Perpetual Investor Confidence

Yesterday, the Dow rose 109 points. Gold went up $4. The 10-year US note is still trading below 3% yield and oil is still below $95.

So, what’s new? The markets seem still to be wondering…waiting…watching to see what happens – just as we are.

The Greek premier won a confidence vote in parliament. That seemed to give investors some confidence. The idea is that if the Greeks can act like they know what they’re doing, the rest of Europe can give them some more money.

Meanwhile, Japanese officials appear to be taking a direct approach. They are said to be intervening in the stock market, buying when the market heads down. That must give investors confidence too.

And back in the USA, everyone seems to be waiting to see what happens when QE2 comes to an end. If stocks and bonds go down, the federales are sure to come into the market one way or another too. Another reason for confidence.

So at least at the top level, all the world’s major financial officials are in harmony…all singing the same tune… And all the world’s investors are confident. All a bunch of boneheads, and all going broke together.

Everyday we see a little more of the picture. It is as if we were on a boat. We hear the sounds of other river traffic. The clangs of bells. The workmen yelling to one another. The sound of the motors. But the fog keeps us from seeing who they are or what they are doing.

Now, the fog is lifting a bit. And not just for us. Even The Financial Times – the pink paper – is beginning to see things more clearly too.

That is, they’re beginning to see things our way!

Clive Crook, writing in Monday’s paper, sees America headed in Japan’s direction. After a recession, America usually gets back to work quickly, he notes. But this time, something is wrong.

This time it is different. Yes, dear reader, it’s different from the typical post-war recessions America has known up until now. It’s more like the Great Depression…or Japan’s “lost decade.”

Crook and other pink paper journalists – especially Martin Wolf – have spent a lot of ink misunderstanding the crisis of ’07-’09 and its aftermath, usually arguing for more bailouts and more central planning.

But they’re no dopes. At least they can see it is not working.

And now Mr. Crook notices that one bad thing leads to another bad thing…and so on. When people don’t have jobs, for example, they can’t spend. And when they can’t spend, sales go down. And so, businesses cut back…and there are even more people without jobs.

America was supposed to be so dynamic. It was thought – in the late ’90s…and again in the mid ’00s – that the flexibility of the US economy would protect it from a serious downturn.

If the auto industry imploded, for example, the autoworkers in Detroit would just move to LA. Problem solved. But what if there was also a serious downturn in the housing market? And what if there weren’t any jobs in LA either? Turns out, in a slump, America’s economic joints get stiff. Now, people can’t sell their houses. So they can’t move. They stay where they are because, even if they had a job, they couldn’t support two residences.

Alas…problem not solved.

Today, in the USA, there are about 25 million people who want to tote barges and lift bales, but the barges and bales have gone. Busmen find nothing to bus…schleppers are given nothing to schlep…and humpers have nothing more to hump. Surplus labor tends to lower prices…which, with interest rates stuck to zero like a fat tick on a lazy dog, real interest rates go up. This was called the ‘paradox of toil’ by Paul Krugman and Gauti Eggertsson. The two economists think it is a paradox. It is really just the other side of the credit cycle…the retreat, where everything goes wrong.

Consumers cut back in order to save money. Less demand lowers prices. So, consumers begin to anticipate lower prices…and cut back even more!

And as businesses are squeezed, they try to get more out of existing employees. Who wants to hire new employees when the fate of the economy is so unsure? In a healthy economy, higher productivity raises wages. But now it lowers them. Businesses need fewer employees to meet the reduced demand – and they have lots of unemployed workers to choose from. Not only that, other things being equal, higher productivity reduces prices…which further inflames the desire to save, rather than spend…and further suppresses prices and employment.

Another paradox? Maybe, but it is just more of the nasty slipping, sliding, bumping and crashing you get as you tumble along the downcycle.

One thing that has increased productivity is the Internet. You can find things faster. You can make connections faster. You can shop more easily and more efficiently. You can store and use information more cheaply. Surely the Internet must be an improvement for the whole human race, right?

But here’s the paradox. Thanks to the Internet, fewer people use the mail. So the US Post Office goes broke (it is expected to run out of money this summer…last we heard). This puts thousands of letter carriers out work. And thousands of printers. And don’t forget the newspapers. Ad sections are smaller. Classified advertising has almost disappeared. And thousands of ink-stained newsmen are out of jobs too. In almost every industry, the Internet has reduced costs and improved efficiency. As a consequence, the US economy has never produced so few new jobs. And as a consequence of that, households have less to spend…businesses sell less…and the economy slumps.

When the cycle turns, everything works against you…

As we reported yesterday, it will take a long time to re-absorb all the people who’ve lost jobs in this go-around. According to the study we mentioned yesterday, it’s supposed to take another 10 years to get unemployment down to pre-recession levels.

So what happens to someone who waits years to find a job? He loses his skills.

Here’s The Financial Times again. This time it gives us another reason unemployment will remain high: Americans don’t have the skills they need for serious jobs:

Eric Spiegel, chief executive in the US for Siemens, the German engineering group, said the problem exposed weaknesses in education and training in the US. Siemens had been forced to use more than 30 recruiters and hire staff from other companies to find the workers it needed for its expansion plans, even amid an unemployment rate of 9.1 percent

“There’s a mismatch between the jobs that are available, at least in our portfolio, and the people that we see out there,” Mr. Spiegel told the Financial Times. “There is a shortage (of workers with the right skills.)”

He said Siemens was having to invest in education and training to meet its staffing needs, including apprenticeship programmes of the kind it uses in Germany.

However, a recent survey from Manpower, the employment agency, found that 52 percent of leading US companies reported difficulties in recruiting essential staff, up from 14 percent in 2010.

A mismatch? You mean, being able to use Facebook doesn’t make you a master machinist? You mean, a degree in sociology doesn’t qualify you for a job? You mean, you can run up $50,000 worth of student loans…and still not be able to do anything useful?


Bill Bonner
for The Daily Reckoning

The Daily Reckoning