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Even though the U.S. unemployment rate fell to 8.8% in March from 10.1% at the height of the Great Recession, sidelined investors are still waiting for better news.
But what they don't realize is that it's a mistake to wait. Instead, what they should be doing is using so-called "capital flows," or the global trends that dictate the flow of investment dollars, to find new profit opportunities.
The U.S. labor market is a perfect – albeit bleak – example of what I'm talking about.
When Jobs Leave
America's stubbornly high unemployment rate is not likely to drop much in the future because – among other reasons – the biggest employers in this country have been exporting jobs overseas.
U.S. multinational corporations (MNCs) cut 2.9 million domestic jobs in the 2000s, but hired 2.4 million workers overseas, according to the U.S. Commerce Department.
General Electric Co. (NYSE: GE), Caterpillar Inc. (NYSE: CAT), and Cisco Systems Inc. (Nasdaq: CSCO), are just a few of the U.S. stalwarts that in the past decade have expanded their overseas operations at the expense of U.S. employment.
But as distasteful as that trend may seem to Americans, it's going to continue. It's the new reality. And it has massive implications for how and where investors need to be invested.
Of course, it's easy to jump on the bandwagon and blame American multinational corporations for exporting jobs overseas, but the cold, hard truth is that U.S. multinationals are in business to make money, not generate employment.
And really, this story is about much more than cheap labor. It's about efficiencies in every aspect of every business. It's about how capital moves towards productive resources.
It's a deliberate, market-driven shift.
It's time to own up to the fact that the United States is no longer the world's growth engine. Developing countries and economies have now assumed that mantle. There's still demand for U.S. goods and services overseas, but it's a lot more efficient to manufacture in those markets where you are selling products.
What we're facing isn't simply about outsourcing; it's a new epidemic of "structural unemployment."
What this means is that there's a significant disconnect between demand in the labor market and the skills and locations of the workers seeking employment. So while there may be job openings, too many unemployed workers lack the skills required to fill them – or live too far from where those skills are needed.
The result is alarming.
The U.S. economy has lost its ability to absorb new workers entering the workforce, as well as its ability to generate jobs for laid-off workers looking for employment.
Disillusioned workers have stopped looking for work and aren't even counted in headline unemployment figures; neither are unemployed workers whose unemployment insurance benefits have run out.
So forget the headline numbers. The government's more-expansive definition of unemployment – known as U6 – now stands at 16.1%, down only slightly from 18% in January 2010.
Questions to Answer About Capital Flows
If you're an investor, you have the option of waiting for the U.S. employment picture to brighten before you commit to stocks. But if you decide to travel that route, you'll be waiting for a long, long time. Even worse, you'll miss out on the huge opportunities that are playing out across the globe and across multiple asset classes.
The better approach is to try and understand exactly what is going on in the U.S. and global labor markets.
It doesn't take more than a quick glance to see that the capital flowing out of the United States and into other countries has been very beneficial for a lot of corporations. Those are the corporations whose shares you should be buying.
Taking unemployment as an example, here are some questions you might ask yourself:
- Where will capital move if the tax code is changed to address structural unemployment issues?
- Where will those capital flows move to as the United States addresses the crumbling infrastructure that once supported a dynamic workforce and manufacturing base?
- Where will capital flow when the U.S. education system is addressed to better prepare a new workforce – or where will capital go if we can't compete with other countries that are doing a better job educating their people?
- Where will capital move to if our immigration laws change?
- And, finally, where will capital flow as countries around the globe – all of whom are looking to expand employment and their exports – try to incentivize companies to do business in their backyards?
America's lost jobs tell the story of how capital flows.
It's not a pretty story, but if investors follow the evolving narrative, they can at least gainfully employ their capital.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
In other words, invest in countries where labor is cheap and education is highly valued and growing. Not the USA, of course, where knowledge of math and science is eschewed, and labor is costy. Cheap labor alone is not good enough, e.g., Mexico, the Middle East. Shah Gilani must be talking about investing in China, South Korea, Singapore, and a few other highly selected places.