Why these good times feel so bad

By Jim Jubak

Things are pretty good.

Economic growth rebounded to 3.5% in the fourth quarter of 2006. The unemployment rate is a relatively low 4.6% and the economy created 111,000 new jobs in January -- not great, but decent. Core inflation is subdued at 2.6%, and inflationary pressures in the pipeline (as measured by the Producer Price Index) have dropped to just 2.2% from 2.8% in July 2005, a high for the decade.

And, of course, stocks are in the midst of a historic bull market run. Stocks have now racked up 47 straight months without a 10% correction, according to Jim Stack of Investech.

So why don't we feel better about the economy? In my e-mails, walking the halls of the recently concluded World Money Show in Orlando, listening to radio and TV call-in shows, and reading blogs and message boards, I find a high level of anxiety and concern. Many of us feel that somehow we're off course. That things aren't working out as we'd believed they would. That the future is more uncertain than we'd hoped.

It's hard to appreciate the 'net'

We do we feel so bad when things are so good?

I've got a theory I'd like to try out on my readers. It's not original by any means. It was suggested by Robert McTeer, former president of the Federal Reserve Bank of Dallas, in a speech at the World Money Show. I got to follow up the idea with McTeer in an interview after his speech. (You can watch the entire video here.) And I'm going to try to take the idea further in this column.

In essence, the idea boils down to this: Whether it's the job or stock markets, the official numbers report a "net" figure -- the final plus or minus after all the messy adding and subtracting is done. But we live our lives in that messy world of the gross numbers before the final calculations. The reality that we experience is in the gross and not in the net numbers.

That's a little abstract, so let me give you the example that McTeer, currently a distinguished fellow at the National Center for Policy Analysis, used in his speech.

We live in the churn

The Bureau of Labor Statistics, McTeer noted, reports job gains or losses once a month. For January, for instance, they reported that the U.S. economy had gained 111,000 jobs.

That's a net number, and as such, it's very neat and clean. But it represents a much messier set of gross numbers. In January, about 2.5 million people lost their jobs in the national economy, McTeer said. At the same time, 2.6 million people found jobs. That churn of as many as 5 million people -- probably less, since some who lost jobs also found jobs in January -- is the world in which we all live. And it's a lot messier and more anxiety-producing than the net result: Economy adds 110,000 jobs. I'd extend McTeer's point to other realms of economic experience. We feel inflation not in the net world -- core inflation measured by the Consumer Price Index is running at an annual rate of 2.5% -- but in the gross world. The way we feel about inflation isn't a result of a mental netting out that says, "Oh, my bill from visiting the doctor is up 6%, but the cost of a computer is down 3.5%, so inflation is just 2.5%." No, we feel the gross pain of paying that 6% increase in the doctor's bill. And the drop in the price of a computer doesn't make us feel better when we're writing the larger check to our doctor.

I think this applies to the stock market as well. In the net world, the widely reported Dow Jones Industrial Average ($INDU) is up 16% for the 12 months that ended on Feb. 13, 2007. But we don't invest in the net world. As investors, we experience the gross world. And in that world, we're aware of all the stocks we didn't buy that soared. Did you catch General Motors (GM, news, msgs), up 72% in this period, or AT&T (T, news, msgs), up 40% over the last 12 months? I didn't. And we know the ones that we did buy that went nowhere, such as Intel (INTC, news, msgs), up 1%, or worse, Dell (DELL, news, msgs), down 25%.

In fact, I think the stock market is a striking example of how a net-world result can make living in the gross world feel worse. Every time any investor reads about the 16% return on the Dow Jones Industrial Average and notices that the return on his or her portfolio is lower, the regret about those mistakes gets larger.

I'd also argue that the way we feel about the difference between the net and the gross world's changes over time. To go back to McTeer's original example of the churn in the job market, I'd say that how we feel about the disruption created by all those job changes depends on both the speed of the churn and whether the tradeoff between the net and the gross world feels worth it.

The churn in employment

My Dad, to take an extreme example but one shared by many in his generation, worked for the same employer all his life, from his start at 17 as a sweeper on the factory floor to his retirement at 62 as a maintenance electrician. For him, except for his service in World War II, the churn didn't exist. It was something that happened to other guys. Until the last few years of his working life, when the company began to talk about shutting down the plant where he worked, as far as I can remember, he never worried about losing his job and having to find another one.

Contrast his experience with the churn experienced by the generation of workers born between 1957 and 1964. Unlike my Dad, born in 1917, these workers held an average of 10.5 jobs between the ages of 18 and 40, according to a study by the Bureau of Labor Statistics. In those 22 years of work, 21% of workers in the study, which ran through 2004, held 15 or more jobs. Only 15% held fewer than four jobs in that period.

No guarantee of a better life

How you feel about job churn, though, depends on more than just the pace of churn. First, it depends on whether you feel that the churn in the gross economy is worth it. Before the cameras rolled for our interview, McTeer told me that his grandfather had been a blacksmith, and his father had owned a truck stop that prospered until a new interstate highway rerouted traffic.

I don't know how it felt at the time to these individuals, but I do know that throughout most of U.S. history, the promise that the anxiety-producing churn of the economy would produce a better future for the next generation has helped make current privations seem worthwhile.

One of the biggest sources of current anxiety in the gross economy, where we all live, is the growing sense that this generational promise has been broken. Many of us raising children now feel less able to guarantee that they will lead economically better lives than we did. That was a promise that our parents took for granted when they were raising us.

And second, how we feel about churn depends on the distribution of the outcomes. If the worst-case result of churn in the economy is a 10% decline in income over the course of a five-year period, that's one thing. If the worst case, however, is a 50% decline for the rest of your working life -- a result that many workers who have seen a well-paid job outsourced have faced -- it's something very different. And it's even more different if the worst case is never working again.

A recipe for anxiety

As the difference between good and bad outcomes in the gross economy where we live gets larger, our anxiety and worry increases.

And that's especially true if we feel powerless to control the outcome. Education is supposed to provide some kind of safety net, right? Well, not when it comes to job churn. The Bureau of Labor Statistics study showed that workers with less than a high school diploma held 10.6 jobs during the 22 years of working. Workers with a bachelor's degree or more held 10.7 jobs.

Looking further out, pessimism seems likely to grow. It certainly doesn't help us to feel more positive about the U.S. economy, whatever the GDP numbers, when 1) economic inequality is growing in the United States, increasing the spread between good and bad outcomes, and 2) social mobility, the ability of a person to climb the economic ladder, is declining -- decreasing the reward for putting up with so much uncertainty.

I think you can extend this perspective to investing and the stock market. Certainly the difference between a good outcome and a bad outcome has increased since the days when workers all expected to retire on Social Security and a company pension. The upside is that with our 401(k)s and IRAs and brokerage accounts, we have a chance to retire with far more money that my father's generation. The downside, of course, is that if we make the wrong decisions, we can retire with a lot less -- a whole lot less -- than we'll need.

In our financial lives -- as in our working lives -- we've been thrust from the safety of a net economy into the mess and uncertainty of the gross economy. And with a feeling that, not only are things more uncertain, but that "taking control" of our future will only pay off if we're very lucky.

If that sounds like a recipe for anxiety and worry, no matter what the official numbers say about net progress, well, it is.

Update to Jubak's Picks

Sell Zoltek (ZOLT, news, msgs)

Zoltek (ZOLT, news, msgs) reported a great fiscal first quarter on Feb. 9. Revenue climbed to $30.3 million, well above the Wall Street consensus of $28.8 million, and pro forma earnings came in at 7 cents a share, exactly on consensus. The problem now is that the stock jumped on the news and has now passed my December 2007 target price of $30 a share. If you assume that the great first-quarter earnings portend great things for 2007 and 2008, I can get to a 12-month target price of $33 a share. That's only a 10% gain from here and not enough reward for the risk in these volatile shares, especially since the Nasdaq Composite ($COMPX) is starting to look a little "toppy." Short-term stock-specific risks include the company's plans to raise capital for expansion by selling stock, which would dilute current shareholders. I'm selling the shares out of Jubak's Picks with a gain of 20% since I added them to the portfolio on Jan. 23, 2007. I'd certainly be more than willing to buy them back on any correction. (Full disclosure: I will sell my personal holdings of Zoltek Companies three days after this column is posted.)

New developments on past columns

"An earnings checklist for nervous investors": Earnings as high as an elephant's eye. Yes, I'm being corny, but corn is the big story for Deere (DE, news, msgs). Before the market opened on Feb. 14, the company reported earnings for the quarter that ended on Jan. 31 of $1.04 a share, 23 cents above Wall Street projections, and revenue of $3.82 billion, $100 million above consensus projections. In the conference call, the company said it expects sales to climb slightly in 2007. That was enough to send Deere shares up 10% for the day.

Wall Street, it turns out, was excessively pessimistic on the stock, figuring that the company would have a tough 2007 after turning in 22% earnings growth in fiscal 2006. Analysts had written 2007 off as a "trough" year that would set the stage for a big leap forward in earnings in 2008. Well, now it looks like the trough won't be anywhere as deep as Wall Street expected. The re-acceleration of earnings growth expected for 2008 looks likely to arrive early, as I wrote in my Jan. 12 column, because growth in farm income -- and Deere gets about 55% of sales from farm equipment -- continues to surprise to the upside.

Farmers will plant 8% more corn in 2007 than in 2006, making this year's planting the largest since 1985, and on Feb. 14, Deere said that it was raising its projections for growth in sales of farm equipment to 8% in 2007 from the earlier 4%. As of Feb. 16, I'm increasing my target price to $123 a share, from the prior $111 a share, by December 2007.

"10 top stock picks for 2007": On Feb. 12, Tenaris (TS, news, msgs) announced that it would buy Hydril (HYDL, news, msgs) for $97 a share in cash. The acquisition of Hydril's line of connectors and pressure-control products for oil and gas drilling will enable Tenaris to continue its drive to increase profit margins by adding technology to its steel-pipe products for the oil and gas industry and should bolster the company's high-technology Tenaris Blue line, which is expected to make up 50% of company sales by 2008.

Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that Jubak's Picks recommendations are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jim's new portfolio, Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.

E-mail Jim Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Tenaris and Zoltek. He does not own short positions in any stock mentioned in this column.