CW 376: The Real Unemployment Rate with Chris Mayer Managing Editor of ‘Capital & Crisis’ and Agora Financial

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Hey, it's my pleasure to welcome back Chris Mayer. He's been on the show before and you've benefited from some of his great insights. He's managing editor of Agora Financial and the editor of the newsletter Capital in Crisis. Chris, welcome. How are you?

I'm great. Thanks for having me on, Jason.

My pleasure. You're coming to us from Baltimore today.

I'm actually in my home office in Gaithersburg, Maryland, which is about 20 miles northwest of Washington D.C. uh huh.

Good stuff. So you're enjoying all this global warming this winter, huh?

That's right. We got snow on the ground right now.

I'm of course being completely sarcastic when I say that. Yeah. So good. Well, let's maybe jump in first. And I want to ask you, Chris, a little bit about unemployment. The book how to Lie with Statistics was probably invented after watching the government.

And the way people are just totally misled by these numbers. What are your thoughts?

Well, unemployment, the unemployment rate is a great illustration of that. The official numbers now show unemployment going below 7%, 6.5% or whatever it is. But if you look in those numbers a little bit, a couple things jump out at you. Really the big change is the drop in the labor force participation rate, which just means that there are a number of people who are willing and able to work but have just stopped looking and dropped out of the statistics. So that labor force participation rate was just to give you some numbers, it was around 66% in 2007 and now it's fallen to just under 63%. And to show you, maybe that doesn't sound like such a big, big difference, but we're back to where we were in 1978.

Well, so we basically have the Carter administration all over again.

We're back to where before women got involved in the workforce. So if you do the math, the true unemployment rate is probably somewhere around 11 or 12% if you assume a more normal labor force participation rate. So yeah, I mean, this is a case where the official number is that the unemployment situation is getting better, but the reality of it is much, much different.

But you know, how do we account for the things, I mean, look at in 1978. Maybe I'll take the government side of it for a moment here. In 1978 we didn't have this sort of independent contractor mentality nowadays. I mean, it's just a, it's like a free agent country that we live in and there's all kinds of great websites that are just enabling this even more and more. Of course employers like it because they don't have to contend with Obamacare and lots of regulation, osha, et cetera, et cetera. So it's fantastic for employers, employees, or I should say contractors like it because they have more freedom and control over their lives. So it can be a real win, win deal. But then you add to it the fact that we've got all these websites nowadays like Uber, of course, and Lyft, L, Y, F, T. These are the companies that are really changing the whole taxi industry and giving that a real run for its money. You know, websites like TaskRabbit, people can do odd jobs and just all sorts of things. I mean, there's so many of them, I can't even think of them all right now. But you know what I'm talking about, right? So how do these people show up in the labor participation rate? Do they show as unemployed?

No, those people would show as working. I mean the employment figures break up into full time and part time workers and those also include contractors and self employed. So I think that's accounted for. I know what you're saying about the differences between now and say 78, and I do believe in what you might call 57 flavors of capitalism. The markets do change and the capitalism we have now is different than it was in the 70s, different than it was in the 50s when you had much stronger labor unions, for example. All those things change a lot. But I think.

There'S probably 20 million people who for whatever reason are willing to work but can't find work. And I think that that speaks to some sort of broader macro problem somewhere.

I most definitely agree with you. And the other thing about it is, and I would venture to guess, but again, I just don't know. And some of the other sites of course are Elance and Fiverr, things like that as well, but I mean it's really more about like how much are these people earning? You know, a lot of these independent people doing these odd jobs, they're really not making any money.

Well, that's true too. I mean when people, you know, you break down what people are making, even, even the job creating. Now when you break it out into higher paying jobs and lower paying jobs, clearly the growth is on the lower end. That's the other tricky thing about these numbers is that even the numbers that I'm using when I talk about the labor force participation rate, they also lie to a certain extent because there's no what you're making. The point you're making.

There'S no qualitative accounting between different sets of jobs working at a very low paying job versus one that's much higher paying job with benefits. And the other things they don't take into account is, it's harder to figure out is we have people who are in, a lot of people who are in prison. Right. Who are incarcerated. We have people who go to school. And these people also don't count in the labor force statistics. So we know when times are tough, people go back to school.

And again, that would mean they kind of hide in the womb of college. Right. They want to make sure they can accumulate enough ridiculous student loan debt.

Talk about a disaster. That's just such a scam. I mean these colleges are so overpriced nowadays and the government did it. The government caused this basically by government insured student loans. They made a lot of money available in the marketplace. And of course, the most obvious and simple definition of what creates inflation, a big supply of dollars chasing a limited supply of goods and services. And so, you know, you look at college inflation vastly outpacing both college both stated official inflation in terms of the CPI and real inflation even, which is.

Yeah, I mean that's 100%, right. I mean it's like housing all over again. It's the same way that engineered the.

Housing bottle with Fannie Mae and Freddie Mac.

Sure.

Yeah, it really is. This is what people just don't understand, especially people on the left, is that this is just. These are all these programs are just another way for the government to pick winners and losers. I mean, think about it. They enrich a whole bunch of mortgage brokers, people that are in the student lo. Collection agencies, university professors, student housing people. Yeah, yeah. Textbook. Oh textbook. Oh my God.

200, $250 to buy textbooks. I was amazed.

Yeah. And they're not published on Kindle. I mean for all these leftist college professors, who are concerned about the environment and teaching things like sustainability. You would think they would be into digital publishing, right?

Yeah.

Unbelievable. They'd rather cut down the trees. It's such hypocrisy. It's ridiculous. But one of the other parts of it is just in the standard labor market, you know, how do we account for the person with a college degree that's working at Starbucks or waiting tables? I mean, they're dramatically underemployed, aren't they?

That's right. That's the magic word, the underemployment number, which is people working at jobs that are substantially beneath their skill level. And it's very difficult to measure that, I don't know, but I suspect there's quite a bit of underemployment.

I would totally agree with you. And one of the things this says is that it says that our semi socialist system that we have now does a very poor job of allocating resources. And I'll give you a great example of that. You know, I mentioned Uber a few minutes ago and you know, I don't know if you use Uber yourself. I think it's a fantastic service. I just, I love it. And I got in a car, took a ride, and, you know, struck up a conversation with the driver and he said, you know, I said, do you do this full time? What you do? What's your story? I always like to know this stuff. And he says, oh, no, no, no, I'm an industrial engineer. I just can't find a job. You know, I talked to another Uber driver who was. He was, you know, in investment banking for a very short time before the financial crisis hit. You know, he worked in New York. In New York. And now, you know, he's driving a car. Not a good, highest and best use of people's talents, right?

No, no. And those, those are tough, tough problem to solve. I mean, the other thing is that you don't hear people talk about. It's just the difficulty in starting a new business. And there's been lots of stories about that, and some of them are ridiculous, but they kind of illustrate the point.

I remember reading one story about the girl got hassled running a lemonade stand somewhere.

But it is true that for small businesses, the increased regulations make it very expensive to hire people. And that can't help.

Right, Right. And that's another thing. The more regulation you have, the more you force the corporatocracy on people and the more you limit entrepreneurship because only the big players can afford to comply. Right. Yeah.

I wonder if the government likes it. Wouldn't prefer to have it that way. Because when you're part of a big company, you're easier to keep track of, either to counter and all that kind of thing.

Fewer things to keep track of. I mean, look at this. You know, if they reduce the number of banks, which, you know, they seem to be doing a relatively good job at, given the whole crisis and the way it's played out there, there's more of the economy just comes under the government's control. You regulate fewer parties. It's easier to do, easier to keep track of them. You're certainly right about that. Yeah, I would agree with you. But you know, on the good side, Chris, I mean, in many ways, it's a lot easier and less expensive to start a business today. I mean, you know, and I'm talking. And software, software as a service based in the cloud, a lot of that stuff has just gotten incredibly cheap. I'll give you my own example. Years ago, well, not that many years ago, maybe four years ago, my company, we had a very expensive Microsoft Exchange server and a lot of maintenance fees go into maintaining it. So everybody could have email accounts and shared calendars. And now you can just use Google Docs and it's free.

My own story is similar. I remember 10 years ago when I started Capital in Crisis. I started it with basically $300 to get a website up and running so I could take people's orders and things like that.

That was all I had to do, and I was off and running. And that was the best $300 I ever spent. But certainly I wasn't trying to hire 10 people either, which is part of the distinction when we're talking about unemployment.

Right, right. So the incentive now is to just use technology, not hire anybody. And if you do hire anybody, have them as a contractor because the government makes it too hard to have them as an employee.

Hire your wife.

It's really amazing. It's really amazing. Tell us what you're up to nowadays. You're going to Ireland soon to check out a company, right?

Yep. I've been following a company called Kennedy Wilson for a couple of years. I recommend it to my readers. It was around 10 bucks and it's about 25 now.

Big property manager, basically now. And they were early investors in Ireland in 2010, when they were still coming out of their crisis. I mean, the Irish property market really got whacked. And from the peak in 2007 to the bottom in 2008, 2009, property prices across the board fell 60, 65%. And rents suffered a similar collapse. I'm going over there. They bought probably a billion and a half worth of property over the last couple of years, and I'm going to get a property tour there. And there's a lot of other opportunities, too. There's a couple of listed REITs, real estate investment trusts that have come on in Ireland. Ireland just recently approved legislation allowing for the creation of REITs. And those are popular vehicles with investors because they're shielded from corporate taxes and pay out 90% of their earnings and dividends.

The Irish market is starting to turn. For example, I was just reading today, the office market up 20%, prices last year, and rents were up 27%. And those are off a very low basis. The most interesting thing about Ireland, I like to tell people, is that it's become a very international market. If you go to Dublin, it's kind of on the doorsteps there of continental Europe. There's a lot of corporate buyers who are willing to set up their regional headquarters in Dublin. Google was one of the first to buy in early 2011. They put their European headquarters in Dublin. There's several hundred companies that have their headquarters there now. I'll know a lot more when I get back, but that's one of the areas I'm looking at now.

What type of properties are they buying? They're still in the acquisition phase or are they more in the management phase?

They've bought a lot of apartments, and then there's also office. There's different REITs to do different things. One of the REITs is buying residential. I'm skeptical about residential in a public entity like that.

Tell us why. That's very interesting you said that, because I got my own opinions on this. But as we've seen. And you're talking about United States now or Ireland?

Well, in the United States, I was skeptical, but I'm going to carry over that skepticism in Ireland. Maybe it's different there.

The basic model is. I know there was a handful of REITs that came public in the US that invested in residential housing. A lot of people liked that idea because they thought US Housing was cheap. But it's not really a good model to run in that kind of format because it's very labor intensive and it's not something that scales easily. It's one thing if you're a REIT and you buy a dozen apartments where you've got thousands and thousands of units and you're able to scale up and leverage that. But I don't think that's going to be the case in residential housing, because they're buying. A lot of times you're talking about portfolios that have tens of thousands of homes scattered across many states. I just cannot imagine how that can be efficiently managed. And a lot of these also have their cost for running these things really low. I mean, you're an experienced real estate. You would laugh at what they have in there as their numbers for turning around a house so they can lease it. In some cases, I've seen figures as low as $500 a house. There's just no way.

Oh, my God, not even close.

So shareholders invested with these REITs on the basis of them thinking they can spend $500 a house to rehab it?

Absolutely. Some of them. Absolutely that's the case. And, you know, really, when you look at the returns these REITs will make, I mean, it's just. I just don't think it works. It's not attractive. And then also, there's a lot of fees. I mean, you think about when you're running a public company, you have to pay for a CEO, a cfo. You've got auditors, you've got lawyers. You've got to get corporate headquarters somewhere. These people have to be paid. They're not cheap, and it's just not really efficient.

Yeah, I couldn't agree with you more. And you know, Chris, one of the things I believe in is very similar to one of your books. You've got a few books now, I believe. Right. One of them I love is invest like a deal maker. And the philosophy. Pardon me if I just ruin this. Just interrupt me anytime. But it seems to be the philosophy is look at the intrinsic value of something and invest. There are other parts of it, but that's one of the parts I really like. Yeah.

Another key part of it is I always do invest with owners. That's one thing I always emphasize.

Yeah. With people who have skin in the game.

Absolutely. Because stocks are not designed necessarily for you to make money. So if you invest in a vehicle that the guy runs, it, owns 20% of it, and you put a lot of his own money in it, well, then you might have something interesting there.

Stocks are designed for the promoters to make money.

For the vast Wall street conspiracy to make money.

There's a lot of people make a lot of money in common stocks and not necessarily the common stockholders.

You have to be careful. But I think they can be wonderful investments. I've been doing this, investing my own money in stocks for 20 years, and I've run this newsletter for 10 and done very well. But you just have to know what you're looking for. You have to be very sensible about it. You have to do the old Ben Graham and Warren Buffet style value investing as if you're owning a piece of a business.

Right.

That is a great point. What you were saying. I predicted long before these institutional players got into our market, I predicted that they would wouldn't like it, that they would pull out. And, you know, now we're seeing some signs of that. It's. I don't think the cycle is complete yet. But the reason is, is like, we help people do direct investment where they buy properties and they own them and they, they have managers, but, you know, they got to manage the managers. So it requires some attention. You know, this is not a. One of my philosophies is that there's really no such thing as a passive investment, at least not one that works, because you always have to pay attention. You always have to be educated. If you are a stock guy, you know, you got to be reading the stuff, you've got to be subscribing to the newsletters. You've got to be getting involved and staying engaged and following this stuff. And so one of the things I say to our real estate investors is embrace the fragmentation. One of the things that keeps the big institutional investors out of the residential, the smaller residential side of the business is that, you know, it's so fragmented, they've got to work with so many different parties and you start to cross state lines and different cities. It's just a very dysfunctional, fragmented industry, which is. And bad. It's terrible for institutional investors, but it's great for the small investor who wants to buy 20 properties. I mean, that's an awesome retirement game for them because they can handle the fragmentation.

I agree 100%. It's like we were talking about before off the air about how it's intensely local. That's the other thing is, you know your markets. So you have a tremendous advantage when these outside international companies come and they're relying entirely on third parties and they really don't have any feel for the neighborhood or the direction is different areas are going and you have that edge.

Oh, and I will speak to that too. We have some private equity groups and hedge funds that will buy properties through us. And basically what they'll do is they'll have a rep that'll cover, you know, four or five states. Yes, I did say that. Four or five states. And that rep will say to our investment counselor, just provide Me a list of 20 or 30 properties and you know, I'm going to go down that list in Excel format. Here are the headers, here's what you need to put in. And they'll just buy them. And frankly, Chris, they overpay. I mean, I'll be the first to tell you, they're just not that picky. They don't really, you know, it's not their money. Why should they care?

I'm just going to say that, you know, a lot of these guys, they have a big pile of institutional money they have to put to work and they're not going to be particularly careful about each property the way, you know, you or I would if we were buyers. So. And in most cases you're right. And it also isn't their money. They're, they're managers, they get a fee for the assets they manage and they don't have their own skin in the game in that particular investment.

Yeah, it's just a whole different deal. So they've got to do big scale stuff. The office buildings, insurance companies for many, many years have always liked office buildings and big things like that. And the yields are much lower, but it's just more manageable when you can manage a 1 million square foot portfolio versus a bunch of square foot single family homes. That's just an unwieldy thing to do.

The other thing is they should do that because then their size also allows them to finance those things at usually very, very favorable rates. It works both ways. Every investor has almost their own little ecosystem they should stick to when they're up in their world of those big office towers and multi billion dollar deals. It can be very economic.

Yeah, right, right, definitely. Well, tell us what your thoughts are about emerging markets and where we're going. Are we just in a calm part? I've long called this a fake recovery. I don't think this is a real recovery. But that has implications that are not all bad though. There are opportunities. Always.

Well, I mean, emerging markets are one of those things that's like talking about housing. It's so different. The markets are so different. And when people talk casually about emerging markets, they're lumping in a lot of very unlike things. Brazil and Turkey and China and so on.

I think there are some opportunities. I think emerging markets generally you have to be very, very careful, especially now, because I think the emerging markets as a group, all of them are under pressure because there are fewer dollars going out abroad than there were and they depend on the US dollar, the reserve currency in many cases, they've borrowed heavily against it. And so that's when you have periodic problems like Turkey, where they have dollar denominated debts that they don't print dollars. So it becomes a problem and their currencies crash. And we've had a whole bunch of different emerging market currencies tank. But there are still interesting opportunities. I've talked more recently about Vietnam. Mongolia is a really interesting economy. So you do have to kind of pick your spots. I've traveled to all these places and, and that's one of the other things I do is I've probably been to more than 30 countries over the last, I don't know, decade since I've been writing this letter. And many times I've been back two and three times or more.

So when you go to these countries, I mean, what do you tell us how your trip goes there? When you land, you get off the plane, you probably check into your hotel and then you probably have to take a nap. Because that's what I have to do when I travel overseas, a very deep one for about two hours. And then I wake up and start to adjust to the time. And then, I mean, are you, you're going to their office and talking to the board? What are you doing?

Well, normally I do a lot of prep work ahead of time and I'll certainly have at least one contact there that I know well who will help me get meetings and will help give me some good kind of guidance on the ground where to go, what to see and help me get those meetings. But yeah, a typical one would be I meet with, at least.

I like.

To meet with a good mix of people. So I like to meet with some investors who are there, either fund managers or private investors. Then I'll meet with, I usually like to meet with large banks, broker, and then there usually be some companies that I like to see. And then there's other times I just want to also leave plenty of time to just wander myself. So I'll go through certain markets and just visit, see how things look and feel. And those kind of trips can be great. And they give me just a ton, a real wealth of information. And then I might not recommend anything initially on a trip, but I have that data bank now and I have those contacts and so I'm ready and I have some knowledge when an opportunity does come along to go ahead and.

Pick something up, I think that's great. And I think it's great that you make the point, Chris, that you leave some time for just wandering around and getting sort Of a sense of. And I gotta tell you, that's so important to just have some unstructured time so you can. You can get a sense for the place and talk to some people that aren't affiliated with anything. Because I would assume when you come out and you visit these companies, I mean, they're really putting the dog and pony show on for you. Right. You know, you're a guy that could recommend their stock and bring them a lot of investors, and you're kind of like a member of the media. When the media walks in, you want to make a favorable impression. So they're going to say good things about you, right?

That's right. I would say much of the time it's that way. Sometimes it isn't. Sometimes in these markets, they just don't really entirely get it. They're not. I mean, I've been to plenty of companies in some of the emerging markets where they don't really have an investor relations person and they don't have that function. They don't think about it that way. They don't pitch their companies in the same way that we think of. Those can be enlightening meanings, the things they'll say or tell you.

You mean they'll say dumb, unguarded things.

That's right. They'll say unguarded things and they'll say things that will make your skin crawl.

Give us an example, if you would.

Well, I remember being with one company and they were telling me about how they monitor their drivers, the trucks they have going delivering goods from one place to another, because they would often stop and siphon off gasoline. And then they would tell me stories about how they had to. This guy, because he was letting his cousin use the trucks. It becomes a situation where you just sense that they really don't have very good controls about what's going on. It would be a very difficult situation to invest in.

Yeah, that's for sure. What are your thoughts about the global financial system? We talked about how it's all local. We talked about all of that stuff. I'm just kind of wondering what's next. Everybody is, are we on the road to this slow recovery or is the other shoe about to drop?

Yeah, well, that's really the big question. Everybody wants to know what's the next thing? Right. Because when I can recall in the late 90s, it was clear there was a tech bubble going on and it was an easy thing to identify and sidestep. And even in 2007, a lot of us knew, and I certainly knew, and Wrote about the housing bubble that was going on and we were avoiding banks and avoiding home builders and staying away from a lot of property. What is it this time? Really? There isn't a good answer. I think.

What it might be is just to say that credit is cheap. It makes everything.

Seem. Well, it sets everything in boom mode, really. That makes it really difficult. I think that at least speaking from the stock market side that the stock market is frothy. There's a definite cheerful consensus. And market, I mean, I just know for myself from finding bargains, it's been very, very difficult this year and even last year it was really hard to find good bargains. And that usually tells me that we're near some sort of peak.

Yeah, it's the old thing, you know, invest when everybody's fearful and sell when everybody's optimistic.

Not much beer out there right now, I tell you that.

Do the opposite. Do the opposite of the crowd. That's a good idea, Chris. Give out your website. Tell people where they can find out more about you. Is it the grow your wealth one?

Yeah, growyourwealth.info that talks about.

What I call the coffee can portfolio, which comes from an old article in the journal Portfolio Management from 1984 written by Bob Kirby. And he had this idea about long term investing which I go into and it's very fascinating. It's an easy thing to implement. You can find all kinds of things I write for the Daily Reckoning on the column is there and that's free. You can check out the DailyReckoning.com as well.

Fantastic newsletter, by the way. Love it. Yours Capital in Crisis and Daily Reckoning are both fantastic. Anyway, good. Chris Mayer, keep up the good work. And the website is growyourwealth.info growyourwealth.info just want to point out that's.info not a dot com, so growyourwealth.info and Chris Mayer, thank you so much for joining us today.

Sure, Jason. Thanks for having me on. It's fun.

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