The employment picture constitutes yet another headwind—and a significant one—to the already-faltering U.S. recovery. It will undermine future spending, company earnings and profitability. Indeed, the poorer the employment picture, the greater the likelihood that households will become more cautious and that the corporate sector will further increase its self-insurance…
— Mohamed El-Erian, Why the Payrolls Report Matters
Strip mining is a nasty, dirty business.
Basically you rip up the land, haul away tons of rock, and then use noxious chemicals to separate out a small quantity of targeted material. What’s left behind resembles a vast denuded moonscape, or perhaps a giant open wound.
Most rich-world inhabitants don’t give a second thought to this process, for a very simple reason – we don’t have to see it. There is no reason for the man in the street to feel concern, except when resource prices rise or environmental tragedy unfolds.
In the same way that mining companies will descend on a region with heavy equipment and chemicals, brutalizing the land until nothing is left, corporations large and small are doing the same thing – with the goal of extracting profits rather than minerals, to the long term cost of the U.S. economy itself.
A recent Economist chart tells the story…
“Corporate profits are back within a whisker of the all-time highs achieved before the downturn in late 2008,” The Economist writes. “American profits are already back to 11% of GDP. Corporate America is reaping the rewards from cutting costs, especially in capital investment and labour, through an unpleasant mix of redundancies, reduced hours and lower pay. The great squeeze cannot go on forever, of course, but it shows no sign of slackening.”
It is this corporate “strip mining” process, along with a failure of stimulus funds to actually stimulate, that is responsible for the great top down / bottom up disconnect we have pounded the table on repeatedly (see “Sunny With a Chance of Earthquakes” as recent example).
The logic chain goes something like this:
- The spigot of cheap money from the Fed buoys the fortunes of U.S. corporations.
- Investors are happy to lend to blue chip borrowers, but not to small businesses.
- Public companies keep profits up by ruthlessly slashing costs (i.e. jobs).
Wall Street then cheers the numbers as three self-reinforcing trends are sustained:
- Strength begets strength on the bottom up outlook for public companies.
- Weakness begets weakness as American jobs are “strip mined” for profit.
- The Fed’s easy money stance is sustained by persistent economic malaise.
In the medium term, the “strip mining” model is a recipe for continued strength in equities. It is very hard to resist a combination of robust profits and cheaply available credit (for the right borrowers) in a zero interest rate environment.
In the longer term, though, this cycle is yet another example of glaring short-termism on Wall Street, of precisely the sort that portends ultimate disaster for the U.S. economy (and for slow-footed investors who fail to cash out before the guillotine drops).
The trouble with the whole strip mining model, after all, is that the practice is not sustainable. Once you have taken what can be taken, there is nothing to be done but abandon the area and leave the land for dead – perhaps to start up another mine elsewhere.
Similarly, the notion that corporations can “strip mine” for profit indefinitely, even as they hoard rainy day cash in the same manner as the banks, is not remotely feasible.
And for those unaware of what’s happening, by the way, here is a little light reading:
- Weak pivate hiring shows recovery on the ropes (Reuters).
- The Long Term Jobless: Left Behind (Businessweek).
- Wary US employers keep hiring plans on hold (Reuters).
- The grimness of US unemployment (FT Alphaville).
- The Biggest Lie About US Companies (Yahoo).
- Michael P. Fleischer: Why I’m Not Hiring (WSJ).
- The crisis of middle-class America (Financial Times).
Stripped of High Hopes
Last but not least: Given that the working metaphor here is “strip mining,” at least one bad pun cannot be resisted. Consider this doozy of an anecdote:
Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs Group Inc. Her bachelor’s degree in game art and design cost $70,000 in tuition and fees. After she graduated in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies. She lost that job a year later when her department was shuttered.
These days, Howard, 26, makes her living in a way that doesn’t require a college diploma: by stripping at the Lido Cabaret, a topless club in Cocoa Beach, Florida. “I didn’t know what else to do,” she says. “I’ve got a worthless degree. It’s like I didn’t attend school at all.”
– Bloomberg, Stripper Regrets Art Degree Profitable for Goldman
How many Americans now feel like Carrianne Howard, one wonders, having spent anywhere from $30,000 to $300,000 on a higher education certificate, its value now reduced to little more than something fancy to hang on the wall.
What should be done about this? Should U.S. companies somehow be forced to give up their “strip mining” ways and start hiring again? No. Trying to impose yet another heavy-handed solution on the free market would only be a recipe for greater disaster.
Companies practicing slash and burn tactics on their own workforce – engaging in the euphemistic process of “right sizing” (rather than down sizing) as they prepare for an uncertain and bleak future – are at least attempting to do right by their shareholders.
What would be nice, really – although it will probably never happen – would be recognition from on high that current economic policies are an utter failure, and have not met their aims in the slightest (except to the degree such aims were secretly focused on bailing out the connected).
The diagnosis is not exceptionally complicated. Attempts to reinvigorate the U.S. economy have failed because the torrent of cheap money provided by the Federal Reserve has consistently flowed to privileged channels, rather than into the parched cracks and crevices that need it most. A simple proximity formula applies: Those who drink most deeply from the oasis are those most closely connected to the Fed.
Meanwhile, consumers and small businesses, which represent 70% of US GDP and roughly half of all U.S. economic activity respectively, have been left to die in the desert.
Ironic, that. As China makes strides to become more like the United States, the United States is at the same time doing its seeming best to become more like China… an economically lopsided hybrid with no true middle class, just pockets of privilege surrounded by vast swathes of increasingly resentful impoverishment.
Killing the Goose
There is at least one positive trend to come out of all this. As the average American finds his retirement prospects diminished, his bank account drained, and his food and energy bills increased, he (or she) is also in position to hit upon an important truth: You don’t need to gorge on “stuff” in order to be happy.
Consider the following, via the NYT:
Amid weak job and housing markets, consumers are saving more and spending less than they have in decades, and industry professionals expect that trend to continue. Consumers saved 6.4 percent of their after-tax income in June, according to a new government report. Before the recession, the rate was 1 to 2 percent for many years. In June, consumer spending and personal incomes were essentially flat compared with May, suggesting that the American economy, as dependent as it is on shoppers opening their wallets and purses, isn’t likely to rebound anytime soon.
On the bright side, the practices that consumers have adopted in response to the economic crisis ultimately could — as a raft of new research suggests — make them happier. New studies of consumption and happiness show, for instance, that people are happier when they spend money on experiences instead of material objects, when they relish what they plan to buy long before they buy it, and when they stop trying to outdo the Joneses.
– New York Times, But Will it Make You Happy?
What does that sound like to you? To yours truly, it sounds like America’s infamously gluttonous, reliably idiotic “shop til you drop” consumer culture, in which bigger is always better and more is better still, is at long last on the ropes.
The only way to kill a truly strong addiction is through forced withdrawal. America’s addiction to sport utility vehicles (SUVs), for example, was likely broken only by the forced withdrawal of punitively high gas prices for an extended period of time. And now we (the collective American “we”) are learning, again through forced withdrawal born of harsh economic circumstance, that “Hey! I don’t really need all that crap bought on credit after all!”
This withdrawal – assuming we don’t revert to our gluttonous, spendthrift, zero down ways at the first opportunity – is good news for the long run psychological and emotional health of the average American family. But it is very bad news for an economy 70% dependent on consumer spending, and worse news still for the ravenous corporate marketing machines aimed at getting Americans to spend, spend, spend, rather than save and live simply.
To wit: By downsizing Joe and Jane Sixpack, wedging them into a hole so tight they have been forced to give up their endless bought-on-credit fix, Wall Street may well have killed the shopaholic goose that laid the golden eggs.
This could ultimately be a good thing… but the painful macroeconomic reality of it means we must go through an adjustment period in which consumer spending becomes a significantly smaller component of the overall U.S. GDP mix (vs historic 70% levels)… and that adjustment is going to HURT. How much and how soon it will hurt, we shall see.
Eat, Drink and Be Merry…
The trading implications for all the above can perhaps be summed up with the old exhortation: “Eat, drink and be merry, for tomorrow we die.”
In other words, Wall Street will have the means to “eat, drink and be merry” as long as public companies are able to effectively continue their “strip mining” process against the backdrop of a fiscally cooperative ZIRP environment — and as long as macroeconomic headwinds don’t become too strong.
But when the waves of turmoil return – most likely in the form of renewed sovereign debt fears, or perhaps keying off some modest geopolitical flare-up or global growth pause – then all bets are off.
The current economic path is not in the least sustainable… and when the U.S. economy mine has been well and truly “stripped,” the next phase of massively painful adjustment will begin.