The lost generation

Small gain for stocks yesterday. Small loss for gold.

Pity the class of ’14!

News comes that students in the US are defaulting on their loans at an 11% rate. We’re surprised it isn’t higher.

Fewer than half of the people aged 18 to 29 have jobs. Even among college grads, nearly half are jobless or underemployed. Hardly surprising, then, that as a share of national income, young people have less than ever.

Over the last 14 years, the number of people aged 16 to 24, who have jobs has fallen by 18%.

For most people, the unemployment rate is back to acceptable levels. But only because so many people are no longer included in the labour force participation numbers.

Retiring baby boomers account for some of the drop off. But there are also millions of young people, who never seem to get a shot at gainful employment. Never getting on the ladder, they have no way to climb higher.

Your editor entered the labour force when he was 14. Thereafter, he was either in school or at work. He worked as an usher, a dishwasher, a carpenter’s helper, a mason, a painter, a truck driver, a teacher. It never took more than a day or two to find a job.

Times have changed. Now, it’s hard to get on the bottom rung.

And according to the Financial Times, things aren’t much better for those on the ladder. If they are lucky enough to get a foothold on the economic ladder, and eventually climb their way into the middle class, they will earn, on average, about as much as a middle class wage earner a half-century ago. How’s that for something to look forward to?

Even the Fed boom of the last six years has done nothing to help. According to yesterday’s paper, the US median household is $4,000 poorer than it was in 2008. Hey, where did all those trillions of bailouts and interest rate subsidies go? Not to the middle class, apparently.

Just take a look at the stores that are taking in revenue. Sales at LVMH, the luxury goods conglomerate, rose 9% in the first quarter. Tiffany said its sales too were 9% ahead of those the year before.

But Walmart – where the middle class shops – saw its revenues drop 5%. Sears said its sales fell 6.8%.

When the economy is weak, the middle class shifts its buying to the discount stores. Discount Tree, for example, is America’s leading cut-price retailer. It saw a 7.2% increase in sales in the first quarter of this year.

But what would you expect in an economy with a falling GDP? And look at the yield on ten-year Treasuries. We’ve seen a number of explanations for this apparent paradox. After all, the Fed is buying fewer bonds; you’d expect yields to rise as prices fall.

Instead, since the beginning of the year, yields have fallen from over 3% on 1st January to 2.45% last week. The most likely cause? The economy really is as weak as it appears. People are not borrowing, because they are fearful, and investors are putting their money in T-bonds, because the alternatives seem risky.

That doesn’t explain why stock prices are so high, of course. But we can’t explain everything in a single Daily Reckoning post. Our guess is that some investors are betting on higher stocks. Others are betting on the safety of bonds. Both will be proven wrong.

First, and most immediately, stocks will begin to stumble as the Fed cuts quantitative easing each month. Second, bonds will prove very unsafe. This will take time to show up, but it will probably happen before today’s ten-year bond matures.

In the meantime, the poor Class of ’14 had better get used to disappointment.

Since the feds took gold out of the currency – in 1968 – the typical man has lost about $3,000 of income every decade, when the numbers are adjusted for the ‘official’ inflation rate. Adjust them to a more realistic measure of inflation, and the loss has been closer to $5,000 a decade.

In today’s numbers, a young man begins work earning about $20,000 a year. Then, his income goes up as he matures, at a rate of about $750 per year, a little more than he loses to inflation, giving him about $40,000 per year when he is in his 50s.

So, young people, listen up. Get a job and get on the income ladder as soon as you can. Work hard. If all goes well, by the time you retire, you’ll have those student loans paid off!