Day 193: Where's Productivity?
The Mother's Little Helper portfolio was UP today +$9,188.51 (-1.27%). Overall GAIN YTD: +$151,632.60 (+25.97%).
According to CNN Money our benchmark index, the S&P 500 is up +8.32% Year To Date (http://money.cnn.com/data/markets/sandp/).
Since the beginning of the year I’ve been touting the strength of the current bull market and preaching the mantra “Stay Invested”. After being skeptically asked several times what’s behind my optimism I thought I might try to lay out my thesis.
Working for an architecture firm affords me many construction metaphors, so I’ll unashamedly hammer a few of them out here, welcome to my house of growth. The foundation that my view is built on is that you can’t have economic growth without two things; commodity and the DOW transports prices must both be rising to support a sustained bull market and a growing economy. The first floor on top of this foundation holds the productivity department. The commodity and transportation prices can keep us out of the cold, damp basement, but unless we have productivity growth we can’t blow the roof off so we can see real economic gains. If we take the elevator to the top we find the final floor of the house of growth, wages. Wage growth combined with productivity growth combined with rising prices in commodities and transportation are the blueprint for economic growth.
Commodities
According to The World Bank, commodity prices in several key area are expected to rise throughout 2017. This is all the stuff we need to build the house of growth, copper, steel, zinc, oil, gold, aluminum, coal, lean hogs, fertilizers, and grains like wheat and corn just to name a few. Year to date you could cherry pick a few commodities and say that prices are down, but if we measure them all in an index the outlook is a bit different. As recent as April TWB was holding steady with a forecast of $55/barrel for oil and $60 in 2018. In fact energy prices in general are expected to increase 26 percent in 2017 and 8 percent in 2018.
The World Bank in its April Commodity Markets Outlook is holding steady its crude oil price forecast for this year at $55 per barrel, increasing to an average of $60 per barrel in 2018. Rising oil prices, supported by production cutbacks by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC states, will allow markets to gradually rebalance. These oil price forecasts are subject to downside risks should the rebound in the U.S. shale oil industry be greater than expected.
Prices for energy commodities, which also include natural gas and coal, are projected to jump 26 percent this year and 8 percent in 2018. In line with oil price forecasts, natural gas is anticipated to gain 15 percent this year, led by a jump in U.S. prices. Coal is seen climbing 6 percent in 2017, due to earlier supply restrictions in China, which consumes half the world’s coal output. Prices for non-energy commodities, which include agriculture, fertilizers, and metals and minerals, are forecast to increase in 2017, the first rise in five years. Metals prices are projected to jump 16 percent this year due to strong demand, especially from China, and supply constraints from various parts of the world.
Transports
Monday the Dow transports set a record high. The Dow Jones Transport index, which includes airlines, railroads and delivery companies eclipsed its March 1 intra-day record of 9,639.33, rising as high as 9,681.88. It also tallied its first closing high since March 1, finishing at 9,639.63, up 0.8 percent on the day. The theory here is that if goods are being shipped at increasing levels then business must be picking up.
Productivity
This is the heart of my optimism and my greatest fears. Productivity is thought to be the most important area of economics and arguably one of the least understood. Productivity as an economic term is defined as ‘output per hour worked’. Sounds simple, you work an hour, someone pays you for that hour and during that hour something got produced. Over time we’ve seen technology increase and businesses investment in new technology increase such that the same hour of labor produced more output. But how do we measure the output of a banker, a hotel desk clerk, a waitress, or for that matter a Facebook employee?
What is worrying about productivity now is that productivity has been deteriorating steadily all the way back to the 1970s. Christine Lagarde, Managing Director of the IMF, said, “if productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today” and that “another decade of weak productivity growth would seriously undermine the rise in global living standards.“
Typically productivity follows cycles of growth and recession. During periods of growth productivity increases and during recessions productivity decreases. If this is true and not just a mirage we all agree to observe then the past 9 years of growth is very contradictory. Why then is U.S and global productivity declining. Even in emerging markets the data shows that productivity is declining.
There are several theories. One suggestion is that the technological advances and management strategies that propelled productivity in the past are no longer contributing to productivity. Another theory suggests that reduced capital investment after the financial crisis has led to workers that are no longer getting new technologies to make doing their jobs more efficient. The lazy-demoralized man theory says that people that are returning to the labor market after the financial crisis are no longer feeling the pressure to increase their productivity. Or maybe, we simply aren’t counting productivity in the right way.
Another idea purports that we simply need to apply some tough love to companies that don’t produce. Stop the bail outs and accommodative monetary policy (abnormally low interest rates). This theory has gained enough traction to have coined a term ‘zombie companies’, companies that have been spared destruction, labeled ‘too big to fail’ and as a result they drag down the whole economy. I’m willing to bet that everyone can name a handful of companies that are so inefficient at delivering the product or service we want from them, that we pull our hair out in frustration and wonder how they manage to stay in business. This is another common theme sited by analysts, that the world’s economy is full of laggards. Laggards are simply companies that have either not adopted new technology to advance their business productivity or have not fully implemented the technology they do have. In short they do nothing to disrupt their own industries.
Unfortunately the outcome of this lack of productivity results in massive inequality. Over the decades since 1970 we have seen more and more companies enter the laggard’s category. For every Google we have a slew of insurance companies with incomprehensible web sites. As these companies lag behind and continually receive support for their below average performance, more and more human resources are employed in the support of the laggard’s. I think what’s happening is that over the decades these companies create inequalities first by hiring more employees then they need and in what they pay those employees, which lowers household income, which lowers buying power, which lowers the savings rate and increases the credit card debit levels to the point where eventually we have no middle class workers but we do have massive inequalities in income. I guess it’s not so much a theory but one more possible explanation of what we see today.
We need to solve the productivity problem fast and in a big, hairy, nasty, disruptive way. There’s no getting around this, it’s a problem we’ve allowed to manifest over decades and we don’t have decades to solve it. Make no mistake, people are going to get hurt by the fix, but on the other side many more people will flourish and enjoy the benefits of a growing economy; not ‘The Economy’, nobody lives there, but their own ‘Personal Economy’ where real day-to-day stuff happens and matters.
Milton Friedman may have said it best;
“The society that puts equality before freedom will end up with neither.
The society that puts freedom before equality will end up with a great measure of both”
We are going to have to get use to a great deal more personal freedoms, and allow our neighbors to exercise their personal freedoms if we expect to see productivity rise in America and globally. This is the only way I can see inequality and wage gaps being resolved.
My Outlook
I still see more growth in 2017 and into the first half of 2018, but the growth I see is stifled by our lack of productivity and our adherence to government controls. In baseball there are three basic skills required to dominate the game, 1) Hitting, 2) Fielding and 3) Pitching; any two of these skills performed better than your opponent will win games. Unfortunately in the game of world economics we need all of the skills I sited above 1) Growth in commodities prices, 2) Growth in Transports and 3) Growth in Productivity. It’s time to get productive.
Stay Invested,
Clay Baker
Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell share withing the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, THO, TWX, VEEV, VZ, XLNX, XOM
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
