Useful jobs

For a job to truly be useful it has to produce more than it costs. In today's society, that equation can be extremely difficult.

At one time it was generally simpler. Jobs often had a direct link to production and the amount produced could be fairly easily compared to the cost of the job and a decision made as to whether the job was worthwhile. Of course as everything got more complex, we started to have jobs that while useful in a way, had no clear link to production. These can be considered service jobs and are characterized by things such as accounting, human resources and management. Now, you have to have these things but they are overhead, and have to be supported by the production people who produce value.

Now, there is an equation for these jobs, where the cost of the job can be compared to the loss of production if the job isn't there. Effectively, does a manager get the producers to produce more than it costs to have him/her? For many other specialties, their lack would also hurt production, if producers didn't get paid or bills didn't get collected or new producers weren't hired in a timely fashion.

However, while useful, they do not in and of themselves produce value. We have at times lost sight of this. In fact, if you think about the American economy, service jobs now dominate. So more and more of us are living off the value created by the smaller and smaller number of producers.

Of course in an economy as complex as ours some service employees appear to create value for their firms. Lawyers for example, may book much more in revenue than they get paid for a law firm. So from the law firms point of view they look like producers. However on a macro view they do not produce anything of overall value such as food, raw materials or manufactured goods.

Further compounding the issue is that more and more of the producer jobs are leaving the country. Ultimately I would argue that as a country produces less and less 'real" value, it becomes less wealthy. Now, there are economists who would argue with that premise and it is clearly quite complex to track value streams across the world economy. However, ultimately, if we import a unit of energy, it has to be paid for somehow. We may pay for it by providing a service to the producer, but how long can that last?

If we want to increase the wealth of this country, we need to promote value producing industries and jobs. The most obvious area would be to internalize energy production. Another obvious one is to promote policies that lead to a revitalization of manufacturing in this country. Certainly we want world trade but we want the trade to be of a balanced nature, not that we export much more wealth than we actually create.

Risky Business

In today's day and age, suppose a Government that has trouble meeting its debt obligations were to simply repudiate them? Now there is some historical precedent for this, the French Monarchy did it a few times, and oddly, they were still able to borrow money. However, in today's market what would it mean?

Clearly, anyone who had lent money to that particular country would lose most if not all of that money. It is of course also possible that various insurance and/or equity markets who had bought or sold risk mitigation for that country would also lose money. In fact, it is more likely that that is where the main damage may occur.

If you think back to the Lehman's Brothers bankruptcy, it also threatened many other firms because the Lehman default's triggered insurance payments. AIG would have been unable to cover their obligations had the Government not stepped in. I haven't done enough research into all the sovereign debt out there, but I suspect many lenders have purchased some sort of insurance to offset possible losses. Further, we most likely have speculators who have purchased instruments that will pay if certain countries default, even though they have no personnel exposure.

This was one of the odd things about the latest financial crisis. Many of these derived financial instruments have become so complex, that very few people really understand all the implications. To some extent they are lottery tickets, sold cheaply on the premise that there will never be a real payout. It is nearly impossible to truly calculate the risk of a sovereign default. Also what is a true default?

Before our current level of sophistication, a sovereign nation could unilaterally make changes to its debt structure and lenders, could sue or live with the changed circumstances. So, when Dubai had its issues a few months ago, it could have simply suspended all payments for a period of time and allowed interest to accumulate until some of the expected income materialized. Of course, this would have dried up Dubai's ability to raise money, but then again maybe not. What it would have done in today's environment is kick off all the default clauses and provisos in all the derived securities that bet for and against that event.

It is likely that since that would be considered a default, payouts would be due even if later all the original debt was repaid at the agreed to interest rate. Clearly, for certain traders, this is a no-lose situation. Of course the insurance reduces their initial returns, and if there is never a default, that money never has a payoff. However, when the lottery does payoff, it really pays off.

For those on the other side of the equation they assumes large liabilities with what they believed to be very low risk, ergo why they get paid so little. If they do have to payout, i.e. Lehman Brothers there is significant risk they won't be able to. Now, allowing institutions that hold assets for pension funds and other depositors to take these risks with company wide exposure is, well, foolish. The fact is that if they lose that bet, they will end up liquidating assets that should have been reserved for those who trusted that institution.

Prohibiting institutions that have any sort of Government regulatory oversight to engage in both behaviors is simply wrong, unless the risky business is shielded.

Perseverance

A lot of times what actually causes failure comes down to two items, resources and perseverance. Very few worthwhile endeavors have an interrupted path to success. Along the way the main enemies are lack of resources and lack of perseverance.

Getting sufficient resources may itself be a matter of perseverance. Let's be realistic, the world is full of naysayers and it gets pretty easy to doubt yourself when a plan doesn't seem to be working. There is no real way to know if everything in a plan is going to work, and since the common belief is that most ventures fail, doubt will appear.

Of course some plans are doomed, and if the plan is based on faulty premises, no amount of resources or perseverance are going to help. However, many well considered and well executed plans do run into snags. You have to believe in the plan in order to persevere. When you go over something in your head again and again, and you still come up with a workable set of circumstances, you need to keep going.

For those who remember their history, we have the example of Admiral Farragut. He is the Civil War Admiral who is famous for responding to someone who questioned his attack plan with the phrase, "Damn the torpedoes, full speed ahead". Now, in some ways this may seem like a dangerous course of action, but it worked because he knew that the torpedoes at best would cause damage but not enough to stop the attack and conquest of Mobile. Had he waited, the torpedo situation wasn't going to get better and in fact, most likely it would have gotten worse.

Now, the Civil War is a great example of perseverance. There were numerous opportunities for the North to decide to stop. Clearly the early success of the Confederates could easily have led to the North deciding it just wasn't worth it. However, Lincoln persevered and eventually he found a General in Grant who also persevered.

Jobs

There is a lot of consternation about the jobs situation in this country and deservedly so. If you want to restore prosperity, you need to create real sustainable jobs. Now ultimately, this is the role of private industry, but Government policy has to create a climate that is favorable for job creation.

The fastest thing the Government can normally due is spend money on infrastructure improvements. Now, this does create jobs and also fulfills a legitimate Government purpose. Infrastructure is something that has to be paid for out of Government funds.

The idea of reducing taxes to create jobs has some problems. The equation has to be such that the jobs created ultimately create more tax dollars than the incentives cost. I fear that Government in general is unable to fathom this relationship and uses political factors to make the decisions. If our Government could simply make sure that sound business principles were used in all our decisions, we would be on the path to balancing the budget and reducing the deficit.

Very simply, if we simply created incentives to promote the use of domestic energy sources, and required pollution mitigation payments, we would stop exporting wealth and jobs overseas and transfer them back here. Think about a class of vehicles that ran on natural gas and were significantly cheaper to fuel up. Ultimately we would encourage a tremendous boost in building infrastructure to deliver the natural gas to delivery stations and we would create a significant demand in either converting current vehicles or building new ones. How hard is this?

Also, changing our tax system to one that taxes the point of sale instead of the point of manufacture would change much of the incentive involved in exporting jobs. Also, if we could equalize the cost of health care for companies doing business here, via paying for it out of a consumption tax, we would further encourage domestic employment.

These are actually relatively easy things and we just need some leadership to get them going.

Competence

One has to be amazed at how badly we, as a nation, choose our leaders. Generally, the business of Government is complicated and it would make sense to have people who were experienced and competent. However, we tend to elect candidates who we like, competent or not. Now, if the candidates were simply front men for a unified party that had policies and plans we had reviewed and felt comfortable with, this might be OK. However, last year we elected a charismatic candidate with very little experience who had an agenda that most Americans were hardly familiar with. He did promise change, and based on the conditions at the time, change seemed good.

So now, a year later, I think it is fair to say that most Americans are unhappy with the very policies that he always espoused. Maybe we should have paid more attention. Universal health care, should be no surprise. Anti business rhetoric that does nothing to create jobs or fire up the economy, should be no surprise. No experience in foreign affairs and, while good in photo ops, no progress in promoting American policies on the world stage. He continues to pour troops into Afghanistan because, well he doesn't know what else to do.

You can't really blame the President for his lack of experience. We all knew about it. However, he comes out of a political environment (the City of Chicago) where most things that need to happen are in place and all you really fight about are things like what ethnic group or community benefits. Even in that environment, he was really on the outside, criticizing, not on the inside getting things done. His time in the senate certainly wasn't long enough for him to really learn much.

He may be talented, he is certainly very bright, and, after a few years, he may learn how to do his job. Can we really afford to wait? Well we have to, and what is going to happen is that we are going to take away a lot of his support in the mid-term elections and further prolong our Governments inability to address the issues we need addressed.

But then again, what did you expect?

Opinions

Everyone is entitled to have an opinion. They are also, at least in most western countries entitled to express it. As we approach the middle of January 2010, I have heard any number of pundits express any number of opinions. The problem that I have with most of them is that they often don't provide enough logical backup.

Now, I will admit that many of these opinions are expressed in forums that really don't allow enough time for someone to fully support their positions. It is certainly possible that the simplistic explanations for the positions i.e. "the Government has printed too much money" or "the Chinese are fudging their numbers" or "the economy can't recover if the unemployment rate stays this high" may have a lot more reasoning behind them then the time allowed to express them.

However, I do think that many of the analysts are what I call long pole people. They have decided that a single indicator, probably because there was a good correlation in the past is enough to determine the future. Now, that prior correlation may have resulted in significant profits, but the question always exists about cause and effect vs coincidence.

It seems pretty simple to say that if there is more money created by the Government that prices will go up since the increased supply of money will decrease its value. However, there is so much more complexity involved in price increases and money supply than this statement would imply. First, if as a whole consumption falls and goods then become more available, that would indicate a decrease in prices. If the money being printed does not go into circulation, it does not lead to higher prices. If the supply of a particular item increases faster than the amount of money in circulation, it would imply a reduction in price.

The price of gold has been increasing and you hear more and more people jump on the bandwagon and maintain that gold should be a part of your portfolio. I particularly like the ads that talk about how gold is a "real" asset that will never go to zero value. Of course, gold could become completely worthless, although I doubt that would happen, but having lived through the last big run up in gold prices in the late 70s, I know that it doesn't have to go all the way to zero to be disastrous. There was a time when gold was above $800 an ounce in 1980 dollars and everyone was saying it is going higher. Well it didn't and in fact it basically collapsed (can we say bubble?). Even at current prices, it hasn't exceeded those prices on an inflation adjusted basis and if you were one of the last to jump on the gold bandwagon then, you are still not really back to even.

Now, gold may continue to increase, and maybe, just maybe it will retain a lot of the current value. However, it could easily repeat the past and drop to levels 50-75% below where they are now. Anyone who tells you different is simply either deceiving themselves or deceiving you. Of course, if you can hold it for 30 years or so, you can possibly wait out any drop in price.

Am I saying we are having a gold bubble? I suspect we may be on the verge of one but similar to other bubbles it is very hard to know if we have passed from high range prices to a bubble. I have some investment in Gold and I'm not getting out of it yet, so I clearly don't think we are about to see it collapse. Of course, that is my opinion and I'm entitled to it. I may of course be wrong.

Profits or Sales Growth?

In 2009 a fairly constant refrain heard as companies reported better than expected earnings was "but they are doing it on lower sales". Now as we kick off the first 2010 earnings season, Alcoa had higher sales but missed the profit estimate. This caused the market to have a small correction, although of course other factors were in play.

The objective of any business is to make money, otherwise it is a hobby. There have been many many cases of businesses that expanded so much on credit that ultimately they were forced into bankruptcy. Having more market share or sales without more profit is not a path to success.

Clearly the ideal company would grow both. The best way to do that of course is to make sure you have a secure business model and expand only when it is clearly justified. Some executives and companies start to think that bigger is better and do whatever they can to expand (including reducing margins). The strategy here is to become so large that competition becomes irrelevant and they can then increase margins. This strategy has a number of issues, and can lead to being over leveraged.

The contraction has left many companies smaller than they were. The ones that have adjusted to this and eliminated significant costs have profited and will continue to profit. Owning stock is owning a piece of a company, and if that company is making money, the share ultimately will reflect that. Profits are the goal.