A may be worth a reposting of a John Mauldin letter about outsourcing, that points out the biggest problem may be productivity. Look at it this way, 30 years ago it may have taken 1000 man-hours to produce a car, today it would take 500 hours (I'm making up the numbers but you get the drift). So GM can produce the same # of cars for half the labor. I don't buy into protectionism, because I believe there is more benefit to free trade etc.
******
Where Have All the Jobs Gone?
More Dead Economists
Repeat: The Fed is Not Going to Raise Rates
Trade Wars and Other Disaster Scenarios
Gold, the Stock Markets and the Dollar
More Airports and Bull's Eye Investing
By John Mauldin
February 27, 2004
Free trade, jobs, fairness and the economy are all front and center in the
coming political debate. As politicians respond to polls, we are going to
hear a lot more about them in the coming months. Most of what you hear will
be VPG - Verbalized Political Garbage. It will demonstrate that most
politicians know very little about basic economics, or else do understand
and simply wish to pander to voters in order to get elected.
Today we will wade into the core of this debate, hoping to give you an
understanding of what is really at stake. Polls tell me that 75% of you
will not like what I write. But since this is a free letter it will not
affect my renewal rates. Likewise I am not running for office and do not
have to couch my terms in evasive language designed to obscure what I
really mean. If we have enough time and space, I am sure I can find
something to annoy the remaining 25%. So let's get started.
Let's begin with a poll by the University of Maryland's Program on
International Policy Attitudes: "...the polls shows that among Americans
making more than $100,000 a year, support for actively promoting more free
trade collapsed from 57% to less than half that, 28%, in just the last 5
years." In general, the lower the income, the less excited about free trade
a portion of the population is. The percentage of people wanting to
actively slow free trade (or stop it altogether) doubled to 33%. More
people want to slow free trade than who want to promote it. (USA Today)
I knew the support for free trade was waning, if from nothing else than
from my readers response and questions. But I was simply amazed at the low
level of support for free trade. I find it troubling, for reasons we will
get into in a moment.
The old joke is that a recession is when you neighbor loses his job. When
you lose yours, it is a depression. As an increasingly nervous middle class
copes with international job outsourcing of higher paying service jobs, the
loss of manufacturing jobs and a job-less recovery, their favorable view of
free trade is clearly waning. Except, of course, for cheap products made in
China and sold at Wal-Mart.
It was one thing when Joe Six-pack lost his job at the factory. That was
simply a recession. Threaten my high tech, information age job or other
formerly safe service job, and the benefits of free trade look a little
murkier. Now we are beginning to talk depression.
Politicians rail about foreign job out-sourcing. John Kerry talks about
Benedict Arnold companies who hire foreign workers and send manufacturing
overseas. It is easy to bash them and play into fears for job security. It
is these very fears which are eroding consumer confidence polls. The link
between consumer confidence and the confidence you have about the certainty
of your job is very high.
Where Have All the Jobs Gone?
I am waiting for the politician who will stand up and finger the real
culprit for the loss of manufacturing jobs: worker productivity. Where are
the calls for legislation demanding we do something to make the
manufacturing base of this country less productive, so we will need to hire
more workers?
Here are a few facts, conveniently brought to us by Martin Wolfe in the
London Financial Times. First, American manufacturer employment has dropped
2.6 million jobs between March of 2001 and January of 2004. By January of
2004, employment in manufacturing was 17% below what it was in June of
2000, the peak month for manufactured output in the last cycle.
Outsourcing? Offshore manufacturing? On the surface, it seems to be the
culprit. It makes for good copy, as it is easy to see a manufacturing plant
closing in Wisconsin and opening in Shanghai. But it is not that simple. If
we look at the numbers, I think we can find another perpetrator. There was
a 17% rise in worker productivity over the same periods noted above, with
just a 3% drop in production. We are producing roughly the same amount of
"stuff" with a lot fewer workers. We produce almost twice as much as we did
just 24 years ago.
Notes Wolf: "Trade does, as critics stress, mean painful adjustments for
those affected, as well as shifts in the rewards for different workers. Yet
this is just as true of productivity. Information technology destroyed the
jobs of armies of clerks and raised the wages of educated workers relative
to those of less educated ones. But it had no deleterious impact on
unemployment."
Now this is a number which gave me pause: he further goes on "Between 7 and
8 percent of US private jobs are lost every quarter. But employment has
still increased." That means the economy is creating quite between 7 and 8
percent new jobs every quarter, just to stay even. And we are doing
slightly better than staying even (but only slightly).
Now, let's be clear. Jobs have been lost as US firms move manufacturing to
China or other nations. Hundreds of thousand have been laid off as work
moves to foreign and cheaper sources of labor. Outsourcing to India and
China of information age jobs has moved hundreds of thousand of service
jobs offshore. But manufacturing and service jobs have also been coming to
the US. Think BMW, Honda and Toyota. Siemens alone employs tens of
thousands of American workers. There are thousands of foreign companies who
have opened plants in the US.
The brilliant economist Thomas Sowell, writing in a Wall Street Journal op-
ed this week makes this point: "Management guru Peter Drucker has pointed
out that this country imports far more jobs than it exports and no one has
contradicted him. Indeed those who are loudest in denouncing the exporting
of jobs totally ignore the importing of jobs."
He goes on to note: "When the North American Free Trade Agreement went into
effect a decade ago, there were dire predictions of 'a giant sucking sound'
as American jobs were drawn away, to Mexico especially.
"In reality the number of jobs in the US increased by millions after NAFTA
went into effect and the unemployment rate fell to low levels not seen in
years. Behind the radically wrong predictions was a simple confusion
between wage rates and labor costs.
"Wage rates per unit of time are not the same as labor costs per unit of
output. When workers are paid twice as much per hour and produce three
times as much per hour, the labor costs per unit of output are lower. That
is why high wage countries have been exporting to low wage countries for
centuries. An international study found the average productivity of the
Indian economy to be 15% of that of American workers. In other words, if
you paid the average Indian worker one-fifth of what you paid the average
American worker, it would cost you more to get the job done in India."
It is no coincidence that manufacturing employment declined 17% while
productivity rose 17%. Let me put this another way: if manufacturing
productivity had not risen as much as it had, unemployment would be far
worse. Why? Because more jobs would have been moved to lower cost
production centers. It is only because we are becoming more productive that
we keep the manufacturing base we have. But of course, being more
productive means we need fewer workers for "unit of output."
As the dollar drifts lower against Asian currencies, it will help restore
some balance to international labor advantages. Fewer jobs will leave the
US because of lower foreign wages. But will that make us better off? No, as
the products and services we buy from foreign nations will cost us more.
Think we would be better off with a little less free trade? Only ten years
ago, US exports supported 7 million workers. Today US exports count for 20
million workers. (Source: WSJ) Take away those 13 million jobs and imagine
the chaos in the US. Without free trade, those jobs would not exist.
Further, realize this happened even as the dollar was rising dramatically
in value, making our exports cost more to the world.
A rational policy would be pushing for more free trade, as it has clearly
been to our national benefit, even while it causes local and individual
suffering. But rational policies and politics sadly rarely mix.
"Demagoguery beats data in the making of public policy," noted my former
congressman and majority leader Dick Armey. Speaking in front of a plant
dependent upon export, where jobs have been growing, does not draw nearly
the national media attention as touring shuttered plants which have been
closed.
Politicians do not create jobs or wealth. For the last 20 minutes, I have
been trying to find the one quote I read this week which showed that
government regulations cost more in terms of jobs than all the outsourcing
to India and China. I readily complain about the cost of government
regulations in my business. Sarbanes-Oxley was a full-employment act for
attorneys, not to mention the Anti-Money Laundering Act and a host of new
rules, all of which add to the cost of doing business.
But whenever I gripe about my regulatory costs with friends, I get no
sympathy. How much does regulation cost the medical profession, up and down
the chain? Construction? Manufacturing? Education? There is no place safe
from expensive regulations.
This week, Greenspan suggested that no new spending should be allowed
without cuts somewhere else or new taxes. Sensible enough. On a similar
note, I would suggest that we simply stop increasing the number of
regulations. If Congress wants to pass a new rule, they have to cut one
somewhere else. Further, they should arbitrarily cut 5% of the rules every
year, as we can all agree that 5% of the rules are without purpose and
harmful.
Any politician really interested in creating jobs would be demanding a
decrease in the cost of regulations so that employers, and especially small
employers where 80% of the new jobs come from, could have more money to
hire and invest.
The simple fact is that out-sourcing is here to stay, just as is
technologically driven productivity increases which reduce the demand for
labor. It is like the tide. Trying to stop it is like King Canute telling
the tide to stop.
Tom Peters (in a e-letter sent to me by a friend) wrote of several policies
which should be implemented to help us deal with what is a very real
problem for the country.
"Big companies do not create jobs, and historically have not. (Big
companies are not 'built to last;' they almost inexorably are 'built to
decline.') ...Job creation is entrepreneurially led, especially by a small
number of 'start-ups' that become growth companies (Microsoft, Amgen et
al.); hence entrepreneurial incentives including low capital gains taxes,
high R&D supports are a top priority...Primary and secondary education must
be reformed, in particular to underscore creativity and innovation -- the
mainstays of high-value added products and services. Children should be
nurtured on risk-taking, with a low expectation of corporate cosseting...
Research universities must be vigorously supported... National/global
protection of intellectual capital is imperative...All economic progression
is a matter of moving up the 'value-added chain.' (This is not 'management
speak': Think farm to factory to R&D lab.) ... Worker benefits (health
care, re-training credits, pensions) should be portable, to induce rather
than impede labor mobility... Workers have the ultimate stake. They must
're-imagine' themselves -- take the initiative to create useful global
skills, not imagine that large employers or powerful nations will protect
them from the current (and future!) labor market upheavals."
More Dead Economists
All this is well and good rhetoric, but it is hard for the person to deal
with who is at the end of his unemployment line, after watching his job of
30 years go to China. It is nice to quote Joseph Schumpeter, "The proper
role of a healthily functioning economy is to destroy jobs and put labor to
use elsewhere. Despite this truth, layoffs and firings will always sting,
as if the invisible hand of enterprise has slapped workers in the face." It
is also somewhat callous.
Thus, when Bush's chief economic advisor tries to explain the theories of
David Ricardo (another dead economist) as to why labor movement is a good
thing in the long run, it falls on deaf ears.
You can talk as long as you want about all the wonderful jobs that free
trade has created in the US, and how labor movement theory says we are al
going to be better off in the long run, but that does not make the person
who has just lost his job feel any better. He feels, as Schumpeter noted,
as if free trade has slapped him in the face. It doesn't feel good, and he
wants someone to make it feel better.
Where Are the Jobs?
All of the above may in fact be true, but it still not does keep us from
the fact that this economy is not producing jobs. Any time we will start to
see job growth kick into gear, economists are telling us, just as they did
this time last year.
Bill King sent this tidbit my way: "The Kansas City Star's Diane Stafford
noticed something in a new Bureau of Labor Statistics report. "Employers
initiated more mass layoff actions in January than in any previous January
in the nine-year history of the U.S. Bureau of Labor Statistics' mass
layoff record keeping...The higher counts were contrary to a general
downward trend over the past year for both the number of mass layoff
actions - defined as those affecting at least 50 workers at a single work
site - and the number of initial jobless claims resulting from the
actions...For January 2004, there were 2,428 mass layoff actions
nationally, affecting 239,454 workers. In comparison, January 2003 recorded
2,315 actions, affecting 225,430 workers." How can this occur with that
monstrous stimulus last year? Guess what happens without the juice?
"Manufacturing accounted for more than one-third of the layoffs nationally
- 35 percent of the events and 37 percent of the individual unemployment
claims....The government sector set a five-year record for the number of
workers filing for unemployment in the month. Another sector that reported
a higher number of initial claimants because of mass layoffs was the
temporary help sector." Two of the leading engines of job creation last
year, government and temps, are now in jettison mode. No wonder consumer
confidence has collapsed. As Seinfeld says, "That can't be good."
Repeat: The Fed is not Going to Raise Rates
You wonder why the Fed is willing to be patient on lowering rates? One of
their mandates is to help foster employment. If you look at their
predictions for GDP over the next year, they are suggesting over 4.5%
annually. Yet their job growth number is not even 150,000 jobs per month,
which is barely in line with the growth in population. What is unwritten in
the assumptions is that it would take growth of over 5% to seriously cut
into the unemployment number. And that level of growth is just not in the
cards. Raising rates would slow things down and hurt job growth which would
soon create a recession.
We threw everything but the kitchen sink in the form of possible stimulus
at the economy last year, and we are barely over 4% today. Without job
creation, we are at the limits of GDP growth.
Stephen Roach of Morgan Stanley and one of my favorite analysts, wrote an
open letter today to Alan Greenspan, calling for him to immediately raise
short term rates to 3%, so the Fed would have some room for rate cuts
during the next downturn.
This is not going to happen. Greenspan just touted the virtues of
adjustable rate mortgages this week. (I simply do not understand why he
would do this, even if his logic might be impeccable. He should not be
encouraging risk taking and more debt.) In any event, do you think he would
do that if he were planning to raise rates anytime soon? "Hmmm, let me see,
what can I do to create the most harm possible? Tell people to get into
adjustable rate mortgages and then raise rates? That would cement my
reputation."
A Financial Times article noted the problem with auto loans, as there are
more and more taken out for 6 and 7 years, which is good for sales today,
but borrows from future sales. The article goes on to make the point that
these longer period car loans mean that it takes longer for borrowers to
get to "break-even" on their loans, thus longer before they can buy a new
car. Rising rates would make that period even longer. There comes a point
where new car sales are going to suffer from the current trend of borrowing
for longer periods.
Next year, independent auto analyst David Littman projects that auto sales
will start declining. "This year, he predicts, tax breaks and other
political actions during the presidential election campaign will support
auto sales by boosting disposable income even if interest rates rise. But
next year he forecasts sales of cars and light trucks will drop to 16
million, from 16.8 million. That might not sound like much but it is the
equivalent to a more than $22 billion revenue cut. 'That is the end of the
world for a couple of automakers.'"
We add to that this note from the normally upbeat Dennis Gartman: "The US'
economic news was anything other than stellar yesterday. Jobless claims
rose to 350,000 from 344,000. Debates rage amongst those who make jobless
claims the focus of their lives regarding weather and problematic seasonal
adjustment factors, but we pay little heed to it. To those in that debate
we say, in all dispassionate honesty, 'Get a life!' If we must pay
attention we note that the 4-week moving average rose to 354,000 from
352,000 and that this is the 4th week in a row that this smoother number
has risen. This, we think, is worthy of note and this we think is
bothersome.
"Further, we note (disappointingly) that the sales of new homes fell 1.7%
to just over 1.1 million units. That in and of itself was disappointing,
but this is also the lowest level of home sales in 7 months. Worse still
this slowdown in home sales is taking place even as the supply of new homes
has risen to what is almost a decade long high of 370,000 units.
"Finally, January building permits here in the US were revised to 1.92
million annualized units from the previous estimate of 1.899 million. In
light of an already problematic increase in the supply of new homes, this
revision is not 'wanted' news."
Maybe Roach is right. Maybe raising short-term rates this year would not be
the serious problem I think it would be. Maybe the economy keeps on
chugging.
But I think the Fed believes that raising rates today risks slowing the
economy down at a time when there are not enough jobs being created,
housing is showing signs of weakness, the auto industry would get hammered,
borrowing costs for business would rise and thus profits hurt, etc. etc. It
is Pascal's wager. Even if one might think risks are small, do you risk the
greater harm?
If Greenspan were to raise rates now and the economy began to slow, the mob
would form and someone would start shouting "get a rope" as they head for
the nearest tall tree.
Trade Wars and Other Disaster Scenarios
Coming full circle, the growing unpopularity and demagoguery about free
trade worries me. Sometime soon, perhaps this week, the European Union is
going to raise tariffs on a selected group of products because the World
Trade Organization has ruled that some of our corporate tax laws create an
unfair advantage. My bet is that they play hardball and select products
from politically tough states for Bush - those where he needs the votes.
Higher foreign tariffs mean lost jobs. Lost jobs are not good in an
election year.
But caving in to "free trade" demands from Europe will not be seen as
popular, and Kerry will beat him up on being weak and not "working with"
foreign nations, no matter what he does.
In this matter, I think the WTO and Europe are wrong. But it could lead to
calls for retaliation. Remember only a few months ago when even Republican
senators were calling for a 37% tariff on Chinese goods? They were playing
to their voter base.
As Zeke Ashton, who writes for the Motley Fool, noted at dinner last night,
I am one of the more optimistic analysts of those who recognize the
problems we are facing. Muddle Through is not exactly bearish.
But a global trade war would turn me as bearish as any analyst I read. It
would precipitate a world-wide depression faster than you could say Smoot-
Hawley, the ill-conceived trade legislation which caused the Great
Depression.
This political season is dangerous because the temptation to play to that
72% of people who are concerned about free trade is going to be huge. Think
that wise heads will prevail?
I might have thought so a few years ago. But after Bush was persuaded to
impose steel tariffs (which time has now shown were not needed, as steel
prices are high and rising fast) and silly tariffs on bras, I am not so
sure. Given that we feel the ridiculous need to protect US sugar from
foreign manufacturers, solely because of political concerns, I get even
more nervous. I beat up on Clinton for many things, but give him this, he
was for free trade.
A trade war and a return to protectionism will cost more American jobs than
outsourcing a phone call center to India. If Republicans cave in to
pressure and start even a few steps toward trade wars, we could soon be in
serious trouble. The concern I have is that they read the polls and note
that 72% of the country think free trade is the problem and not the
solution.
Yes, we need to be tough on our trade negotiations. Yes, we need to make
sure our trade partners play by the rules. China needs to be made
accountable for the huge amount of piracy they condone. If we are going to
allow foreign trade into the US, "they" must allow our companies to have
access to their markets as well.
But we cannot retreat from a world where trade and commerce is free. If we
do, we will suffer. "They" might suffer more, but it will be of small
comfort to those on the breadline.
I recognize change is a tough thing. We need to come to recognize that 3
billion people are coming into the 21st century. They are leaving the
deprivations of communism and socialism, of castes and repressive
governments. They have seen the promised land of freedom, dignity and
capitalism. They are smart and are willing to work. This will change the
world in ways we cannot even imagine today. It is surely for the better,
but it is going to create a lot of change in the lives of the entire
developed world, and not just the US. Fighting that change is futile, and
even destructive. We must figure out how to adapt and to help all levels of
our societies cope. Bashing foreign countries as the cause of labor
movement might get votes, but it is not good economics.
The job of government is not to protect us from change. At most, it is to
help us transition and to mitigate the effect of change. If we become a
people who think government can solve the problems of the marketplace, we
are indeed heading for grave disappointment.
Gold, the Stock Markets and the Dollar
On another front, and for what it's worth, a few of the more respected
market technicians I read are suggesting gold may be ready to "correct."
The Aden Sisters, Ian McAvity, Dennis Gartman and others have either turned
medium term bearish on gold or are warning of a possible drop. I can
certainly see where gold could stand to "take a breather" as it has come
quite far.
That being said, I think that gold long-term still has some significant
upside as I am still long term bearish on the dollar, and I would use this
draw-back, if it continues, as a time to "average in."
I have written in past weeks that this may be a classic "sell in May and go
away" year. After a few questions from readers, I should note that I do not
think the market may not start to go down before May. It very well could. I
am not picking a date (May 1). If May 1 is the top, it would be a pure
coincidence. I am simply suggesting that the bull run is getting aged,
market valuations seem high and a summer swoon, especially if there is any
economic weakness, could be significant.
More Airports and Bull's Eye Investing
My dream of staying at home for a few weeks is starting to vanish. It looks
like a few day-trips are forcing themselves upon me. And my wife returned
from her getaway in Puerto Vallarta this week, reminding me that we need to
get away together. She prefers places without phones and internet
connections. We are moving offices in a three weeks as well, spring break
is around the corner which means lots of kids, and
I am reading the "galleys" of my book this week. It will be on the press in
a few weeks and in the bookstores later on in April. There are lots of
details, including convincing my publisher (Wiley) and editor (Debra
Englander) that we need to make some changes in the cover. But overall, I
am quite pleased with the book.
As do most authors, we have been sending the manuscript out to a few
friends and fellow authors and writers, hoping to get some nice comments
for the back cover. I have been quite pleased with the comments. I will
share a few with you over the next few weeks. The one I got yesterday still
has me smiling. It is from George Gilder, who before writing on technology
wrote Wealth and Poverty, which was one of the seminal books of the last
century. Quoting from his email:
"Good news: I uncovered Bull's Eye Investing upon my return and have been
engrossed for hours. Although as you probably guess, I think you pay too
much attention to the lordly consumer (speaking of smoke and mirrors!),
none the less, [here is a quote for you]:
"Bull's Eye Investing is a lucidly written, lambently cautionary, edifying
and diverting must-read guide to the ways and means of hitting the gyrating
target of a 'Muddle Through Economy.' Mauldin is the Ben Graham of the New
Millennium, but unlike Graham he combines investment savvy with a sense of
humor and a gift of style. - George Gilder"
Yes, I did have to look lambently up. It means softly bright or radiant, as
lambent embers or lights at night. Next week, I will let you see what
Richard Russell wrote.
Your lambently blushing analyst,
John Mauldin
John@FrontLineThoughts.com
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