IceCap Asset Management March Perspectives: "I Need A Job"

From IceCap Asset Management March 2012:

Just as Mr. Greenspan had a conundrum, so too does Mr. Bernanke. And just as Mr. Greenspan completely misunderstood his conundrum and how to address it, so too does Mr. Bernanke.

Mr. Bernanke was very clear that his conundrum is the job market. The reason his brow has become furrowed is due to the eternal question of whether the lack of a strong recovery in jobs is cyclical or structural.

Now since most people live in the real World, this concept of cyclical versus structural falls on deaf ears. However, it’s actually a very important concept for you to understand and it could even save you a few bucks in your portfolio.

Cyclical simply means the regular ebbs and flows of a market. Think of your daily commute to work (if you have a job) – some days are longer, some are shorter but in general they are quite predictable.

Structural refers to the underlying foundation and how it supports the system. For example, what happens if suddenly in the middle of the night the bridge everyone uses collapses. Suddenly your commute has become a lot more complicated and will remain complicated for a long time.

In the real World, 6 million people had their bridge collapse and lost their jobs. Yet, in Mr. Bernanke’s World this cyclical inconvenience could easily be fixed simply by cutting interest rates to 0%, spending billions on “shovel ready” projects, and cutting taxes. Sadly, a funny thing didn’t happen - the usual boomerang (or cyclical) rebound in new jobs has not occurred, and for some strange reason the collapsed bridge hasn’t been replaced either.

The high levels of employment reached during the 2004-2007 period were achieved on the backs of the housing and debt bubbles. During that time, economic growth was boosted by 400% as a result of people taking equity out of their homes (mortgage equity withdrawal). Considering no one has any equity left in their homes to withdraw, economic growth and the jobs that come with it are going to have to find another adrenalin shot. If you know the next big thing – feel free to share it, the World needs it.

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