Saturday, October 17, 2009

Double Dip Recession

Jon Lekas came on Kudlow Report, on CNBC, last night with his doom and gloom scenario. Lets put the facts up front and then talk. Are we going to hit unemployment (official) of 10%, OF COURSE (if you haven't factored that in then you're not being realistic)! Is the "real" unemployment already close to 20%, of course it is. Will our economy be changed forever, of course it will. The reality is that when we left agriculture, now 90% of the US does something else. When we left the industrial revolution, 90% of the world does something else now. When we left the tech bubble, millions of people lost their jobs. Now we've left the financial bubble, and we've lost major jobs in that sector.

So, what am I getting at? We cannot spend all of our time lamenting all the jobs that we have lost in manufacturing. Why is it that we talk about jobs, the first comment is always about US manufacturing. Check out the Wall Street Journal Article from August 3rd of this year titled: "China's Gains in Manufacturing Stir Friction Across the Pacific" here is the direct quote:

"Anyone who walks the aisles of a U.S. retailer might think China already is the world's largest manufacturer. But, in fact, the U.S. retains that distinction by a wide margin. In 2007, the latest year for which data are available, the U.S. accounted for 20% of global manufacturing; China was 12%." The full article can be found at: (We use to shorten links so they don't take up the whole page)

The US Manufacturing share of the global economy is 20%! So, what does this mean? Technology is doing the work that people used to do. That's the new reality. If you want to complain about US manufacturing, please, get upset over the right thing: technology. Here's the reality about tech: It's not going away.

With technology taking US jobs, what do we do with all of our unemployed people? That is where Warren Buffett comes in. He has said, do not bet against the US Entrepreneur. We will invent new products and new industries. Those things will lead to jobs. What else will we do, invent new tech, that cause new tech cycles, that create new jobs. We cannot expect the world to remain stagnant. That means, if you have a job, you need to continue to make yourself relevant your entire life! You cannot get a job as a cashier at a grocery store, or Walmart, and expect to be doing that in 20 years. Now, I know there are some who have done that...but if it were up to us, those people would not be able to afford a house in most states, it would be hard to own a car, and they would probably be below the poverty line. Why would we say such a terrible thing? Because it doesn't require anything but (maybe) basic math skills...and not even that to run a register. If you can smile, and work a computer, then you can operate a register. Those who make technology have made a machine that can be operated with very little education. Why should that person make anywhere near what someone who spends 10+ years in school getting a bachelors, masters, and PhD and goes on to do...who knows what? That person has spent a DECADE doing something that is VERY difficult and proving themselves. They have also made themselves relevant.

Before we get 10,000 angry comments, let me address what is great about being a cashier. Go into a Walmart right now and ask the management how many of them started out as cashiers, and you'll be surprised that many of them never graduated from college or they did and still started out as a cashier or even cart pusher. But that didn't stop them and they refused to resign themselves to being a cashier forever. Good old fashioned hard work goes a long way in this country. In fact, I think it can take you all the way. The moral of the story is that you MUST keep yourself relevant or face the elimination of your job or even line of work in our ever changing economic landscape.

So, now that I've gone WAAAAAAAY out of the way to talk about jobs, let me get back to my point about the Kudlow report and Jon Lekas. He is calling for us to be back below DOW 6,500 before the end of the year! Now, if this were July and we were selling off week after week, then sure, we'll take you seriously. But please, come on. You are simply trying to convince the producer to get you on television when you call CNBC with a story like that. We only have 75 days left until the year is OVER! I really don't think it's realistic to talk about a DOW below 6500 and we haven't seen one single rate hike, any real inflation, unemployment hasn't dropped (meaning the feds will not remove the punch bowl until the party starts to end). With 75 days left, besides the feds dramatically hiking the rate, what catalyst will bring the markets to their knees? I can't think of one and I don't think any rational economist can either.

Does the possibility of a double dip recession exist next year or in 2011 if we don't get sustainable growth in employment next year? SURE! Are we in danger of a double dip if the government jacks up our taxes beyond what can be borne to eliminate the deficit? SURE! Will we be very worried if the Fed takes interest rates to 7% in 2010? YES! But I don't think any of those things will happen this year, so lets just stick to the real data and see how earnings season goes. We're only 12% of the way through, and we'll know a whole lot more after next week.

Bottom line: Jon Lekas, if you want to talk DOW 6000 or DOW 5000, please talk about next year, so you can have some time to be right if things go wrong. Everyone else, ENJOY your weekend, do your homework on the stocks that you own. If you're up big and you're worried, then sell some stock or buy some longer dated puts on your stocks so that you can sleep at night because the DOW below 6500 in the next 75 days, just doesn't seem very realistic to me.

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