23rd August 2012
Reversion to the mean
Mark Urquhart, investment manager at Baillie Gifford suggests that the really dangerous words in investment are not ‘this time it's different', but ‘reversion to the mean'. He says that despite the ubiquitous risk warnings, investors persist in assuming that the past is a guide to the future and it can be extremely costly. He believes that there is a profound tension between innovation and longevity of growth and concludes: "being open to the idea that things do not revert to the mean is useful…after all, in the 20th century 90% of all businesses failed while the majority of the world's population experienced monumental political change'.
US labour market
Urquhart gives the example of communist countries, but an example closer to home would be the changes at work in the US labour market. In the Financial Times, Sebastian Mallaby points out that there has been a huge change in the US labour market that is creating ripples across the whole US economy: "US unemployment has gone from lowest in the G7 to third highest. Because workers have become discouraged, the US labour force participation rate has slipped from the top spot to the middle of the pack. In consequence, the share of Americans in work has declined by fully 7 percentage points, a fall nearly three times more drastic than experienced in the UK."
He argues that the US's traditional ‘carrot and stick' approach to labour laws – where low unemployment benefit was countered by plentiful employment opportunities – is no longer working: Technical change has reduced opportunities for low-skilled men, who often find it impossible to re-enter employment once they have lost their jobs. The crisis also impacted construction, leaving 35% of working age US men without a high school diploma out of work (up from 25% in 2005). This has meant the Government has had to hike previously low unemployment benefits.
Mallaby's solution? "Payroll taxes should be reduced, especially for low-income workers. Enrolment on disability should be policed for abuses, and the disabled should be encouraged to re-enter the workforce where possible."
Plenty disagreed. On the comments board Nnelg says: "Companies aren't hiring because consumers aren't spending — at least not like they were. And consumers aren't spending because many of them are out of work, under-employed or have seen their nest eggs (in the form of the home value or retirement accounts) plummet in worth. You don't break that cycle by forcing discouraged workers back into the labor force." Rogerbater blames outsourcing: "Massive numbers of low skilled (but well-paid jobs) have been exported together with the industries that supported them – never to return."
Although it can be difficult to see through the mire of employment statistics – it is clear that a shift is taking place. The unemployment rate in the United States remained at 8.3% in July of 2012. Historically, from 1948 until 2012, the United States Unemployment Rate averaged 5.8%.
Could this be why Romney is now coming out in support of heavy industry?
His recent volte-face on the coal industry may be a recognition that these low-skilled jobs are diminishing: "Romney, who as Massachusetts governor vowed to close an aging coal-fired power plant because it "kills people," has embraced the coal industry in his presidential bid, with Murray proving a key ally. He touts coal development as central to his aim of achieving "North American energy independence" at the end of a second term in office."
The shifts in the labour market may have other unintended consequences. Previously, US demographics have always been relatively strong. There is a danger that the paucity of jobs may threaten this. Many couples are postponing or forgoing marriage until the financial foundations of their relationship improve," said sociologist Bradford Wilcox, director of the National Marriage Project at the University of Virginia in Charlottesville. "Given high rates of unemployment and underemployment for young adults, this pattern of postponing the wedding among many young adults is likely to continue until the United States sees a robust recovery kick in."
Rise of the robots
On Mindful Money we have already discussed how robots may be cutting out low-skilled jobs in China. There is every danger that they will do the same thing in the US:
"Robotisation has the capacity to do for manufacturing labour what digital did to analogue or the printed word. It can make complex items such as mobile phones which are currently churned out in China by hundreds of thousands of workers."
The shift in the US labour market is profound and long-term and has the potential to impact on the country's favourable demographics. Reversion to the mean is a seductive theory, but there may be far-reaching changes in economies, investment markets and companies that investors should factor into their decision-making.
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