Do you remember what it's like to be looking for work? I remember trudging down to the New York State Unemployment Office in the early 1960s to collect a weekly check. And I remember accounting for my job searches there, which I recall might have been the price for the weekly check. Yes, that's it! I had an interview with a government worker who took notes about my job hunt. I also cannot forget the endless interviews, and how disheartening it was to be turned down time and time again.
Why is that we so confuse self-worth with the job we hold? It must go back to our hunting ancestors. The hero came back with food for the table (okay, there was probably no table; maybe just a rock).
Politics
No one wants there to be unemployment, even though there always are some people out of work -- such is a part of the normal ebb and flow of the capitalist machinery. Even so, politicians seem to try to capitalize on high unemployment.
Clearly, manufacturing in the U.S. is still significant although it's in decline in some industries (automobiles and clothing come to mind). However, the government says it thinks that car companies are too big to fail. Are they? When government steps in, it seems to keep bad companies that made horrific decisions in business longer. Is this smart?
And is it smart, as a worker, to bet the farm on a job building automobiles? I mean the writing has been on the wall for years, hasn't it? Auto manufacturing is not necessarily stable employment. Like crack cocaine, high-income jobs with great benefits can prove to be irresistible, but the price is instability and now government bailouts.
Will people start buying cars again? Probably. Will they buy automobiles that are fuel-efficient? Maybe. It depends on fuel prices. As this is written, pump prices are edging up; if they fall, ever-fickle Americans could easily return to large gas-guzzlers, which they seem to love. (Speaking of fuel prices, I figured, at least in part, that Warren Buffett's January purchase of Burlington Northern Santa Fe was about the fact that a locomotive can move tons of goods for far less per fuel gallon than trucks, discussed in previous columns, and it's notable that a Tulsa-based national trucking company went bankrupt over Christmas, leaving drivers and rigs stranded across the U.S. with no money and no fuel cards; this week the company's rolling stock was sold at auction.)
Politicians who feel they owe manufacturing unions tend to try to prop-up dead jobs at any cost, even to the extent of continuing the operations of non-profitable companies. Face it, if you are a congresswoman or senator from Michigan, you will do everything you can to keep Michigan manufacturers in business. If you are a U.S. president, no matter where from, if a big part of your support came from unions, you will do all you can to keep that base intact. And, if you are a red state politician, you are likely to not be as interested in bailouts, and more interested in the management (business owner) side. In a democracy, the majority rules, one reason why congressional elections have much to do with population density.
It's a B paper, or an A-
If we have unemployment of 10%, it means that 90% of us are working. And, okay, I'll buy that 10% is twice as many as we should have unemployed (generally, economists consider 5% unemployment to be shorthand for "full employment," even though there is argument from some scholars who say, "No no, it's got to be 0% unemployment to really be full). If we have 10% unemployment, we actually have greater-than-10% unemployment, since some are "underemployed," but let's not go off in arcane deliberations; let's just go with the 10 number, okay?
Now we have to look at skills -- the definition rambles on about people who have the required skills being unable to find jobs at their level, which leads to a story. I have a friend who, several years ago, said something like this: "I feel so bad about Frank. He's been looking for work for eight months, and he simply cannot find work. He's living off his wife, and he's miserable."
"What does he do?" I asked.
The response: "Frank is a software engineer."
I laughed.
My friend said, frowning at me, "There's nothing funny about being out of work."
This was during a time of full employment, so I said, "He can find work; he just can't find work as a software engineer." I told my friend that I had sympathy for Frank, but that, in my opinion, he could have found paid work. In my day, unable to find suitable work, I've worked as a waiter, packaged dial calipers, accounted for toys, played conga drums, driven a truck, and loaded and unloaded cargo (plus other, usually-for-one-day, work). "What you are saying," I said to my friend, "is that Frank was only going to work as a software engineer, no matter what."
"Point taken," said my friend.
At any rate, in most calculations, 90% is good, even an "A" grade. We focus, though, on the 10% and politicians are willing to turn the world upside-down because we are 90% employed. (Again, I'm not denigrating the unemployed in any way. It is miserable to be unemployed. I'm trying to go for a kind of global perspective, and -- if you think 5% is the true counterweight to full employment; then we are just 5% off the mark and we have a 95% paper, which is an A+ in some schools.) If 95% of us are essentially working, things should be good, except for the remains of the housing and mortgage bubble and the wretched excesses of the financial sector. Gene Epstein, the economist at Barron's, looks for 4% growth through mid-year and then 3% or a tad more through the end of 2011. Yes, we have problems. Did I mention the bailouts? Government debt? Higher taxes? But consumers have loosened their wallets and unemployment will probably soon decline to 8.5%.
Marketplace
On March 18, NPR's Marketplace did a bit on Lincoln Electric, a company that has guaranteed employment since The Great Depression.
Lincoln's way could be the future. In listening to the report, my mind turned immediately to the auto industry and I thought to myself that it would be a way to adjust payroll costs in bad times. Lincoln pays bonuses when times are good that may equal 75% of pay. When times are bad, the bonuses are ratcheted backwards. Employees at Lincoln have the assurance of a job, so long as they maintain skills and follow company procedures. Each employee also knows that he or she will participate in company success and company failure. This is a model that has worked well for Lincoln and for its shareholders and employees.
Dickens again
Charles was right, wasn't he? You could almost say about any time -- that it's a combination of the best and worst of times.
So, we have 5% of our citizens not working and/or not working at what they want to be working at, government debt out the wazoo, two kind of wars, and global warming (or a new ice age, if the blizzard-like storm that hit Oklahoma on the first day of spring is an indicator) to deal with. On the other hand, the earth has not been hit by a comet, the Internet is working and businesses here and abroad seem to be doing better. We still get married, have children and enjoy family life. You and I can go to Wal-Mart or Super Target and buy groceries, hardware and home improvement stuff -- we don't have to dig in the dirt to raise vegetables (unless we want to), and we don't have to hunt for food (unless we want to).
Taxes will go up for awhile; then local, state and federal governments will finally really be forced to shrink because of the public outcry over increased unemployment and high taxes. Time will pass and, with smaller governments with reasonable pension schemes for employees, we will again have a surplus, and taxes will go down and things will be good. At least until we all again forget that governments can only be so big -- if they get too big, they tend to topple over. (It would be interesting to know what percentage of the population of the Soviet Union [remember the Soviet Union?] worked for the government? It's one of those things politicians in the U.S. don't talk about much -- what percentage of us now work for local, state and the federal government.)
Aside from all that, can you make money for your customers through investing and third-party management? Yes! Can you be of great value to customers? Yes. You are in a great profession. Enjoy.
Broker's Bookcase
The Big Short: Inside the Doomsday Machine, by Michael Lewis (Norton, 2010).
The book reviewed here is among the two most important I've read recently. I'll review an equally good and more instructive one next month. If you buy my term for the credit/housing/financial bubble as being The Great Debacle, these two books are the post-debacle, post-apocalyptic views to guide us forward through the maze of our finance and investing world.
The Big Short gets you inside -- w-a-a-y deep inside -- the subprime mortgage mess. You'll come away wondering why the clowns at the top of the financial pyramids in New York make the $100 million bonuses and huge salaries. You'll finally understand how the layers of financial skullduggery known as CDOs operated, and why many of the people involved in the executive, manufacturing and production didn't have a clue about how they work. When Greentree Financial and others went under in the 1990s, it was because they still owned little pieces of the CDOs. The new and retreaded 2000s players figured out how do to do sub-prime without owning any of the residual.
The first book I read about the financial mess -- before there was an observable explosion -- was Barry James Dyke's The Pirates of Manhattan. Barry started the research for this book in 1997 and published it in 2007. After losing much of his first manuscript, contained on the hard drive of a laptop, in a 2004 auto crash, he began rewriting Pirates from memory and added new research. I did not give Barry a great review, mainly because of the book's theme, which seemed to be in favor of abandoning investing in favor of life insurance cash accumulation (please keep in mind that I'm an investment writer and it's hard to for me to get excited about earning 2-4% on life insurance when Berkshire Hathaway has a compound growth rate of nearly 24% and other investment choices lay between the two extremes). However, I have to say again that Mr. Van Dyke nailed more than a few of the scalawags and scams in Pirates. And I'll give him a point in that he made me reflect about one thing life insurance does better -- I believe that life insurance regulation, handled by state insurance commissioners, has been far more successful than has federal and quasi-independent regulation of the securities industry.
In The Big Short some people made money, but maybe not who you think. For example, a doctor in San Jose named Mike Burry, with a glass eye and Asperger's syndrome, an expert at buying the right side of credit default swaps, made out like a bandit when things went south in sub-prime. Why? Because, among other things, he read mortgage bond prospectuses -- such bonds being the financial instruments created from the dreck and dross of the sub-prime tranches. Burry figured out that sub-prime could not work, only he figured it out before things went suddenly negative.
The Big Short reads like a novel. It's great stuff. Toward the end, Steve Eisman (one of the principal characters, and he is a character) says, "It was like feeding the monster. We fed the monster until it blew up."
Yes, this Michael Lewis is the same Michael Lewis who wrote Liar's Poker and The Blind Side, currently a hit movie. The man can write, and he makes complex things simple, a pretty neat trick.
This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Evaluation copies of software and review copies of books are sometimes furnished by publishers without charge; however, Mr. Hoe only reviews books and programs he feels will be of value to LIS readers and avoids writing about books and programs he feels would be of little interest.
Richard Hoe, ChFC, CLU, AEP, has been an investment professional for 40 years, and is a registered
representative and investment advisor representative. He is a member of the adjunct faculty at the California Institute of Finance, a graduate school at California Lutheran University. Readers may e-mail Richard Hoe at richardhoe@richardhoe.com.
