Downright Scary - 10/05/09

October 5, 2009

Downright Scary
By Alan Abelson, Barrons

September jobs report makes for spooky reading. The deeper you dig, the worse it
gets.
HE WHO SUPS WITH THE DEVIL HAD BEST use a long spoon. That hoary adage applies to lunch with the devil
as well. What prompts us to resurrect it isn't the likelihood that you're about to dine with that old pal of a broker
who put you into AIG just before the roof fell in, but something more cosmic: For the first time in 30 years, the
U.S., in the person of the undersecretary of state, William Burns, and a mucky-muck from Iran had a one-on-one
powwow while chomping away on free eats.
The mano a mano meeting took place in Genthod, Switzerland, widely known for the yodeling prowess of its
inhabitants, during a luncheon break in a single-day gab session between Iran and six more or less civilized
countries -- the U. S., Britain, France, Germany, Russia and China (we said more or less civilized countries) --
whose aim was to persuade that rogue nation to cease and desist from implementing its earnest desire to nuke the
world. If it doesn't, our side threatened, Iran will be really sorry, because we will absolutely insist on holding a
repeat talkathon, and soon.
As a matter of fact, the fun-loving Iranians already have agreed to attend just such a gathering. No mystery why,
either. For as they've demonstrated time and again ever since North Korea slipped them the not-so-secret blueprint
on how to build a nuclear bomb six or seven years ago, the ruling regime is truly proficient at however you say
filibustering in Persian.
What the regime is clumsy at is rigging elections, and bashing and torturing any unarmed citizen who has the bad
taste to make a fuss about it. The president is a dead ringer for Charlie Chaplin run amok -- in other words, a
malignant clown -- but the real power is wielded by the Revolutionary Guard, an elite militant body that owns a
piece of everything it can get its grimy hands on, kind of like some of our successful private-equity firms. The
Guard is too busy adding to its bulging portfolio stocked with chunks of stuff snatched from rightful owners to
waste a lot of its valuable time keeping the populace in line or in hospitals and jail. So it franchises out the rough
stuff to the Basij, a thuggish militia made up of brutish young hoods keen on breaking heads, but in a strictly
nondiscriminatory way, with the noggins of women and old folks very much included.
We suppose you can make a case that, as a general rule, blah-blah is better than bang-bang in dealing with bad
guys, but we wouldn't get giddy just yet about anything coming from this "engagement" (a truly scary word to use
in this context, since in common parlance it usually connotes a prelude to marriage). Because as one British security pro, quoted by Bloomberg, put it, Iran is likely "to hold out the prospect of concessions, whilst continuing a
strategy of stalling, in order to achieve a 'breakout' nuclear-weapons capability."
Not perhaps an exceptional sentiment, but concise and to our point. Iran's wacko but cunning president and guileful
"supreme leader" are hardly insensitive to the rising discontent among their subjects grown weary of pervasive,
often bloody repression, and, thanks to unabashed corruption and woeful bungling, an economy that sucks.
Desperate for image repair, they decided to change the face they put on in confronting the rest of the world. And
that, we suspect, is all they've changed.
For all that Iran momentarily found itself front-and-center among global attractions last week, on Wall Street it was
pretty much a nonevent.
One reason for this seeming insouciance might be that investors' attention was riveted on a veritable outpouring of
other, more substantive news. Like a slew of economic data, including the September jobs tally from the Bureau of
Labor Statistics.
Not to mention such exciting tidbits as the announcement by Ken Lewis that he's stepping down as Bank of
America's CEO (no need to ask why that man isn't smiling), President Obama's futile trip to Copenhagen in hopes of
snaring the Olympics for Chicago, and David Letterman's confession of amorous indulgences with female staff
members and the extortion attempt that issued from those indiscretions.
And, oh yes, there was the stock market and, more specifically, the stunning revelation that it was capable of --
dare we say it? -- going down as well as up.
ARE THERE ANY EASILY FRIGHTENED little ones or elders afflicted with delicate tickers within eyeshot? Do us a
favor and send them out for ice cream (and make it two scoops, please), because we're about to discuss an
absolute horror: the September employment report.
On the surface, things are bad enough; the more you dig into the numbers, the worse they get. Payrolls shrunk by
263,000 from the previous month, just a tad more, obviously, than the 175,000 the Street's richly paid
professional guessers were projecting. That brings the official count of job losses since this stubborn recession
reared its head in December 2007 to 7.2 million (and lifts the overall total of people on the dole by the Bureau of
Labor Statistics' reckoning to 15.1 million), while the unemployment rate edged up to 9.8%, from 9.7% in August.
If we turn to the household survey, which seeks to determine whether or not people are working by asking
individuals about their job status rather than querying the companies who employ them, the September figure is
positively staggering: 785,000.
John Williams, of Shadow Government Statistics, contends that the household survey is more reliable, asserting
that the sampling is fairly well established and, significantly, the unadjusted raw data are not revised.
Our own favorite measure of unemployment is, as we've noted more than once before, is good old U-6, which
reached a new peak of 17%, up from 16.8% the previous month (and 10.6% a year earlier). U-6 includes parttimers
who lust after a full-time job but can't find one, along with, as the BLS dubs them, "marginally attached
workers." Actually, that's a wonderful description, conjuring up, as it does, the image of folks hanging by a thread.
As Doug Kass, our hedge-fund-manager friend, who was a whiz at arithmetic when he was 10 years old and still
can do his sums, totes it up, there are 2.2 million of these marginally attached souls, who would like to work but
haven't been able to land a job and aren't receiving benefits. Add in some 9.2 million involuntary part-timers and
the aforementioned 15.1 million formally unemployed, and the jobless total swells to over 26 million.
A compassionate portfolio manager (if there is such an animal), Doug tries to fathom in flesh-and-blood terms what those dry-as-dust dry statistics mean. And what he envisions are 26 million people not going to malls for extras, or
taking the kids to the movies, hunting the cheapest victuals they can find at the supermarket and who are denying
themselves the pleasures of travel, eating out, upgrading to Windows 7 or buying iPhone apps.
Now conceivably, they may not miss the Windows 7 or buying iPhone apps. (Apple and Microsoft might not agree.)
Still, 26 million, even give or take a million, is an awesome number of unemployed men and women. The ironic
conclusion Doug draws from this dismal picture as an investment pro is that corporate revenues are destined to
continue to drag, and companies straining to realize those absurdly inflated Street expectations for 2010-11
earnings will continue to focus on cutting costs, which translates into cutting jobs.
In a similar vein, John Williams dismisses the consensus outlook and hype from Wall Street and Washington about
improving economic conditions as "irrationally optimistic." And he feels that "with the constraints on broad systemic
liquidity still tightening, unhappy surprises are likely in that area as well."
It seems like forever that we've been delivering a monthly rant occasioned by the release of the data of the socalled
birth/death model, launched during the Bush administration and extended by the current one, that is
supposed to capture the employment additions of new firms and the subtractions of those that go belly up. As it
happens, the model is a bust during recessions (as a modest example, it created 34,000 mythical jobs last month).
Comes now the preliminary revision of the March 2009 benchmark, and it turns out that, in fact, courtesy of the
birth/death model, that month's payrolls were overstated by a mere 824,000. As Philippa Dunne and Doug
Henwood, proprietors of the Liscio Report note, since job losses in the first quarter of this year were already
reported at 2.1 million, "adding the better part of a million to that suggests a truly savage bloodletting in early
2009."
They also point out that September was the 21st month in a row of shrinking employment, the longest losing
streak since the monthly numbers started being published back in 1939. It's also the worst decline -- even without
the benchmark revision -- since the post-World War II demobilization. The sorry consequence of the severe
damage wrought by the recession, combined with the weakness of the 2002-07 expansion, is that private
employment is now 2.6% below where it was at its December 2000 peak.
And (you can almost hear them sigh) as Philippa and Doug observe, "We've never seen anything remotely like that
kind of long-term carnage" in poring over 70 years' worth of monthly stats.
Yeah, yeah, we know, employment is a lagging indicator. Not this time, buddy.