The world is changing. The world is changing because it must change. When the unemployment rate hits 27 percent, as it now stands in Spain, something more is going on than just a business cycle.
Unemployment is also above 27 percent in Greece. In Italy, the unemployment rate is close to 12 percent. In France, the unemployment rate is above 10 percent. The employment problems in these countries are not just cyclical, they are structural.
The same for the United States. Although the unemployment rate in the United States is under 8 percent, the startling figure concerning the U.S. labor market is that the labor participation rate has dropped below 64 percent, a figure not reached since the latter part of the 1970s when women were not as big a part of the workforce as they are now.
These structural forces are causing divisions between countries as the world tries to recover from the Great Recession and more. Angela Merkel, German Chancellor, "highlights eurozone divisions." The unemployment rate in Germany is 5.4 percent.
But, as we know, the utilization of capital in the western world tends to be lower now, for this stage in the business cycle, that at any other time in the past fifty years. Western countries are not only not using the human capital that is available; it is not using the physical capital it possesses. The competitiveness of the eurozone is an issue that comes up over and over again.
Phillip Stephens writes in the Financial Times about The New Deal for Europe: More Reform, Less Austerity. "High unemployment in Europe is not just a reflection of recession. It often mirrors ossified labor markets that lock out young people and discourage investment and innovation."
But he also goes on to talk about the problem in the pension area. Additionally, there is the education and training shortfall. The infrastructure is not up-to-date. And, then there is always the problem in many areas of Europe of political corruption and unworkable governmental bureaucracies.
The problem for politicians is that these are long-run problems; they are not problems that are going to be achieved in the near future. And, that is where the austerity issue also comes into play. Almost everyone seems to believe that government deficits must come down. However, trying to bring the deficits down in the short-run can just exacerbate the problem. Most countries in Europe that have attempted to reduce their budget deficits have found that due to the slower growth that results their budget deficits have actually increased.
So many politicians act according to the quote attributed to John Maynard Keynes: "In the long run we are all dead." To the politicians, if they focus on the long run, they fail to get re-elected. Thus, the time horizon for a politician is the next election.
But, this is where money comes into play. Politicians also need money to get re-elected…and to live "the good life". In some areas of Europe, getting money from constituents is just "business as usual." So there are a lot of structural issues that must be dealt with and, in most cases, these issues do not have easy solutions.
These issues, however, will produce some kind of results -- one way or another -- because the world always moves into the future. Even the political corruption issues cannot continue to be ignored. For an insight into this issue check out the book review by Janet Maslin in the New York Times headlined, "Formatting a World With No Secrets," which deals with the book "The New Digital Age."
The important point is that these structural problems are going to have to be dealt with. Education and training are going to be done differently. How much can on-line courses help resolve the issue? Do we continue to need massive universities and public school systems to educate the masses? Are public and private pension systems on the verge of massive changes?
But, what about our financial system? If the commercial banking system of the United States, which at present provides about fifty percent of the credit to the US economy, becomes a smaller and smaller contributor, what is going to happen to the financial structure of the country?
What about the natural gas revolution that is taking place? How is this going to impact utilities, manufacturing firms, and the infrastructure? And, there are the changes taking place in the health system. The health system has constantly been a laggard in the use of information technology. This is changing rapidly and everything I read about this the "revolution" here is going to change how we are treated, how we benefit from the new associations being created in the health field, and, I am told, these changes are going to increase our ability to deal with sickness, old age, and quality of life.
The story can go on and on. This re-structuring is going to create a large number of investment opportunities. However, these opportunities are not going to be short-term opportunities. These opportunities are going to be of the longer-term type because they involve major changes in the way America, Europe, and the world, do business.
Yes, I am a value investor. I believe that investors do best by paying attention to what is going on "over the long run". I also believe that we are in a time of transition in which the world is dramatically changing around us. We have not seen such a transition period in a long, long time. If one looks back to former periods when substantial transitions took place one finds that there were many, many opportunities for people to make money. But, it did not happen overnight.
I must admit, I write about the short-term -- in fact, I write a lot about the short-run. Economic downswings and recoveries are high on my list. My current forecast for the U.S. economy is for continued tepid growth. The release of the first quarter GDP number continues to support this view. What the Fed is doing and will do is another major topic. Is the stock market too high? Using the CAPE approach developed by the economist Robert Shiller, I would argue that it is because, given the above forecast for the U.S. economy, the corporate sector is just not going to be able to produce the profit levels that support the current level of CAPE.
Almost all of the research I know of confirms my belief that in terms of investing, short-run results are very problematic. There is a lot of uncertainty attached to them.
In the same vein, the research indicates that long-term results is where the real money is made. As a consequence, I believe that there are some real opportunities that are available or will become available over the next few years as the re-structuring unfolds. I tend to be a short-run pessimist and a long-term optimist. I don't like to bet the near-term ups and downs. I do believe that there will be quite a few long-term plays that can really pay off. I plan to focus on the latter more and more in the future. But, I will still write about short-term events in the economy.