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Today's Commentary: 10.06.04
Long After the Election: Jobs
Long after the votes are counted, (the electoral ones - not the ones that so many Americans are being encouraged to cast) the candidates will need to deal with some serious issues that are bound to get worse no matter who is ultimately given the job.
I hate to sound sardonic but far too many people still have no idea how this whole process of electing the President works. For a brief refresher before I tell you why this job will be plagued with problems well into the near future, read on.
All others may go to the next paragraph. The framers of the Constitution did not want the popular vote to elect the President directly. Nor did they want the legislators to have the task of choosing the next commander-in-chief. So the job was left to electors and this is who you really vote for when you cast your ballot. With the majority of the states requiring plurality in the casting of their votes, the majority vote wins the states electoral votes. If your state chooses a candidate in majority, your electoral college is required to vote your wishes for president. Key word is majority.
And as I have said before, who would want the job? The current administration has created so many financial and iconoclastic problems for the next resident of the White House, reality should be on the ticket as well.
This Thursday, Mr. Bush and Mr. Kerry square off again on the eve of the jobs report for September. There is little likelihood that either candidate will be off message with their reports on the state of employment. But only one man will speak the truth and we will have to wait and see which one that is.
There is no real optimistic outlook for jobs on the horizon. This evidenced in the newest debate about employment: the quality of the work that many folks have been forced to take.
This debate is not new and depending on whom you are speaking with, you can find faults with all arguments. One school of thought claims that there is no such thing as a bad job. Any work that has the reward of income is a job worth having. This type of thinking relies on the marketplace to make decisions for the workers from conditions to pay to the actual supply of those jobs.
Referred to as neoclassic economists, these folks also believe that pay adjusts itself downward to a competitive level and in doing so, they offer proof that no job is paid more than an employer's willingness to pay.
On the flip side of that argument, some economists believe that unions restrict competition, employers can be generous with employees in wages and compensation beyond market levels, and sometimes, because the results of paying above market wage actually raises productivity and courts that employee's loyalty.
But what the candidates face is a growing and widening monopsony. Wal-Mart is an excellent representation of monopsony as they actively control workers wages while retraining workers because of lack of other available jobs, lack of mobility, or worse, lack of training that would garner them more competitive positions. More than one industry is undergoing just such a shift in workers attitudes and reduced to its least common denominator, that is the one thing economists are least likely to correctly predict.
The new labor market as a result is filled with workers whose jobs lack fulfilling pay for the work provided or worse, competitive pay. So how do you determine, if you are the new President, that your effort at creating employment is worthwhile?
Economists usually use union labor as the template for their studies. Union work, although greatly diminished in recent years, generally still pays better with more benefits than workers who do not have contracts. What is shading job growth is lateral skill changes in pay. Once the worker decides to leave a company for any reason, there is little likelihood that, unless the company happens to be recruiting employees for specific positions, that your new job will pay more. In fact, it might even pay less depending on marketplace competition for those positions.
So growth is mostly negated by the very market that created it. That makes wages a relevant measure of jobs. Unfortunately, wages have grown at a much slower rate and that is mostly due to inflation. Despite what Greenspan has described as a "slight shift", jobs, wages, and job growth have been impacted by the Consumer Price Index, even if they exclude food and energy.
Because of this shift, these problems result in the creation of services surrounding low wages and diminishing wage jobs. Economists are loath to suggest that with higher pay, Social Security would probably be unnecessary for a wider range of retirees because of the increased quality of wage, unemployment benefits would not cost the economy as much as it currently does and the high costs of safety and health may even moderate with an improved, more reward driven workplace.
Consumer Confidence that was measured in September dropped on the lackluster creation of employment opportunities. The one element that is hardest for economists to measure, willingness or lack of it, is creeping into the job search and may have had a real effect on the respondents in the survey done monthly by the Conference Board.
For those of you that place an unholy importance on polls conducted after the debate, you will have to filter out the jobs number reported the following day. With wages over the last year trailing the inflation rate by about a percentage point, pollsters will seek to keep respondents focused on how the candidates did during the debate. But it will matter little really.
Mr. Kerry will have a real problem if he wins. He has a solid plan that does involve growth in real and fiscally responsoble way. It won't be quick or even painless, but his strategy, if he can articulate it to the millions of people watching, could sway those who were teetering in their loyalties.
Mr. Bush will no longer be able to spin a positive face on his failed economic policies should he regain the office. Reality will be awfully difficult to ignore without changes in policiy. Words will not talk this economy down from the ledge.
Either way, the jobs problem will trickle into the following year but with Mr. Kerry, that should be all that is needed.
Today's Commentary: 10.03.04
Training the Young to Invest
Nothing warms the hearts of investment community than the thought of training young students to be investors. But the question of whether this is necessarily a good idea seems to be pushed aside as economics classes across the country come online to participate in the Stock Market Game.
Since the inception of this interactive program in 1977, over 8 million students have, according the web site, allowed tight budgeted schools to combine many different core studies into an exciting game. The mission statement on the site reads: "The Stock Market Game is a trademark of the Foundation for Investor Education, a nonprofit organization dedicated to developing and providing learning resources for investors of all ages, raising the level of investor awareness in the U.S., supporting research programs, and advocating the advancement of investor education." That foundation is a front for the Securities Industry Association, which was established in 1972 through the merger of the Association of Stock Exchange Firms and the Investment Banker's Association. That coalition seeks to bring together the shared interests of more than 600 securities firms to accomplish common goals.
Sounds noble enough, doesn't it, even without the shadowy existence of Wall Street in the background? But what would we think if the world poker tour took a similar approach? It too could use such savvy core studies as sociology, math, and perhaps even intro to psychology as a reason to instruct students in the fine art of when to fold, when to hold and how to read a bluff. Maybe not but the insinuation that this game will teach students something other than how to be good brokerage clients leads me to ask, who is the course really designed to educate?
Brokerage houses are basically chasing pennies when the take the fine art of stock trading to our impressionable youth. They understand that there is little chance that the game will actually give these kids much more than a workable vocabulary and quite possibly a thrill or two in the process. What the ten week course will not be able to parse is the expertise and investment styles of the parents that will come into play for some of the participants.
I am fortunate enough to have a seventeen year old who is not only literal but conversational in a way that many his age are not. He knows that I write about this stuff and as a result I may be a good person to give him the edge in the game. To him it is logical to seek advice. The game however might see the input, however innocent, as parental kibitzing.
Seeking advice is a two way street. Good advice must come from someone trusted enough to take the blame if the advice was erroneous with the person who takes the advice also admitting, if unwittingly, that the results of the decision should be ultimately theirs. Just like in the real world, those fortunate to have accounts where brokers will actually use the vast research and analysis departments to give you the cutting edge, it it the investor who must make the decisions and the broker who must take the blame. In the real world, this is a difficult and precarious position to be in during stretches when the market is referred to as a "stock picker's market", when it is bearish, moving stubbornly downward, and when it is bullish. Yes, even when the market is on the rise, the ability to beat everyone else comes into play adding a new pressure to the investor/broker relationship.
No one should envy brokers and their damned if they do, damned if they don't existence. But these kids do not have the time to do the kind of research necessary to make anything more than a semi-educated guess which in offshore parlance is a wager. a bet, a gamble.
During the game, students are give a hypothetical $100,000. This money is invested into the market accompanied, as in my son's case, by some rudimentary economics words and theories. But giving them the language of the commentators rarely gives the students the savvy they need to adjust long term thinking into short term results, a skill that is one of the most difficult to learn, and doubly as troublesome to teach. Just as every armchair quarterback knows, commenting is different than playing.
Economists are this game's armchair quarterbacks. The dismal science is meant as a clinical observation of why people do certain things, react a certain way, and given the right stimulus, how they would react repeatedly. Economist merely provide that statistical analysis that helps Wall Street make more odds-friendly bets. During the market bubble and ultimate crash in the early part of this decade, economists led by the nation's top banker, a respected economist as well, watched in wonderment as the investor thinking was changed, seemingly overnight from exuberance to defeat and eventually to ennui. And it was economists controlling interest rates and money supply that enabled those vast changes in emotions and wealth. To a lesser extent, changes in fiscal policy in Washington had an effect but that is another story altogether but not without its share of the blame.
So when my student asked me for short term suggestions, I helped. I picked several companies crossing the screen via the pre-market crawler. Companies whose products and price/earnings ratios would never see a single investment dollar of mine were the likely candidates. These volatile stocks ranging from nanotechnology companies, cutting edge pharmaceuticals, the ethereal world of the internet to weapons of low destruction (such as Tasers) would provide a hefty return and, had they invested the day I handed him my picks, he would have been handsomely in the lead. Trouble was, they did not invest that day and now, some of those picks don't look as attractive. For instance, Google, one of my internet picks has seen a fifteen point move since then and is not likely to keep up such a torrid pace. Such is the stock market!
Many of these stocks suffer from lack of liquidity and that alone makes them dangerous places for real money. But pretend money is different but no less competitive. For that reason, I suggested he tie only twenty percent of his money into these high risk fliers. The remainder of his cash should I suggested, be put into exchange traded funds.
There is prevailing notion that suggests that if you take out all of the booms and busts, which according to Stephen Sachs of Rydex ETF, will give you a more normalized view of the markets, add in diversification, you can be assured of beating all market cycles instead of just one. That is long range thinking from a fund whose design is based on short term reactions. Traded all day long and priced throughout the trading session, these funds have offered investors what mutual funds lack - the thrill.
So I suggested he diversify using these funds, also not something I would do with my own money. These funds do serve a purpose for the skittish investor offering a basket of stocks in sectors that would require far too much research for the average person. ETFs do have some of the same transparency issues plaguing mutual funds with one exception, they charge higher fees by comparison across every share. Fund expenses tend to be much higher in ETFs although some of the tax consequences are handled differently. Because many of these funds are managed by big brokerage houses, ETFs can make what is called "in kind exchanges". These exchanges often offset the high cost of redemptions and long term capital gains that might have hidden capital gains.
ETFs are also faced with rebalancing issues as the index they attempt to track changes. But they do provide a good opportunity to invest in some very volatile overseas markets without the necessary research that would otherwise be needed. Latin America, Europe, and the Pacific Rim ex-Japan all look as if they will grow consistently over the next quarter and that is about the length of time my son has to place his bets. I did offer some ETF listings that do index small-cap and value stocks traded here in America as well.
But let's not kid ourselves and our students. This game is a pleasant academic diversion that might just make economics a little easier to swallow. We should be honest with ourselves that this game is not a life lesson anymore than Texas Hold 'em is a sport.
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