On the Losing Side of a Credit Battle; Leon T. Hadar on Readjusting to the New Global Reality

The Daily Reckoning Tuesday, October 06, 2009 US jobs aren't just 'lost' - they are dead.... A rumor, based on conspiracy, wrapped up in presumption... We always warned that private equity was a fraud... Leon T. Hadar on readjusting to the new global reality...and more! --------------------- Special Offer --------------------------- Think you can't afford your dream retirement? Think again. In the right places overseas, your dollars buy you way more than they do at home... A vineyard in Italy for less than $100,000... Six places in Mexico where you can live well on $1,500 a month... Your own escape on a palm-lined beach in Brazil for $63,000.... This time next year you could be living your dream. Let us help you make it happen. --------------------------------------------------------------- On the Losing Side of a Credit Battle by Bill Bonner London, England Where have all the jobs gone long time passing Where have all the jobs gone long time ago Where have all the jobs gone Gone to graveyards everyone When will they ever return Oh when will they ever return - Sung to the tune of "Where Have All the Flowers Gone?" "Many lost jobs in US will never come back..." says The Wall Street Journal. Need we explain why? Because they're not lost, waiting to be rediscovered. They're not missing in action, to be repatriated after the fighting stops. Instead, they're dead. Gone forever. There have been 7.2 million jobs lost since recession began. Many of these jobs were Bubble Age jobs. Millions of people, for example, earned their money in 'housing.' They were putting up houses in the sand states...or building granite countertops....or selling, flipping, financing the houses. Those jobs are gone forever. Never again in our lifetimes are we likely to see such an explosion in the housing industry. Sure, people will still build houses...and do all the other work involved in the traditional housing industry. But it will be only a fraction of the industry it was in the 2002-2007 period. There were also all the jobs involved in selling things to people who didn't need them and couldn't afford them. Labor was needed at every step of the way - manufacturing (perhaps in China), shipping, stocking, retailing, fixing, and financing the stuff. And don't forget all that mall space...and all the trucks...and all the other things that supported the over-consumption of the Bubble Age. And now the Bubble Age is over. It will not come back, no matter how much cash and credit the feds pump into the system. (Not that they can't make things worse...in a BIGGER bubble...but that is not yet in sight.) In The Wall Street Journal yesterday was an item about Las Vegas. The casinos are folding up their expansion plans, says the WSJ. But the big news yesterday was that the service industries are growing again...at least that's what the latest figures show. This news so delighted investors that they bid up Dow stocks 112 points. Oil rose above $70. Gold posted a $13 gain. Don't get too excited about that rise in the service sector. Everything bounces...even dead jobs. Dead jobs bounce; they still don't get up. After months of decline, it may be true that the service industries have had a rebound, but don't expect them to begin recovering the stamina and strength of the bubble years. A few more people may have gotten jobs serving drinks in Detroit's bars last month, but it is not likely to turn into a durable recovery of the job market, In the 1990s, the US economy added 2.15 million new jobs every year. It needed to add at least 1.5 million or so just to remain at full employment - that is, with about 5% of the workforce unemployed at any time. To put that number in perspective, this year the economy as LOST 2.5 million jobs, just in the last six months. Those jobs aren't coming back. As we keep saying, this is a depression. It is a major correction, in which the economy needs to find new jobs...because it can't continue to do what it has been doing. New jobs are typically created by new businesses - small businesses that are growing. Big businesses already have all the market share they're going to get. They also typically have all the employees they need. Then, when hard times come, they discover that they don't need all that they have, so they cut back. Job cuts from large businesses is what you expect in a recession. But this time it is different. This time, big businesses have let people go by the million. But small business has not been hiring them either. So not only is unemployment growing...the trend shows no signs of coming to an end. Economists are reconciled to high unemployment levels for a long time. The head of the IMF says unemployment might peak out in 8 to 12 months. Even if that were true, it will be a very long time before the job market recovers. Just do the math. We'll keep it simple. The economy needs, say, 1.5 million new jobs per year. Instead, over the last two years, it lost 7.5 million. Now, it has to stop losing jobs...let's just say that happens a year from now. By then, the total of jobs lost may be near 10 million. Plus, there are the new jobs it needed - but never got - over that 3 year period. That's another 4.5 million. So, the total will be about 14.5 million jobs down. Then, let us say, because we are in a generous and optimistic mood, that the economy then begins creating jobs again...at the rate it did during the '90s. What ho! After five years, that still leaves the economy more than 10 million jobs short, doesn't it? In order to get back to full employment, the economy has to surprise us on the upside. It has not merely to return to the growth levels of the '90s...it has to surpass them. It needs to grow so fast it creates 3 million jobs per year. And even then, it would take nearly 10 years to get back to full employment. Pretty grim, huh? Well, don't worry about it. It won't be like that. It will be worse. Keep reading... [The worst is yet to come, but we know you'll be prepared - because you set up your financial defense strategy. If you haven't yet, there's no time to waste - and these resources are completely free to you. Get them here.] More news, from The 5 Min. Forecast: "A rumor, based on conspiracy, wrapped up in presumption... that's all it takes to get markets moving these days," writes Ian Mathias in today's issue of The 5. "And it's why your gold investments just hit a historic high: "A global consortium of European, Middle Eastern and Asian nations are plotting to stop using the US dollar to trade oil, says the UK's The Independent. "The paper - which has captured the attention of essentially every financial news outlet - claims that 'Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council (GCC), including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.' "Quite a mouthful, eh? According to The Independent's 'Gulf Arab and Chinese banking sources,' secret meetings between all these nations are already well underway and a potential transition out of the dollar is viable 'within nine years.' "Of course every government mentioned has dismissed the report, but some damage has already been done. The dollar index sank almost a point to 76.2, just above its yearly low. And gold, as we illustrated above, found a new record high. But, is this story for real? "'At first sight, such a move looks highly unlikely,' says Peter Cooper, one of our contacts in the UAE, who also just happened to be giving a city-wide tour of Dubai to Addison Wiggin and Chris Mayer today. 'The Gulf Arab countries are staunch allies of the United States and dependent on the US for military protection in their volatile region... It is far more likely that such rumors, if they are true, are more a question of policy makers mulling over policy options.' "'These rumors are especially interesting,' adds Addison, 'because they presuppose a unified position among GCC nations. Independently of this story, we learned yesterday at a press conference hosted by Standard Chartered bank of England that these countries don't necessarily agree with one another. "'The Saudis, Kuwaitis, Qataris and Emeratis have been trying to create a Euro-style unified currency in the Gulf region. But they can't agree on who would be the leading party, how the currency would be weighted, or even what to call it. It's a huge assumption that the GCC could get this currency off the ground in the near future...an even bigger presumption that these nations could agree on a strategy for replacing the dollar pricing of oil. "'Of course, it's possible - stranger things have happened. But at this point, it's a long shot. And it's no strange wonder that the rumor floated on the first day of the IMF meeting in Turkey today. The main subject under discussion at the meeting will be viable alternatives for the trillions in dollar reserves held by the Gulf States and BRIC nations...'" Incidentally, we have recently assembled four "go-teams" of in-country experts in the world's fastest growing markets. People who know first- hand all the ins and outs of investing in Brazil, Russia, India, and China. And if you act by tomorrow, Wednesday, October 7 you'll get a BRIC currency play that's guaranteed by the US government. But you have to act fast - this window of opportunity for this play is closes at midnight, Wednesday, October 7. Act now... And back to Bill, with more thoughts: "Uh...Bill...what do you mean, 'worse'?" Glad you asked. In the typical post-war recession, jobs are lost...then they are recovered when the economy gets on its feet again. But this happened in the credit expansion of the '45-'07 period. Each recession was just a pause, when the economy was catching its breath. Then, it was off again...in the same direction - up the mountain of credit. This time, it's not a typical post-war recession. It's something different. Now, we've reached the peak. We're coming down the other side...wheee! Look out below! Now we don't need all those people building houses, stocking the shelves and selling things. We don't need such a big financial industry either. Now, people want to get rid of credit, not get more. And the businesses that were goosed up in the credit bubble are now deflating fast. They're not just taking a break. They're lining up the jobs and shooting them in the back of the head. Those jobs are gone. (See below...) In a 'normal' recession, jobs reappear because the economy continues in the same direction. In a depression, it changes course. Debts are paid off. Spending goes down, more or less permanently. The economy actually contracts...until consumer debt is once again down at an acceptable level...or a new model for growth can be found. The Wall Street Journal mentions a statistician who was making $100,000 a year. He too is a victim of depression. His job has been outsourced to India. Businesses, with less revenue coming in the door, must cut costs in whatever way they can. Labor is the single biggest item on most firms' ledgers. They will reduce it however they can. And once the change is made, there is little chance that the job will come back. It is a little like a battle. In an attack, troops often get separated. They are 'lost' - for a while. Then, the winning side is able to recover its missing troops as it advances. But the losing side gives up its troops forever. They are stuck behind enemy lines and cannot rejoin their units. We are now on the losing side of a credit battle. Having gained so much ground, and so many jobs, in the advance, the United States is now giving them up. "I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows," Strategic Short Report's Dan Amoss chimes in. "As we 'lap' the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I'm amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality." [Dan is working on a bonus short idea that ties into this for his readers. If you are one of them, look for it next week. If you aren't a Strategic Short Report reader, now is the time to get in... Dan's recommendations flourish in this kind of market environment. Get all the info you need here.] And here is a story we foretold years ago. Private equity was mostly a fraud, we said. Sharp operators bought companies for more than they were worth, loaded them with debt, collected huge fees, and then sold them back to the public or to other private equity firms. Come the revolution, we mused, these deals would go bad. Well, the revolution has come. The deals have gone bad. The New York Times reports: "Simmons [the mattress company] says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company - the seventh time it has been sold in a little more than two decades - all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money. "For many of the company's investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company's downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees - more than one-quarter of the work force - laid off last year. "But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise. "Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years." Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- Grab Your Share of the Most Aggressive Wealth Creation in History Sure, the Dow is up 50% from its lows last spring. But the market in this "wealth refuge" is up 100%. And I think it's just the beginning. Now imagine if you had a team of people who live and work in that country, uncovering the very best companies - just for you. You can put that team to work for you today... before we open access to the general public on Wednesday, October 7. But you must act fast...get in now. --------------------------------------------------------------- The Daily Reckoning PRESENTS: There is often a recognition lag between when an event actually happens, and when it is recognized by the mass majority. As Leon Hadar points out, below, changes in economic conditions, changes in the global status and power of nations, are not always immediately apparent, especially to the politicians and the generals who yield that power and to the journalists who cover them. Read on... It's the Balance of Power, Stupid! by Leon T. Hadar Washington, DC Historians agree that Britain's rise as a pre-eminent global power came as a response to changing circumstances and not as a part of a grand master plan; Britain, it has been said, stumbled into an empire. But the converse was also true: the dismantling of the British Empire wasn't a linear process involving a manageable and steady decline in its military and economic power; instead it had a haphazard muddling through quality. British leaders weren't aware that Rule Britannia was already history even after the fat lady had sung that it was over. Indeed, Prime Minister Winston Churchill who had led his nation into an impressive military victory in World War II, confident that the defeat of Nazi Germany would help save the British Empire, failed to recognize that the enormous military and economic costs of the war had actually created the conditions for the liquidation of the empire, starting with the withdrawal from Palestine and the "loss" of India after the war. But while the sun was setting on the British Empire, members of its political elite continued to live under the illusion that their nation had remained a paramount global power. If you traveled in a time machine to London 1949 and attended a debate in the British Parliament, browsed through the pages of the Times or listened to a BBC news program you would come across numerous references to Britain as a Great or "superpower,"; a term that was applied to the United States and the Soviet Union after World War II. And if you encountered diplomats in His and (after 1953) Her Majesty's Diplomatic Service and bankers in the City of London, you wouldn't be surprised if they continued to behave as though the world was still their domain to rule. It was the humiliating abandonment of the Anglo-French invasion of Suez in collusion with Israel in 1956 that proved to be the turning point in Britain's retreat from empire and ensured that London would never again attempt global military action without first securing the acquiescence of Washington. The time lag between the effective end of the British Empire and the recognition that indeed it was all over, proved to be quite lengthy. The concept of "recognition lag" is familiar to economists. It refers to the time lag between when an actual economic shock, such as a sudden boom or bust, occurs and when it is recognized by economists, central bankers and the government, like when officials signal a recession in the economy several months after it has actually begun. And just like changes in economic conditions, changes in the global status and power of nations, are not always immediately apparent, especially to the politicians and the generals who yield that power and to the journalists who cover them. That the elites continue to share such misconceptions about their nation's ability to exert global influence has less to do with the power of inertia and more with the vested interests they have in maintaining the status-quo that could be threatened by challenges at home and abroad. While no one is comparing the global political, economic and military status of the United States to that of Great Britain after World War II, there is an eerie resemblance between the resistance of officials, lawmakers and pundits in London 1949 and that of their contemporary counterparts in Washington 2009 to adjust their nation's foreign policies to the changing global balance of power. That may explain why so many members of the US foreign policy establishment seem to be so depressed in face of the Obama Administration's current difficulties in dictating global developments, ranging from the military quagmires in Iraq and Afghanistan, Iran's nuclear aspirations and the deadlocked Israel/Palestine peace process to the stalled negotiations on global trade liberalization (the Doha Round), the efforts to reach an international agreement on climate change and the global financial imbalances between the US and China. Where is US leadership on this or that global policy issue? Why can't the Obama Administration "do something" to resolve this or that international crisis? As expected, neoconservative critics depict President Barack Obama as an idealistic peacenik, if not a 1930's-style appeaser. They blame the perceived erosion in US' ability to call the shots around the world on Obama's alleged failure to stand-up to Russia (by abandoning the missile shield program in Eastern Europe), to Iran (by trying to engage it), to Venezuela (by shaking hands with Hugo Chavez) and to Al Qaeda (by overturning torture practices), and on his supposed betrayal of allies (Israel, Georgia, Poland, the Czech Republic). Not to mention Obama's refusal to launch new crusades against Islamofascism, to promote the Freedom Agenda in the Greater Middle East and to annoy the commies in Beijing on a regular basis. "...there is an eerie resemblance between the resistance of officials, lawmakers and pundits in London 1949 and that of their contemporary counterparts in Washington 2009 to adjust their nation's foreign policies to the changing global balance of power." That's rich coming from the guys at the Weekly Standard and the American Enterprise Institute (AEI). After all, it was the mess that the Bush administration, guided by these neoconservatives, had made in the Greater Middle East - where US military power was overstretched to the maximum, and where American policies helped strengthen Iran and its surrogates in Iraq, Lebanon and Palestine - coupled with the dramatic loss of American financial resources, that has produced a long-term transformation in the balance of power in the Middle East and worldwide, and has significantly eroded Washington's geo-strategic and geo-economic clout. In fact, the increasing wariness of the American public regarding new US military interventions, as a consequence of the wars in Iraq and Afghanistan, and the expanding US deficits would have made it difficult even for a President John McCain to promote an aggressive US policy in the Middle East and elsewhere. That Obama finds it so difficult to press Israel's Benjamin Netanyahu, Iran's Mahmoud Ahmadinejad and Afghanistan's Hamid Karzai to change their policies may have to do with the fact that unlike many of the elites in Washington, the above and other foreign leaders have succeeded in deconstructing the current geo-strategic reality and recognized that the global balance of power has been shifting and that US ability to exert its diplomatic and military leverage over them has been constrained. Let's hope that these changes will also be recognized in Washington as soon as possible, and that unlike the leaders of the British Empire, those in charge of Pax Americana will have enough time to readjust to the new global reality. Regards, Leon T. Hadar for The Daily Reckoning Editor's Note: The above piece was originally published in The Huffington Post and has been republished with permission. Leon T. Hadar is a foreign policy research fellow at the Cato Institute and author of Quagmire: America in the Middle East. He is also former UN bureau chief for The Jerusalem Post and is currently Washington correspondent for the Singapore Business Times. His analyses have appeared in The New York Times, Washington Post, Foreign Affairs, and interviews on CNN, Fox News, the BBC and elsewhere. He is a graduate of Hebrew University in Jerusalem, earned MA degrees from Columbia University, and his Ph.D. from American University. You can buy his book, Quagmire: America in the Middle East, by clicking here. --------------------- Special Offer --------------------------- Imagine if you were a "Clockwork Millionaire". That means bringing in simple triple-digit profits, again and again. Like clockwork. You could enjoy a limitless stream of cash that rolls in every single year, for the rest of your life... With just one easy trade a week - the play even comes on the same day around the same time. 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