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Unemployment and the Stock Market

Thanks to TraderMark’s article and his link to Cramer’s Mad Money yesterday in which Cramer put forth that unemployment was good for the stock market. In this hilarious, but chilling segment, Cramer plays a kind of high priest of Moloch (the god to whom ancient Semites sacrificed their children). He tells us that he is going to ignore what is in his heart, i.e. compassion for small business owners and the unemployed and root for more corporate layoffs and outsourcing because that is what is good for the stock market and his job is to help us make money rather than espouse political opinions. It reminded me a bit of Jonathan Swift’s great satire, “ A Modest Proposal,” in which Swift suggested that Irish babies be served up as a new dish at the tables of absentee English landlords in order the save Irish children from starvation. Some readers actually took Swift seriously and inquired about his offer to provide recipes. I suppose many took Cramer seriously also although I must admit that Cramer’s subtext was somewhat subtler than Swift’s: As an investor you need to play the system or you will be screwed; but then the system may ensure that you and your children will be screwed. “Profits without prosperity,” was the way Cramer summed it up.


Cramer’s premise is that the stock market is made up of mainly larger corporations whose bottom lines will benefit from continued expansion of outsourcing and domestic layoffs. But is his conjecture that the stock market will continue to boom under these conditions correct? Is unemployment good? Well layoffs may serve the self-interests of certain multinationals for a time. But longer term this may be similar to the belief that invading foreign countries is good for America’s industries; although invasions may benefit certain sectors and boast that absurdly misleading indicator, the GDP (a future article), ultimately wars are a drag on a country’s economy.  I remember stockbrokers becoming activist peaceniks in the early seventies to oppose the Vietnam War during one of the longest periods of economic stagnation in US history.


Outsourcing in this sense is not much different than fighting foreign wars; sending your country’s treasure overseas will not make your country wealthy. And at what point, we have to ask, does increasing unemployment in the US backfire on the multinational corporations? Eventually they will have laid off so many US workers that they have poured sand into the engine of the world economy that is ­fueled by the US consumer. I can’t buy the popular premise that China and India will take up the slack in US consumption for the following reasons:


  1. Both countries are resource poor in relation their vast populations. Many seem to forget that the US, like Canada, and Russia are blessed with vast resources compared to their relatively smaller populations. India and China, like Japan, on the other hand must maintain constant trade surpluses to keep their people at anywhere above a subsistence level. They simply do not have the natural resources relative to their populations to maintain an internal economy; they must manufacture and trade in order to be able to buy the raw materials they need to continue.
  2. The US has a huge government and consumer debt; China and India on the other hand have a huge environmental debt. I just returned from India and I have traveled in China previously. You have to see it to believe it. Millions of people in those countries die of pollution related causes every year.
  3. China and India are using fossil aquifers to supply much of their irrigation water. Combined with the melting of the Himalayan glaciers (I’ve seen this over the twenty five year period I have been traveling there) the draining of the aquifers will ensure that sometime in the not too distant future neither country will be even self sufficient in agriculture.


I have been expecting a consumer backlash against outsourcing for quite a while. So far it hasn’t happened. I personally will pay significantly more for a US made product than a made in China one simply because the quality is generally much better. This is not patriotism – I am not even an American citizen nor do I live in the US. Judging by the way big box stores belonging to US corporations are stocked here in Canada though it seems that the vast majority of US consumers do not feel the same way about the quality of their country’s products as I do. I went shopping recently looking for a replacement light bulb that was not made in China because I have noticed that none of these bulbs seem to last the 5000 hours they are guaranteed to. Couldn’t find any; they were all brand names, but all made in China. So I bought a GE, brought it home, didn’t work. Had to take it back to the store. I mentioned this to a Physicist friend of mine and he said that he had just bought 80 light bulbs for his lab. About 10% of them did not work off the bat so he tested the rest with instruments that he has there and found that about half of the remainder would fail in a relatively short time. They were all brand name. Remember when that used to mean something?


This brings us to the other issue concerning US based multinationals and the government itself – when do they lose credibility? I have to admit that I was shocked that the stock market cheered when the major US banks were blatantly allowed to cook their books last year. Mark to market accounting is a basic, universally accepted principle; without it you have… well….Enron. If your house is really worth what it was three years ago as the banks’ books claim then why can’t you get a loan from them based on that? Why does it work for them and not for you? When does the US government lose its triple A rating after the Chairman of the Fed tells congress, as he did last month, that federal government deficit financing based on projected economic growth is completely unsustainable and there is no solution in sight? And how will corporate welfare for the multinational corporations continue when the huge number of Americans who are unemployed cannot pay taxes? Now it turns out that the Secretary of the Federal Treasury tried to conceal the true beneficiaries of the AIG bailout when he was governor of the NY Fed. These beneficiaries, the banks, continue to be subsidized by the US taxpayer; the banks borrow money from the Fed at 0 % interest and then instead of lending it to small businesses and consumers they buy treasury bonds from the Federal treasury for which the taxpayer pays them interest. It goes on.


I realize that SA is a site about profiting from investing rather than moralizing but consider this: good business in the long run has always required ethics, accountability, and transparency. There is a reason that companies like United Fruit, Union Carbide, and Enron, are no more.

Disclosure: Disclosures: Long DXD, SLV, CDN $ Short SPY