Mike Lipper’s Monday Morning Musings
Falling Confidence Beats Numbers,
but be Careful With 2nd Quarter GDP
———————
Is a Structural Recession Coming?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Managing the News
The classical definition of a recession is two consecutive quarters of negative GDP. The first report for the first quarter indicated a decline of 1.4%. This was the headline, although the remaining bulls focused on subsequent reports adjusting first quarter results to a positive number that never made it into the conciseness of the market. Perhaps the message the market has taken is that this Administration is tone deaf. The White House had an afternoon and an evening to manage the news through its obedient media but failed to bolster confidence in the Obama team’s overall competence. It will be interesting to see how the second quarter GDP is handled after the July 4th holiday. If like the first quarter it is a negative, which looks more likely than not, the definition of two consecutive negative quarters representing a recession, may be viewed by some as fulfilled. If not, we may have to wait for an October surprise.
Current Pictures
Racetrack handicappers hope to find “smart money” to give them an edge. Two suggestions - Transportation and Speculators vs. Investor timing.
Transportation: One of the earliest stock market signals led to the Dow Theory, which states that a trend is likely to continue if the performance of the Dow Jones Industrial Average (DJIA) is confirmed by the trend of the Dow Jones Transportation Average (Rails) and visa-versa. The theory was based on industrial shares being more future oriented and rails representing freight that was actually sold. Applying this thought to the week’s performance. After 8 weeks of the DJIA declining, it was up 3 out of 5 days. However, the Dow Transportation Average was down 3 days this week. This makes sense to me considering US rail traffic was down 5.4% this week. Of the 10 classes of freight, 7 were down and only 3 were up.
Market performance depends on which forces are dominant. Generally, there are more long-term investors owning shares traded on the NYSE than the more speculative holders that invest in the NASDAQ listed stocks. Larger passive index funds are more significant owners of “Big Board” shares. In terms of share volume for the week, only 47% of the NYSE shares rose vs 40% on the NASDAQ. In terms of transaction volume, the NYSE had 45% rising vs 42% for the NASDAQ. Clearly, participants in the market are not enthused with the current direction.
Since recorded time, civilizations have had economic cycles. While some were blamed on weather or plagues, most of the time the main cause was a prior foolish expansion that could no longer be supported. When this is recognized, it usually requires major structural changes to make progress. Is the forthcoming recession an advance signal of a structural depression? Quite possibly!!
A Problem Needs to be Addressed
The identification of the problem to be addressed is generally too simplistic. Global supply chain disruptions have almost universally been blamed on insufficient physical capacity. While temporary capacity limitations cannot be denied, the focus as usual is misplaced. There is a real shortage of qualified workers and most importantly of first line supervisors. In the US, we already know the ratio of publicly available job opportunities to registered unemployed has almost doubled. This is not purely a US phenomenon, as this week we were alerted to the UK’s ratio of opportunities/unemployed. There are now more opportunities than unemployed, probably creating a pattern I experienced in the late 1980s when we couldn’t hire sufficient qualified computer programmers in the US. We sought help from substantial software development shops in India. We were delighted when our designated vendor showed us the credentials of those assigned to produce the required software on a tight schedule. When it didn’t happen as planned, it became clear the good programmers we were introduced to were no longer there. They had left that employer for another, for perhaps an additional $5/week.
Today we are experiencing a decline in the quality and timeliness of deliveries at supermarkets, department stores, law firms, accounting shops, and hardware/software manufactures, etc. In almost all cases these organizations are desperate to find qualified workers, despite the high wages being offered. They have applicants, but they often don’t have the required work skills. The problem most often is that applicants don’t have the right attitudes toward work.
I suggest this is a generational problem, if not longer. The combination of stressed homes and a unionized bureaucratic school system is not producing disciplined students who value intellectual honesty, nor are they capable of budgeting their own time. To me this is distressing as a fiduciary and a consumer, but it doesn’t have to be that way. I am biased in favor of military training, sports teams, and religious organizations. In the US Marine Corps, officers quickly learn that the wonderful history of The Corps is due in part to non-commissioned officers, starting with Napoleon’s early rank of corporal. (Unfortunately, when cost- accountants run companies, they eliminate levels of supervision. They view it as overhead and don’t recognize that first line supervisors are the main cultural builders of a company.)
I hope we never again have a war that requires us to re-introduce conscription (draft). I say this for lots of reasons, including my grandchildren, great grandchildren, nieces, and nephews. However, as an analyst I am worried that at least half if not many more could not qualify to serve their country, due to their physical condition and mental discipline.
The likely business solution to those unemployed by choice is to encourage more automation. Much of the work done by low level workers has already been automated. Business and non-profits have already figured out that the cost of automation can be amortized over a few years, and so doing they eliminate a substantial number of problems in the workforce. Total compensation paid to lower-level employees vs. the cost of the facilities needed to support them does not offer sufficient pay-back.
This shrinkage of low-level jobs may lead to a permanent group of unemployed, at least in terms of the public record. While developed countries are moving down the replacement trend, it will take far too long to eliminate the unemployed problem. These concerns may be the underlying reason we cannot exclude the possibility of a structural depression.
Investment Conclusion
Be careful and invest wisely for the various likely futures and keep us informed as to what you are doing. We all need help.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/05/inconclusive-but-trending-lower-weekly.html
https://mikelipper.blogspot.com/2022/05/three-worries-april-near-term-slowdown.html
https://mikelipper.blogspot.com/2022/04/short-long-term-thoughts-weekly-blog-729.html
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