NEW YORK, April 8, 2013 - Spring is finally here. The cherry blossoms are blooming and elites are gearing up to savor summer. Yet a persistent pall looms, threatening even those who profess that our worst days are finally behind us.
Last Friday, we learned that employers still stubbornly resist hiring new workers. According to the U.S. Bureau of Labor Statistics, the ratio of employed persons as a percentage of the total population remains stuck at just 58.5%, down even from dismal 2009 when the ratio was 59.9% in March and way below the peak of 64.6% set in March 2000.
These disturbing trends mask a far more serious set of problems.
The employment ratio treats part-time and full-time workers equally, failing to adjust for the fact that earnings from part-time employment are smaller than those for full-time employment.
The ratio does not segregate employees who work in fiercely competitive global industries who are most vulnerable to out-sourcing from employees who either work in government or work for companies who concentrate upon supplying or serving the government sector.
Furthermore, the sharp decline in the employment ratio needs to be considered along side the simultaneous soaring in total debt. Eventually, debt levels are reduced. In a benign scenario, this is because they are repaid. In a dreadful one, it is because of default.
The Heart of the Problem: The Strange Death of Corporate “Franchises”
From 1945 through 1999, companies fortunate enough to join the Dow-Jones Industrial average comprised the elite of elites. These businesses were acknowledged leaders in their fields, were managed ably and watched carefully by directors, regulators and the investing public.
Of the 30 Dow-Jones components, eight operate primarily in the heart of traditional industrial activity: General Electric, United Technologies, Boeing, Caterpillar, Honeywell, 3M, Dupont, and Alcoa.
Evidence is finally coming to light that shows just how vulnerable the venerable names have become in the new world of free and open, global competition.
Moments ago, Alcoa reported results for the first calendar quarter of 2013.
Founded in 1888, Alcoa is the third largest global player in its industry. Alcoa suffered a sales decline of 2.9 % in the first quarter of 2013 as compared to the first quarter of 2012. While pretax profit did increase from $ 138 million in 2012 to $ 234 million in 2013, cash flow from operations was a negative $ 70 million in 2013 and cash flow less capital expenditures was a negative $ 305 million.
From a financial standpoint, the Alcoa “franchise” remains wounded in 2013, years into an operating environment where governments have poured on fiscal stimulus while Central Banks opened the floodgates of easy money. Soon we shall see just how wounded other Dow-Jones components remain in 2013.
Losing Control of our Geo-Political Destiny
As we struggle to re-energize hiring and bring our debts under a semblance of control, external threats are rising much faster than sensible solutions seem to be emerging.
Beyond the perennial challenges America faces in the Mid-East, with rising China and versus a newly assertive Russia, here are three sets of mounting external threats.
The Final Act for Japan, Inc.
Since Japan’s epic peak in 1989, policy-makers followed a maxim of “if at first you do not succeed, fail, fail again.” With the decision taken last Thursday to explode the balance sheet of the Japanese Central Bank, our stalwart Pacific ally has likely doomed itself.
A rich nation that has chosen not even to reproduce itself cannot regain productive economic traction by devaluing its wealth to boost a portion of its annual economic output (exports).
Like America, Japan already has a severe debt problem. But unlike America, Japan’s population is trapped on an island whose terrain poses unique challenges. Furthermore, Japan’s population is heavily skewed to the senior camp.
As we see throughout 38 “Gray Zone” nations including many in Europe, Japan and the United States, older populations change their buying and investing habits. Lowering nominal interest rates punishes savers and ultimately limits flows available to support consumption.
Japan’s desperate move to devalue its currency decisively may increase the appeal of some exported goods in key foreign markets. However, Japan remains energy starved and will find that the rising cost of certain key imported goods erases some gains arising from higher exports.
Finally, China certainly is not amused by Japan’s pre-emptive currency war—and old tensions between these two ancient societies remain fresh in many minds.
What happens when foreign investors suddenly abandon securities denominated in Japanese Yen? Nothing good.
An Italian Job could Destroy the Euro Project
Weeks ago, few were concerned about Cyprus and fewer still understood just how complex a “Fortress” Bank such as JPMorgan Chase might be.
Things are not yet moving as swiftly as they did starting in early September 2008, but instability is rising and the quoted prices of European financial institution securities have fallen sharply since their first quarter 2013 peaks.
At surface level, the European Project holds great appeal, creating a large, seemingly unified market must hold benefits. The trouble is that Germany and some northern European states have quite a different view of fiscal discipline and the need for “hard” money than is exhibited across the southern tier.
Five years following the near debacle that seized attention between September 2008 and March 2009, large states like Italy find themselves wrestling, again, with stubborn unemployment. Without a national government, Italy must now face the reality that her southern region is even more challenged than is the national whole.
Furthermore, like Japan, Italy has an aged population that is not reproducing and a tradition of opaque financial reporting that may understate the true gravity of economic travails.
What entities will rise to re-right Italy’s national finances and banking system in Meltdown 2.0? The European Central Bank and the International Monetary Fund do not yet have internal financial capacity to move rapidly and effectively enough.
The United Kingdom Could Cry Again for Argentina
Hours ago, we learned that Baroness Margaret Thatcher passed away at the age of 87.
In 1982, with strong support from President Ronald Reagan, Prime Minister Thatcher regained control over sovereign British territory known as the Falkland Islands that was temporarily seized by Argentina.
More than 30 years ago, the Falkland Islands were not much of a “prize.” Few understood that rich stores of energy lay underneath these desolate places and their dependencies.
In 2013, Argentina is led by an Administration that remains afflicted by ill-conceived populist tendencies that have bankrupted an otherwise rich land several times already. Unlike in 1982, when Reagan and Thatcher were soul-mates, President Obama seems less likely to provide the kind of strong support for the United Kingdom should President Kirchner of Argentina decide to distract focus on internal economic woes with another adventure involving the Falklands.
How much aid will the United States be able to provide the United Kingdom if conflict starts in the Falklands while tensions boil again in the Middle East and escalate in the Pacific?
Will Fortune Favor the Brave?
How will the end come to bubbles that have steadily been building since March 2009? I suspect in the way Hemingway had one old man note: “slowly, then suddenly”.
While it is important to look on the bright side of life, please remember this sage advice from Francis Bacon:
“It is the peculiar and perpetual error of human understanding to be more moved and excited by affirmatives than by negatives.”
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