Up and Down Wall Street
| SATURDAY, NOVEMBER 19, 2011Tinder for Trouble
A severe lack of jobs worldwide clouds the outlook for global economies and markets. Will protectionism and social and political upheavals follow? Plus, a new and promising cottage industry.
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It isn't often we're privileged to witness the birth of a promising new cottage industry. But we can see it now: a thicket of shingles springing up across this broad and fertile land bearing the legend "Member of the U.S Congress and Investment Advisor."
Enter the plain premises in an easily accessible location (a storefront will do very nicely) and you find yourself in a small waiting room adorned by a photograph of the well-fed congressperson hanging above the obligatory little table bearing a stack of his (or her) business cards containing the usual name, rank and serial number, plus the discreet informative description, "specialists in inside information."
Now that the word is out and the populace is abuzz with the realization that our solons enjoy legal immunity for trading practices that normal human beings would find themselves tossed in the hoosegow for indulging in, those crafty legislators can hasten to leverage their ill-gotten gains by inveigling the public to come along for a ride (for a suitable fee, natch).
The revelation that our sanctimonious lawgivers have been battening rich is actually no surprise to anyone over the age of 4 and even then only when newly arrived from Inner Mongolia. But, frankly, it's a relief to confirm that they didn't contrive to come by their wealth honestly.
It also explains why Congress is incapable of getting anything constructive done—the members are too busy trading on the latest bit of inside dope in any of the bills they've been helping to draft. And you have to be a tad merciful here: Those bills, few of which ever make it into law, can be tough to plow through, and reading does tend to make your average legislators' lips grow tired.
The upside of the disclosures of the flouting of security regulations is that it proves the conviction that Washington is hopelessly split along partisan lines is just a nasty fiction. For luminaries on both sides of the congressional aisle have demonstrated time and again they're wholehearted participants in committing market mischief.
Moreover, when they're privy to something negative about the economy, the market or a sector, they feel constrained to sell short, even when they loudly disapprove of the practice for everyone else, including the suffering slobs who elected them and at whose expense they not infrequently prosper.
All things considered, our lawmakers seem perfectly cast to offer investment advice and still have time and energy galore to fulfill the sacred obligation of their office—which, of course, is to raise campaign funds and get re-elected.
JOBS IS THE FAVORED ELIXIR of just about everyone, from the drum-beating Occupy Wall Street crowd to the most imperious panjandrum of the GOP, for what ails our clinically torpid economy. So you'd think that when new claims for unemployment broke below 400,000 for the second straight week, reaching a new low since April, and the ranks of those on the benefit rolls declined to a three-year low, it would have triggered at the very least a nice little celebratory equities rally. Instead, the always-fickle market gods yawned and spread a melancholy gloom over the investment landscape.
As if to justify that quixotic reaction to what ostensibly was good news was a commentary early last week by Joseph Quinlan, chief market strategist of U.S. Trust, headed "The Brewing Global Jobs Crisis." As he acknowledges, "the last thing crisis-weary investors want is still another crisis brewing." And this one is not just a nagging little devil but global in reach, and has to do with the lack of jobs.
Joe graphically describes what's happening: "In a world of insufficient demand, excess labor, bulging new labor entrants in the emerging markets and productivity-enhancing techniques that substitute capital for labor, both the developed and developing nations are on the cusp of a jobs crisis that could spawn just as much volatility, uncertainty and damage in the financial markets as the European sovereign- debt crisis."
The numbers, he reports, are stark and stunning. A tally by the International Labor Organization shows the world will have to add 80 million jobs over 2012 and 2013 just to get back to where employment was in 2007. The reckoning is that the developed nations need to generate 27.2 million jobs in the next two years to return to normal. But the likelihood is that only 2.5 million will materialize, or a woefully shocking 25 million fewer than necessary.
As for the developing nations, even though they've been growing somewhat more aggressively than their more developed counterparts, their employment prospects aren't exactly coruscating, either. They'll have something in the neighborhood of 53 million slots to fill in the next couple of years, but the projection is for the addition of 38 million jobs, or 15 million shy of that mark.
The upshot, Joe notes glumly, is that in the coming 24 months the total shortfall in global job creation will approach a formidable 40 million slots.
That's quite a heap, he points out, and it's ideal tinder for social and political instability—one might even venture upheaval—in any number of places around this troubled little planet. It certainly, as already alluded to, promises to occupy front and center in the coming election here and, Joe adds, jobs are a political imperative as well in China, the Middle East and across Europe.
It's also the stuff in which protectionism sprouts. It's not surprising that protectionism is on the rise in the U.S., Europe and various and sundry emerging markets. According to Global Trade Alert, which keeps tabs on such things, in the first half of this year it counted 140 such measures (half a dozen in our beloved country), and the sorry news is there are plenty more in the hopper, itching to get out as the worldwide job shortage intensifies. Most at risk, Joe believes, "are large-cap U.S. multinationals leveraged to global growth."
He warns that "millions of dissatisfied and idle workers are a combustible political-economic variable that will keep politicians and investors on edge for the foreseeable future. Nothing saps the confidence or the animal spirits of consumers, businesses and investors more than the ugly images of rioters in the streets."
Think Greece multiplied geometrically and you'll have a reasonable notion of the potential problem.
WHAT STRIKES US MOST ABOUT the stock market is its rather desultory action. For it comes in the face of increasingly bullish sentiment on both Wall Street and Main Street, which includes a supposedly temporary change of heart on the part of some prominent erstwhile skeptics.
More to the point, it comes when the news backdrop no longer is wholly dreary. Besides the apparent improvement on the jobs front, there has been a decent trickle of upbeat reports on stuff like retail sales and the leading economic indicators.
To be sure, it's not all wine and roses. The menacing crisis that's raking Europe continues to defy the puny ineffectual solutions cooked up on the fly by France and Germany to solve it. And it's still anyone's guess whether it'll ever occur to the powers-that-be on the Continent that austerity unaccompanied by monetary ease is the path to perdition for the European Union. On that score, fears of contagion were fanned last week by Fitch's warning about the vulnerability of U.S. banks, contributing to the droopy market action.
Another damper, we freely acknowledge, has been the wretched standoff by the super committee (the only thing it's truly super at seems to be deadlock) on how to cut the deficits. And the days do dribble inexorably down toward this week's deadline. But you'd think investors would get used to it since quibble and delay are now D.C. perennials.
To judge by the sentiment soundings, we can only infer that investors, many of whom haven't had all that great year in the equity market, are counting on the traditional year-end rally to transform their performance into at least mediocre. And given the insistently quirky way the market has been acting, we wouldn't rule out what has cloyingly come to be called the Santa Claus rally. (We always though the old gent would be too smart to fool with stocks, but you never know.)
Our own view is that whatever the market does for the rest of this year, the outlook for 2012 is pretty darn bleak. Yes, yes, we realize it's an election year, and typically that means the current administration will spread the boodle around as much as it can to gain favor with the citizenry. However, the opposition is apt to prove as intransigent as ever, if not more so.
Further, the sore spots in the economy, starting with the banks and ending with housing, are not in the best of shape, which may be putting it mildly. In particular, we think the rising expectations for some kind of a housing revival are destined to be disappointed. As Mark Hanson, who knows just about everything there is to know about real estate, notes in a recent dispatch, anyone hoping for a big lift from loan modification is due for serious disenchantment.
He points out homeowner's equity is down 55% from the 2006 peak to $6.2 trillion and hurrying toward the record lows of what he calls Armageddon 2009.
We just can't see how this wobbly economy of ours is going to recapture its brio until housing stages a recovery worthy of the name.
E-mail: editors@barrons.com
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