Double Edged Sword - Productivity vs. Consumption
Today we can the incessant technical analysis and turn to an issue that is fundamentally critical in trying to determine our future investment positions.
Peter Schiff's article entitled More Consumption Less Production inspired some interesting responses on Safehaven.com's "Talk Back" feature. Interesting to me anyway, given my long time participation in the US manufacturing sector. From Mr. Schiff's article:
December's larger than expected jump in non-farm payrolls is predictably being touted as evidence of a more vibrant U.S. economy. Unfortunately, the data does not support this conclusion. The bloated service sector added 178,000 jobs, while manufacturing shed another 12,000 jobs. What this means is that 178,000 more workers will be consuming goods while 12,000 fewer will be making them. The result will be larger trade deficits that merely compound already stretched global imbalances and exacerbate America's inevitable day of reckoning.
A service sector can only exist so long as it is supported by a vibrant manufacturing sector. The reason is simple. People employed in the service sector consume goods but do not actually produce any of them. Therefore they must rely on others, who presumably benefit from their services, to produce goods in their stead.
"Talk Back" commentators correctly point out the linkage between automation, productivity and declining manufacturing employment. For reference I will trot out an old Biiwii.com nugget, Deflation: A Manufacturer's View, where the many benefits of automation and the drive toward ever-increased productivity has truly been a "good thing". My concern was then, and remains today one of proportions. In reference to Schiff's concerns noted above, it is not the decline in manufacturing jobs that bothers me. Not at all. That is natural, expected and highly efficient and progressive. Where I continue to have concern is of course with the "bloated service sector" and the consumer economy that continues to float ever higher on an ill wind of helium (some elements of which are derivatives leverage, the US Fed and its easy credit policies, BOJ and an entrenched culture of speculation that these stimuli have promoted) filled expectation.
I saw a headline this week that President Bush plans to balance the budget going forward. Unfortunately, given the full time job of running a business with the added part time job (yes, I think I am productive :-)) of running a website, I do not get much time to read fully the main-stream media. So, all I got was a sound bite, where Mr. Bush is attempting to counteract sentiment aimed at rolling back his tax cuts. Believe me, I am all for lower taxes, but again, the proportion of the massive and growing consumer and services elephant (in the room) vs. the puny but ever more productive manufacturing sector is what concerns me. I will have to look into his plans more closely at some point and see if there is anything in there resembling actually productivity as opposed to ever-more debt leverage.
But I have come to realize that if perma-bullishness and levered speculation are a major industry, the packaging and selling of negativity and doomsday scenarios is at least a cottage industry. Moving away from manufacturing and the headline hyperbole about "outsourcing of American jobs" for a moment, a look at the various technology sectors shows awesome progress toward a better, or at least more efficient modern world. Examples include the high speed connection I am about to upload this article through to an entire world of potential readers, remote surgery where the doctor sits at a console across the room (or across the continent or world?) from the patient (see ISRG, a former customer of ours), the fact that instead of getting in our petroleum fueled vehicle and driving to a big box store and buying our petroleum based plastic packaged software, we can simply download our software at the click of a mouse... these are important trends. I do not see them presented often enough in the doomsday cottage media.
But Biiwii.com has presented nightmare scenarios repeatedly in the 2.5 years of its existence among trillions of other data bits floating around out there. That is because it is difficult to rationalize the excesses and assumptions we all see every day, which seem to outweigh the progressive and wonderful impulses of productivity and efficiency on the scale of the previously mentioned bloated elephant vs. let's say, a hamster or perhaps a small dog. Those who have followed the website over time have seen a penchant for a favorable view of technology (in the real economy if not always as a stock market investment) and realize we are always on the lookout for signs that we are missing the "big picture". Given the proportions of the negatives vs. the positives, I must still come down on the side that Mr. Schiff is trying to present, although his "Talk Back" critics make some strong points that resonate with yours' truly.
There is hype everywhere; bullish and bearish. American manufacturing workers are most definitely feeling a strain on the whole. As a manufacturing employer I can tell you that I have felt the strain many times myself (just this past week I found out that a large customer had attempted an "outsource" to China on a critical medical component that we have produced as a sole source for the last five years. Well, "China" screwed it up and we remain on firm footing - for now. But these are the ever-present potential hazards in the minefield known as the global economy. We take the challenge seriously and are committed to winning. What other choice is there?
I suppose the main point I am trying to make is that investors should attempt to meet each new day with an open mind and a serious attitude. Nobody, but nobody knows what will happen or where we are going. There is a spectrum encompassing everything from technological nirvana and global productivity to the fear of the dreaded "Amero" (memo to global elitists if you exist: that is a really tacky name, how about something like the "Monopo") and it is the job of investors, if they are serious, to approach it all with balance and thoughtfulness. My personal stance remains one in which I actively and optimistically participate in the real economy with hopes for the best, but also with extreme awareness as to the size of that elephant.