Harry S. Dent Jr.'s Blog, page 146
July 3, 2015
Unemployment, the Uber Economy, and the Throes of Part-Time Labor
On a recent trip to the D.C. area, I needed a ride to the Baltimore airport. I dreaded calling a cab, since I knew the ride would be over $100 and the cab itself might make the 30-minute ride less than pleasant. So I took the occasion to hail an Uber car.
The car arrived at 6:10am, and I had a very pleasant ride to the airport in a recent model Volvo S60.
The driver assisted me with my bag, offered me bottled water, and drove directly to the airport without talking on his phone or blasting the radio. The trip only cost about $60.
It was an enjoyable early-morning drive. But what struck me the most about the ride was the driver himself. He appeared to be in his early 40s, was well-dressed, and obviously had (or had access to) a car that was less than three years old.
Why was he picking up Uber fares at 6am on a Saturday morning?
Welcome to the Uber economy, where people are cobbling together part-time jobs in an effort to replicate the full-time employment they wish they had.
Right now in New York, Uber is battling a proposal to cut the number of cars on the road by limiting their business in the city.
Uber drivers are outraged. While the turnout to Uber’s staged protest was small, several Uber employees showed up with signs saying “Don’t destroy Brooklyn jobs” or “My car. My business. My family.”
For them, it’s a matter of paying the bills. And it’s a matter of finding work wherever they can get it in an economy lacking full-time jobs.
It matches the sentiment of the millions of people surveyed by the Bureau of Labor Statistics (BLS).
Each month the Bureau issues the Employment Situation report, which includes the much-discussed unemployment rate and net change in non-farm payroll jobs.
Often lost in the noise is a host of other data points that are very useful. One of those is Part-Time Employment for Economic Reasons, which counts people who would like to be working full-time, but have taken part-time work instead. This is either because their employer cut back their hours, or part-time work’s all they could find.
Keep in mind that, as far as the broad measure of unemployment is concerned, these people have jobs even if they work just a few hours a week. But just because you have a job doesn’t mean you can pay the bills.
The number of people in this category more than doubled from December 2007 to September 2010, from 4.618 million to 9.246 million, then fell to 6.652 million as of last month. That’s a great improvement from more than nine million, but it’s still almost 50% higher than where we stood at the end of 2007.
When the Federal Reserve tried to get to the bottom of this, they concluded that it’s largely a matter of the business cycle. From their view, higher wages drive up part-time positions, not full-time ones, as employers fight to keep costs down. That’s why this number remains high even as the overall unemployment rate drops.
But they also determined long-term structural issues that are making matters worse: That there are more boomers than young adults under 25 looking for work, and the simple fact that the area where the economy’s been adding new workers are in leisure and hospitality – which are, traditionally, part-time gigs!
This all comes back to the Uber driver. Assuming from his age that he wants to work full-time, he could have a regular job and simply be supplementing his income. Or, he could be unemployed – by his terms, not the BLS’ – and using this as a way to bring in a little cash until he finds a new position.
He’s a tiny sliver of a large workforce ready for full-time employment and/or better pay. Problem is, there are almost too many applicants for employers to choose from, even as jobs become available. Which keeps a lid on what companies must pay to attract qualified workers.
This might be good for companies, but it’s a drag on the broad economy. With less income, consumers can’t spend as much as they otherwise might. The economy remains stagnant.
Before our economy can truly recover from the financial crisis, we’ll have to create more full-time jobs to soak up the workers who would love to be on the clock for 40 hours per week. But for now, they have to spend their days in hospitality, leisure, or the driver’s seat of an Uber car.
Rodney
Follow me on Twitter @RJHSDent
6 Tips to Help You Survive Earnings Season
Earnings season is a bit like the casino game craps. You can win or lose a lot of money. Fast!
As we prepare for earnings season I wanted to offer a few tips to help guide you through the next few weeks. Because as companies report their quarterly results, it can lead to a wild ride for stock prices!
First, ignore the headlines. Websites such as Yahoo! will post articles that proclaim XYZ Company beat earnings expectations by $0.03 a share. And, believe it or not, investors react to that news without doing anymore work. They forget that it’s important to actually read the press release and determine whether the sources of earnings are sustainable.
Second, find out if the revenue that companies report is of good quality. One thing you can check is their balance sheet: Does the growth in revenue compare with the growth in receivables? If receivables are way up, it could indicate management offered customers incentives to purchase a product today that they otherwise would’ve bought at a later date. Great now, but what about future earnings?
Third, look at profit margins and determine if the changes make sense. Expanding margins are not a good thing if management is using accounting shenanigans to overstate the results. For example, a company may write off inventory in one period, and sell it in the next for a 100% profit margin boost!
Fourth, analyze the tax rate and share count. Companies can use a variety of tax management strategies to get their tax rate down, effectively buying a penny per share of earnings. Stock buybacks do the same. So sometimes companies appear to beat earnings when they’re really just rounding up the reported earnings per share.
Fifth, track inventory growth on the balance sheet. If inventory is rising and demand is starting to slow, for any reason, future margins are at risk. Unless inventory is rising ahead of a product launch or based on demand, watch out for it.
Finally, check the cash flow. For all a company might earn, it can’t spend earnings. It can only spend cash. Most companies do not report their cash flow numbers in the earnings release. That means it’s important to check them in the SEC filing, which usually comes out within 45 days after the quarter. (Remember, cash is king.)
These are a few quick things you can do to check up on your holdings so you can spot trouble before the stock implodes and torpedoes your portfolio. Many of the warning signs are right there in plain sight. Don’t be the kind of investor that ignores them.
John Del Vecchio
Contributing Editor
July 2, 2015
The Best Demographic Trends of the Century
Greece is not the place to be right now.
Its citizens are capped out at $67 a day on the ATM. Its pensioners are pinching pennies. Its doctors are leaving in droves. Its long-term demographics are deplorable, making the chances for recovery more and more abysmal. It’s a nightmare!
I’ve already explained that large-scale debt deleveraging will be one of the triggers that sends the global economy back into crisis. Now that Greece has defaulted on its $1.7 billion IMF payment, they’re looking more and more like the beginning of the end.
If Greece kicks the bucket, it could spill over to the other weak euro zone members — namely, Portugal, Italy, and Spain. Lance explained yesterday that investors who are fearing the worst from Greece dropped out of not only Greece debt but those other lower quality bonds as well.
With so many developed countries already sitting on the brink, and with the worst yet to come, it’s important to consider which countries will be hit the hardest… and which will fare the best going into the next recovery.
The truth is that, with the lower birth trends that come from increasing urbanization, wealth, and education, almost all developed countries have sideways (at best) to falling demographic trends for decades to come.
But there are a few exceptions…
And they are, in order: 1) Australia… 2) Israel… 3) Switzerland… 4) Norway… 5) Sweden… and 6) New Zealand.
In these countries, the millennials or “Echo Boomers” will ultimately bring them to new heights.
They’re the few countries that, unlike the U.S., saw a larger generation following their baby boom. These demographics are partially due to higher birth rates but mostly because of strong immigration policies.
When you consider how the stronger demographics in a country like Australia translates into more spending, you understand why they’re at the top! Here’s a look at their spending wave from the middle of last century to the end of this one:
It’s been flat from 2010 to 2015, but after this, it’s the only developed country with slightly positive trends into 2018.
But in the first stage of the next global boom, from 2023 to 2036, Australia will have the strongest surge of any developed country. It’ll have a minor downtrend into 2045, but then another boom later on in the century, around 2065 to 2070.
Right now, Australia has the highest immigration per capita of any major, wealthy, developed country. It’s greater than even Canada or the U.S., which are immigration magnets. And it could continue to enjoy good immigration levels at times, even in the coming depression, as the wealthy flee countries such as China.
The bottom line is that Australia simply has the best demographic trends of any wealthy, developed country. While the bubbles in China, commodities, and their own real estate will hurt them especially in the next global financial crisis, there isn’t a country with lower debt, or one better positioned for the next boom.
The other five have similar patterns. They’ll see (or are already seeing) demographic downturns into the middle or end of next decade. After that, they’ll enjoy a surge going into 2040.
Unfortunately, in the grand scheme of things, those six are only smaller countries.
Australia only has a population of 23 million people. Sweden has even fewer at 9.5 million. And the others even less: Israel at 8.3 million, Switzerland at 8.1 million, Norway at 5 million, and New Zealand the lowest at 4.5 million.
Combined, these countries contain less than a sixth of the U.S. population.
The greatest demographic growth of all will come out of the emerging world, between 2023 and 2070. Those are the countries that will experience a boom due to greater urbanization and a growing middle-class consumer population (though they won’t become as affluent as their developed-world counterparts).
That’s when we could see the greatest commodity boom and bubble in history, as emerging countries dominate growth. And Australia, with its strong commodity exports, is perfectly set to ride the wave.
Harry Dent
Founder, Dent Research
Follow me on Twitter @harrydentjr
Move Over Greece: Don’t Get Distracted by the Financial Media
Rush-hour commutes on Interstate 95 – through Miami-Dade, Broward and Palm Beach counties – are something like an arcade game.
Cars blast past you at 90 mph, and others putter along at 45 mph. You’ve got two to four traffic-jamming accidents a day, and last week, my wife was parked on the interstate for three hours because an RV caught fire!
Needless to say, no one’s ever learned to be a good driver by watching the crazy antics of other drivers (least of all in Florida).
On the same token, no one I know has ever gotten rich by watching the financial news. Not only does it distract from the bigger picture, but it skimps on real, valuable information.
When it comes to watching the financial news, this is my personal philosophy:
“I glance… only because it takes too much effort to fight the urge. But then I quickly turn my focus back on the road ahead.”
The same could be said about driving on I-95 in Miami-Dade county. The only way to be a good, safe driver there is to follow a few simple rules:
Rule #1: Plot your course, then drive it.
Rule #2: Focus on the road ahead, little else.
Rule #3: Be defensive… so you can live to drive another day.
When it comes to the markets, investors can’t control what happens in Greece. And no amount of financial news will tell you what’s actually going to happen, let alone which investments you should be in through the saga.
Like an accident on the highway… what’s going on in Greece is just a distraction. Disciplined investors know to heed it, then move on. Just as it’s dangerous to focus on distractions while driving, choosing to focus on the ever-changing twists and turns of a financial storyline can be detrimental to your portfolio.
I shared last week how volatility spikes occur more frequently, and are of greater magnitudes, during June, July and August. So I positioned Cycle 9 Alert readers in a play that would not only protect them from the summer’s volatility… but also give them a chance to profit from it.
Mind you, I had no clue whether the situation in Greece would resolve favorably or not. That outcome is clearly beyond my control.
But it was within my control to use data-driven research to plot a course for Cycle 9 Alert readers – one that would protect them from the turmoil in Greece, regardless of the outcome. If you find yourself confused by the news, and looking for ways to profit through the summer and beyond,
July 1, 2015
Will the Trans Pacific Trade Agreement Cost Americans Their Jobs?
Imagine you and I are the only two people in the economy. I’m good at making shoes while you’re good at making baskets. Each of us needs both. Instead of us making our own stuff, we should trade one for the other. That way we can focus on our specialty, reduce the time we spend on things we don’t do well, and still enjoy the highest quality product available.
If you get that concept, then welcome to Adam Smith’s The Wealth of Nations. The 18th century Scot argued that trade among nations raises the standard of living for everyone. In this way, the quality of stuff goes up, prices go down, and everyone’s happy!
It’s a great theory, but in practice things get dicey.
One big issue is that nations don’t produce equally. A country good at making many different things would soon drive companies in the less efficient country out of business. The two nations would quickly develop a trade imbalance, where the efficient country took in a bunch of money, while the less efficient country paid out more than it received.
When imbalances occur, weaker producers are supposed to lower their costs to once again become competitive on the world market.
But that simple notion of lowering costs masks a very large point of pain – wages.
The biggest expense in most businesses is compensation. If you find your company competing with a low-cost producer from overseas, then Adam Smith’s logic would have you slashing wages.
That’s where the fight starts.
People don’t like it when their wages go down. They particularly hate it when this happens so that domestic consumers can save a few bucks by purchasing goods made overseas.
Never mind that this destructive process gives local consumers a slightly higher standard of living because those goods are cheaper or better. And never mind that it provides more income to the low-cost producer in another country. The fact remains that the local employees of the company selling less stuff will suffer with lower wages or, more likely, people will lose their jobs.
Which brings up the next problem – what are we supposed to do with excess labor?
Before the Industrial Revolution – in Adam Smith’s time – there wasn’t much surplus of anything. If an inefficient producer went out of business, its workers could just switch to another industry or work the land. Today, not so much.
Even if a local company does win foreign orders, it doesn’t necessarily need to increase headcount, at least not where it’s based. The domestic firm can meet demand by growing production at overseas facilities or through automation.
What is a country to do with thousands of unemployed people of various ages that have either lost their jobs or had their wages cut? This is a question without a good answer.
And then there’s currency.
When Adam Smith was writing, the basis of trade was either precious metals or the British pound, which, at the time, was minted from precious metal. Comparing prices on goods and services was simple.
Today, transactions happen in many currencies (though the U.S. dollar is the leading one), none of which are based on a metal or any other fixed commodity. Most currencies float, so the exchange rates among them are always changing. That means countries have the power to influence international trade by manipulating the value of their currency, like Japan is doing today.
When Japanese leaders thought their currency was overvalued, the Bank of Japan took several steps to drive it down. In U.S. dollar terms, it fell from 75 to the dollar at the end of 2012 to 122 two years later.
This increased the cost of imported items that were priced in dollars by more than 60%. The change in exchange rate not only hurt U.S. goods sold in Japan, but also made Japanese products cheaper on the world markets.
The change in competitiveness had nothing to do with the quality of Japanese products. It was simply a function of prices reacting to monetary policy and changing exchange rates.
Since every country is interested in its own prosperity first, it seems self-evident that governments pursue monetary and fiscal policies that increase their exports while limiting imports. And this doesn’t begin to address the myriad of government programs – such as low-cost government loans and nationalized supply chains – that exist to support specific, export-related industries around the world.
Still, there’s no denying that trade agreements bring cheaper, better, or simply different goods to foreign markets.
In the U.S. we enjoy thousands of products from other nations that undercut or displace American goods. In that sense, free trade works.
But while the broader population enjoys a higher standard of living, we can’t ignore the cost of lost employment in some industries.
As we contemplate the new Trans-Pacific Partnership among the U.S. and several Asian nations, we have to remember that free trade definitely isn’t free. Determining if it’s worth the loss of jobs probably depends on whether you are a consumer that will buy cheaper goods, or an employee of a company that will compete with those products
Rodney
Follow me on Twitter @RJHSDent
June 30, 2015
Winners & Losers: Projected Annual Returns Don’t Favor the U.S.!
In the immortal words of the physicist Niels Bohr: “Prediction is very difficult. Especially if it’s about the future.”
I rarely make firm market forecasts. I’m happy to leave that responsibility in Harry’s capable hands. But I do like to see what broad valuations imply about future returns.
You know the refrain: Past performance is no guarantee of future results. But the following returns estimates,
June 29, 2015
Beyond Greece: The Euro’s Fundamental Flaw
I have a sister who is two years older than me. We fought from time to time growing up. I distinctly remember this one time when I was 11 and our dad forced us to make up by putting our arms around each other’s shoulders. I don’t remember what the fight was about, but I do remember that the outcome wasn’t pleasant!
