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April 1, 2014

 

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John R. Deitrick, CFP� 
         
Featured Question of the Week...
Since my daughters are on Spring Break this week I will give you a week off as well.


Thought for the Week:
Do We Even Have An Unemployment Problem?

Synopsis

  • The Fed continues to defend their policy of artificially low interest rates due to weak employment and low inflation.
  • However, the Investment Committee argues that our labor market is not as weak as the Fed preaches, and we believe that wage increases are coming.
  • A rise in wages will ultimately inject inflation into our economy, and we strongly urge investors to consider inflation protection in their overall portfolio allocation.    

Labor Market Dynamics

 

The labor market is similar to any other market, and therefore, the laws of supply and demand govern it. For example, if the demand for workers far exceeds the available supply, then they can command more money from prospective employers.

 

We have witnessed this trend for years in high-tech sectors of our economy, where the demand for engineers and software developers has far exceeded the available supply of properly trained talent. Hence, the salaries for these skills have risen dramatically as these engineers have had the leverage to command more money for their much-needed services.

 

On the flip side, when the supply far exceeds the demand, workers grudgingly accept a lower wage given the lack of opportunities elsewhere. If an employer can have their pick from hundreds of qualified candidates for a single position, then they possess the leverage in the hiring process

.

Last week's Thought for the Week criticized the Fed's use of Quantitative Easing (QE) to try to repair the structural issues in unemployment in our country. The Investment Committee's argument was that the Fed lacked the necessary tools to fix the real issues that affect those individuals who have been out of work for more than six months.

 

Now let's spend some time discussing why we believe that unemployment is not as bad as the Fed has declared and why the implications of an improving labor market are critical to investors over the next several years.

 

What Really Matters

 

To begin, let's first revisit how unemployment is measured. Unemployment is broken into two parts: short-term and long-term. The threshold is 26 weeks, so if someone has been looking for a job for a year now, this individual would have been classified as "short-term" for the first 26 weeks, and after he/she would have been moved to the "long-term" bucket.

 

Total unemployment is calculated by adding short-term and long-term unemployment together. Currently short-term unemployment is at 4.2%, and long-term unemployment is 2.5%, which gives us total unemployment of 6.7% (4.2 + 2.5 = 6.7).

 

Long-term unemployment is currently well above its average of 1%, and although the Fed seems to dwell on this issue, the Investment Committee believes that long-term unemployment has little effect on our economy for three key reasons:

  1. They Can't Keep a Job: The data indicate that the long-term unemployed have a hard time finding a job but also keeping a job. Many of these workers end up unemployed within months of landing an opportunity for a variety of reasons (personality, poorly trained, etc).
  2. Most Won't Leave Their Field: Long-term unemployed appear to be unwilling to make big career changes and tend to prefer to search for employment in the fields that they know best.
  3. Retirement: Long-term unemployed typically end up leaving the workforce, and the most common reason is because they no longer want a job, suggesting the decision is permanent.

Simply put, the long-term unemployed have little effect on our economy because they do not exert upward pressure on wages. Since the demand for their skills is generally quite low, they are often succumbed to the "take it or leave it" attitude from prospective employers.

 

Short-term unemployment, on the other hand, is well below its historic average of 4.8%, and we believe that this subsector of unemployment is a more accurate measure of our labor market for two key reasons:

  1. There Aren't Many Out There: Short-term currently represents 63% of all unemployed, which is far below its historic average of 84%. Meaning, the supply of available labor is lower that normal, and those who are short-term unemployed are finding work rather quickly.
  2. Demand is High for the Highly Skilled: The unemployment rate for those with a college degree or better is 3.8% vs. 12% for those without one. Companies are desperate for talent as our economy continues to improve.
The grid below is a brief summary our analysis of the supply and demand of the two sub-sectors of unemployment:

 

The key takeaway here is that skilled employees are finding jobs quickly, and companies are now realizing that in order to attract talent and keep them, they must become more competitive in compensation.Furthermore, our strengthening labor market is driving wages higher for those individuals who spend the most money in our economy. As these wages rise, inflation will ultimately creep into our economy, and the Investment Committee believes that investors should prepare sooner rather than later.

 

NOTE: This type of inflation is referred to as "demand-pull" inflation because the demand driven by more dollars in consumers' wallets is chasing too few goods. Producers will notice this rise in demand and attempt to raise prices in order to profit.

 

The bottom line is that the Fed considers "full employment", or the employment level where inflation remains steady, to be achieved when the total unemployment rate is equal to 4.6%. While we agree that this figure most likely keeps inflation constant, we disagree that total unemployment gives an accurate representation of the labor market because only the short-term unemployed are able to push wages higher.

 

Implications for Investors

 

Traders that attempt to accurately time the arrival of inflation are either lucky or wrong. Inflation is a monetary phenomenon that is observed after its effects have been felt, and therefore, the Investment Committee recommends that investors prepare for rather than predict its arrival.

 

The DIAS Inflation Protection Portfolio (IPP) is one tool that investors can utilize to dampen the impact of inflation. The portfolio consists of equities that tend to outperform during times of inflation by maintaining positions in companies that have the power to pass along their cost increases to their customers. For example, think about how easily energy companies can raise their prices as the cost to extract oil and gas from the Earth continues to rise.

 

Given our view that inflation is coming in the near future, we strong urge those investors who are comfortable owning equities to consider a small allocation to an inflation-protected product of some kind. For those interested in IPP specifically, we recommend no more than 5 - 10% of your overall portfolio.

 

The bottom line is that we disagree with the Fed's assessment that unemployment is weak and inflation is low. Think about the last time you went grocery shopping and noticed that your bill was lower, or even the last time you paid a cable or utility bill and subsequently thought about what you plan to do with all of that money you are saving from lower bills. Sarcasm aside, the time to prepare for rising inflation is now.

 

 

This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.  All charts courtesy of Bloomberg.

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The specific products or services described in this section of the newsletter are neither offered through or recommended by Global Financial Private Capital, LLC., an SEC Registered Investment Adviser. 

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I hope you find this information adds value. If you would like to talk to John regarding these, or any other financial concerns, please feel free to call us at (614) 602-6506 and we will be happy to schedule a visit.
 
Have a great week!  Enjoy His gift of today!

 

Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital. 
 
 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP�, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame design) in the US., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

In This Issue
Featured Question of the Week!
Thought for the Week: Do We Even Have An Unemployment Problem?
Anyone Out There Looking for Help??



John R. Deitrick,

CFP�,

  Founder

 

Advanced Retirement Design, LLC
 
7263 Sawmill Rd. Suite 150
Dublin, OH 43016
 
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fax: 614-259-6094 
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