TAKING STOCK: A contrarian opinion

Dear Mr. Berko:

Thanks to the money manager you recommended, I'm now comfortably retired. But our four married and college-educated children, who are in their late 30s and early 40s, are underemployed and earning just enough to stay afloat. They're treading water in dead-end jobs, waiting for an economic recovery to boost their employment prospects, and one of my boys is receiving food stamps. More Americans are working today; home prices seem to be improving; stock prices are higher; and corporations are reporting better numbers. What's missing?

JM, Cleveland

Dear JM:

This is a tough economy, and for many Americans, it's going to get worse, worser and worserer. During the Great Recession, the economy shed millions of middle-income jobs in construction and manufacturing, and during the recovery, they've been replaced by low-wage service-sector jobs. Flipping burgers at McDonald's, clerking at Target and stocking inventory at Wal-Mart are now career positions. So unless your kids have marketable skills, they'll be treading water and collecting food stamps for a long time.

Many observers suggest that the recovery has gone about as far as it can go, that continued economic growth will be spotty and that corporate earnings will begin to peak in the third quarter. Note that the leisure and hospitality industry (hotels and restaurants) accounted for 38 percent of the increase in payroll jobs in May, June and July, or nearly 228,000 of the approximately 607,000 new jobs. Payroll growth at restaurants and bars is usually a strong indicator of economic recovery, suggesting that consumers are showing confidence and likelier to spend their disposable income on nonessentials.

The Obama administration trumpets this as a positive sign for the economy. But Nobel Prize-winning economist Paul Krugman, Josh Bivens of the Economic Policy Institute, Brian Wesbury of First Trust and Martin Armstrong of Princeton Economics International (to name just a few) disagree. They are worried about economic stagnation. They note that the average weekly earnings in the leisure and hospitality industry are $351 a week, compared with $706 for private industry. And economists at UBS are concerned that employment in other low-wage sectors (health care, clerical, retail sales, maintenance, service, etc.) is increasing at three times the rate of employment in the high-wage sector. So how can a growing number of workers earning lower wages return the economy to the prosperity it enjoyed prior to the recession, which began in December 2007? The Bureau of Labor Statistics acknowledges that today's average worker earns less than he did in 2007. And recognizing that the consumer is responsible for 70 percent of the country's gross domestic product, it's almost a certainty that continuing lower disposable incomes can't support a consumer-driven recovery.

Yes, home prices have increased, but those increases are not the result of purchases by middle-class America. Rather, they reflect the purchases of hundreds of thousands of homes by large public corporations - such as Blackstone Group, Och-Ziff Capital Management Group and Bank of America - and thousands of smaller, nonpublic companies that are becoming landlords to a nation of renters. Less than 25 percent of the housing market is represented by first-time buyers. And many of these pilgrims have to empty their savings accounts to purchase new appliances, carpets, drapes, furniture, lawn and garden tools, and entertainment centers. That is a great temporary spurt for the economy, but the majority, with insufficient savings, are impelled to increase their credit card debts enormously. MasterCard (MA) is trading at a new high of $642 a share and will report record revenues and earnings for this year and perhaps 2014. Visa (V-$183) expects record growth in revenues and earnings this year and next, as does American Express (AXP-$77). It appears that growing consumer debt, not income, has been largely responsible for the rise in corporate revenues and earnings.

As long as the Federal Reserve continues to add $1 trillion a year to the economy, share prices will continue to rise. The economy, like a drug addict, has become addicted to the Fed's $85 billion monthly cash injection. Remove that stimulus from the economy and the withdrawal symptoms could be ugly.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Fri, Aug 16, 2013