U.S. State Finances
I see (and have seen for some time – see previous e-mails) U.S. State and Municipal Government finances to be a ‘big negative deal’ going forward. Last evening a CBS ’60 Minutes’ segment discussed U.S. State and Municpal ‘funding crises’. If you didn’t see it, I strongly suggest you watch it here – listening and viewing time about 15 minutes.
The segment features Meredith Whitney, the New York investment banker who predicted the 2008 bank crisis. Ms. Whitney predicted a State based financial crisis would come in the next 12 months, that States are faced with hundreds of billions in losses, and that municipal insolvencies could be widespread. The Governor of New Jersey and a senior Illinois employee are featured, and what each had to say I consider ‘pretty scary’.
If you are an equity investor I consider this video a ‘must view’, and a ‘go away and think seriously about it’ experience.
Cash for Shares
A Wall Street Journal titled ‘Number of the Week: Cash for Shares‘ says that in Q3 2010 U.S. companies spent U.S.$92 billion buying back their own shares – reading time 2 minutes. The article goes on to say this a ‘risk-free’ exercise by these companies that immediately boosts their earnings per share because there are less shares outstanding after the share buyback than there was before it. Indeed, such buybacks will result in increases to earnings per share, all other things equal, but they are not risk free. They would only be risk free if one assumes the equity markets as a whole will remain at equilibrium prices or continuously go up. If equity markets drop, the shares of the company who bought its own shares back could well drop below the price the company paid for them. In that event the company would have been better off to retain its cash.
U.S. Structural Unemployment
In an article yesterday titled ‘No Evidence of Structural Unemployment‘ a co-director (Dean Baker) of the (U.S.) Center for Economic and Policy Research gives three reasons why a Reuters news story titled ‘Special Report: Is America the sick man of the globe‘ is wrong about U.S. Structural Unemployment.
The Reuters article says “America now faces “structural” unemployment. Which means unless the world’s largest economy changes in a fundamental way, millions of unskilled workers will remain jobless and economic growth will be sluggish, at best”. For those unfamiliar with the term, simply put structural unemployment means there is a meaningful mismatch between the skill-sets of unemployed workers and where they live, and the skill-sets required to fill available jobs and where those jobs are located. Mr. Baker claims there is no ‘structural unemployment’ in the U.S.
Structural unemployment is a big deal if it exists in any economy, and certainly so for America if it exists in the U.S. economy. The U.S. is still a major driver of the world economy. So if the U.S. has a serious level of structural unemployment (and I think it does) as it works to convert from a ‘manufacturing and service based economy’ to a predominantly ‘service based economy’ it has a serious long-term problem that is only now being talked about by economists and commentators. Structural unemployment is a very serious problem in that if it exists in a material way in the U.S. in circumstances where the manufacturing sectors and residential and commercial construction sectors do not come back ‘big time’ in the near term the following things seem to me to be inevitable:
1. the U.S. will face high levels of unemployment for many years to come;
2. U.S. worker re-training costs for younger people employed in manufacturing and residential and commercial construction (25 – 45 age group) will be time consuming and expensive;
3. U.S. GDP will suffer in both the near term and long term from reduced consumer spending;
4. U.S. Government (at all government levels) income and sales tax receipts will be lower than anticipated, and government budget deficits accordingly will be higher than expected; and,
5. U.S. monthly net trade deficits will continue to run a comparative high monthly and annual amounts,
all of which will continuously weaken the U.S. economy and its fiat currency when measured against the economies of those countries with high GDP growth rates.
I believe if you are an equity investor or trader you ought to think hard about whether the U.S. has a ‘structural unemployment problem’. Accordingly, I strongly suggest you read the Reuters news story – reading time 10 minutes, Mr. Baker’s article refuting it – reading time 3 minutes, and the following comment I added to Mr. Baker’s article where I say why I disagree with him.
It seems to me Mr. Baker bases his views that the U.S. does not face ‘structural unemployment’ issues on an underlying assumption that the U.S. unemployed are looking for jobs in a pre-1995 U.S. economy. His reasoning is there is no structural unemployment because:
(1) if there was structural unemployment there would be high rates of job openings in some sectors where the unemployed did not have the skill sets to fill them. In point of fact, there can’t be high rates of job openings in the two most important employment sectors, manufacturing and construction, because of permanent loss of manufacturing jobs to emerging economies, and the fact of the U.S. housing and general economic morass. Hence I don’t see this as an argument that structural employment doesn’t exist in the U.S.,
(2) if there was structural unemployment there should be sectors where wages are rising rapidly as they compete for an inadequate supply of skilled workers. As I see things, that view assumes an economy with either an historically normal or more buoyant level of economic activity. This is not the case in America today. Accordingly, I think that to suggest that wages are not rising rapidly in some sectors in the U.S. today does not mean there is no structural unemployment, and to suggest this as a ‘marker’ that structural unemployment doesn’t exist in the U.S. today for me doesn’t ‘hold water’, and
(3) if there was structural unemployment there should be sectors where workers are putting in a large number of hours, which isn’t happening. This observation strikes me as premised on the same assumption as Mr. Baker’s #2 reason there is no structural unemployment, and again to me is a ‘meaningless marker’ by which to discount the existence of U.S. Structural Unemployment.
Explain what ‘structural unemployment’ means to an unemployed auto worker who has applied for a job with their local ‘health care unit’, and ask him/her whether or not the U.S. suffers from Structural Unemployment. I think that auto worker would ‘smile with tears in their eyes’. Simply put, without extensive re-training, that auto worker is unlikely to find a job in ‘health care’ – other than perhaps as a janitor or maintenance worker – in either the U.S. city or town they live in, or any other U.S. city or town. That to me is only one of multiple examples that could be given of what I see as strong and irrefutable evidence of current U.S. ‘Structural Unemployment’, which I for one think is a current, and will be an ongoing, serious U.S. economic problem.
A month ago I wrote about Structural Unemployment. I think some of what I said at the time bears repeating. I think importantly, there seems to be an underlying (and frequently unstated) assumption made by economists and commentators that the U.S. can function in ‘service economy mode’ at the same level of overall economic success that it functioned at when it was a vibrant ‘manufacturing based economy’. I simply do not buy into such an assumption, nor do I buy into a belief that U.S. Government Quantitative Easing or other subsidization programs will result in re-establishment of the number of comparative high-paying jobs that existed in the U.S. Manufacturing and Construction Sectors prior to 2008.
That said, I continue to believe – based on the foregoing definition of ‘Structural Unemployment’ – that the U.S. is faced with a serious, and likely irresolvable, ‘Structural Unemployment’ problem, and that is a (if not the) fundamental issue faced by the U.S. and its Governments (at the Federal, State and Municipal levels) going forward.
Q&A Forums
As readers of these e-mails know, we recently introduced over 1,600 Question & Answer Educational and Company Forums to Stock Research Portal. Watch an instructional Audio PowerPoint Presentation on our Forums – listening and viewing time about 12 minutes.
I encourage you to both read and contribute to our over 1,600 Educational and Company Forums. To get started, create your Q&A Profile.
Additions to Stock Research Portal’s ‘Company Universe’
Today we added the following Companies to our Company Universe:
Alange Energy Corp. (TSXV:ALE). We currently categorize Alange Energy Corp. as an Oil & Gas Exploration and Production company operating in South America (Colombia). Alange Energy Corp.’s current market capitalization is approximately Cdn$433 million. Review research data on Alange Energy Corp.
Brigus Gold Corp. (TSX:BRD). We currently categorize Brigus Gold Corp. as a gold producer operating principally in Canada (Ontario). Brigus Gold Corp. also operates in Central America and Mexico. Brigus Gold Corp’s current market capitalization is approximately Cdn$340 million. Review research data on Brigus Gold Corp.
C&C Energia Ltd. (TSX:CZE). We currently categorize C&C Energia Ltd. as an Oil & Gas Exploration and Production company operating in South America (Colombia). C&C Energia’s current market capitalization is approximately Cdn$655 million. Review research data on C&C Energia Ltd.
Disclaimer: I currently own no shares in these companies, currently have no plans to buy any, have done very limited recent research on any of those companies, and am not recommending you either buy or sell their stock. None currently are paid advertisers on StockResearchPortal.com.
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