Robert Reich on Jobs, Treasuries in Perspective

Includes: BAC, C, GE, GS, JPM, MS
by: Bernard Thomas

Those who know me are aware that former labor secretary Robert Reich and I have little in common in the way of economic theory or political beliefs. So no one was more shocked than when I was very much (but not totally) in agreement with his assessment of the employment situation and the economy as a whole as published in Monday's Wall Street Journal.

None of what he said was new or especially intuitive. In fact, much of what he opined has been discussed in this space. Here is some of what Mr. Reich had to say:

The U.S. economy added 162,000 jobs in March. That sounds impressive until you look more closely. At least a third of them were temporary government hires to take the census-better than no job but hardly worth writing home about. The 112,000 real new jobs were fewer than the 150,000 needed to keep up with the growth of the U.S. population. It's far better than it was-we're not hemorrhaging jobs as we did in 2008 and 2009-but the bleeding hasn't stopped.

He puts employment in its proper perspective.

Some economic cheerleaders say rising stock prices are making consumers feel wealthier and therefore readier to spend. But most Americans' biggest asset is their homes. The "wealth effect" is felt mainly by the richest 10%, whose net worth is largely stocks and bonds. The top 10% accounted for about half of total national income in 2007. But they were only about 40% of total spending. A vigorous jobs recovery can't be based on 40% of what was spent before the economy collapsed.

He is right about consumers not being willing or able to spend as they had during the most recent economic expansion. However, consumer spending as seen during the expansion was fundamentally unsustainable. He should also be careful of demonizing the so-called investor class as it is their capital which seeds economic growth and job creation (along with consumer spending).

What's likely to slow the jobs recovery most, however, is the indubitable reality that many of the jobs that have been lost will never return.

This is the truth, but it has been true of the last few recessions and recoveries. However, the U.S. economy has a way of creating jobs in new sectors, if it is permitted to work unimpeded.

More Americans will be working, but for pay they consider inadequate. The approaching recovery will be tepid because so many people will lack the money needed to buy all the goods and services the economy can produce.

Americans will once again be employed, but they will also be back on the downward escalator of declining pay they rode before the Great Recession.

I will argue, again, that wages are adjusting to levels which are indicative of the supply of jobs versus the demand for jobs. For decades, jobs and wages were protected by union contracts and government legislation. Once the economy went global, U.S workers were priced out of a world of eager and ambitious job seekers.


On another topic, there has been much disagreement over the direction and destination of long-term treasuries. Morgan Stanley sees the 10-year treasury yield rising over 5.00%. Goldman Sachs believes it will fall deeper into the 3.00% range. Noted technical analyst Louise Yamada believes that when the long bond reaches 4.80% that will complete the bottom of a head and shoulders pattern and rates to rise sharply. So much disagreement? I guess this is what makes markets.

First of all, I don't like technical strategies. economics is not a science. Things don't just repeat themselves due to natural forces. The markets are as fickle and unpredictable as their participants. Assessing the direction of the markets is not like predicting the natural seiche of Lake Erie.

Too many analysts fall in love with their models. They should get out of the office and hang out with the common folk every once in a while. They would see that many people are not working. Spending is stronger, but consumers remain cautious. Structural forces such as foreign demand for treasuries to "manage" currency exchange rates and the demand (direct or indirect) from an aging population are helping to keep long-term rates low. This won't change any time soon. Low rates will keep the balance sheet recovery in full force. The stock market will continue to rise.... until calmer heads prevail, but that might not happen for quite some time. Meanwhile, enjoy the ride.

Disclosure: Long: Citigroup (NYSE:C), Ford (NYSE:F), Sirius (NASDAQ:SIRI)