, I’ll end with the thought that hopefully this is all crazy and I’m crazy for telling you to think about it.  But here’s a question for you…think about all of the past dynasties…do you think any of the citizens thought that their dynasty was going to end?
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1. Some Results of the Great Recession

Four day work week. There are approximately 15,000+ school districts in the country.  More than 100 have moved to a four-day school week.  Obviously, this helps with budgetary shortfalls.  (Jenny homeschools two of our kids – maybe we should try this to solve our budgetary issues.)




Increased coupon usage. The number of coupons redeemed increased 27% from 2.6 billion to 3.3 billion in 2009.  This was the largest percentage increase in the 20 years the data has been collected.  CouponMom.com has 2.2 million members – up from one million in January 2009.




Everyone is feeling the recession. IBM’s Chairman and CEO saw his 2009 compensation drop by $200,000 to $24.3 million.  Hopefully someone will tell him about couponmom.com.




Junior liens (which sometimes make it difficult to work out a short sale on a house). There are $1.05 trillion of junior-lien home loans outstanding as of September 30^th.  Approximately 75% ($766.7 billion) are held by commercial banks.  Most of the rest is held by savings banks and credit unions.  Many of these loans are worthless due to the drop in home prices.




We have a deficit and we’re cutting taxes. Los Angeles has a $200MM budget shortfall that could cause layoffs (and supposedly) creates the risk of bankruptcy.  But last week, they cut taxes for internet companies.  These are tough issues.  Cities don’t want companies to leave.




Money flowing out of US stocks. In 2010, worldwide investors have pulled $15.3 billion from US stock funds (which includes ETFs).  Approximately $2 billion has gone into emerging market stocks.  Last year, $65 billion went into emerging market stocks and $20 billion in US bonds.




The Greek Prime Minister is pushing the US to investigate currency speculators who are driving down the value of the euro.  I think he learned this lesson from the US when we banned short selling during the financial crisis – implying that everything was the fault of the evil hedge funds.  I’m not sure why anyone would question the value of the euro when the EU controls monetary policy but not fiscal policy and they have countries that no one wants to lend to because people cheat on taxes and strike when there are austerity measures announced.  Those evil hedge funds…how dare they.




Greek tax and court officials, sanitation workers and local government workers are planning strikes this week. In a recent survey, 48% of Greeks disagree with labor unions’ stance (against the austerity measures) and 45% agree.




E. W. Scripps shares were off as much as 20% on Monday morning. Managers were given 1.8MM shares after they vested on Friday.  Apparently, they were all sitting by the computer on Monday morning hitting the sell button.  This is what happens when management goes a year without bonuses.




Woe is me! I was emailing back and forth with a good friend yesterday (both of us are 45) and we were talking about the fact that our generation hasn’t done great.  We’ve had no stock returns in the last ten years, no home price appreciation since 2003, job markets that are much more competitive than what our parents had, 401(k) plans instead of pensions and we pay more for our health care.  Of course, our kids are going to have it even worse.




2. Interesting Article from Paul Krugman

In Paul Krugman’s weekly NY Times piece, he wrote about a recent research paper that identified the common characteristics between Ireland and the US with respect to each country’s housing bubble and ensuing financial crisis.  The point of the paper and Krugman’s article is to say that we have attributed the problems (in the US) to many things (such as Fannie / Freddie, the Community Reinvestment Act and exotic financial instruments)…but these are things that they didn’t have in Ireland.




Apparently, the paper identified four common features between the US and Ireland:

1. irrational exuberance – the belief that high prices would go higher
2. cheap capital – China financed the US and Ireland was financed by the EU and especially Germany
3. players had the incentive to take risk (they did not bear the risk of loss)
4. regulatory imprudence

I have not read the research paper yet.  But here’s a link to Krugman’s article and that has a link to the paper.

http://www.nytimes.com/2010/03/08/opinion/08krugman.html?ref=opinion




3.  A Few Random Stories

I wish I had Cablevision as my cable provider! Disney blacked out ABC stations to Cablevision holders for a short while, saving them from having to watch the Academy Awards.  Who watches this crap?  Next time I get a teaching award, I’m going to start crying and thanking all the people who made it possible.  Why would we watch these freaking idiots?  I’m not sure, but if I only had two choices, I would consider watching skating over this.




Pretty brave people. Approximately 62.9% of eligible voters turned out in Iraq, despite bombs and various threats.  As a reference point, in the 2008 election in the US, 61.7% of eligible voters turned out (although 64% of people claimed they voted when asked by the Census bureau!).




Placement firm Challenger, Gray and Christmas says that the first week of the NCAA tournament may cost US employers as much as $1.8 billion in unproductive wages. The math is based on $18.70 hourly wage with 58.3 million people watching games and filling in pools.  Each 20 minutes cost $362.2 million.  Using this math, there’s no telling how much money Tiger Woods cost corporate America.  In reality, how much do most people goof off on a typical day…

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Consumer spending accounts for approximately 70% of GDP (in normal times).  Consumer spending is premised on income and borrowing.  (While borrowing ticked up in January, it’s been very weak for the past two years; asset / collateral levels are lower, banks are less willing to lend and consumers want less credit.)  In order for consumers to have income, they must have jobs.  So without jobs, we’ve got problems.  In addition, unemployment exacerbates our deficit: fewer people are paying taxes and more people are receiving transfer payments.




The Jobs Report is particularly important because there is uncertainty in the market as to what the current jobs status is.  Below, I will take you through some of the arguments used by bulls and bears.




Background

The “jobs report” is actually called “the employment situation” and it really is comprised of two reports:

1. The Household Survey
2. The Establishment Survey

The Establishment Survey is larger. The Household Survey is a sample of 60K households.  The Establishment Survey covers 140,000 businesses and government agencies (covering ~ 410,000 worksites and approximately one-third of all nonfarm payroll employees).




Each of the two surveys has some advantages. The Household Survey includes the self-employed, unpaid family workers and private household workers.  It also includes people who are on unpaid leave.  The Household Survey doesn’t duplicate people (whereas a person could be on two payrolls).  Unfortunately, the Household Survey is more susceptible to “puffery” from participants and requires a much larger change to be considered significant.




The Establishment Survey is larger and is based on hard data.  Contrary to common thought, the Establishment Survey does include small firms.  Approximately 40% have fewer than 20 workers.  The Establishment Survey also has an adjustment to account for business births and deaths.




There are two headline numbers: the unemployment rate (9.7%) comes from the Household Survey and the number of jobs lost (36K) comes from the Establishment Survey.  The numbers are not always consistent.




Severe Weather

Many commentators are suggesting that severe weather may have affected the numbers, but the BLS can’t quantify it.  It’s very hard to determine the impact.  Certainly, people might not have been hired due to the storms.  With that said, some people found employment because of the storm (cleaning up, doing repairs, etc.).  The joke going around is that bosses couldn’t get to work to fire people.  Many people think that the storm results in undercounting jobs because the job numbers jumped in 1996 in the month after some big storms.

Severe storms shouldn’t have a huge impact.  In the Employment Survey, if you were paid for the period including Feb. 12, you were counted as employed (even if it was for one hour).  You have to have been off for the entire period in order for the storm to matter.  In the Household Survey, you were counted as employed if you missed work for weather-related events, even if you were not paid for time off.  On the flip side of all this…it’s hard to create jobs when then world is shut down because of snow.




Bullish Arguments About the Employment Situation

Job losses have abated. Nonfarm payroll employment dropped 36K in February.  This continues the trend of fewer job losses and is a particularly strong number given the inclement weather.  Remember: from November 2008 – March 2009, we were losing more than 600K jobs per month!




The February data corroborates the January numbers. January’s loss was only 26K and February was 36K.




In both surveys, the number of unemployed people was close to unchanged. In the Household Survey, the number of unemployed person was essentially unchanged at 14.9MM.  The Payroll Survey showed an increase of 36K unemployed people.




The Household Survey (unlike the Payroll Survey) showed a huge increase in the number of people who are employed. The number of employed increased 541K and 308K in January and February.  During that time, the labor force grew by 453K.  This is (1) population growth of 74K; and (2) 378K fewer people are “not in labor force” (re-entrants).  This increase in jobs shows why the unemployment rate (which we get from the Household Survey) dropped from 10% to 9.7% in January (and stayed at 9.7% in February).




The unemployment rate stayed at 9.7%. There has been a lot of fear that we would head toward 11%.  The fact that the number has stayed in single digits is better for confidence and it can be a self-fulfilling prophecy.




Temporary services increased jobs. Temporary help services added 48K jobs.  Since September 2009, this has risen 284K.  This is often a precursor to full-time jobs.




Other important sectors have stopped losing jobs. Manufacturing was unchanged.  Retail employment was unchanged.




The number of long-term unemployed has dropped. The number of long-term unemployed (27+ weeks) has decreased from 6.3MM to 6.1MM.




Past job losses weren’t as bad as we had thought. December was revised from     -150K to -109K and January was revised from -20 to -26K.  If you combine the past two months, we actually lost 35K fewer jobs than we had thought; when you combine those changes with the 36K jobs we lost in February, it basically nets out to zero!




The unemployment rate is not terrible for those with a college degree. For those with a college degree or higher, the unemployment rate was 5%.  One year ago, it was 4.2%.




We’re seeing fewer industries lose jobs. The diffusion index, which weights the number of industries increasing employment vs. decreasing employment, is 48.  It was 17.1 a year ago.  A reading of 50 indicates equal balance.




Bearish Arguments

We need 125K – 150K jobs to be created to satisfy new entrants each month. This is misleading right now (we don’t see “new entrants”) because people are leaving the labor force, but once we start creating jobs, we will return to this normal situation.  As a result, losing 36K jobs is not a great report.




In addition to the 125K – 150K jobs described above, we need to create significantly more jobs in order to reduce the unemployment rate. If we create an addition 150K jobs per month (bringing the total monthly jobs number to ~300K), it will take approximately 4.5 years to recover the 8.4MM jobs lost since December 2007!




If it weren’t for the civilian labor force shrinking, the unemployment rate would be approximately 11%. The civilian labor force has shrunk 900K in past year.  If you had the same participation rate (65.7% of the population participating in the labor force) as one year ago, that would mean that the unemployment rate would be approximately 11%.  (Here, I’m assuming that 65.7% of the population was part of the work force and the number of employed is “as stated”.)




Understand the craziness of the participation rate. During the year, the population grew by 2.085MM.  If ~65% of people are in the work force, we should have had 1.3MM more workers.  Instead, we had 900K fewer.  That means that the 2.085MM (of population growth) plus the 900K who left the work force increased the “not in the work force” category by 2.975MM.




The number of persons working part time for economic reasons increased from 8.3MM to 8.8MM. In January, this number had decreased, but it turned back up in February.  These are people who had their hours cut or who were unable to find a full-time job.  These people are considered employed, but many are dissatisfied with their situation.




Approximately 2.5MM people were marginally attached to the labor force. This is an increase of 476K in February.  These are people who are not in the labor force even though they wanted and were available work.  While these people had looked for work in the past year, they had not looked in the past month (and as a result, they are not considered to be part of the labor force – and are not counted as unemployed).

Among the marginally attached, there were 1.2MM discouraged workers in February (up from 473K last year).  Discouraged workers are not currently looking because they believe that no jobs are available to them.  The remaining 1.3MM marginally attached workers had not searched in the past four weeks because of school or family.




Certain industries might not see a return to their peak employment levels. Construction employment fell by 64K in February – similar to past six months.  Since December 2007, construction employment has fallen by 1.9MM.




While the number has decreased (from 6.3MM), there are still 6.1MM people who are considered “long-term unemployed” – jobless for 27 weeks or longer. The average time of unemployment is 29.7 weeks.  The median is 19.4 weeks.

For most people, this can decimate their savings and have long-term repercussions on spending.  This can also have an impact on family issues for some.

The increase in temporary jobs may show a new trend – to use temp workers rather than provide benefits or commit to full-time employees.   One example of temporary jobs that is skewing our data is the use of Census workers.  This month, we hired 15K temporary workers for the Census.  If it weren’t for the census workers, the report would have been a loss of 51K.




There are certain groups that are disproportionately impacted by the recession. The teenage unemployment rate was 25%!  This has long-term repercussions in their career.  Minorities are also suffering from high unemployment rates.  Blacks and Hispanics have very high unemployment rates – 15.8% and 12.4% respectively.




While almost as many industries are adding jobs compared to those that are losing jobs in the past month, we are far below our employment levels one year ago. Virtually every industry (Table A-14) has higher unemployment than one year earlier.




The more inclusive unemployment rate ticked up from 16.5% to 16.8%. This means that one in six Americans is either unemployed, underemployed (they’ve accepted part-time work when they want full-time work) or they are too discouraged to look for work.  (In the past year, approximately 500K people have become discouraged and have stopped looking for work.)




Conclusion

If the “weather blamers” are correct, the next payroll report could be a great report and could change consumer confidence.  If they’re wrong, pessimism will reign.  My gut feeling is that we’re going to see a good number next month, but we’re still in for a very long haul before we get back to 5% unemployment.




What do you think?  If you’re interested in sharing your thoughts, tell other readers your prediction for two questions: (1) what do you think next month’s job number will be; and (2) how long will it be before we get back to 5% unemployment?

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