Despite what spin-doctors in Washington may tell you, the job situation is ugly and getting worse.
According to the Labor Department’s report on Friday, 2.35 million jobs have disappeared in a puff of smoke since March 2001.
Many are so fed up that they drop out of the labor force entirely. That’s why the percentage of people in the job market fell to 65.9% last month, the lowest since September 1988.
I can’t say I blame them. Of the 8.2 million people who are unemployed, 1.87 million have been out of work longer than six months. On average, it takes 20.3 weeks for people to find a new job, the worst since 1984.
Then, when they do find work, it’s usually in a low-wage, service job – not the higher-paying manufacturing job that used to be so abundant. Indeed, last month, factories shed ANOTHER 3,000 jobs, the FORTY-THIRD month in a row of falling factory payrolls.
SNOW JOB
Just four and a half months ago, U.S. Treasury Secretary John W. Snow gave an interview to the Times of London. He was asked about the job situation in America.
His response: “Everything we know about economics indicates that the sort of economic growth expected for the next year, 3.8 to 4 percent, will translate into 2 million new jobs from the third quarter of this year to the third quarter of next year – I would stake my reputation on employment growth happening before Christmas.”
Separately, he estimated that 200,000 jobs a month would be created over the coming 12 months. He was wrong. On average, only 52,000 jobs have been added per month, little more than one-FOURTH the forecast.
How is this possible? How can there be such a stark contrast between the glowing, cocky words coming from officials and the dire realities on the ground?
Actually, the discrepancy between official fiction and financial reality is a very common behavior pattern in our modern culture. And this morning, to give you a broader sense of this phenomenon, I want to take you back in time to two other events.
They are not about jobs. They are not even about the economy’s ups and downs. But they will show you how easy it is for important people in high places to completely lose touch with reality.
LIES AND “BUYS”
We go back 22 months and 2 weeks – to Bowling Green on the southern tip of Manhattan. The date: April 22, 2002, clear in the low 40s, and a bit windy.
We look around to get our bearings. Behind us is Bowling Green Park, the place where George Washington’s troops belatedly celebrated the Declaration of Independence on July 9, 1776. They toppled the statue of King George III, chopped it up, shipped it to a Connecticut foundry and made it into some 40,000 Patriot bullets.
A few blocks to the North is the still-smoldering cavity where the World Trade Center used to be.
Far to the East – 6,009 miles to be exact – is downtown Baghdad, where the statue of Saddam Hussein still stands and will continue to do so for almost another year.
Right now, though, we turn our attention to the majestic building directly ahead of us – the old U.S. Custom House. Senator Moynihan saved it from demolition in 1979, and the United States Bankruptcy Court for the Southern District of New York moved in eight years later, about a month before Black Monday, the worst stock market crash of all time.
Sculptures of four of the continents – America, Europe, Africa, and Asia – flank the entrance. If you arch your neck and look up to the sixth story, you can see more sculptures, representing the great commercial and seafaring powers of world history who criss-crossed the globe with their wares.
Suddenly, a black sedan pulls up and three men in dark suits get out. They walk into the interior of the building, and we follow.
We’re now in a huge rotunda, one of the largest public spaces in New York City. We stop momentarily to gaze at the large mural displaying eight views of the port of New York, with eight smaller panels depicting figures of famous explorers, painted in grisaille.
But the men seem to be in a hurry. Something has happened. And you can tell from their body language that they want to get it over with quickly.
Indeed, they’re here today to file bankruptcy for Williams Communications (NYSE: WCGRQ), helping to end one of the wildest chapters in the history of American technology – the mad rush by telecom giants to criss-cross the planet with their wires.
Williams Communications’ beleaguered competitors like Global Crossing, McLeodUSA and Adelphia Business Solutions are already in bankruptcy. Now it’s Williams’ turn.
Just two months earlier, Williams’ Chief Financial Officer Scott Schubert said any reorganization plan would NOT include bankruptcy or a substantial dilution of equity. But he was living in a dream world. Now shareholders have been wiped out, and today’s Chapter 11 filing will merely be the coup de grace.
But the company’s CFO isn’t the only one out of touch with reality. Six months ago, nine prominent Wall Street analysts were still giving Williams Communication a “buy” rating, while eight were still telling investors to “hold.”
Ironically, even on this very morning of April 22, 2002, as the three men open their attaché cases and pull out the official bankruptcy forms, 11 research analysts on Wall Street are STILL telling you to “hold” the company’s stock, while five still have “buy” ratings. That’s right. The company is going under. But they’re tacitly telling you to BUY the shares nonetheless.
Only one of the Wall Street analysts covering Williams Communications has had the courage to finally throw in the towel and pronounce the s-word – “sell.”
Shocked? Then brace yourself. Because it’s actually a common event in 2002. In fact, in just the first four months of the year, 19 Wall Street darling companies bit the dust, some in this same building. When they died (or went into a coma), 12 of them were still sporting “buy” ratings from famous analysts.
Take Adelphia Business Solutions, for example. When it filed for Chapter 11 on March 27, it had two “buy” ratings and three “hold” ratings. Not one Wall Street analyst gave it a “sell.”
Kmart, which filed on January 22, was even more beloved by Wall Street – three “buy” ratings, and nine “holds.” Or consider the case of Global Crossing, which filed for bankruptcy six days later, on January 28: Five “buy” ratings, nine “hold” ratings, and also no “sells.”
Overall, there were 121 ratings on the 19 failed companies. Guess how many of those ratings were “sell” ratings on the date of failure. Only 9.1%! Less than one in ten. All the rest were still “holds,” “buys” … and … lies.
MUTUALLY BENEFICIAL?
Our next time-machine stop is a sprint across the Hudson – to Broadway and Broad in downtown Newark, and back another 11 years in time.
It’s July 13, 1991, and we’re standing before another imperial-looking building with two sets of eight Roman columns, the headquarters of another major company that’s going down. But this time it’s not technology. It’s life insurance.
The local Bergen County Register has just reported that Mutual Benefit Life, one of the largest insurance companies in America, has run out of cash. Nearly all its assets are locked up in real estate and mortgages, much of it high risk, a lot of it gone bad.
Large institutional investors, who had their money in so-called “guaranteed insurance contracts” (GICs), have just taken their cash and gone. Millions of policyholders are left holding the bag.
Right now, as we stand outside in the hot July sun, officials from the New Jersey Department of Insurance are on their way to take over, freeze policyholder assets and begin the long clean-up process.
There are no broken columns or smoldering embers. But the financial damage is greater than the total value of hundreds of buildings this size.
Today’s Saturday. A.M. Best, established nearly a century earlier in 1899, is the leading insurance rating company in the country. It’s also here in New Jersey. But they won’t issue a downgrade to warn investors of Mutual Benefit’s demise until Tuesday of next week, three days AFTER the event.
Standard & Poor’s, which has just recently entered the field of insurance company ratings, isn’t even that “timely.” It won’t issue its downgrade next Tuesday, next Saturday or even next year. In fact, according to a General Accounting Office report to come out in 1994, “S&P never assigned a `vulnerable’ rating to Mutual Benefit Life. It discontinued rating the insurer July 12, 1 day prior [to the failure].” In Wall Street’s parlance, it dropped coverage. That’s right. S&P will NEVER downgrade the company – not even after it ceases to exist.
For all the officials involved in this mess, that arrangement may have SEEMED mutually beneficial: The company got a high rating despite horrendous finances. The rating agencies got their big fees from the company, despite billions in policyholder losses. And regulators turned a blind eye. But today, it all came tumbling down, and everyone, including the officials, are going to pay the price.
An unusual event in the insurance industry? Not exactly.
In fact, in the early 1990s, A.M. Best fails to warn investors about nine out of ten of the large life insurance failures until AFTER the companies go down.
Other established rating agencies follow essentially the same pattern. All told, among the 23 ratings issued by four major agencies on large companies that fail, only THREE of the ratings give adequate warning (at least one week in advance) of the pending disaster.
Six million Americans have policies in these large failed insurance companies. Among them, over two million have cash value. Now all that cash is under a moratorium – frozen solid.
If you’re among the victims, and you want your money back, don’t hold your breath. No policy surrenders and no policy loans are being processed. If you have an emergency, you MAY be able to make a partial withdrawal, but you’re going to have to beg for it. You’re going to have to convince them that your emergency is worse than everyone else’s emergency.
BACK TO THE PRESENT
How is it possible for all this vital information – about the job market, about the stock market, even about insurance – to get so slanted, twisted and bent out of shape? How can so many smart people not only deceive the public, but lie to themselves as well?
The answer can be found in one, not-so-simple, four-letter word: BIAS.
All of us are biased in one way or another. Some people even say that I’m biased because I’m “always stressing the negative.” I’ll respond to that in a moment.
But first, let me make this key point: Although bias is part of human nature and something we need to deal with daily, the truly poisonous and dangerous form of bias is the kind that comes with serious CONFLICTS OF INTEREST.
* U.S. Government officials, whether Republicans or Democrats, are supposed to be giving us honest opinions. In reality, we all know they often give us little more than spin to achieve a strategic objective.
* Treasury Secretary Snow, for example, was probably told by his staff that the now-infamous 2-million-job-growth forecast was just one of several possible scenarios. Yet the other, more sanguine scenarios never saw the light of day. Did they choose the best scenario because they really thought it was the most likely? Or did they choose it because they knew it would have the most feel-good impact on the public?
* Wall Street research analysts are also supposed to be giving us honest opinions. But, alas, Eliot Spitzer proved that was often not the case either. In private e-mails, analysts derided the very same companies they were telling you to buy, the same companies that later wound up in places like the United States Bankruptcy Court for the Southern District of New York.
* Well-established rating agencies like A.M. Best and S&P live and die by their honest opinions. But in the early 1990s, even that was less important to them than keeping their customers – the rated companies – happy, and keeping the companies’ customers – you – in the dark.
My warning to you: Beware of these conflicts of interest. And don’t let any politician’s promises – whether they’re in office or not – snow you.
MY BIAS
My bias lies in my confidence in America. More so than any other large modern industrial nation on earth, we still retain the flexibility and spirit of a frontier society.
We have what it takes to face reality, survive hard times, and move on to bigger and better things.
We move our place of residence more frequently and more efficiently than almost any other culture. We climb the socio-economic ladder with unparalleled speed. We can adapt amazingly well to rapid change. We can handle the truth.
So we need not shirk from it, no matter how ugly it may seem. Nor must we fear a decline – in the stock market, the economy or our standard of living.
It’s OK to slow down. It’s OK to take a breather from the maddening pace of growth. That’s what I recommend. Not just for the country, but for you, too.
Your first priority: Protecting your capital.
Good luck and God bless,
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
