Structural Issues Causing Weak Jobless Reports?

The July jobs report showed a loss of 131,000 non-farm payroll jobs and only 71,000 private sector jobs created. Furthermore, the June report was revised downward to a decline of 221,0000. While the unemployment rate remained at 9.5%, an increasing number of workers are "leaving the workforce" as unemployment benefits are exhausted and thus potential workers do not file weekly for benefits.

The government is increasingly in an uncomfortable position. Republicans looking to cut taxes further are somewhat neutered due to the Bush tax cuts already in place, and set to expire at the end of the year. Democrats arguing for further stimulus spending are confronted with mixed results from the recent stimulus and rising debt levels. If the politicians continue to argue over these general approaches, I think we're in trouble.

The government needs to start directly confronting what I perceive as the problem, which is structural in nature. In short, too much capital allocated to low returning assets funded by monetary stimulus that aggressively relied on lowering interest rates. In a previous post I highlighted the "race to the bottom" that our overly aggressive monetary policies have encouraged over the past few decades. The argument is that government policies of lowering interest rates to stimulate growth has enabled businesses to avoid pruning under-performing assets and even investing further in relatively low return projects. Obvious examples over the past decade are the dot-com companies and housing, but I believe the issue is widely spread throughout the economy. This low return asset base has built up over 30 years and is a significant drag to the economy since these significant assets need to be written-off.

One program would focus on human capital and one program would focus on invested capital. The human capital-focused program would provide funds for re-training of the workforce. The invested capital-focused program would provide tax credits to companies who actively trim low-yielding assets, either on their balance sheet or who provide services to remove poor performing assets.

Until the country takes more concrete steps to confronting the structural problems, I argue investors should underweight U.S. investments, in general.