What to Expect in 2014 (And Beyond)

This outlook is being written a good 45 days later than when “What to Expect in 2013…” was written over a year ago. It is amazing how much can happen in that short time frame and can influence one’s view of the next year. If I let another 45 days pass I am sure there would be some things that would change. I believe the risks are to the upside on more positive news on the economy but at some point that news could affect Fed action.  Much of what could happen this coming year is influenced by what is going on in the energy sector. Middle East economies, of course, but also inflation, GDP growth, and geopolitical events will affect markets and the US economy specifically. These points will become clear as I spell out some of my expectations. Understand that these expectations follow the Byron Wien formula where I believe there is greater than a 50% chance they happen when the rest of the world may not agree. The “Expectations” are designed to stimulate thought. Some of them can relate directly to the securities markets, but some do not, and this year, a little whimsy. Hopefully, you can figure out which one that is. Let’s begin:

1. After printing two 4% GDP quarters in 2013 and seeing a 1 percentage point drop in the unemployment rate, there is finally some recognition that, maybe, the Fed’s actions really did produce some stimulus. This could lead to self-sustaining growth in the US economy in 2014 with at least one more 4% print this year. Less noise from the crazies in Washington adds to business confidence and, ultimately, capital expenditures.
2. Economic growth and job creation become more apparent with forecasts for a decline in the unemployment rate possibly approaching 6% before the end of the year. The Federal Reserve begins making noise about speeding up tapering and hints at reducing the time the Funds rate would remain anchored at its current level. This is in spite of limited evidence, at least early in the year, that the inflation rate is approaching the targeted 2% level. This ultimately has a dampening effect on the markets.
3. We begin seeing some academic work and, of course, the pundits talking about an acceleration of the technological revolution making the case that low inflation or maybe even some signs of deflation are actually a good thing in this technologically driven environment. The low inflation picture is reinforced at the headline level by energy supplies expanding within the US, in the Middle East from Iraq and, ultimately, Iran. As other countries embrace fracking the potential for even more supply keeps downside pressure on energy prices.
4. The negative elements on inflation, which are not sufficient to cause major concerns, come via erratic supply in soft commodities from continuation of drought in certain areas combined with weather abnormalities which, more and more, are blamed on climate change. As we get into the latter part of the year, the improving developed market economies combined with growth in Asia put some upward pressure on hard commodities. Investors must make the decision to invest in the extraction companies that have suffered from low prices or directly into the commodities themselves.
5. The positive change in US trade balances from lower imports of energy combined with rising energy exports adds more than a percentage point to US GDP and reinforces the case for a strong dollar relative to almost every other currency except possibly the Chinese yuan. Asia shows growing signs of a currency war fueled by the impact of further weakening of the Japanese yen beginning to very seriously affect the export trade of its Asian competitors.  While this has a tendency to push up inflation rates in many of the Asian countries, the developed markets benefit from lower prices on many imported goods further softening their inflation rates.
6. The impact of the currency wars raises questions about the stability of some of the emerging markets, particularly in Asia. There are also concerns about the pace of wage increases in these heretofore attractive locations for outsourcing. Manufacturing and some service corporations begin making different strategic decisions on the best places to locate manufacturing and processing centers.  The decisions are reinforced by a growing belief that technological advances will continue to allow capital to substitute for labor, or at least keep pressure on wages. More business activities find their way back into the developed countries of the world. China moves cautiously in the same direction, taking advantage of its own technological progress. It begins marketing itself as a technological leader as opposed to a low-cost labor market. This is not easy as China, at the same time, continues to push toward a more consumer-oriented society. Incomes have to rise and, politically, the population needs to be kept content. It will not be a smooth year for China.
7. Coming elections in India point to a possible loss of leadership for the Congress party. Combined with continued economic difficulties and some strife associated with the potential leadership change, the country moves further down the path of being even less attractive for foreign direct investment. It loses another year to the relative growth of its Asian neighbors and finds itself participating in the currency wars as a possible way to salvage elements of growth.
8. With the exception of Chile, Colombia, Mexico and Panama, the rest of Central and South America flounders. The US begins to pay more attention to its southern neighbors. Out of desperation, Argentina reaches a settlement on its outstanding debt and begins a focus on building its energy sector with some help from outside sources. A Menem-like regime change becomes a more likely political outcome.
9. The changing energy picture outside the Middle East, combined with likely increased production out of Iraq and, ultimately, Iran, result in a change in the relative importance of Saudi Arabia and, to some extent, Israel. This could produce some positive movement in the Palestinian situation, and some changes in the relationships of Saudi Arabia with the rest of the Middle East and possibly Asia as the US becomes an even smaller market for its oil and an export competitor. On the other hand it raises the risk of some turmoil in the region as the power picture changes and attempts are made to preserve the old order in  a possibly military fashion.
10. The fading newspaper industry surprises the street with its earnings in the early part of the year and benefits from contentious congressional races in the third and fourth quarters as well. The advertising related to Academy Award nominations and ultimately selections reaches new heights in print and social media. Studios advertise some small (but not cheap) movies to extremes to compete with some very high quality films and performances. We actually walked out of a couple of the most highly advertised ones. Aren’t two-page spreads a little extreme? Unfortunately, the correlation between the advertising and the nominations and awards becomes very direct leaving it up to the audiences to hopefully, make their own decisions after the fact. The quality and audience continue to rise for television productions and the associated delivery mechanisms for these performances leaving 3-D sequels and prequels to the movie industry. Can’t wait for “Inside Llewyn Davis Today–in IMax.”

So what does this all mean for the markets? I wish I knew. History says that the kind of equity market we had in the US in 2013 is usually followed by a decent year.  I don’t think it is that simple. We could see some re-allocation by institutions whose US equity portfolios have been pushed above their target percentages. At the same time, if we are beginning to return to a more normal relationship between earnings yields and fixed income yields, traditional debt doesn’t look that attractive. It may mean that markets outside the US are more attractive–maybe Europe and maybe some of the emerging markets if the currency is hedged out. There are some risk elements in the geopolitical situation. I think we will have to look harder for returns this year and the risks are high enough to look for some less correlated investments. I wouldn’t reduce my equity exposure, but I might change the mix.

We’ll have to see if another 45 days sets us up for totally different surprises. If nothing else I hope this has provided some food for thought.

I have some longer term expectations including a carryover from past years which, one of these days, will actually come to pass. I include these as additional repast for the brain. As has been the case since the millennium, the year will likely be more interesting than we anticipated.

1. Contrary to normally quiet years during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes further steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring more immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service operations.
3. Moore’s Law, driven primarily by Intel driving down the nanometer scale and introducing other innovations,  continues to march on. The use of Big Data becomes ubiquitous. This produces technological advances that enhance the opportunities in health care, manufacturing, extractive industries, media and services beyond even the imagination of some of the best speculative fiction writers. These advances, on balance, are positive but continue to raise concerns about the environment and quality of life and opportunity for those at the lower end of the economic and educational spectrum.
4. Breakthroughs in stem cell research particularly led by work coming out of the New York Stem Cell Foundation change the nature of disease management and eradication and move general therapeutic advances away from animal models to direct testing on human cells. Targeted therapeutics driven by DNA analyses tied to narrower classes of patient recipients change the nature of drug and health delivery. It becomes apparent that the US FDA model is slowing the pace of US therapeutics development by the cost and time required to bring solutions to market. Much as financial services regulation was geared to the benefit of larger entities, it becomes clear that therapeutics development has been on the the same path. Change occurs in response to other countries moving more rapidly in bringing solutions to market.
5. Away from continual ups and downs in financial assets as the world works its way through the hangover from the 2008-2012 financial crises, the general march of human progress is positive. I hope to be around to observe it. Maybe the breakthroughs suggested in the previous expectation will help that.

Joining the Chorus–Sequestration: Any Fiscal Austerity Now is a Mistake

Everyone with a brain has commented on Sequestration and what should be done instead–some with sound logic and facts and data to support their view. The most recent brought to my attention in a comment by Tom Gallagher, via RenMac, is an analysis of the impact of austerity in Euroland, “Panic-Driven Austerity in the Eurozone and its Implications“.

The best complete article on this topic and what else needs to be fixed in America–actually in Washington–was Fareed Zakaria’s in a recent issue of World Affairs, “Can America Be Fixed–The New Crisis of Democracy.”  It details the ills of the US and spells out some solutions. The solutions were summed up in a sentence in his second paragraph of the 10-page article: “The focus in Washington is on taxing and cutting. It should be on reforming and investing.”  In the same issue, Roger Altman, who would have been my candidate for Treasury Secretary,  wrote a rather optimistic article, “The Fall and Rise of the West.” asserting his view that the West would emerge stronger from this financial crisis. I think Altman is right if Zakaria’s prescriptions are followed. I would highly recommend both of these articles as well as the fall, 2012, issue of the World Policy Journal, which devoted the whole journal to the subject of Democracy. If you only have time for one article it should be Zakaria’s–an elegant and fairly complete synopsis of how we got to this point and what should happen to get us past it. Zakaria provides some very appropriate solutions, which unfortunately require our politicians, and to some extent, we, the people, to act responsibly. Unfortunately, there is no evidence of this happening either from the Administration or Congress or us. And, now that it looks like it will happen, Sequestration is getting a “…it’s not so bad…” rationalization from some who should know better.

I am hoping for a miracle, I guess–just a simple agreement to postpone this nonsense and any short-term series of compromises and truly to focus on a long-term well-vetted plan,with a clear understanding of timing and consequences, that results in “…reforming and investing.” I think the markets, companies and individuals would react well to this. There isn’t much substantive to add to what others have said. I simply urge you to click on the links above to understand a bit more of the madness that is rampant in Washington and its implications.

The Debt Ceiling, Long Term Deficit Reduction and Insanity

Having barely survived the Fiscal Cliff, we now face the prospect of the crazies using the debt ceiling as a second attempt to derail this recovering economy. Everyone acknowledges that we have a growing debt problem which must be solved. That is a long term issue and should be dealt with accordingly, as opposed to immediate austerity in the face of a fragile but growing US economy. Even the IMF has finally concluded that austerity at the wrong time and at the wrong level is not the answer.  Restoring the Payroll Tax is already a mistake. This is not the time to reduce any flows into this economy.  It is time to sit down and develop a long term plan to reduce the rate of debt accumulation via serious review of federal spending across the board, entitlement reform, tax policy and, at the same time, redirection of spending and policy toward areas that will produce long term economic growth and jobs in this country and the world. We know the levers that will produce growth–education, technology, infrastructure, energy independence, immigration.

We do run the risk of waking up one day and finding the global financial markets unwilling to finance the debt we continue to incur.  However, if we develop a serious long-term plan that begins to go into effect well before this administration is out of office, while still maintaining a growth path, the financial markets will likely be very supportive. Companies and individuals just need to know the rules and see an economy with opportunity. While it was a rather optimistic view, the forecast I made in December does provide at least a vision of what could begin to happen this year. Look at how global equity markets, including our own, have reacted to what was a modest resolution of the fiscal cliff. I would predict that if the debt ceiling increase is accompanied by the elements of austerity that the chief crazy, Mitch McConnell, wants to put in place immediately, financial markets will reverse in anticipation of a major slowdown in growth domestically with an impact on global economies as well.

Where are the folks that are prepared to have the discussions in meetings among disparate parties as opposed to fighting their battles in the media? This includes both sides of the aisle as well as the Executive Branch. We have a real opportunity to get this right. Let’s hope we don’t blow it.

The Fiscal Cliff, Long Term Deficit Reduction and Instant Gratification

Well, there was a form of Fiscal Cliff Resolution which appeared to make no one happy except maybe real people who got a little more certainty about how they need to handle their finances.  There seems to be general disappointment that the long term deficit problem was not dealt with.  Let’s state the obvious: the long term deficit problem is just that–a long term problem. Instant gratification is not required–except maybe for the securities markets. The short term problem, even for the securities markets and certainly for the commonweal, is maintaining the pace of a recovery that remains fragile. Why would any leader want to truly deal with a long term problem with a lame-duck Congress, particularly when the incoming Congress is modestly more in his camp? I would posit that he may not even want to deal with the long-term problems with this Congress if he has any belief that the 2014 elections could swing things even more his way as Congress continues to look political as opposed to statesman-like.

Right now, we need to deal with the short-term issues of maintaining this recovery. Some of the compromises made to get past the Cliff didn’t do that–the Payroll tax restoration being a big one.  No doubt there will be more compromises to get past the debt ceiling issues. However, I do believe it is becoming more difficult for the majority in the House to continue to hold a gun to this economic recovery. The majority in the Senate and the minority in the House need to do their part as well. In addition, the ratings agencies should also stop looking for instant gratification. The long term deficit problem must get dealt with, including entitlement reform. It will get dealt with because it has to and it can be done. If that takes two years, during which we continue to see a reasonable economic recovery, I don’t think that’s a problem. Maybe  is pays to take another look at what could be happening if we keep eliminating uncertainty and maintain this recovery.

“Miracle at Philadelphia”–The dissent, compromise and grace that created the Constitution of the United States and moved the country from a Federation to a Nation.

I recently read the late Catherine Drinker Bowen’s, “Miracle at Philadelphia,” the story of the 5 months of the Constitutional Convention in 1787 that created the Constitution of the United States. The book was published in 1966, but has so much relevance in so many ways to where we are in this country today.  The book, which Bowen acknowledged owes much to James Madison’s detailed daily diaries, goes through the intense discussions and arguments that resulted in the Seven Article, 4,450 word Constitution. It took two years for the 13 states to ratify the Constitution and another two years before the Bill of Rights, the first ten amendments, were passed. The book is fascinating reading. It is not my intent to recreate what Bowen wrote. I would urge everyone to read the book. It is not easy to find, although it ranks number 54 among all books in terms of presence in the most US libraries.

The significance of the book is the detailed descriptions of the back and forth that clearly, in a miraculous fashion, resulted in a Constitution that we have come to believe was created by an all-knowing group of wise men who could do no wrong.  They could do wrong, and they disagreed violently at times, in private. The objective though was “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the blessings of Liberty to ourselves and our Posterity…”

What comes across in the book, in addition to the ultimate intelligence, civility and seriousness of the attendees, is the continued reference at tense times to the importance of Happiness and Tranquility, as an expected outcome of the proceedings. There were references back to the Declaration of Independence and “the Pursuit of Happiness.” There was the letter to the Federation’s Congress, which had to approve sending the Constitution for ratification by the States with the appeal “That [the Constitution] may promote the lasting welfare of that country so dear to us all, and secure her freedom and happiness, is our most ardent wish.” This letter was signed by George Washington who opened and closed the convention.

We seem to have moved a long way from those original intents and the process that delivered them.  We are an unhappy country. I certainly don’t hear politicians talking about happiness and tranquility as objectives. Nor is there any desire to seek elements of compromise and do what is right for the country. This ranges from Nancy Pelosi’s statement to a freshman congressman that “we always vote as a bloc,” to Mitch McConnell’s ..”the single most important thing we want to achieve is for President Obama to be a one-term president.” It would be useful if every policy maker in the country read this book before making their next decision on what they say to their constituents and what goals they try to achieve in carrying out their responsibilities.

Let me provide some of the highlights from the book.

To get from a gathering of state representatives to a Constitution of the people required bringing together diverse interests of agriculture and mercantilism, small and large states in size and population, the concept of states’ rights with a national government and the issue of slavery. Slavery was the one kicked down the road with the only agreement that the importation of slaves would stop in 1808 and that a slave would account for 3/5 of a person. The convention started with the establishment of a Rules Committee which came back to the body quickly with a mode of conduct and resolution. Importantly, it included a decision that all deliberations would remain within the convention until resolution. It included general rules on civility of conduct–hearing each other out–, and an ability to reconsider matters that had already passed until agreement was ultimately reached with no recording of the Yeas and Nays that might fix one into a binding position. Later in the proceedings, there was the Great Compromise which resulted in the two chambers of Congress–one determined by population and the other by equal representation of each state. There was the clause in Article VI “…but no religious Test shall ever be required as a Qualification to any Office or public Trust under the United States.” It was a six-day a week process for those 5 months producing a 23-Article treatise.

A final committee was created after the elements of the Constitution were clear–the Committee of Style. It had the responsibility of translating the treatise into the document  that would be presented to the people and the states. Five men, Dr. William Samuel Johnson (chairman), Alexander Hamilton, Gouverneur Morris, James Madison and Rufus King were given that responsibility. None of these men agreed with all the elements in the proposed Constitution, but they were selected because of their command of the language, their no-nonsense approach and their historical perspective. They stayed true to the agreements reached in the convention. With an enormous amount of wordsmithing and simplification, in four days the document was condensed from 23 Articles down to 7. It took into account earlier documents in the history of man including the Magna Carta and the Iroquois Nations’ constitution. At conclusion, the phrase, “We the People…” bothered some of the states’ rights folks, but is said to have ultimately become a rallying cry against the absolutist kings of Europe. And, not all present at the convention agreed with everything in the final document. Benjamin Franklin expressed it well: “ I confess that there are several parts of this constitution which I do not at present approve…But I am not sure that I will never approve them…Most men indeed as well as most sects in religion, think themselves in possession of all truth and that wherever others differ from them it is so far error…But though many private persons think almost as highly of their own infallibility as of that of their sect…In these sentiments, Sir, I agree to this Constitution with all its faults, if they are such.” He subsequently went on to say it astonished him how close the Constitution came to perfection, and later wrote to a friend, “I consent, Sir, to this Constitution because I expect no better and because I am not sure that it is not the best. The opinions I have had of its errors, I sacrifice to the public good. I have never whispered a syllable of them abroad. Within these walls they were born, and here they shall die.”  He was not alone in these sentiments. Some at the convention did not sign, 33-year old Edmund Randolph, governor of Virginia, being one. He had actually presented in the first days of the convention many of the major elements that ended up in the final document. Every state, excluding Rhode Island, which did not attend the convention, did have signators. Randolph did go on to indicate that he would not necessarily oppose the Constitution “without doors,” but simply wanted to be free to do his duty as determined by his future judgment. Franklin’s future judgment included many letters to his friends in Europe urging them to form a Union of the countries with a Constitution and governance similar to that created for the United States.  As usual, a little ahead of his time.

Well, how does this have relevance to today’s picture? As I stated earlier, I am not even sure Happiness comes up as a topic among our politicians these days. Civility, and compromise are also lacking from the picture.  It is not that there wasn’t passion back in the 18th century with strong positions held. But what appears to have been less present –not absent totally–back then, was the personal animosity, the unwillingness to compromise and the disregard for ultimately doing what was right for the country and the people in a timeframe that mattered. We have moved so far away from the process and actions that led to the formation of this country and its success over the last two+ centuries. A good task for all of us would be to understand the steps taken at the beginning that should be the foundation of today’s behavior. This  book, “Miracle at Philadelphia,” could provide a perspective for all of us on how we should be acting today. Find it and read it, please.

The Facebook IPO: In my view it was quite successful

I don’t totally get the Sturm und Drang around the Facebook IPO.  There may prove to be some issues around disclosure, NASDAQ, stabilizing of price, and anything else someone wants to raise to support their own agenda.  However, I said yesterday on Bloomberg Hays Advantage that from the company’s point of view, this was a very successful IPO.  The company issued public stock against a set of governance issues that in many instances would not have allowed a “normal” company to face its shareholders with a straight face. The underwriting fees were at a discount to “normal” fees.  It basically got the near term high tick on the stock price. It was the third largest raise in the history of IPOs and put additional capital in the company’s coffers and provided more immediate liquidity for its private equity investors than one would ordinarily see on an initial offering. Even with the decline in the stock price, this company is being valued at around $60 Billion, significant multiples of revenues and earnings. Certainly, the senior executives are expecting to continue to build a company over a long time period and have the ability to control that build, given the degrees of freedom to do so without interference from their shareholders. Today’s price of the stock is of less concern to them.  The public shareholders can only vote by buying more stock or selling it. They have very limited say in the governance of the company. The 26 pages of risk factors in the S-1, the filing statement, clearly spelled that out.

From the underwriters’ perspective it doesn’t look as good.  Underwriting does involve taking risk. There is always an attempt by the underwriters to leave something on the table. It takes out a fair amount of their risk and makes room to exercise the “shoe” to sell more stock (and generate more fees) above the original offering amount. The demand appeared to be there, but with some pushing from the company, I am sure, the price and amount were raised, as was the risk.  The world of IPOs has changed though, given the increase in high-frequency trading and the increasing presence of hedge funds in the IPO process. While most companies would prefer to see their stock go into the hands of long-term investors, the underwriters have a client constituency that, implied or otherwise, expects to get significant participation in a hot IPO because of all the other business they do with the investment bank. In this instance there was also a decision made to put more of this stock into the hands of a less-informed individual investor. I would like to know how many of those individual investors actually read the S-1 before they made their decision to buy the stock.

In addition, the concept of being able to “stabilize” the price movements and trading action around an offering is almost non-existent. The dollars available in the market place to influence price movement overwhelm any amount of capital that the underwriters can put to work. In this instance, even the trading systems, as robust as they are, were not adequate to handle the 80 million shares that ultimately traded in the first thirty seconds after the stock was finally opened, much less the 570 million shares traded in the full day. This was a huge offering of shares of a company operating in a mode of creative destruction of legacy businesses with the volatility associated with that. Exciting, newsworthy, with more news to come over many years. I am most excited about the wealth creation that did occur for those who put their capital and their energy at risk in the creation and early funding of the company. Much of that capital will likely make its way back into the creation of other companies that will take advantage of the phenomena of increased processing speeds and the power of information control put into the hands of individuals. Very, very exciting!

The Latest Jobs Report. Lots of Negativity Which I Don’t Buy

I recently joined Patrick O’Keefe, director of economic research at JH Cohn LLP to discuss the April 2012 jobs report. Listen to my talk with Bloomberg’s Kathleen Hays and Vonnie Quinn on “The Hays Advantage” on Bloomberg Radio on May 4, 2012.

Download the podcast

Labor Market, Stock Market, The Economy, and Why the JOLTS Report is Both Good and Problematic

The labor market is fine, but there are some concerns (and opportunities). Listen to the podcast of a conversation with Bloomberg’s Kathleen Hays and Vonnie Quinn of “The Hays Advantage” on Bloomberg Radio from April 10, 2012. These two posts and a link will also provide some background: http://bit.ly/wfpykq , bit.ly/zAEswR , bit.ly/H9EBHo .

Download the podcast

The Employment Situation is Quite Dynamic–2 Million quit their jobs in February

The February employment numbers are showing an encouraging trend that began last year. I expect this to continue with some ups and downs. It is supporting one of the surprises in “What Could Happen in 2012 (and beyond).”  Net, net, 227,000 jobs were added in February, and with a half million increase in new job seekers, the unemployment rate stayed at 8.3%. I am not sure everyone understands the components that go into that net number which reflect a very dynamic labor situation in the United States. The net number of new jobs is a result of about 4 million people being hired every month while roughly the same number leave their jobs. What is interesting is the make-up of those numbers. Using the latest available data (December 2011) here are some interesting facts that, if nothing else, will provide some cocktail conversation at your next party (don’t invite me, please):

In December 2011, 4.0+ million people were hired. 3.9 million were separated. Only 1.9- million were actually laid off. 1.9+ million quit, typically to take other jobs, and 330 thousand left for retirement or other personal reasons. At the end of the month there were 3.4 million job openings remaining to be filled.  This is up from 2.9 million in December 2010.

This kind of dynamic goes on every month in the US. If we look at some of the peak numbers prior to the recession, in 2006, average monthly hires were 5.4 million; layoffs were only 1.8 million; other separations were 0.4 million; Quits were a very large 3.0 million. The average number of unfilled jobs at the end of each month was 4.5+ million. Construction employment also peaked in that year averaging 7.7 million. In December 2011, it was 5.5 million.

	December 2011	2006 monthly average
Hires	4.0 million	5.4 million
Total Separations	3.9	5.2
Layoffs	1.9	1.8
Other Separations	0.3	0.4
Quits	1.9	3.0
Net Jobs Added	0.227	0.155
Job Openings	3.4	4.5
Construction Employment	5.5 million	7.7 million
Unemployment Rate	8.5%	4.5%

There are many interesting statistics that tell a story of a fairly dynamic labor picture in the US. One of the most worrisome numbers, in my view, is Job Openings. In such a dynamic labor force there will always be substantial unfilled jobs. While geography, timing and Quits play a role, it is an indication that the skill sets don’t match up with the requirements.  Companies find much of their labor requirements from those who already have jobs and skills. It is great for those with the acquired skills who are improving themselves, but, on balance, it raises labor costs and does nothing about those who want jobs who don’t have the appropriate skills. I think corporations will have to fill the training role–and some are. Clearly, our educational system isn’t doing it, although the unemployment rate for those with a college degree is only 4.2%. The military can also fill this role as an important plus for those who do choose to serve. By the way, the unemployment rate for all veterans is 7% while non-veterans are at 8.6%.  Among male veterans/non-veterans it is 7.2% and 9.3% respectively.  I could go on with these little tidbits. For those who are interested just visit www.bls.gov. I find it much more interesting than browsing Facebook. It is tougher working it in to a cocktail conversation, though. Seems to have less impact than talking horoscopes or The Voice.

Eight Days in Cuba—Things are Changing Right Now. The direction of change is not totally clear however.

I recently was part of a humanitarian group originating in Key West that visited Santiago de Cuba and Havana. We brought medical supplies and some writing materials to two clinics run by The Sisters of Charity of St. Vincent de Paul. We did have some free time over the 8 days and were able to experience the people, the nightlife and the culture. The participants in the arts, science, education and other fields are true professionals, having been selected in a classic communist manner at an early age to pursue a path. Although I must say the music and dancing on the street were amazing as well. And the old cars are ever present.

We also heard a variety of lectures on history, art, religion, restoration, and “la vida cotidiana.” Most of the lecturers as well as our quite knowledgeable guide, a former history teacher, were born after the 1959 revolution. They have an interesting historical view extending back to 1492, which doesn’t necessarily correspond to the history we in the United States were taught, read about or actually experienced.

While 8 days in a country combined with some reading does not make one an expert I do have some observations. Let’s start with some facts and maybe a few anecdotal factoids:

Cuba, an island nation, 90 miles south of Key West, is about the size of Pennsylvania, 44,000 square miles. The population is about 11.2 million with Havana, the capital and largest city at 2.2 million. The primary sources of revenue would appear to be tourism, sugar, mineral exports and remittances from Cuban-Americans to family members.  About 70%, –a declining percentage–of the work force is employed by the State. The State also provides free medical care, a monthly food allowance (good for about two weeks of the month we were told), and free education. What did happen after the 1959 revolution were the creation of schools throughout the country and the development of a universal health care system. The literacy rate is stated at 99.8%. However, we did run into several members of that 0.2%. The country has the highest ratio of doctors to population in the world, although there is a real shortage of medical supplies and equipment. We were often asked on the street if we had any medicines or soap(!). We were also told that the Universal Health Care primarily applies to the military and the police with long waits and limited supplies for others. Not sure Michael Moore got the full story.

There is a dual currency system. Those employed by the state are paid in Cuban pesos (CUPs). It is not totally clear what the differences in compensation are within this part of the economy, but we were told that doctors are paid about 300 Cuban pesos bi-weekly. In the last 5 or 6 years certain Cubans have been able to start their own businesses, typically on the street or in their homes. Some of these are a part of the Cuban economy, but most are in some fashion related to what is called the CUC (“kook”) economy. A CUC is a unit of currency convertible into a similar unit of the US Dollar, although a 10% tax and a small fee apply. This makes a US Dollar worth about .87 CUC. If one is exchanging any other currency for CUCs there is no tax. The exchange rate between the CUP and the CUC is 24:1. As several Cubans told us, the closer one is to the CUC economy the better off one is, in spite of as much as a 50% tax on reported CUC revenues. Those receiving remittances from relatives in the States or elsewhere are even better off. The Financial Times recently reported that such remittances totaled $2 Billion last year. That is not surprising. According to the US Census there are 1.8 million individuals identified as of Cuban origin living in the US of which 1.2 million are in Florida. The current US administration is allowing unlimited travel by Cuban-Americans to visit relatives and unlimited remittances of funds. This compares to one trip per year and $1200 under the previous administration. Some of the current Republican candidates made noises about returning to the previous policies, but that did not go over too well with the community. We had different types of Cuban-Americans on our flight: some couples who go at least once a month to visit relatives bringing gifts and money; some individuals doing the same but with some specific business ideas in mind; a man who was making his first trip in 43 years to visit his dying godfather.  On the Cuban side there are changes as well. There is now some house trading allowed. Cubans can own their own homes (not the land), many of which were given to them after 1959 or were built by the Russians during their 30 years of support. Available funds can be used to build or improve a home or be used as a part of the swap from a smaller home to a bigger one. Funds can also be used to start or improve a business.  This participation in the CUC economy can make an enormous difference whether it is remittances or income. Let’s take the small example of our guide. Our trip was 8 days with about 20 people as a part of the group. The recommended “tip” was about 2 ½ CUCs per day per person. A guide could walk away with about 400 CUCs for the 8 days and repeat that experience many times during the year. That compares to the doctor getting 7800 CUPs a year or only 325 CUCs at the 24:1 exchange rate. The buying power difference is huge over the course of a year. It is hard to see how this can last. Beyond the tips for the guides, all payments for food, lodging, souvenirs, artwork, etc., were in CUCs and the prices weren’t cheap. My biggest overpayment was for a 3 CUP bill with Che featured on the front. That cost me a CUC.

It is no wonder many of the doctors are happy to be lent out to other countries where there may be some income possibilities. Supposedly, there are 30,000 Cuban doctors in Venezuela now as part of an exchange for oil. Cuba imports about 100,000 barrels per day of high-sulfur oil from Venezuela. This supplements the 56,000 barrels per day produced domestically. This primarily goes to provide not-very-clean power for factories and the utilities.  This is tragic in a way. Cuba has reasonably high sun–DNI (Direct Normal Irradiance), as do most Caribbean islands, which makes solar power a real alternative. We saw a few solar panels out in the countryside, but no real significant use of solar for heating or electricity. Solar may not happen. There could be significant offshore oil and gas, maybe as much as 4.6 Billion barrels and 9.8 Trillion cubic feet respectively, according to the USGS. Apparently, Brazil and Spain are working with Cuba to explore these possibilities.

Wikipedia, provides a concise description of the country, its history, and its structure. I recommend it for those who are interested in learning more. While in Cuba, what was fascinating to me was the view of history held by those of the generations since the 1959 revolution. The view of history is not necessarily wrong, but like most histories, it extends from a very specific point of view.  That view is very much one of the US having an interest in controlling Cuba, extending from George Washington to the present. This view comes complete with quotes and the text of various laws and amendments over the years up to the present–the Platt Amendment seems to come up in most conversations. As the one older historian we heard from said, “It is easy to find in actions and words, proof that the US is not interested in Cuba being an independent country and is doing what it can to ultimately control it. This is reinforced daily. If we have too much rain or no rain the view is the US clearly must have done something to make that happen.”

I wanted to get some sense away from the dialogue of how pervasive this is. I bought three books (in Spanish) which I have been attempting to read: 1) Cuba y su Historia  2) Cuba-USA, Diez Tiempos de una Relación and 3) Obama y el Imperio. This last book purports to be a series of writings by Fidel Castro covering the period from May, 2008, to June, 2010.  These writings all reinforce what was coming from the mouths of almost all of those we encountered during the trip as expressed by the older historian we met. There is a general view that what happened in 1959 was the culmination of a Revolución (with a capital R) that began in 1868, with the true heroes being Cespedes, (not the ball-player who just signed with the A’s) and Marti. It took this long to establish true Independence because of the interference of the US–not much credit to Teddy Roosevelt or Generals Wood and Pershing at the turn of the last century.

All are hopeful that things are changing. It is not clear how quickly those changes will occur in the economy, the political structure and the daily lives of the people. As with many countries this year, there are changes in leadership occurring.  The first signs in Cuba are not encouraging. The Council of Ministers (31 individuals) has changed with the elimination of some of the more liberal members. Raúl Castro’s recent speeches have been somewhat hard-line. His primary speech in the Assembly focused on the US, corruption (with references to the US) and a reiteration of the importance of the Communist Party (about 800,000 members).  He may be catering to the “old white men” (a phrase from the historian about the leadership) in the Congress or he may be pulling back from some of the reforms. There has been an apparent tightening of security with some retentions and restrictions on gatherings. Something is happening. It may simply be a precaution during this period of transition.  It may be a policy shift. It may be some concern about the Pope’s visit in March.

Granted, Cuba is just another Caribbean island. And what happens there is unlikely to change the course of the world. It does have a long history with the US, though, and it is close.  The people, individually, are terrific. Some real talent exists, and maybe things can get better for them. It is worth taking a “humanitarian” trip to see for oneself. Be sure and bring soap.