The Shrinking Labor Pool

I have a lot on my mind today, and one article just isn’t gonna cut it.

I haven’t written a “Random Thoughts” style article in a while, so let’s go with that.

• A lot has been written about the strong trend higher for U.S. employment. The economy has been adding jobs at a robust pace, and the unemployment rate has fallen dramatically. Still, it’s not ideal because wages aren’t rising fast (the low-quality job complaint) and participation in the labor force continues to shrink as Americans just drop out.

The job quality issue is valid. But I’m not so sure the falling labor force participation rate is the canary in the coalmine that some people think it is. The fact is, the labor force participation rate among American men has been in a downtrend since the 1950s…

I don’t know what forces are driving this trend, but it’s undeniable. The participation rate obviously accelerated to the downside during and after the financial crisis. Some of this can be explained by the retiring baby boomers. As of 2014, 77% of people 65 years and older were not in the labor force.

I’m sure there are other reasons for the declining participation rate. And maybe they’ve changed over time. But people dropping out of the workforce is not a new indicator that something is horribly wrong with the U.S. economy. It’s been this way for a long time. 

If you want to know what the U.S. economy really needs, you have to look at Congress…

• Fed Chief Yellen was grilled at her latest testimony before Congress on why the Fed has so far failed to spur demand in the U.S. economy. And that’s not all. One congressman actually said to Yellen: “Nobody is suffering from unemployment like the African American community,” and he implored Yellen to put black unemployment “on the front burner” of the Fed’s priorities.

Another asked why no bank executives went to jail after the financial crisis…

You have to wonder what the hell the members of Congress are thinking. It seems that Congress has no idea what the Fed’s job actually is. The Fed has two mandates: 1. To insure price stability; and 2. To ensure full employment.

Monetary policy can only encourage conditions that spur demand, i.e. cheap money. Monetary policy cannot create demand. That’s Congress’ job — to pass fiscal measures that create jobs and improve business conditions. And it simply isn’t doing it.

The OECD cited fiscal policy as an obvious problem in a recent downgrade of U.S. GDP growth: “A stronger collective policy response is needed to strengthen demand… Monetary policy cannot work alone. Fiscal policy is now contractionary in many major economies.”

Former Fed chief Ben Bernanke recently said the same thing: “If fiscal policymakers took more of the responsibility for promoting economic recovery and job creation, monetary policy could be less aggressive.”

For starters, Congress should be looking at infrastructure. That’s an obvious place it needs to be sending money.

• I’m getting really worried about the Middle East. To me, this is the big threat to the global economy. Russia has entered Syria to support Assad. Iran also supports Assad. Turkey and Saudi Arabia are supporting Syrian rebels. And everybody is against ISIS.

But Iran and Saudi Arabia are not friends. Turkey and Russia are not friends. And you know that Russia is pissed at Saudi Arabia for crushing oil prices. If Saudi Arabia and Turkey actually send troops to Syria, look out. That sets up a direct confrontation between enemies. Assad and Iran have already told Saudi Arabia and Turkey not to get involved. The Saudis have responded by sending to troops to Turkey, preparation for what may be an outright invasion. 

Obviously, U.S. foreign policy in the Middle East has been a disaster under Obama. After the Bush administration took out Iraq’s Hussein, Obama helped take out Egypt’s Mubarak and opposed Syria’s Assad from the start. Those moves have directly led to a rise in fundamentalism and terrorism in the Middle East. 

To make matters worse, Obama’s foreign policy is allowing Russia’s president Putin to do basically whatever he wants. Maybe there’s a happy ending to all this, though I don’t know what it is.

I will say that buying U.S. oil stocks is a good idea right now. Any provocative moves from the Saudis and/or Turkey could send oil prices soaring. Putin may be sociopath and a thief, but he’s not stupid. I’m sure he knows that if he can draw the Saudis into Syria, oil prices will go higher. 

• It looks like I jumped the gun a bit when I recommended Twitter (NYSE: TWTR) back in December. However, the stock has been pretty strong over the last week, and it looks like it has put in an important bottom. I still say there’s value with Twitter stock, and eventually, management will figure out how to unlock it. 

As an investment strategy, I am focused on strong brands (Starbucks, Disney, Under Armour, etc.) right now for two reasons. First, I’m not seeing many solid trends right now. What’s the next big thing? What sectors are really outperforming? I don’t have a good answer for either question.

But I see that strong brands are getting stronger, satisfying their customers better, and just doing a better job all the way around. Also, I don’t think it’s a coincidence that these stocks are consumer focused. If there’s a pocket of strength in the U.S. economy, it’s consumer spending. 

• I want to be bullish on solar stocks. On a fundamental level, I am. Demand is strong, most solar companies execute well, and there is plenty of upside for solar installations. The problem is that solar stocks just can’t seem to get any momentum going. (The only notable exception has been First Solar (NASDAQ: FSLR). It’s the biggest and best, and that’s why my Wealth Advisory readers have ~30% gains on the stock.)

Still, the best play on solar might be to avoid utility stocks. I know, the utilities have done well this year, but I can’t get over how desperate they are to prevent people from putting solar panels on their homes.

Nevada and Virginia just passed laws making it harder to finance solar panels for your home. Oklahoma is trying to add new fees for solar. Florida, Georgia, Mississippi, and several other states have restrictions on solar deployment.

Why? Well, the more power people generate on their own, the less they buy from the power companies. No doubt U.S. utilities are well aware of what’s happened to German utility stocks, for instance…

It’s been a one-way ticket lower for many European utility stocks. And it’s because of increased solar installations. So check your portfolios — the recent rally for utilities is a good opportunity to sell them.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.