Victims and Winners of Economic Cycles

by Steven Hansen

This has been an interesting week with jobs data all over the place.  The underlying REAL driver of the economy is jobs.  But more importantly, a society which is unable to provide enough jobs will end up with social unrest or social trends which undermine the economy.

It can only be hoped that jobs growth will start gaining traction soon – a summary of week’s jobs releases here.  December data is a month of extremes – in part caused by data collection over a holiday season.

My new friend David (aka GreenRiver) gave me the thought for this week (reprinted with permission):

I am dismayed, sometimes, how little practical experience or understanding of base human nature a lot of economic theorists have. Lots of things that sound good in principal would be abject disaster in application. Very few “ivory tower” theorists seem able to admit that. Just as in battle, little in economics follows a neat text book example.

I would much rather see a fiscal and monetary policy that is designed for stability, rather than speed or efficiency – kinda like training wheels on a bike. The set of guidelines which were developed in 1930′s were like that – the excluded a lot of sexy innovations, instead limiting the economy to a slow, plodding path. We started taking the training wheels off a little in the ’80′s, and more so in the ’90′s – culminating with the repeal of Glass-Steagall in 1999. So, now we’ve had two huge bear markets, the tech bubble, the housing bubble, the financial crisis, and the Great Recession – all in the span of ten years.

Our economy now resembles that of the Victorian era, another era of great booms and busts, depressions, crises, and the like. The late 1800′s were great if you were a robber barron, not so great for anyone else.

The most vulnerable people in downward economic cycles are the young (who are entering the workforce when there are fewer jobs), the lower educated / lower skilled (who do not have many employment options AND are not clever enough or rich enough to take advantage of the changing landscape), and the old / retired (who are living on fixed incomes).  This group is at least half of the population.

The biggest gift economists can give the weakest or most vulnerable members of society is economic stability which allows jobs growth.

2011 will be another interesting year for “investors”.  Already, we are hearing a dichotomy of doomsday and boom time conditions.  The looming threat of deflation is fading for now, but the Euro-crisis may bring it back with a vengeance.  Yields have been bouncing around in the first week of 2011.  Bonds up or down?  Equities up or down?  Commodities?

What exactly is investing:

a) engaging in any high-risk behavior in which decisions are made based upon incomplete knowledge; or

b) acquiring property or assets for securing long-term income and/or capital gains.

I doubt many of us are truly investors – just gamblers.  I would be surprised if I owned anything in my current portfolio 3 months from now.  You gotta understand who you are to recognize your reflection in the mirror.

Good Luck in 2011.

Economic News this Week:

Econintersect economic forecast for January 2010 pointing to a slightly improving economy.   This week the Weekly Leading Index (WLI) from ECRI continued to improve from 2.3 to 3.3 implying the business conditions six months from now might be improving.

Initial unemployment claims in this week’s release were down slightly after the large drop last week.  This week’s unemployment claims release is overshadowed by the jobs numbers released this week.

No data released this week was inconsistent with Econintersect’s December forecast of slow growth.  The table below itemizes the major events and analysis this week (click here for interactive table).

Bankruptcy Filed this Week: First National Bancshares

Bank Failures this Week: