Barry Ritholtz—money-manager, author of Bailout Nation, and writer for one of the top financial blogs in the country—recently spoke with Financial Sense Newshour about the "big picture" on jobs, the economy, and stock market. Here he explains another reason why the stock market continues to move higher while jobs go nowhere.
Barry, we just got another fairly disappointing jobs report last week. When you step back and look at the big picture, what do you see as the main underlying cause for weakness in the jobs market?
"The longer secular trend in the labor participation rate has been down for about a decade, and probably the lion’s share of the blame for that will go to the retiring baby-boomers (something like 55,000 of them are retiring a day), but you can’t blame all of that on the baby boomers. A lot of it has to do with jobs just disappearing, and I don’t mean people just getting laid off. There are less jobs being created in this economy than in prior cycles. Globalization is at fault for some of it. Another major part is that there are productivity gains that simply allow companies to do more with less people. My own office—my group—is a team of 5 people. We put out two blogs, a number of research pieces, a number of printed columns, and we manage 100 plus million dollars. Years ago that would have taken a team of 40 people to do—there’s five of us. So, the things we can do with technology, the productivity and efficiency enhancements of the internet—it’s very much a double-edged sword."
Is this something we’re likely to see for, at least, another decade?
"I think this is something we’re more likely to see for the future—forever. This is not going to change. Maybe at a certain point it’ll plateau but, look, one of the easiest things for a company to buy is business intelligence software that allows them to generate the same output with fewer and fewer workers. The amount of quantitative data that companies are generating internally means they know pretty much exactly how many people they need to produce the goods and services they create practically in real-time. In the old days a company would produce widgets all around the world and they would produce a hundred different versions of it and it was a guessing game as to how much steel they had to buy, how many people they had to have working at different plants, and when you would say to them, “What is your best-selling widget in Europe and how does that differ from the best-selling widget in South America?” They would say, “Well, we could tell you what our best-selling widget was two years ago but we really don’t have the information as to, you know, last quarter.” Today, they can tell you the best-selling widget, second by second, in every region of the country, every region of the world, practically in real-time. “Hey, this widget ABC is a huge seller in Brazil, it doesn’t really do well anywhere else in the world, why don’t we move the manufacturing of that widget to a local plant that’s not too far from there instead of shipping.” Think about that sort of decision-making process being repeated over and over and over, across many different industries, across many companies—as you get more and more efficient and more and more productive, what you’ve done is to eliminate a lot of the jobs that were there that allowed you to be wrong in various forecasts. You don’t how many flanges you’re going to need, you don’t know how many widgets you’re going to need, you don’t know where they’re going to go, so that meant you had to have a lot of factories, you had to have a lot of them staffed-up and there was a lot of transportation going around—the modern form of productivity and business intelligence and efficiency means that fat is all cut and it’s great for companies and it’s great for the ability to purchase these things at ever cheaper prices but think about all those jobs that are just gone forever. That’s just a leaner way of operating and that’s likely to continue for the foreseeable future."
Is this one of the main reasons why companies are making record profits? One of the common complaints is, how can these corporations be making all this money when we have high unemployment and the economy is growing at an anemic rate? Is it basically just companies learning to make more with less?
"There’s that. Also, companies have become much more global than they used to be. Half of the S&P 500 profits come from overseas. That wasn’t true 30 years ago. Look, India is growing at 6-7%, China was growing at 9%—their recession means they’re only growing at 7%—but if you look at parts of South America and you look at other parts of the Pacific Rim, there’s a ton of growth around the world and so, even when the United States is only growing at 1.5-2%, which is better than what’s going on in Europe, there’s still other places where good services can be sold. So you have this situation where it’s a global market and there is almost no leverage on the labor side. Everybody forgets what a significant impact labor has on prices. You know, the most expensive component in a box of corn flakes isn’t corn and it’s not the box—it’s the labor that goes into it. Corn is second and, I believe, advertising or transportation comes in third or fourth. So, with wages flat, unemployment relatively high, and no negotiating leverage on the side of employees looking for work—outside of very specific fields and areas where technical skills are limited or scarce—it allows companies to be extremely profitable despite a somewhat lackluster background. Besides, as Warren Buffet once famously said, even if you knew what the economy was going to do, you still have no real idea what the stock market is going to do in response to that, and these are the exact factors why."
In the rest of this interview Barry discusses some long-term investable themes, a few of his favorite stock picks, and the best way to play the fast-growing e-commerce market.
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