Wages Are Rising, Though Unemployment Remains Stubborn

The unemployment rate has now remained above 8 percent for 39 straight months – the longest 8+ streak for the U3 number since the Great Depression. Meanwhile, the chronic unemployment rate – the percentage of unemployed individuals who remain out of work for six months or longer, approaches a post-Great Depression high.

That’s not much of an improvement at all, for an economy supposedly in recovery.

To put things into perspective, the “recovery officially started in June, 2009. Since that time, the economy has actually shed some 355,000 jobs. Some recovery!

But unemployment is just one small data point in a very large economic picture. Are there other more encouraging signs?

Wages Poking Up in Some Markets

Well, a recent survey conducted by PayScale.com, a nationwide compensation consultancy firm, has some promising news. Their proprietary PayScale Index, which measures compensation trends in dozens of industries, is tracking a broad increase in compensation across the country.

Some key findings, from PayScale’s own analysts:

• The Puget Sound metros lead the way in wage growth. The Seattle metro saw a 3.2% growth from Q1 2011 to Q1 2012. Houston (2.7%), Philadelphia (1.8%) and St. Louis (1.7%) were the next highest.

• Houston’s growth is partially fueled by the powerful surge in wages in the Mining, Oil & Gas Exploration industry. That industry led wage growth at 4.9% from Q1 2011 to Q1 2012.

• While most industries grew in the past year, a lone industry saw a drop in wages from Q1 2011 to Q1 2012. Food Services & Accommodation is still fighting negative conditions and as a consequence wages declined 0.2%.

• Workers at larger companies saw bigger wage increases than those at small companies. Large company employees enjoyed increases of 2.5%, three times the rate experienced by small company employees.

In addition, PayScale’s 2012 Compensation Best Practices Report indicated that the percentage of companies that had decreased in size over the previous year was down to 14 percent, compared to 41 percent in 2009.

Of those companies most likely to have increased in size in 2011, information, media and communications led the way with 57 percent. Other high-growth niches include warehousing and transportation, with 55 percent reporting employment expansion in 2011.

Politics

The employment numbers are highly charged, every election year. They’ve been so ever since the Carter Administration succumbed after a single term under the onslaught of Reagan and the GOP’ weaponization of the “misery index”, a composite of the inflation and unemployment numbers for 1979, which were miserable indeed that year.

But take everything you hear about employment with a pinch of salt. The truth is not as bad as the GOP tries to make things seem (well, with unemployment, anyway. With the debt situation, it’s worse). The unemployment situation is nowhere near as good as the Obama Administration paints it, either. The truth is invariably somewhere in the middle – and difficult to measure, as employment is a notoriously lagging economic indicator.

Small Cap Stocks are Rockin’ – But Steady the Course

The gains come on the heels of a huge move in October of 2011, when the Russell 2000 rocketed up 15 percent. Things bumped around in November and December, then took off again in January (+7 percent) and February (+2 percent), for a total change of 15 percent in the last six months.

Traditionally, small cap stocks have been extremely sensitive to economic cycles. They take the biggest bruising when the economy slows down – but they also tend to come back strong when the economy begins to recover.

Investors are beginning to notice: Net inflows to small-cap funds and ETFs were north of $1.8 billion in February.

Does that mean we’re backing up the truck to buy all the small-cap shares in the Russel 2000 index?

No. We don’t quite work that way. If anything, the opposite is true: If you bought a bunch of small cap stocks back at the beginning of October, when the Russell 2000 Index was taking a bruising, your portfolio may have been thrown out of whack by the rise in small cap stocks.

If the rally continues, it may be prudent to balance things out a bit. After all, economic cycles come and go. Just as the great Pete Seeger song “Turn, Turn, Turn” implies, there is a time for bulls and a time for bears, a time you may purchase small caps, and a time to gather bonds together.

We’re still pretty early in the economic recovery, so we’re not too concerned about small-caps taking it on the chin just yet. Although they’re not exactly cheap at current valuations (the average P/E is about 17) have room to run. But no one knows the future for certain. We don’t like our clients to make gambles they can’t afford to lose.

Strategy Trumps Tactics

Batters keep their eye on the ball; hitters keep their eyes on the game. Take a look at your portfolio as a whole. If you are willing to accept risk at all (and that’s not a given!), then you should probably maintain a healthy split between small caps and large cap stocks – as well as U.S. and overseas stocks. You should also maintain a healthy diversification across industries, as well.

What does that mean? It’s a little different for everyone.

The easiest way to do that for most people is to use index funds, or their close cousins, ETFs.

The execution: Keep things balanced. Investing is like flying a multi-engine airplane: You want to keep an eye on all the dials. You want to keep engine output as balanced as possible. When one engine begins to overheat, or is pulling too much of the load, it will begin to become inefficient – and at an elevated risk of a flame out. So you back off the throttle a bit, and distribute the workload among the remaining engines.

The same with investing: At some point, you’re going to want to back off of small-caps, or back off of gold and precious metals. You start with a target allocation, and when any one asset category takes up too much of your portfolio, back it off some.

In our view, the time is long past to back off long-term bonds, including long-term treasury bonds. Those yields have gotten miniscule, compared to the risk you incur when a long bond collides with a rise in interest rates. It’s not pretty.

Corporations are not People (They’re “Persons.”)

Contrary to what some people are arguing, no one is seriously positing that corporations are, in fact, people. What is undoubtedly true, however, is that corporations are persons.

See, the law has to deal with more diverse economic units than just individuals. So when legislators craft a law imposing something even as mundane as, say, the requirement to take out workers compensation insurance to protect laborers, they have to craft it to apply to more than just individuals. It is, in every jurisdiction I know of, illegal for corporations and individuals alike to employ a laborer to work on a roof without having first taken out workers compensation.

How do they do it? By defining the term “person” under the law, to include not just individuals, but also corporations, trusts and estates (and labor unions, for that matter).

There are a lot of reasons for this: Any of the above entities – a corporation, a trust or an estate – can and frequently do enter into contracts. A corporation, trust or estate may, through a direction of their trustees or executors, enter into a contract for services from an individual, such as an attorney, for example. We regard corporations as “persons” for a very good reason – to include them in the long tradition of contract law, to make agreements they enter into enforceable. Otherwise, an attorney (or financial planner, for that matter!) could put in hundreds of hours of time into the account – only to find out that the executor, trustee or officer of the corporation who physically signed the contract got fired, quit or died.

The doctrine of corporate personhood allows the individual or other person who rendered goods or services to enforce the terms of the contract, regardless of personnel changes at the corporation, and regardless of whether ownership of the corporation changed hands in the meantime. The new stockholder has responsibility for all the inherited obligations and debts of the corporation. You can enter into a contract with a corporation secure in the knowledge that the contract is legally enforceable, precisely because we consider the corporation a separate legal entity from the people running it.

This is part and parcel with the doctrine of limited liability. Few people can take personal responsibility for the obligations a large corporation must enter into routinely. If a middle manager at Boeing thought that having signed a contract for delivery of a 747 jumbo jet to an airliner in three years’ time thought the courts would hold him personally responsible for a $100 million dollar airplane on his salary of $150,000 per year – and threaten to strip him of everything he owned and his children’s college if there were a snafu with the delivery beyond his control, he would find another job. And if the contract were not enforceable after he quit, no one would enter into a forward contract for a large capital investment anyway. The result: Boeing doesn’t function, planes don’t get bought or sold, and nobody travels.

The doctrine of limited liability, of course, extends specifically to shareholders: Stockholders in C publicly traded corporations stand to lose their entire investment in every stock they own – but unless they buy on margin, they can’t be sued for more than that. If people who owned a single stock in Boeing could realistically get pursued and held jointly and severally liable for a judgment after a company declares bankruptcy, it would be exceedingly difficult to raise money for the next corporation. The result: Again, planes don’t get built, jobs don’t get created, and nobody flies.

You cannot have limited liability without considering corporations to be a separate legal entity. That doesn’t mean that corporations are people, though some, like Bill Press, are working hard to obfuscate the definition. It means that corporations have obligations under the law, and with those obligations come rights, as well.

Citizens United

In a landmark Supreme Court Case from a few years back, called Citizens United, the Supreme Court held 5-4 that laws abridging the freedom of speech were unconstitutional, even when applied to U.S. corporations (Citizens United had just made a move critical of the Clinton response to the gathering Al Qaeda threat, and prominent Democrats were moving to suppress it.)

This would seem to be a 7-0 decision, simply on the basis of a plain reading of the first amendment’s text:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

There is no provision, allowance or carveout for exempting legal entities other than individuals from the protections of the 1^st amendment.  Indeed, even a moment’s thought renders the notion absurd:

If we grant government the authority to suppress the freedom of the press on the grounds that corporations such as Citizens United are not entitled to 1^st amendment protection of freedom of expression, then we would have to apply that law evenly to include The New York Times Corporation, The Washington Post Corporation, ABC, NBC, CBS, the Tribune Corporation, Gannett, FOX, Time Warner, which owns CNN, and thousands of others, including your hometown newspaper.

All of these organizations that we rely on to hold government accountable could exist only at the mercy of the government, which could shut them down as soon as they viewed coverage to be unfavorable.

We would also have to extend the ruling to labor unions, which are themselves 501(c)(3) corporations, as are churches and synagogues. (Contrary to popular belief, they are not prohibited from making political statements or participating in campaigns. They only risk losing tax exempt status because of it. They risk no other sanction, absent any fraud, other than being treated like everyone else under the tax code.)

Advocates of a restrictive policy, abridging 1rst amendment protections for non-individuals, must address the troublesome question: If I have a 1^st amendment right as an individual to express myself via advertising, why is it that I lose those protections if I band together with other likeminded individuals in an association?

Yes, Mitt Romney is on record saying “corporations are people.” And democrats and republicans like Ron Paul pounced on him, alike, making the obvious points – that are only obvious if you don’t think about them too hard.

But in a legal context, Romney was referring to the fact that corporations are, in fact, associations of individuals with a common purpose – and that any taxes collected from corporations ultimately come from the pockets of individuals, for they can only be paid by reducing shareholder dividends or (as is common with gasoline), by raising the price the individual pays for goods and services to account for the higher tax.

There may be a legitimate state interest in placing some restrictions on corporations spending money on political advertising – though the constitution should properly place a very heavy burden on those seeking to abridge the first amendment to do so. But the effort to go beyond that, by mounting a withering attack on the doctrine of corporate personhood in its entirety, are throwing the baby out with the bathwater.