Hi Tim. I have seen Warren Buffett mention that the threat of nuclear weapons is what scares him the most about the future of America. I understand that this is a personal question, but I hoped you would share what you consider the greatest threat to the American economy, and how to prepare for it if possible. Okay thanks… -John
Interesting question, John. I like it because not only do you want to know what I consider to be the biggest problem, but what I consider to be the solution as well. I like receiving questions where I can already tell that the person asking the question has a fighting spirit.
As we get ready to close up 2014, our economy is in a pretty good spot. At the very least, it’s nothing like the Great Depression years, the 1973-1974 bear market, the 2008-2009 financial crisis, or any of the other crisis that have left their mark on American workers.
Despite the fact that the large corporations that dominate the American economy are making record profits, we still get news like this: Cisco is cutting 4,500 jobs. Merck is cutting 8,500 jobs. Siemens is cutting 15,000 jobs. Microsoft is cutting 18,000 jobs. I think Hewlett-Packard is getting rid of something like 30,000 people, the kind of number that sounds so miserably high you end up triple checking the figure to make sure it is right.
Those are the signposts indicating that companies are able to grow without making a capital investment in people. What scares me is that the old saw that companies add jobs in good times and cut them in bad times has been replaced with “companies cut employees in good times, and cut even more in bad times.”
The whole premise of this site—using excess cash from your labor to build reliable sources of income—becomes undone when the notion of having a job can no longer be taken for granted. I think the best advice remains to get a degree in something practical—I’ve written here about how my skill set would have been made me more employable had I pursued a geology degree instead of English writing (although, heck, The Conservative Income Investor would never exist if I had become a petroleum engineer, so there’s a little bit of a redemption story).
More specifically, I would wish that I had developed a skill set than involves my hands—if I could have developed the skill set to change some electric wires, I’d always have a job. If I had developed the skill set to fix toilets, I’d always have a job. If I had developed the skill set to fix cars, I’d always have a job. Electricians, plumbers, and mechanics aren’t going to see their jobs get outsourced (and, in fact, they can often go into business themselves and directly reap the rewards of their own labor).
That’s the first, and important line of defense: Get a practical degree or develop a skill set that involves your hands.
From there, and this seems counterintuitive maybe, the next step is to invest in these same companies that are doing all the layoffs. I have contemplated the morality of this, and I realized that my abstention from ownership does not improve the lot of someone who has lost a job. If you got laid off from Bank of America, whether or not I own 500 shares is not going to improve, worsen, or affect the quality of your life thereafter. Worrying about that is an ultimately misguided emotion, even though it comes from a good place in your heart. If anything, you should feel a strong desire to own a whole bunch of the stock so you can convey to management that you’d rather make a nickel less per share than see your fellow man treated like cattle.
One company that has gotten very good at minimizing costs is Colgate-Palmolive. A couple generations ago, they used to have commercials showing men and women screwing in the caps to toothpaste. This is just the latest permutation of that fact—every year, it is going to take fewer and fewer people to transit toothpastes and cleaning oils, even as the business grows. The only time you will really see spikes in their hiring count is through acquisitions and unique departments like perhaps the tech division. This means that if you become the owner, more and more money will flow directly to you because there the input costs of producing the profits will be trending downward as the number of humans involved continue to decrease.
Not that long ago, it seemed weird to have self-checkout at a grocery store. Most people have now grown accustomed to it, so much so that we now have baseball stadiums beginning to have self-dispensers for beer with only one monitor guiding the line. I was reading an article about how the St. Louis Cardinals price their tickets, and they used to have an entire department dedicated to informing the owner Bill DeWitt of the areas sell well and those that don’t. Now, he gets zapped an electronic current from Stubhub that gives him all the details he could want, so he can modify the pricing however he wants. This outsourcing happens a bit here and there, all over the place.
The best defense I got this: (1) Be a workhorse. (2) Get educated in something that will give you a specialized skill that cannot easily be outsourced, and/or develop a strong skill involving your hands. (3) Spend much less than you make, for as long as you can while still enjoying the ride. (4) Build a diversified collection of blue-chip stocks that sell products you intuitively understand which don’t seem to run the risk of becoming obsolescent, and have been raising their dividends for at least 25 years and have grown profits by at least 5% over the past decade. That’s the best advice I got for the economic side of life.