Like a mosquito in a nudist colony

by Stephen Butler

What a great time to be young, and employed. The dichotomy of recessions is that people tend to get increases in pay if they are fortunate enough to avoid layoff. While the world is going to hell in a hand basket, employers may reduce head count, but they are inclined to increase pay for those who stay on and are absorbing more of the workload. When the chips are down, smart employers don't want to lose people they can count on.

In 2008, average pay increased by 4 percent across the country. While the media harp on the large number of the newly unemployed, as a percentage of America's workforce, it is relatively small. "Full employment" is defined as the point when only 5 percent of the workforce is unemployed. If we are approaching 10 percent unemployment today, then its only 5 percent above the norm. In other words, 95 percent of those usually employed still have jobs and on average they are making more money.

For young people with jobs, life is better today than it has been in the last five years. For one thing, they can buy homes today for about half of what they might have paid two years ago. Need mortgage money? It's available at historically low interest rates. Stocks and mutual funds? Same thing. Need to splurge just a little? EBay and Craigslist offer a cornucopia of "stuff" at a fraction of what new consumer goods were selling for before the economic crisis. Want to go somewhere? Check out this Travelocity package: I just spent three nights in New York City at a medium-priced hotel, and the round-trip airfare on Jet Blue was free. What's to not like about a combination of pay increases and half-price sales?

So, things are not as bad as they sound. In general, businesses are still making money, just not as much as before. Business owners or managers are preparing for the worst, of course, so they are quick to cut marginal employees in preparation for what might become a downturn that actually impacts them. They're thinking: "even paranoids can have real enemies." The reality is that gross domestic product actually increased over the year in 2008, and the average company made more money last year than they did in 2007.

There are certainly pockets of despair, but only 3 percent of the American workforce is employed in the financial sector. The homebuilding industry employs five times the number of people in the automobile industry, and clearly both industries are hurting. But then, there's everyone else, and for the most part they are working for companies that are having a reasonably good year, considering.

Warren Buffett just pointed out that the economy was in shambles and would be in turmoil for awhile. That didn't mean that stocks were not a good buy, however. Given today's opportunities, he says he feels "like a mosquito in a nudist colony."

Stocks get pummeled, in part, by a new round of redemptions from hedge funds. Investors, spooked by the proliferation of "Ponzi schemes," are suddenly sensitive to the fact most hedge funds just give their clients a simple sheet of paper every quarter saying only what the earnings or losses were. No backup. No nothing. Who knows? But, as Warren Buffett reminds us, "When the tide goes out, you see who's not wearing a bathing suit." I say, "Mix those metaphors and bring on the mosquitoes."

Since October, over $1 trillion dollars has left an industry of hedge fund wise guys that lost an average of 19 percent, an average that fails to count all those that lost everything and went out of business. What this means to the "little people" like you and me is that the supply of stocks for sale overwhelms the demand and drives down the value. This further disconnects the value of stocks from the intrinsic value of the companies they represent. How disconnected? The dividend alone from General Electric now represents a 15 percent return on the current share price.

Bottom line? It's an opportune time to be young with a lot of investment years ahead. A struggling economy offers a great chance to purchase investments at substantial discounts. Apply a little discipline now, and when the market turns around, you'll feel like a genius.

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