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Mark's Market Blog

7-28-13: Jobs aren't happening for our youth.

By Mark Lawrence

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Nothing much happened again this week. The market was flat; this may be a breather in a long term up trend, or it may be topping behavior. I haven't a clue. I can name people who I respect on both sides of that discussion.

S&P 500 February 1 2012 to July 26 2013

Japan had elections; their current ruling party won big. This was seen as a big vote in favor of Abenomics, the theory that you can print money until your demographic problems are solved. Japan is now having inflation instead of deflation for the first time in about 30 years; the Yen keeps dropping, stocks are going up again. That's all "good," in the sense that it's what they wanted. However one major point of this was to increase exports and that's not happening. I believe we will continue to see positive results out of Japan for the next 12 to 24 months, then it's going to get really bad really fast.

The Fed's manufacturing survey came out and shipments, new orders, backlogs, and capacity utilization fell this month. Consumer sentiment in July hit a six year high. We're getting mixed messages about our economy right now.

Last week I noted that retail investors - Joe Plumber - are pouring $2B per week into the market. Meanwhile institutional investors are dumping stocks at record rates, according to BofA / Merrill Lynch. This is almost always a sign of a market top.

Europe is seeing an up tick in PMIs, which many are taking to mean their recession is coming to an end. I think we're in a time of near-continuous rolling recessions in much of the world, especially Europe, so I'm skeptical about interpreting this as green shoots. China meanwhile looks to be entering a recession; I also doubt this. They will experience a period of slower growth, but I just can't bring myself to call 5% growth a recession.

Obama's approval rating has sunk to 41%, a new low for him. He first dipped below 50% about 10 months ago. Obama is suffering from continuing concerns about the economy, the various spygates and middle east unrest. 54% think the country remains in a recession, 56% disapprove of Obama's handling of the economy, 60% see the country going in the wrong direction. I think the people are right: the economy sucks for two-thirds of our people, payoffs to the lower classes in the form of Obamaphones, food stamps and disability payments don't improve the economy, and the middle class continues to be gutted. Of course this speaks very poorly for democrats chances in the upcoming midterm elections, so Obama immediately announced he'll be living out of Air Force 1 for the next couple of months while he does the thing he does best: fly around and campaign. No new initiatives, no new ideas, no new policy, just more talk, more promises, more blaming everything on conservatives. What's his record? We're adding about 180,000 jobs per month. It takes about 125,000 to 150,000 new jobs per month to just keep up with the US population increase, so we're getting laid off people back to work at the rate of 30,000 to 45,000 per month. And most of those new jobs are part time low-wage. This is not nearly good enough. The populace at large is completely innumerate so these arguments go unspoken and unheard, but they still know the truth: the economy sucks for average people and it's getting worse, not better.

We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. It is not working. We have a younger generation that is having trouble finding full-time work and developing the skills needed for the transition to more stable, higher-paying employment. The longer the situation persists, the more difficult making up lost ground and lost time becomes for them. My take: the Fed is evil, Wall Street investment banks are evil, and Bernanke and all of Washington are enthralled with them. However, I believe interpreting the graphs below as showing that the Fed is causing part time employment is confusing cause with correlation - during tougher times the Fed uses low interest rates and jobs are hard to come by. I believe the poor growth of jobs is because we're creating a youth cohort that's uneducated and being replaced by automation. So while some would tell you if the Fed lets interest rates rise then jobs would be created, I believe that this poor jobs environment will be with us for a generation - the rest of my life. Plus there's increased demand for part time workers as a buffer against Obamacare costs.

What happened to Detroit? The big three auto companies have always had a profound suspicion of universities, and always maintained their own tech centers and done their own research in private. So today Detroit has only one good public university - U Mi, which moved a hundred and fifty years ago from Detroit to Ann Arbor - and no significant private university. Try to imagine Palo Alto without Stanford, Pittsburgh without Carnegie-Mellon, Cleveland without Case Western Reserve, Boston without Harvard and MIT. When the auto industry went into historic decline a couple generations ago, Detroit had no fall back position. Of course one must also note that the left took control of their government decades ago and hired public workers in numbers that the community could never afford, then awarded them pensions that today have bankrupted the city. Many cities in the east lost their primary industry - Pittsburgh is a case study when steel went away - but had fall back positions due to their educated populations. The cognitive elite fled Detroit 30 years ago, and now all that's left is a carcass. In the new economy, jobs and industry live across the street from major universities.

Oakland has the highest crime rate in California and recently laid off more than 100 police to fund retirement benefits and pension-obligation bonds. Murders and robberies shot up by nearly 25% last year. To avert steeper cuts, the city borrowed an additional $210 million to finance pensions. Philadelphia and Chicago are now having to make balloon payments to prevent their retirement funds from going broke. Philadelphia is spending about 20% of its budget on pensions to make up for years of short-changing the system. In 1999, it issued $1.3 billion in bonds to invest in the pension fund, but it has paid more in interest than it has earned on its pension investments. The city has recently raised sales, property and business taxes. The city council is now discussing using revenues from a one-percentage-point sales tax hike in 2009 intended for schools to finance pensions. Its sale tax rate is now 8%, the limit under state law. Chicago is also fast approaching a day of reckoning. Chicago Public Schools last week announced 2,100 layoffs, which Mayor Rahm Emanuel blamed on a $400 million spike in pension payments. "The pension crisis is no longer around the corner," he said. "It has arrived at our schools." I have one reform I think is long overdue: cops and firefighters leave the force at age 50, but their pension doesn't start until they're 65. 62 if they want to take lower payments, just like social security does. Meanwhile, they can get a J-O-B. This business of paying 50-something cops $100k / year to golf must stop, and will stop.

About 20 California community college have been sent notices that their accreditation may be revoked unless changes are made. If they lose accreditation, then student aid and transfer credits are at risk.

78 y/o Bruce Malkenhorst took home $911,000 a year as city manager of Vernon. His reign ended shortly before he was convicted of misappropriating public funds, and he walked away with an annual pension that topped $500,000. But CalPERS last year decided to cut his pension to $115,000, concluding he'd derived some of his hefty salary improperly. So now the 78-year-old Malkenhorst is suing Vernon to make up the difference. His lawyers are making a novel if improbable argument: Because it paid him a high salary, the city is responsible for keeping his retirement benefits at the higher level even though CalPERS balked. Last year CalPERS found that Vernon improperly boosted the retirement benefits of nearly two dozen top employees, resulting in the largest public pension reduction in state history. Malkenhorst's successor, Eric T. Fresch, who made as much as $1.6 million in 2008, had his pension stripped completely. Fresch died last year. Bell's former city administrator, Robert Rizzo, was poised to receive a pension of about $650,000. But CalPERS cut it to $50,000 after Rizzo and seven other city officials were accused of corruption. His assistant, Angela Spaccia, had her projected pension cut from $250,000 to $43,000.

Charlie Munger, #2 at Berkshire Hathaway, had something to say about US energy independence. "If energy independence was such a good thing, let's just imagine that we go back to 1930 or something like that and we were hell bent to have total energy independence from all the foreigners. And we just drill and use every technique we can and we produce our hydrocarbon reserves which are absolutely certain to be limited. Well, by now we have way less in reserve and are way less energy independent. In trying to get energy independence we would have destroyed our safety stock of oil within our own borders. Oil and gas are absolutely certain to become incredibly short and very high priced. And of course the United States has a problem and China has a worse problem. And China has the correct solution. Imported oil is not your enemy it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization. And what responsible people do with a Confucius ethos is they suffer now to benefit themselves, their families, and their countrymen later. And the way to do that is to go very slow on producing your own (domestic) oil. You want to produce just enough so that you keep up on all of the technology. And don't mind at all paying prices that look ruinous for foreign oil. It's going to get way worse later. Every barrel of foreign oil that you use up instead of using up your own you're going to eventually realize you were doing the right thing. Energy is one of the unique areas where free-market policies end up causing more problems than they solve. In the case of energy governments should step in and encourage imports (it should be noted, of course, that this situation already partially exists, since exporting U.S. crude has been banned since the '70s): Why are the policy makers in both countries so stupid on this single issue because they are not stupid generally? I think that it's partly the economists who have caused the problem. Because they have this theory that if people react in a free market that it's much better than any type of government planning but there is a small class of problems where it's better to think the things through in terms of the basic science and ignore these signals from the market. Now if I'm right in this, there are a whole lot of lessons that logically follow: (1) Foreign oil is your friend not your enemy; (2) You want to produce your own assets slowly; (3) The oil in the ground you're not producing is a national treasure; running out of hydrocarbons is like running out of civilization. All this trade, all these drugs, fertilizers, fungicides, etc. which China needs to eat with a population so much, they all come from hydrocarbons. And it is not at all clear that there is any substitute. When the hydrocarbons are gone, I don't think the chemists will be able to simply mix up a vat and there will be more hydrocarbons. It's conceivable, of course, that they could but it's not the way to bet. I think we should all be quite conservative and we should pay no attention to these silly economics and politicians that tell us to become energy independent." I agree completely with Mr.Munger: we're leaving our children under-educated, deep in debt and with little or no job training. The least we can do is also leave them some oil.

For the first time in over 20 years, Consumer Reports found an American car to like. The Chevy Impala was given best in class ratings, beating out the Toyota Avalon and Ford Taurus, and scored higher than any car CU has ever tested save for the Tesla model S and the BMW 135i. Since it's a new model they have no reliability data, so of course it's not a recommended car - actually recommending you buy an American car was one step too far for the Japanophiles. I've been amused for years about how they rant that Detroit doesn't hire or pay enough, then tell you to buy a Japanese car.

Global warming: The Arctic continues to warm up; it looks like the ice thaw this year will be slightly less than the record setting thaw last year, but the trend is clear. Now some scientists are warning that in the next ten years this warming could result in the release of a trillion tons of methane into the atmosphere, the by-product of millions of years of bacteria eating. This could speed up global warming to the point where the 2°c rise often quoted as the most we can handle comes by 2035. The big losers in this: loss of crops and droughts in Africa, Asia, S.America, and severe food shortages world wide. The US estimates world population in 2050 will be a bit over 9 billion; if correct, it's likely many of them will be starving.

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