Thursday, August 12, 2010

Unemployment ... profit and value.

Dear Colleagues

I follow economic news quite closely ... but do not find very much in the news stories that helps the reader to understand what it is that is going on.

One of the news sources I use had the follow news clip:

JOBS PICTURE DIMS AS UNEMPLOYMENT CLAIMS RISE: The employment picture is looking bleaker as applications for jobless benefits rose last week to the highest level in almost six months. It's a sign that hiring is weak and employers are still cutting their staff. First-time claims for jobless benefits edged up by 2,000 to a seasonally adjusted 484,000, the Labor Department said Thursday. Analysts had expected a drop. That's the highest total since February.
In the same news cycle there is a front page article in the Wall Street Journal that has the heading "Markets Swoon on Fears" and in the Money and Investing section an article with the heading "Dow Loses Grip on the Year's Gains" ... and in the sub-heading the phrase "Fear Gauge Perks Up".

The fact that the US stock market has not surged ahead in 2010 should have come as no surprise ... but the markets wanted to believe, it seems, that corporate profits based on way less employees in the USA was a great formula for a sustainable future ... and there seems to be surprise when this approach to investment analysis ends up with companies that have bigger profits, but less employment and, frankly, less future.

So then, who is to blame ... and remembering President Roosevelt in the Great Depression who said, I believe that we have "Nothing to fear except fear itself" ... the capital markets are talking about fear and uncertainty in the market and looking squarely at Washington and President Obama as the source of the uncertainty ... possible taxation changes ... the impact of health care reform ... the impact of financial regulatory reform ... the impact of consumer credit regulation, etc.

I would be interested in the financial journalists and the capital market analysts writing about the value proposition that drives the capital markets and socio-economic progress and performance. Arguably the quality of life in the USA has declined materially in the last twenty years while the stock market indexes have doubled. The business model that created stock market wealth did so at the expense of society as a whole ... the economy imploded and only the intervention of the government in the USA and in other major countries stopped what might have been a really great depression. What Hank Paulson did when he was Secretary of the Treasury should not be forgotten ... he mobilized hundreds of billions of dollars of government money over a weekend to save the global economy ... not exactly the intervention one would normally expect from a Republican administration in the USA.

What happened to stocks in 2008 ... they went into free fall!

What happened to stocks in 2009 ... there was a substantial recovery.

What has happened in 2010 so far ... as of now pretty much a wash.

What happened to employment in 2008, 2009 and 2010? Massive reduction in employment in 2008 and continuing through the first half of 2009 ... then some stabilization and then some very modest employment growth in 2010.

What else is happening? Government at all levels in the USA has a revenue crisis brought about by the low level of economic activity, mainly employment ... and this is going to mean a reduction in critical services unless something is done about it. A reduction in healthcare services and children's education is almost certain because the money in government is not available.

At the same time the corporate sector is awash in cash ... balance sheets are more liquid than they have been in decades. This is not only banks, but also industrial organizations.

When I am stuck in a traffic jam because the highway infrastructure is years out of date ... and the water mains are breaking ... and raw sewage flows straight through poorly maintained treatment plants it is absolutely clear that the "management" of society is in crisis, and the allocation of resources to what is really important is very dysfunctional. I think it is time for the leadership elite to wake up and start doing things that are valuable as well as merely profitable.

When someone becomes unemployed the national economy takes a hit. An employed person is contributing to the economy and the family is financially stable. Without income there is a value decline that may be as much as $2 million a person discounting future earnings and benefits. But also the goods and services that are needed never get made ... more value impact, though this time it is opportunity value. These are big levers in the dynamic of the economy ... all negative when people are becoming unemployed. At the same time the corporate profits are stabilized and then improved ... but on top of economic value that has been destroyed. An economy won't work when these dynamics are in play! There has to be changed!

I think this change can happen ... value metrics are able to show not only what is profitable but also what is valuable ... and with value metrics there can be rapid game change. The US has a lot of potential if the decisions that get made put value into society as well as profit into the enterprise. When profit and value are in some sort of good balance then society has a future ... otherwise the new normal is a second or third rate USA!

I am a potential optimist!


Peter Burgess

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