Fwd: The Rational Optimist - John Mauldin's Outside the Box E-Letter

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From: John Mauldin and InvestorsInsight <wave@frontlinethoughts.com>
Date: Mon, Nov 29, 2010 at 6:50 PM
Subject: The Rational Optimist - John Mauldin's Outside the Box E-Letter
To: jmiller2000@gmail.com

	Contact John Mauldin Print Version Volume 6 - Issue 49 November 29, 2010 The Rational Optimist by Matt Ridley One of my great and increasing pleasures is the Wall Street Journal Weekend Edition. I have grown to really look forward to reading Peggy Noonan, maybe my generation's most gifted essayist. That would be enough reason to pay the subscription price. To read her wordsmithery (is that a word?) is a sublime joy to this humble journeyman writer. And the Review section in the WSJ has become a revelation over the last few years. The essays are getting better and better. And the book reviews make me weep, because there are so many great books and I will just not be able to get to them all. But at least I can read the reviews and remind myself of what I should have learned. I spend a few hours every weekend trying to get through the treasure in those pages – on the treadmill, at the coffee shop, or at brunch. I commend it to you. And getting the Journal online here on the ocean is cool. ( www.wsj.com) Today's Outside the Box is two essays, by Matt Ridley and Bill Gates, from the Review section of the WSJ. Ridley has written a book called The Rational Optimist, which I have downloaded into my iPad and will read on the Forbes cruise this week. Bill Gates writes a longer essay to say why he thinks Ridley has some things wrong, while overall giving the book high marks. This is one of the more thought-provoking exchanges I have read in a while. I am on the Forbes cruise and we are at sea on the way to Cabo. Heard Steve talk this morning. I always feel better after listening to him speak. I just like the optimism. For whatever reason, my phone is working, as is the internet. You gotta love it. But I will get a little play-time in. And I'm already working on this week's e-letter. This one may be somewhat controversial, but it will be fun. Have a great week. And now enjoy this week's Outside the Box. Your ready to catch up on some reading analyst, John Mauldin, Editor Outside the Box The Rational Optimist Bill Gates The science writer Matt Ridley made his reputation with books like "The Red Queen: Sex and the Evolution of Human Nature" and "Genome: The Autobiography of a Species in 23 Chapters." His latest book, "The Rational Optimist: How Prosperity Evolves" is much broader, as its title suggests. Its subject is the history of humanity, focusing on why our species has succeeded and how we should think about the future. Although I strongly disagree with what Mr. Ridley says in these pages about some of the critical issues facing the world today, his wider narrative is based on two ideas that are very important and powerful. The first is that the key to rising prosperity over the course of human history has been the exchange of goods. This may not seem like a very original point, but Mr. Ridley takes the concept much further than previous writers. He argues that our success as a species, as opposed to earlier hominids, resulted from innate characteristics that allowed us to trade. Not long after Homo sapiens emerged, we were using rare objects, like obsidian blades, far away from the source materials needed to produce them. This suggests that large numbers of commercial links were established even at the hunter-gatherer stage of our development. Mr. Ridley gives many examples of how exchange allowed groups to thrive, by enabling them, for example, to acquire fish hooks or sewing needles. He also points out that even the most primitive human groups today are open to exchange. I've always thought this openness was surprising, considering the risks involved, but Mr. Ridley convincingly describes its adaptive value. Exchange has improved the human condition through the movement not only of goods but also of ideas. Unsurprisingly, given his background in genetics, Mr. Ridley compares this intermingling of ideas with the intermingling of genes in reproduction. In both cases, he sees the process as leading, ultimately, to the selection and development of the best offspring. The second key idea in the book is, of course, "rational optimism." As Mr. Ridley shows, there have been constant predictions of a bleak future throughout human history, but they haven't come true. Our lives have improved dramatically—in terms of lifespan, nutrition, literacy, wealth and other measures—and he believes that the trend will continue. Too often this overwhelming success has been ignored in favor of dire predictions about threats like overpopulation or cancer, and Mr. Ridley deserves credit for confronting this pessimistic outlook. Having shown that many past fears were ultimately unjustified, Mr. Ridley finally turns his "rational optimism" to two current problems whose seriousness, in his view, is greatly overblown: development in Africa and climate change. Here, in discussing complex matters where his expertise is not very deep, he gets into trouble. Mr. Ridley spends 14 pages saying that everything will be just fine in Africa without our worrying about negative possibilities. This is unfortunate and misguided. Is his optimism justified because things always just happen to work out? Or do good results depend partly on our caring and taking action to prevent and solve problems? These are important questions, and he doesn't answer them. In discussing Africa, Mr. Ridley relies on critics who say, essentially, "Aid doesn't work, hasn't worked and won't work." He cites studies, for instance, that show a lack of short-term economic benefit from aid, but he ignores the fact that health improvements, driven by aid, have been a major factor in slowing population growth, which has proven, in turn, to be critical to long-term economic growth. I may be biased toward aid because I spend my money on it and meet with lots of people who are alive because of it, but even if that were not the case, I would not be persuaded by such incomplete analysis. Development in Africa is difficult to achieve, but I am optimistic that it will accelerate. Science will come up with vaccines for AIDS and malaria, and the "top-down" approach to aid criticized by Mr. Ridley (and by the economist William Easterly) will fund the delivery of these life-saving drugs. What Mr. Ridley fails to see is that worrying about the worst case—being pessimistic, to a degree—can actually help to drive a solution. Mr. Ridley dismisses concern about climate change as another instance of unfounded pessimism. His discussion in this chapter is provocative, but he fails to prove that we shouldn't invest in reducing greenhouse gases. I asked Ken Caldeira, a scientist who studies global ecology at the Carnegie Institution for Science, to look over this part of the book. He pointed out that Mr. Ridley celebrates declining air-pollution emissions in the U.S. but does not acknowledge that this has come about because of government regulations based on publicly funded science, which Mr. Ridley opposes. As Mr. Caldeira rightly observes, "It is a wonder of development that our economy can grow as air pollution diminishes." What is true of the U.S. case, I'd suggest, can be true of the world as a whole as we deal with the challenges posed by climate change. "The Rational Optimist" would be a great book if Mr. Ridley had wrapped things up before these hokey policy discussions and his venting against those he considers to be pessimists. I agree with him that some people are overly concerned with potential problems, and I hadn't realized that this pessimism was so common in rich countries over the last several centuries. As John Stuart Mill said in 1828, in a quote from the book that I especially enjoyed: "I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage." The most obvious instance of excessive pessimism in Mill's era was the "Communist Manifesto." In one of history's great ironies, Karl Marx used the profits from the German textile mills of Friedrich Engels's father to support the writing and distribution of a political philosophy based on pessimism about capitalism. Pessimism is often wrong because people assume a world where there is no change or innovation. They simply extrapolate from what is going on today, failing to recognize the new developments and insights that might alter current trends. For too long, for instance, population forecasts have ignored the possibility that population growth would ease as the world became better off, because people who are wealthier and healthier do not feel the need to have so many children. (For more on this issue, see the excellent presentations on the "Gapminder" website of the development expert Hans Rosling.) A lot of the rhetoric about sustainability implicitly assumes that we will exhaust our natural resources, as though there will never be any substitution of one commodity for another in the future. But there has always been such substitution. The late economist Julian Simon made a famous wager with the biologist Paul Ehrlich, author of "The Population Bomb." In response to Mr. Ehrlich's prediction that population growth would lead to resource scarcity and mass starvation, Simon bet him that the cost of a basket of commodities, including copper, chromium and nickel, would actually decrease between 1980 and 1990. Mr. Simon won the bet because he believed that, despite increased demand, increased supply would win out. And in fact, to take one example, fiber optics soon took the place of copper wire in many communications technologies. There are other potential problems in the future that Mr. Ridley could have addressed but did not. Some would put super-intelligent computers on that list. My own list would include large-scale bioterrorism or a pandemic. (Mr. Ridley briefly dismisses the pandemic threat, citing last year's false alarm over the H1N1 virus.) But bioterrorism and pandemics are the only threats I can foresee that could kill over a billion people. (Natural catastrophes might seem like good candidates for concern, but I've been persuaded by Vaclav Smil, in "Global Catastrophes and Trends," that the odds are very low of a large meteor strike or a massive volcanic eruption at Yellowstone.) Even though we can't compute the odds for threats like bioterrorism or a pandemic, it's important to have the right people worrying about them and taking steps to minimize their likelihood and potential impact. On these issues, I am not impressed right now with the work being done by the U.S. and other governments. The key question that Mr. Ridley fails to address is: What's wrong with worrying about and guarding against threats that might become real, large problems? Parents worry a great deal about their children's safety. Some of that worry leads to constructive steps to keep children safe, and some is just negative emotion that doesn't help anyone. If we all agree to join Mr. Ridley as rational optimists, does that mean that we should stop worrying about trends that might cause problems and not take action to anticipate them? Mr. Ridley devotes his attention to just two present-day problems, development in Africa and climate change, and seems to conclude, "Don't worry, be happy." My prescription would be, "Worry about fewer things while understanding the lessons of the past, including lessons about the importance of innovation." This might qualify me as a rational optimist, depending on how stringent the criteria are. But there can be no doubt that excessive pessimism may cause problems with how society plans for the future. Mr. Ridley's book should trigger in-depth discussions on this important subject. Like many other authors who write about innovation, Mr. Ridley suggests that all innovation comes from new companies, with no contribution from established companies. As you might expect, I disagree with this view. He also seems to think that innovation involves simply coming up with a new idea, when in fact the execution of the idea is critical. He quotes the early venture capitalist Georges Doriot as saying that as soon as a company succeeds, it stops innovating. A great counterexample is Intel, which developed over 99% of its breakthroughs after its first success. Mr. Ridley describes the economy of the future as "post-corporatist and post-capitalist," a silly throwaway phrase. He never explains what will replace all the companies that figure out how to make microchips or fertilizer or engines or drugs. Of course, many companies will come and go—that is a key element of capitalism—but corporations will continue to drive most innovation. It is a dangerous and widespread problem to underestimate the ongoing innovation that takes place within mature corporations. In his quest to highlight exchange as the key mechanism in the success of our species, Mr. Ridley underplays the role of other institutions, including education, government, patents and science, all of which, especially since the 19th century, have played a central role in the improvements that humanity has experienced. Too often, when Mr. Ridley finds an example that minimizes the contributions of these institutions, he seems to think that he has validated the idea that exchange deserves all of the credit. I am always amazed by scientific possibilities. Electricity, steel, microprocessors, vaccines and other products are possible only because of our efforts to understand the world and how it works. The scientists and tinkerers who investigate these mechanisms are engaged in a profound process of discovery. Without their curiosity and creativity, no amount of exchange would have produced the world in which we now live. —Bill Gates is co-chairman of the Bill & Melinda Gates Foundation and serves as chairman of Microsoft. Africa Needs Aid, Not Flawed Theories By Matt Ridley Bill Gates likes my book "The Rational Optimist." Really, he does. Even though he dislikes my points about Africa and climate change, these take up, as he notes, just one chapter. The rest he summarizes fairly and intelligently, and I appreciate that. It's great for an author when anybody reviews a book "well" in both senses of the word. It is worth explaining why I chose Africa and climate change as the "two great pessimisms of today." The answer is simple: Whenever I speak about optimism and someone in the audience protests, "But surely you cannot think that we can ever solve..." the subjects that most frequently cross their lips next are African poverty and global warming. Mr. Gates also mentions potential threats from super-intelligent computers and pandemics. Maybe he is right to worry about them, but I have yet to be persuaded that either is more than a small risk. Mr. Gates dislikes my comments on climate change, which I think will be less damaging than official forecasts predict, while the policies designed to combat climate change will be more damaging than their supporters recognize. I argue that if we rush into low-carbon technologies too soon, because we think the problem is more urgent than it is, we risk doing real harm to ecosystems as well as human living standards—as the biofuel fiasco all too graphically illustrates. The rush to turn American corn into ethanol instead of food has contributed to spikes in world food prices and real hunger, while the rush to grow biodiesel for Europe has encouraged the destruction of orangutan habitat in Borneo. I also argue, however, that it is highly unlikely, given the rate at which human technology changes, that we will fail to solve the problem of man-made climate change even if it does prove more severe than I expect. For example, the world is on a surprisingly steady trajectory toward decarbonization. The number of carbon atoms we burn per unit of energy we generate is falling as we gradually switch from carbon-rich fuels like wood and coal to hydrogen-rich fuels like oil and especially gas. At current rates, we would be burning almost no carbon by about 2070, though I suspect that point will never actually be reached. The question that I pose in the book is whether optimism is likely to be right. In essence, neither Mr. Gates nor I think that the problem of man-made climate change is going to prove insoluble or fatal to civilization. We disagree only on how urgent it is to devote massive expenditures to dealing with it, which would put poverty reduction at risk. I think that direct spending to alleviate malaria, which now kills a million people a year and whose incidence is likely to increase as a result of global warming by less than 0.03% per year, is a far higher priority. So does Mr. Gates, judging by his foundation's spending. It is on Africa that Mr. Gates throws his sharpest barbs. Yet, once again, I think that we agree on the most important point, namely, that Africa can have a good future. "Development in Africa is difficult to achieve," he writes, "but I am optimistic that it will accelerate." Yes! I don't believe that "everything will be just fine in Africa," but I do think that Africa's real and profound problems can be overcome. My targets are the ubiquitous pessimists who say that, whatever we do, Africa is doomed to remain stuck "in deepest, darkest poverty," in the words of one environmentalist. Yet, with exceptions such as Somalia and the Congo, economic growth is gaining momentum all over the continent, birth rates are dropping and poverty is falling, as the Spanish economist Xavier Sala-i-Martin has documented. Lots of people deserve credit for this, among them Bill Gates. His foundation, as far as I can tell, does exactly what I suggest in the book by concentrating on solving real medical and humanitarian problems. ************************************************************* AID TO AFRICA $44 billion Official development aid given to Africa in 2008 $3.3 billion Official development aid given to Ethiopia, Africa's top recipient of aid, in 2008 41% Aid to Africa that went to social services, including education and health care, in 2008 19% Aid to Africa that went to economic development in 2008 $7.2 billion Amount of development aid given by the U.S. to Africa in 2008 58% Africans living on less than $1.25 a day in 1996 50% Africans living on less than $1.25 a day in 2009 $510 Gross domestic product per capita in sub-Saharan Africa in 2000 (in 2000 dollars) $623 Gross domestic product per capita in sub-Saharan Africa in 2008 (in 2000 dollars) Sources: Organization for Economic Cooperation and Development, World Bank ************************************************************* Far from saying that aid "doesn't work, hasn't worked and won't work," I actually say this in my book: "Some of the most urgent needs of Africa can surely be met by increased aid from the rich world. Aid can save lives, reduce hunger, deliver a medicine, a mosquito net, a meal or a metalled road." I go on to say that "statistics, anecdotes and case histories all demonstrate that the one thing aid cannot reliably do is to start or accelerate economic growth." Now here I admit that Mr. Gates does have a point. Unintentionally, I have given him and perhaps other readers the impression that, in my view, combating malaria or AIDS does not pay economic dividends. It does. What I do take issue with is economic aid designed to stimulate economic growth. For example, a 2006 study by Simeon Djankov of the World Bank (now deputy prime minister of Bulgaria) and his colleagues concluded that "foreign aid has a negative impact on the democratic stance of developing countries and on economic growth by reducing investment and increasing government consumption." Economic aid diverts resources into projects that fail, puts money into the pockets of corrupt government officials and crowds out the efforts of entrepreneurs. In one example, only 13% of educational aid to Uganda reached schools; the rest was siphoned off by rent-seeking officials. I am disappointed that Mr. Gates is so defensive about "top-down" aid. Just as everything from software design to education can benefit from bottom-up crowd sourcing in which elites no longer determine what happens, so surely humanitarian aid can benefit too, however much vested interests in governments and in big agencies dislike this trend. Likewise, Mr. Gates takes issue with my assertion that the economy of the future will be post-corporatist and post-capitalist. I know that these radical ideas are not to everybody's taste, and he is right that most innovation takes place within existing companies. But it is very striking that some of the most far-reaching innovations over the past several decades have come from driven, visionary outsiders like Mr. Gates, Mark Zuckerberg and Sergey Brin rather than from corporate research and development departments. What is more, these innovations have been achieved with much less capital investment up front than in the days of Andrew Carnegie and Henry Ford. It is true that there is still a vast amount of work needed to bring ideas to market, and this requires cash and corporate organization. But increasingly, corporations are turning themselves into virtual entities, arranged around flexible networks of suppliers, retailers and researchers, rather than monolithic bodies sitting in fixed plants. That seems to me to make the word "capitalist" somewhat misleading. Mr. Gates thinks I underplay the role of education, government, patents and science in the innovation that drives economic improvement. Maybe, but I make a carefully argued case that most of the existing commentary overplays the role of these institutions and that innovation is sometimes hindered by these institutions, too, especially by patents and government monopolies. Am I saying that we should cease worrying about trends that might cause problems? Of course not. I am arguing that we should worry about real problems, including Africa's plight, but that we should do so in the knowledge that we have solved many such problems before and can do so again. I am certainly not saying, "Don't worry, be happy." Rather, I'm saying, "Don't despair, be ambitious"—though I admit it's not nearly as snappy a song lyric. —Matt Ridley's many books include, most recently, "The Rational Optimist" and "Francis Crick." His website is rationaloptimist.com. John F. Mauldin johnmauldin@investorsinsight.com You are currently subscribed as jmiller2000@gmail.com. To unsubscribe, go here. Reproductions. 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Fwd: Recessions are on the Margin - John Mauldin's Weekly E-Letter

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Date: Sat, Nov 27, 2010 at 11:26 PM
Subject: Recessions are on the Margin - John Mauldin's Weekly E-Letter
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Thoughts from the Frontline Weekly Newsletter Recessions are on the Margin by John Mauldin November 26, 2010
In this issue: Recessions Are on the Margin A Rose is Still a Rose If It Feels Like a Recession The Rough Road Back Mexico, New York, and The Endgame
I've got to admit it's getting better A little better all the time I have to admit it's getting better It's getting better since you've been mine Getting so much better all the time - John Lennon / Paul McCartney, Sgt. Pepper's Lonely Hearts Club Band And the data out over the last few weeks tells us it is getting better. Does this take us out of the double-dip woods, even as the Fed is lowering its forecast? And what is a recession? Yes, we all know it's when the economy doesn't grow, but we are in a rather unique economic environment, this time. Maybe things are getting better, but is it enough to get us back on the road to full employment? Let's start off with what is going right. We had a slate of news over the past few weeks that was good. The ECRI weekly Leading Index, after some ugly downtrends, is showing signs of turning around. We have had small increases each week since October 15, and the annualized growth rate of the index is now only -3.1%, having increased for 12 weeks. Its recent low was in July. Yes, I know that a large part of that growth is in the financial sector, as the stock market is up and interest rates are low, but it does suggest that 2011 should not be a recession year. The Federal Reserve Bank of Chicago's National Activity Index improved in September and is now only slightly negative, again suggesting that there should be no recession in '11. The Richmond Fed Manufacturing Survey was up this last week, as well, to its highest level since August. And the Kansas City Fed survey was up for the third month in a row. Moody's World Business Confidence Survey is up slightly. "Business sentiment has taken on a slightly better hue in late November. Although overall confidence has remained largely unchanged since early July, responses in regard to current business conditions, sales strength, and investment in equipment and software have improved in recent weeks. The survey results suggest that global growth may be gaining some traction at year's end after a lull this summer and fall. It is also encouraging that hiring intentions remain firm, and while pricing is soft, there is no indication that deflation is a serious problem. Nonetheless, businesses do not anticipate a significant acceleration in activity anytime soon, as expectations regarding the outlook into mid-next year have shown no meaningful improvement." ( www.dismal.com) Third-quarter GDP was revised up to 2.5%, although inventories accounted for just over half of the growth. Building inventories counts as a plus in GDP accounting, and selling them deducts from GDP growth. Just the way it's done. But at some point inventories will stabilize. That headline number will be harder to get up over 3% when that happens. (I decided to go back and look at the BEA historical inventory numbers. Interestingly, there seems to be a bug in that particular data and it shows up as -9999 in both online and printed formats. All the other data was fine. Someone should fix that. After 20 minutes of trying to find it elsewhere, I decided I needed to get on with writing.) Initial jobless claims dropped to a seasonally adjusted 407,000 this week, a rather amazing number, as the actual number was 462,000 (although the week before the actual number was just 409,000). That is why most people pay attention to the seasonally adjusted number, as this data series is extremely noisy. Let us hope this is a trend. And what's this? Personal income was actually up 0.5% for the month? That's positive, as personal income growth has not been all that good, and is now up 4.1% over the last year. Just six months ago, in May, it was up only 1.8% over the preceding year. Mortgage applications were up, although new-home sales dropped a rather dismal 8.1%. New-home sales are close to the 47-year record low set last August, and down 29% from a year ago. The median sales price is down 9% from a year ago. The good news in all this is that as prices drop and foreclosures keep on coming, homes will become more affordable to people who want to buy. The cure for low prices is low prices. While it may be well into 2012 before we work through the excess inventory and the aftermath of the housing bubble, as I wrote here in 2008 (I was told I was such a doom and gloomer!), we are closer to that point than we were a year ago. These things work themselves out over time. The economy has now grown at a rate of 3.1% over the last four quarters. That is the good news and it'sthe best growth we have had for four quarters since 2005. We have been slowing down somewhat the last two quarters, but are still north of 2%. With inventory growth slowing, it is really possible to be below 2% for the 4th quarter. A Rose is Still a Rose There is a theme to a lot of the positive news we've been getting lately: it is positive, but not by much. Normally at this time in a recovery we would be seeing 4-5% (or more!) GDP growth and some real recovery in employment. Still, 2% is not a recession. And given what we have seen, there should now not be a recession in 2011, barring some "exogenous" shock. Something that is from outside the normal system. I have written for a long time that the one thing I really am concerned about is that the Bush tax cuts will not be kept. If the Bush tax cuts on the middle class are not kept, it seems a lock to me that we'll be in recession rather soon in 2011. At 2% growth, the economy MAY be able to handle it if we only end up taking away the tax cuts for those with over $250,000 in income. It will slow things down, but probably not enough to cause a recession, if we are growing at 2.5%. I know a lot of my readers think it is just me being political, but that is what the research and the data tells us. Maybe if I called them the 2001-03 tax cuts and didn't use the name Bush it would be less offensive to some. I really get that. But the research is the same no matter what name I use. A rose is still a rose. Take capital gain taxes. An increase in capital gains taxes has never - NEVER - increased tax collections as much as forecast. And a decrease in capital gains taxes has always - ALWAYS - produced more tax revenue than forecast, and often more in taxes than was being collected before the tax cut. People change their behavior over what seem like small changes in capital gains taxes. The data and history are clear. Right now the people who seem to know think those tax cuts will get extended. If they do, is there anything else that could shock the system? The first thing that leaps to my mind is a real credit and banking crisis in Europe. European banks are in bad shape and own a massive amount of government debt in Greece, Ireland, Spain, and Portugal. Truly massive. This is a graph of the exposure of French, German and UK banks to Spain, Portugal, Ireland, and Greece. For those who are seeing this in black and white, the top part of each bar is Spain, and going down to Greece. Any wonder why the markets get nervous when Germany starts talking about the need for bond holders to take a haircut in any debt restructuring? We will take a look at Europe next week. But as I have written on numerous occasions, and as should be very clear by now, the international credit and banking systems are very connected. While US banks are not overly exposed to European sovereign debt, we are exposed to their banks. We just simply do not know what the ramifications of a credit crisis will be here. But it bears watching. If It Feels Like a Recession The old joke is that a recession is when your neighbor loses their job and a depression is when you lose yours. As noted above, the economy is growing, so why does it feel like a recession? Maybe because the data is still in recession territory. Let's look at a few items. Capacity utilization is well off its lows but is in territory normally thought of as a recession. Look at the latest data from the St. Louis Fed FRED research database (a treasure trove of all sorts of data; love this site!). 75% capacity utilization has only been seen in past recessions, and indeed in many recessions never got this low! We all know unemployment is high, but it bears looking at how high, to get an historical perspective. Only once has it been this high. Notice that it took almost 8 years in the '80s, with a powerhouse economy, for the unemployment rate to drop 6.5%, and in the '90s it took 9 years to drop 3.5%. It only dropped by about 2% over five years in the middle of the last decade. We are now at an effective 10%. Nine years to get back to 6.5%? Five years to get back to 8%? Now some will point out that unemployment fell about 4% in just a few years in the '80s, back to 7%, before taking a breather and then falling a lot more over time. And that is true. But we had a lot more manufacturing jobs back then. Take a look at the past 70+ years of manufacturing employment in the US. At the peak in the late '70s the US had almost 20 million manufacturing jobs with a population of a little over 220 million. In June of 1998 we still had 17.7 million manufacturing jobs. But by October, 2010 we were down to 11.6 million manufacturing jobs in a country of 320 million people. Six million manufacturing jobs have been lost in the last 12 years, and 2 million in the last two years alone. We now have fewer manufacturing jobs than we had in 1941. And the following charts shows that as manufacturing jobs have fallen, government jobs have risen. Which of course means that taxes (or debt) have risen. This is not a pleasant chart, for me at least. The rapid drop in unemployment in the early '80s after a major recession was manufacturing workers going back to work. Those jobs are gone now and there are few left for people to return to. Let's look at the following comparisons of job losses and gains from the peak job months prior to recent recessions. Notice that job recoveries are slower as we go forward in time. A large part of that is due to the falloff in manufacturing. The Rough Road Back There are roughly 14.5 million unemployed in the US, another 9.4 involuntary part-time workers, and 2.5 million marginally attached workers. The latter category is basically people who would take a job if they could find one but haven't looked in the past four weeks. Plus younger people who have gone back to school because they can't find a job. For the part-time workers to get full-time jobs we need to create (guessing) at least 4-5 million full-time jobs to give them the hours they want. That is at least 11-12 million jobs we need to have to get back to the unemployment levels of 2007 (assuming that about 7.5 million jobs gets us to 5% unemployment). Now, we need about 1.5 million jobs every year to cover new people coming into the labor force - or that is what history and economists tell us. I am not so sure that number is not itself history. What group of people has seen its unemployment level go down? People over 55! My generation is not retiring as planned and indeed is going back to work. Retirement is somewhere in the future in a world where stocks have gone nowhere for ten years and housing values have collapsed. We may need more than 1.5 million jobs a year (125,000 a month) if Boomers aren't going to quit. But let's assume they do, for the sake of argument. That means in the next five years we need more than 19 million jobs to get back to under 5% unemployment. That's almost 4 million jobs a year or more than 325,000 a month, each and every month. Or 27 million jobs to get back there in ten years, or almost 230,000 jobs a month each and every month. No recessions allowed. No crisis can show up. And the economy needs to grow at 3.5% plus on average to really give us jobs. Below are the employment statistics for the last 20 years. Straight from the BLS web site into my Excel spreadsheet. Notice that with the exception of 1994 and the last quarters of 1997 and 1999, we had no consistent quarters of 300,000-plus jobs a month. Also note that the economy grew (if memory serves) at 3.3% in the '90s and at 1.9% in the last decade. That marginal growth makes a big difference. This recovery is going to be long in coming, at least in terms of employment. And that brings us to the thought that started this letter. Recessions are on the Margin 10-12% of the US is really unemployed. Over time, that number will come down, albeit slower than anyone would like. But that also means that 88-90% of us have jobs or are working at least part-time. The plane I get on tomorrow is completely sold out. The malls I visit are full. We are buying Beatles music like there was only Yesterday (when troubles seemed so far away). Retail sales are up. Things are slowly improving. But we dug a very deep hole for ourselves, and until we create whole new industries (which we will) unemployment is going to remain high. If you are among the 10% who are unemployed, or the 7% who are underemployed, it is going to feel very much like we are still in a recession. And that is the crux of it. The difference between a technical "recession" and growth is meaningless if you can't find a job. If sales are slower because 17% of people are underemployed and governments are cutting back, it certainly doesn't feel like a growing economy to you. That difference is the margin between 2% average GDP growth and 3.5% average growth. That doesn't seem like a lot, but the compounding effects are large over time. The US economy grew at 1.9% for the last decade, the slowest since the 1930s. Given that government spending is going to go down (at least I hope so), unemployment is going to take some time to get under control; and with the whole developed world in a mess, it is hard to see an economic environment where we can average 3.5% a year for this decade. It is going to be another Muddle Through decade. Unless you are on the margin. As businesses adjust, as entrepreneurs respond, we will slowly come out of this. But it is going to take longer than we would like. Mexico, New York, and The Endgame I leave tomorrow for the Forbes cruise around the Mexican Riviera. I am looking forward to it, as there will be good friends sailing with us, and Tiffani and Ryan are coming as well. And, armed with my IPad, I have a few sci-fi books to read. I sent the final (well, almost) version of The Endgame to Wiley today. Seems they wanted a few revisions but, I must say, a lot fewer than I thought and a lot less than for Bull's Eye Investing. Those who have read it are giving us very good reviews. Dylan Grice, macroeconomist at Societe Generale in London, said, "I think the book is brilliant. Well-written, crystal clear and hits the spot. My favourite chapters were the ones on Fingers of Instability (which I think everyone in finance should read and reread each year lest they forget), and the one on East Europe as both a lead indicator for what's in store and a potential land mine which could yet do for the euro what Credit Anstaldt did for the gold standard. But it's a tough call. Lots of very good stuff in there." When I get back from Mexico, it will be time to start thinking about promoting the book. It is more than just book sales. My real dream is to help foster the debate about how we as a country (and indeed the developing world) need to get our act together if we want to avoid becoming Greece. If you are a producer for radio or TV or print media, drop me a note. We'll set something up. I will be in New York the 12-14 of December for meetings and then home for the holidays. All my kids will be here for Christmas, so we may have an even bigger crowd than last Thursday, which was around 35. I thought we had a lot of food, but it was almost gone by the end of the day. It is time to hit the send button. My torturer (AKA my trainer) has some especially hard stuff in store for me after Thanksgiving and before Mexico. We use these small weights, or nothing, but I leave the gym like a wet rag. Lots of reps and less impact on my body, but it is doing more than my old, simple pumping-iron workouts. Although I do miss the iron. Maybe I can sneak in a few pumps on board the ship. Have a great week. And keep yourself away from the margin! Your ready for some relaxation analyst, John Mauldin John@FrontLineThoughts.com Copyright 2010 John Mauldin. All Rights Reserved Note: The generic Accredited Investor E-letters are not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for accredited investors who have registered with Millennium Wave Investments and Altegris Investments at www.accreditedinvestor.ws or directly related websites and have been so registered for no less than 30 days. The Accredited Investor E-Letter is provided on a confidential basis, and subscribers to the Accredited Investor E-Letter are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.
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