An easy way to tell if innovation is real or fake

  • Does this really signal a growing economy?
  • Take note of this rule of thumb
  • Better than common sense
  • Nothing new about this
  • Tune in to Jim Rogers
  • Doesn’t make sense

When in Australia, your editor rarely, if ever, reads a newspaper.

If we want to see what they have to say at the Age, Sydney Morning Herald, Australian Financial Review, or the Australian, we’ll read it online.

But when we travel, we always grab one or two newspapers to read. It’s usually as an accompaniment to breakfast at the hotel.

Anyway, on arrival at our hotel in Annapolis, Maryland, we grabbed a copy of USA Today.

We’re glad we did; the headline on the front page of the business section announced, ‘More Americans Are Moonlighting’.

Hmmm, we wondered, what does that say about the current state of the US economy?

We’ll give you the background to the story, and our take on it, below. First…

Markets

Overnight, the Dow Jones Industrial Average fell 51.98 points, or 0.29%.

The S&P 500 index fell 6.48 points, for a 0.3% fall.

Meanwhile, in Europe the Euro Stoxx 50 index fell 16.47 points, or 0.54%. The FTSE 100 lost 0.94%, while Germany’s DAX index lost 0.73%.

In Asian markets, Japan’s Nikkei 225 index is up 23.88 points, or 0.14%. China’s CSI 300 is up 0.3%.

In Australia, the S&P/ASX 200 is up 22.02 points, or 0.41%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$50.16 per barrel. Brent crude is US$51.75 per barrel.

Gold is US$1,256.09 (AU$1,642.79) per troy ounce. Silver is US$17.49 (AU$22.88) per troy ounce.

The Aussie dollar is worth 76.47 US cents.

Does this really signal a growing economy?

Positivity (and negativity) are in the eye, mouth, and ear of the beholder.

You may look at something and note the positive. Your editor may look at the same thing, and note the negative.

To be honest, we can’t help it.

We have a reflexive, built-in reaction to anything we read in the press. We assume that everything the mainstream writes is junk.

So we read whatever they have to say, and take the view that they’ve got it wrong. We then leave it to the author to convince us that they’re right and we’re wrong.

Sadly, it’s not often that they convince us. That’s not being arrogant, it’s simply because mainstream journalists, especially financial journalists, don’t understand economics or how markets work.

They’ve spent years being brainwashed by economics lecturers and tutors who don’t understand economics or markets either. All they know is what they’ve read and learned from textbooks.

That means they think economics is all about fancy formulas and spreadsheets. In reality, economics is about the interaction of people. That’s something you can’t put into a spreadsheet.

So, what mainstream nonsense has polluted your editor’s eyes this morning?

USA Today reports:

Many Americans who struggled to find a job several years ago are now juggling two or three.

The number of multiple job holders hit an eight-year high in September as several forces reshape the labor market. Many workers are seeking extra income as wages are inching up. Job openings are near record levels. And the burgeoning gig economy is putting a premium on freelance work and short-term projects.

We will never claim to have our proverbial finger on the pulse when it comes to the latest fad words and phrases.

But we have to say, the term ‘gig economy’ is new to us.

From what we can gather, it’s the idea that a big percentage of the workforce is voluntarily choosing multiple part-time roles rather than one full-time role.

According to the report, 7.8 million of the US workforce have multiple jobs. That’s 5.2% of those employed.

The report suggests this is a positive sign. USA Today quotes Mark Zandi at Moodys. He says the number of multi job holders reflects a ‘tight labor market.

Amy Glaser, from Adecco Staffing says that:

We are seeing an uptick in available part-time positions in general, likely due to the need to get additional staff on board, even if (job candidates) can’t make a full-time commitment.

It’s a sign, we’re led to believe, of a stronger and better US economy.

Maybe that’s true. But as you can guess, we’re not convinced. We see other factors at play. We don’t see a stronger economy; we see inflation.

We’ll explain why and how in a moment. But, though the USA Today article tries to paint a glowing picture of the economy, even it can’t ignore the negative side of the story.

However, in typical mainstream fashion, it has ‘buried the lead’, by only acknowledging an alternate reason for multi-jobbers at the end of the article.

It notes:

At the same time, some Americans are working multiple part-time gigs because they have no choice. Nearly 6 million such workers would prefer full-time jobs…

And this:

Others have shied away from hiring full-time workers to side-step requirements to provide health care coverage under the Affordable Care Act.

And perhaps the biggest giveaway:

And some full-time workers are taking on part-time gigs because their weekly income has fallen, says Tom Gimbel, CEO of LaSalle network, a Chicago staffing firm.

Ah, Mr Gimbel, we think you’ve hit the nail on the head.

There is a simple reason for all of this. It’s inflation.

Most folks misunderstand inflation. They believe inflation is just rising prices. But that’s not it.

Inflation is the printing of money by central banks. It can also be the creation of credit by retail banks…especially in a low interest rate environment.

The manifestation of these policies then have various impacts within an economy. One of those can be higher prices. But, it can also be lower wages.

How? Inflation creates what the Austrian School of Economics calls malinvestments. That means, cheap money results in businesses making decisions and taking risks that they otherwise wouldn’t in a normal interest rate environment.

Businesses may expand and make new investments in their business. Part of that expansion could involve hiring new staff. But just because the business is hiring new staff, it doesn’t mean they’re offering top-dollar wages.

Because the business expansion is marginal, the business may not be able to afford to pay high wages. Furthermore, the expansion by one business may have a negative effect on other businesses.

The increased competition may harm another business’s profitability, causing it to cut employee hours, or cut overtime, or cut wages.

Now, you may say, isn’t competition good for the economy? Yes, it is. But only a free market can provide genuine competition. Money printing and low interest rates are creating false signals in the economy, encouraging businesses to expand when the real economics of the business would suggest they shouldn’t.

The way we see it is that the increase in the so-called ‘gig economy’ is really a hollowing out of the US economy.

Central banks and governments can’t manipulate an economy without it having negative effects on the economy. The ‘gig economy’ is one of those negative effects.

And our bet is in the weeks and months ahead you’ll see further evidence of the hollowing out of the US economy.

Take note of this rule of thumb

Some folks will say that the ‘gig economy’ is an innovation of the free market. They’ll say that it’s an evolution of other innovations such as the ‘sharing economy’.

(Note: the so-called ‘sharing economy’ encompasses businesses such as AirBnB and Uber, where people rent their homes out to others for limited periods, or drive their own car in a taxi-style ‘ride sharing’ service.)

However, we have a simple rule of thumb to determine whether something is a genuine innovation or whether something is just a reaction to government meddling.

The rule of thumb works like this: Does the ‘innovation’ result in you doing more or less work?

Take self-service checkouts at the supermarket. Is that a free market innovation? You could argue that. But how does this innovation work? That’s right, instead of a checkout person scanning and packing your groceries, you have to do it.

What’s more, it doesn’t cost you any less. You pay the same for your goods as you’d pay if the checkout person did it.

In this case, the innovation is a response to government labour laws. Namely, minimum wages and public holiday loading.

Another example is the demise of the petrol station attendants who used to fill your car with petrol. They’d check your water and oil, and sometimes your tyre pressure while they were at it.

Those jobs mostly don’t exist anymore. Instead, you have to put petrol in your car yourself. You have to check your own oil and water and tyre pressure.

Again, blame government meddling, and labour laws.

The same goes for porters at airports, and in Australia, a lack of service in restaurants and retail stores.

You have to carry your own bags, get your own food at the counter, and good luck finding someone in Myer or David Jones to help you find what you want.

So, there’s your simple rule of thumb. If the ‘innovation’ results in you doing more, then it probably isn’t a real innovation.

By the same method, if someone has to take on two jobs rather than one in order to meet their living expenses, it’s not because of some baloney (ed note: when in Rome) ‘gig economy’. It’s because of central bank and government meddling, which has led to inflation and the devaluation of wages and living standards.

Simple.

Better than common sense

Back to the markets. What’s one of the most common, and arguably over-used phrases, in the stock market?

It’s ‘buy low and sell high’.

Well, that may sound like good common sense. But what about the idea of ‘buying high and selling higher’?

To our way of thinking, that’s common sense too.

Well, as you’ll see in our special video series from the Time Trader team, they’ll show you that not only is it common sense, but it’s the only way you should approach active investing.

Watch the video now and see how mastering a fundamentally different way of thinking could supercharge your ability to find winning stocks…and determine the way to trade them.

To watch the video series, go here.

Nothing new about this

We continue to work our way through Jim Rogers’ written works. We began reading Hot Commodities on our flight from New York today.

In the introduction to that book, and in his previous book, Mr Rogers mentions the nonsense surrounding the emergence of the ‘New Economy’ during the dot-com boom of the late 1990s.

His comments about that are relevant to the so-called ‘gig economy’. As Rogers writes:

Whenever someone claims that investing has become different this time around, I grab my money and run. The only thing I could determine that was “new” about the New Economy was that it seemed to be a place where companies valued in zillions by Wall Street weren’t required to make a profit. That surely defied common sense, never mind economics and history. Corporate earnings could never justify those share prices. There was certainly nothing new under the sun about losing money — or your mind — in the middle of widespread market hysteria.

When we read how it’s a good thing that folks are taking on second and third jobs in order to make ends meet, we just don’t believe it.

To us, the ‘gig economy’ is just another sign that global growth, especially US economic growth, is in big trouble.

Tune in to Jim Rogers

Speaking of Jim Rogers, remember that you can watch Jim Rogers’ presentation at our Great Repression conference from the comfort of your own home.

Not only that, but you’ll see the one-on-one conversation between colleague, Greg Canavan and Mr Rogers.

Plus, you’ll get to see something that even the conference goers won’t get to see on the day ­— an after-presentation interview that I’ll conduct with Jim Rogers.

I’ll ask him about his investing experiences, how his globe-trotting travels have influenced his investing, and what opportunities he sees in the markets today.

To find out how to watch the Great Repression conference from home on your PC, tablet computer, or other mobile device, go here.

Doesn’t make sense

More from USA Today, under the interesting headline of ‘8 companies about to lose gobs of money’. We’ll assume that ‘gobs’ is a lot.

And that appears so:

Investors aren’t expecting to see any profit growth during the just-kicked-off earnings season. Some companies, though, might deliver something even worse than no growth: whopping losses.

There are eight companies in the Standard & Poor’s 500 index, including integrated energy explorers ConocoPhillips and Hess as well as tax-preparation firm H&R Block that are expected to have lost $100 million or more during the third quarter, according to a USA Today analysis of data from S&P Global Market Intelligence.

This is what we mean about inflation and the false signals about the economy created by the US Federal Reserve and low interest rates.

If the economy really was booming, we doubt if these big companies would record multi-hundred million dollar losses.

And we doubt if investors would predict no earnings growth. It just doesn’t add up.

That’s why, despite the market’s certainty, we just don’t see the Fed raising interest rates this December — or anytime soon.

Memories

Reading USA Today always brings back a bit of nostalgia for your editor. We remember in the 1980s our American aunt (a Second World War GI war bride) would come back to England every couple of years to visit.

Each time, she would bring back a few copies of the National Enquirer tabloid, Boston Red Sox or Boston Celtics paraphernalia, and a couple of copies of USA Today.

Final word

The final word goes to USA Today:

In his incendiary and increasingly unhinged campaign for the presidency, Donald Trump has, by one count, disparaged more than 270 people, places and things.

His targets have included Mexican immigrants, Muslims, Fox News anchor Megyn Kelly, Iowans, Belgians, Republican House Speaker Paul Ryan, Republican Sen. John McCain, Pope Francis, German Chancellor Angela Merkel, China, Japan, The New York Times, fellow billionaire Mark Cuban and as of Sunday morning, Saturday Night Live.

Our biggest surprise is that the insult count only stretches to 270. If we didn’t know, we would have guessed over (well over) that number.

Back tomorrow.

Cheers,
Kris