Common Cents for March 16, 2018

Section I

Does anyone really like surprises? By that, I mean are there really people who want to wake up without any clue as to what the day might bring? The source of their next meal? Where they will sleep in the evening? With whom they will interact? The environment in which they will live? Is anyone so spontaneous, living so in the moment, they eschew all form of structure? To the point where any measure of predictability is anathema to their personal happiness and well-being?

Outside of the pages of amateurish manuscripts and Lifetime movies, I doubt it seriously. After all, even the biggest Dead Heads knew where the next show would be, and that there would be plenty of grilled cheese sandwiches once they got there. Yep, humans crave some sense of normalcy, consistency, probability, and, dare I say, even boredom.

For years, I started my economic presentations with something along the lines of: “If you liked last year, you are probably going to like this year.” Frankly, I had conversations with co-workers about how dull economic commentary had become, and how the business media was trying to fill 24/7/365 outlets with information it would have relegated to the back page of the Saturday business section in simpler times.

Something seems to have changed, but has it really?

I can’t remember a time in my life when things seemed to be in such a state of flux. From the discussions I have had, it would appear our clients feel largely the same way. Just what in the world is going to happen next?

Are we going to meet with the North Koreans or get into a nuclear war with them? With whom are we going to get into a trade war? The Chinese, the EU, NAFTA, or all of the above? Who is running which cabinet this week? Which company will Amazon buy next? Since when does an Alabama senate race make global headlines? Or a Congressional seat in Pennsylvania? Wasn’t the Cold War over? Wasn’t Tiger Woods retired or something? Is Bitcoin a thing or not? Is Xi a dictator or is he the new emperor? Does it make a difference? What exactly is a Space Force? Shouldn’t Sears have gone belly up before Toys R Us? How in the heck did Alabama win that football game? The Astros won the World Series this year and the Cubs did in 2016, really? The Eagles won the Super Bowl? Can time in space really alter your DNA ‘expression’? What does that even mean and what does it mean for future exploration? Will astronauts mutate if they spend enough time up there? Robert Mugabe is no longer in power in Zimbabwe? When is 3-D printing going to live up to the hype? What will that mean? What can’t my phone do? When will Cape Town run out of water? When the James Webb Space Telescope is launched next year, will it really be able to look back in time like I have read? Could you explain that to me again, as I get it but I don’t at the same time? When there is so much interesting science and technology in the world, why must I avoid potholes in the road? Why do long stretches of the interstates on which I have recently traveled feel like they are an overloaded 18-wheeler away from cracking down the middle? Is the Federal Reserve going to be hawkish or dovish in 2018? It wouldn’t really be so stupid as to invert the yield curve, would it? When is the fallout from negative interest rates in Europe going to come home to roost? Next year or the year after? Did the entertainment industry finally admit there was such a thing as the ‘casting couch’ and that it wasn’t a good thing? Will the EU and UK play nice or will they drive each other into the dirt? How soon can we have lab grown human organs ready for implantation? When will the grocery stock lab grown animal proteins (meat), and you read that correctly? When will the Tokyo to New York in 2 hours plane be commercially viable? Is Mars 2030 a realistic probability? How many different brands of Bourbon do we really need? When will GE finally find a bid? Did Costco really recently come out with a so-called Doomsday Kit which will feed a family of four for a year for $6,000? What happens after that runs out? Did you know NASA has designed something it calls the Hammer, an 8-ton spaceship capable of blowing up or deflecting threatening asteroids? Could both major US political parties implode at the same time?

Am I really turning 50 in a couple of months…even less than that? I feel like I just got started.

Maybe it just me, but I feel like we are a hair’s breadth away from something absolutely extraordinary happening…and it is going to be awesome. However, we are going to have suspend some amount of disbelief.

For long centuries, the basic human condition didn’t change too dramatically. The overriding objective for the vast majority of individuals was simple survival, and most people scratched out a relatively brutal, short existence through subsistence farming, cottage industries, and basic animal husbandry. While there are still millions for whom this is still the way it is, humankind has advanced very far in a very compressed period of time. Reread that long paragraph above and then consider this: my father’s father was 12 before the Wright Brothers left the ground.

While no one really likes unpredictability, a quick review of recent history suggests we have been living through a period of outlandish technological and scientific advancement, the most unpredictable period in human history. What if the unpredictable has become, well, predictable? That we have come to expect the unexpected? That we now embrace change without knowing it? That, despite the commentators constant harping about how the markets hate uncertainly, investors dislike complacency even less? Ah…therein lies the rub, a rub, or something along those lines.

When I look at the current headlines, it would be extremely easy for the world to develop a bunker mentality. The worst-case scenarios are far easier to make than the best-case ones. Still, if you wish or dare, all you have to do is peel back one extra layer of the proverbial onion to find a story that will baffle you with the brilliance of our species.

Recently, I have said as much to clients and others when they have asked me about the impending doom which is certain to befall us sooner rather than later. Certainly, there will be another recession in our future, and maybe even a red year in the investment markets. Soon? Well, the odds are this will happen before the end of 2020, so soon enough. Another 2008? Nah, that doesn’t appear likely at this time, but negative 5-10% over a 12-month time frame is a possibility….notice I didn’t say calendar year. That is just what happens, and what people do.

As I type, it appears the rest of 2018 is going to be a roller coaster in the markets and one helluva ride in science and technology. I have told clients to expect a decent year in their portfolios, even if it might feel like they took a gut punch to get it. The rearview mirror will show a year not too dissimilar from previous ones: moderate economic activity and decent investment results….that is what every data release and economic report currently suggests.

It will just be completely unpredictable, and which is becoming increasingly predictable. That is really cool when you think about it.


Section II

Mark Twain popularized the humorous expression: “there are three kinds of lies: lies, [darned] lies, and statistics.” This is funny because it is kind of true. Looking at data alone can tell a story which may or may not be completely accurate. After all, a swinging bunt single looks like a line drive in the box score the next day, right? A deflected, wounded duck touchdown pass is as pretty as a tight spiral in the papers, isn’t it?

If you read the business section with regularity, you have probably read how Alabama’s unemployment rate has fallen the most in the country over the last 12 months, and I mean like a bag of flour off a bridge. So much so, there has been no shortage of officials bragging about Alabama’s surging economic strength and all of that. “See how good we are doing? The numbers don’t lie, and I don’t either.”

Perhaps. I don’t know, and I gave up caring about politics a long time ago.

To be sure, the number of unemployed in our state fell an eye-popping 39,947 from January 2017 to January 2018. That is great news. On the flipside, 17,962 fewer people were actively looking for work in Alabama. As a result, the unemployment rate fell from 5.5% last January to 3.7% in 2018. Had the size of the labor force remained the same, the unemployment rate would have been closer to 4.5%. While that is certainly an improvement, no argument, it still would have been comfortably higher than the national average.

You see, we can keep whittling away at that unemployment rate until no one is actively looking for work. If you have 10 people looking for work and 9 have jobs, your unemployment rate is 10%. If that 1 person decides to go fishing instead, the rate falls to 0%. There has been no change in aggregate output or income because this individual opted out, but 0% sure looks better than 10%, doesn’t it.

Then there is the way the government gets the data: it conducts a survey of households and individuals. “You looking for work are you? You got a job?” Of course, the methodology is a little more scientific than that, but it is what it is: reliant on people telling a bureaucrat the truth.

Perhaps a better gauge of labor market strength is what is known at the Establishment Data. The Bureau of Labor Statistics reaches out to actual businesses and other employers and asks “How’s things? How many did you say you got working over there? What you gotta pay ‘em these days?” Again, there is more to it than that.

Using this measure, Alabama’s economy created right at 14,000 net new jobs from January 2017 to January 2018. That would have been a 0.70% growth rate, or roughly half the national average for those 12 months. Huh? Yeah, that doesn’t sound quite as good does it? To be sure, a decrease of 40,000 in the number of unemployed is certainly easier on the ears of potential voters than the creation of 14,000 payroll jobs in a labor market in excess of 2 million workers.

The difference in the old adage and the employment numbers is no one is lying here. In fact, everyone is telling the truth. It is just the truth looks different depending on the data you decide to use.

Perhaps Twain should have called them [darned] statistics instead of lies.


Have a great weekend