Idle Young Men, Retesting March Lows, An Honest Government Employee, Rare Earths and More!

by Addison Wiggin & Ian Mathias

  • The real danger of depression rears its head: Ranks of unemployed youth grow exponentially
  • Stocks regain tepid outlook… Dan Amoss on what could trigger a retest of March lows
  • More recovery rip-offs: TARP chief comes clean, study shows large loans in serious trouble
  • Plus, the next chapter in China’s rare earths monopoly… Byron King weighs in


  “The real danger — economically, socially or politically speaking — in the 1930s was loads of young men without jobs.”

It’s probably a literary no-no to quote yourself. But we begin today with words we wrote last November not because we admire our own work, but we because we meant it then… and it’s becoming a reality today.

  No matter which way you measure it, unemployment among Americans aged 16-24 is now at a post-World War II high. As typical in these kinds of stats, we’re seeing numbers all over the place… the NY Post reported yesterday that the rate has “exploded” to 52%, while the government’s latest tally (set to be revised this week) has it closer to 25%. Neither stat includes students not looking for work.

Both ends of this spectrum still mark the highest youth unemployment rate since at least 1948, when the government started keeping track. That’s especially interesting given the “official” unemployment rate for the total population — a 26-year high of 9.7%.

This has the Obama administration worried enough to shell out $1.2 billion — an earmark in the stimulus bill which has (if anything) only kept the situation from getting REALLY ridiculous. In the meantime, the masses of disgruntled youth swell by the day. How dangerous is that in modern times? Ask Mahmoud Ahmadinejad.

  Why do our youth have it so tough? For starters, competition for jobs is at a record high. Here’s a worthy alternative way to examine our jobs crisis:

There are 14.5 million officially unemployed people in the United States and 2.5 million job openings. In other words, for every six people looking for work, there is one job to fill — not counting those already employed who are looking for a new gig. And we hasten to add, these are Labor Department numbers… if the reality were twice as bad, it’d be no surprise.

So pity the youth. That English Lit degree might be useful one day, but not up against five other resumes with real work experience. Summer internships are over, and all that’s left are a few hourly, low-wage gigs. According to Northwestern University, half of college grads under 25 that do hold jobs are working in a position that doesn’t require a degree — also the highest portion on record.

Our biggest fear is that these jobless youth lose all hope and make the ultimate mistake — law school.

  We’ll be watching jobs closely this week. ADP issues its best employment guess Wednesday. The government’s latest initial jobless claims report hits Thursday, and the much- belabored — and statistically questionable — jobs report comes out Friday.

If you’re a data hound like us, it’ll be a good week. Here’s the quick and dirty:

· Today: Zilch

· Tuesday: Case-Shiller Home Price Index, Consumer Confidence

· Wednesday: ADP Employment, Final GDP, Chicago PMI, Crude Oil Inventories

· Thursday: Personal Income & Spending, Initial Jobless Claims, ISM Index, Pending Home Sales, Auto Sales

· Friday: Jobs Report

  Stocks will enter this data-heavy week in a tepid mood. The Dow fell 1.6% last week, its worst week since early July. The S&P fared even worse, down 2.2%. Both indexes managed to open in the black today, thanks mostly to surprise merger news from several sectors: Xerox is buying ACS, Abbott Labs is buying Solvay and Johnson & Johnson picked up a big piece of Crucell.

  “Whether this correction in the market since last week turns into a more bearish scenario,” writes Dan Amoss, “will depend entirely on investors’ appetite for risk, which is very high. There’s not much fear out there today, as everyone seems convinced that the economy will be off to the races in a sustainable recovery at any point now. But markets that rise on speculative hopes rather than solid fundamentals tend to reverse violently. Fear of recent paper gains vanishing could overwhelm fund managers’ fear of missing a rally, which has been the primary explanation for this overstretched market to remain aloft.

“Many desperate managers have resorted to chasing ’junk’ stocks or overvalued stocks like Research in Motion (RIMM). You can see how the bottom fell out of RIMM after this overvalued, over-loved security missed earnings expectations last night by just a smidge. We could see the same sort of reaction in stocks when they report earnings in the coming weeks…

“If I had to point to one factor that’s driven investors to bid up risky assets, it would be the dramatic compression in credit spreads from panic levels to levels that price in a typical postwar economic recovery. This compression in credit spreads — the rally in junk bonds and leveraged loans — has had a magnified influence on stocks that represent levered bets on credit risk and resumption of debt-fueled consumption: banks and real estate investment trusts.”

That’s one reason why Dan’s readers have short plays in both the banking and commercial real estate sectors. For the fine details, look here.

  “I can’t tell you if we are safe; I don’t know,” said Neil Barofsky over the weekend. He’s the inspector general for the Troubled Asset Relief Program (TARP) — a man who first gained attention, and a smidge of our liking, by being the first guy to ask how much this TARP mess could cost (worst-case scenario = $23.7 trillion!). He’s back in the spotlight today with this refreshingly candid snippet… how long until this guy gets the gag order?

“Banks that were too big to fail are bigger than ever. They’ve become consolidated. With government encouragement, some of the largest banks have become larger and are more interconnected than ever.

“You hear about moral hazard — heads I win, tails the taxpayer pays for it. We certainly have not moved away from that. In fact, I think we’ve made it very clear… we’re not going to let our large financial institutions fail. And with that, I think we may be in a far more dangerous place today than we were a year ago.”


Heh, and one more, less startling, admission: “It is extremely unlikely that the taxpayer will see a full return on its [$700 billion] TARP investment.”

Just another government rip-off.

  Losses on large loans at U.S. banks are looking to get even worse. From a study by the party animals at the Shared National Credit Program:

· Of loans exceeding $20 million, 22% are “substandard,” “special mention,” “doubtful” or “loss” so far this year. That’s $642 billion worth of loans and almost double last year’s rate.

· The “doubtful” and “loss” rated loans total $477 billion — triple last year’s count.

Think all those bad loans have been faithfully written down or charged off at banks around the country? Heh… right.

  Can’t blame the dollar for falling a bit today. The dollar index is down a few tenths of a point as we write, to 76.8. That’s about a full point above last week’s 12-month low.

The re-election of German Chancellor Angela Merkel has helped pull the euro out of last week’s slump. It’s back at $1.46 after falling two full cents late last week.

  The dollar’s weakness has helped gold arrest its fall. The spot price plunged as low as $985 Friday, but has since buoyed back to $995.

  The Chinese have written a new chapter in their quest to completely corner the world market for rare earth minerals. The country has withdrawn its bid for Aussie miner Lynas — one of the world’s only remaining non-Chinese rare earths players. China Nonferrous Metal Mining Company (CNFM) was supposed to pick up 52% in exchange for some quick cash, but the Australian government said late last week that it wouldn’t allow China to have a controlling stake… so China walked.

“The Chinese approach is crystal clear,” says Byron King, a long sufferer of the rare earths beat. “Any rare earths project that is NOT under Chinese control is a threat to the monopoly of the Middle Kingdom. The CNFM investment in Lynas was another way of keeping control over future world markets in rare earths. By limiting Chinese investment in Lynas to under 50%, Australia’s Foreign Investment Review Board has made it impossible for CNFM to control the miner. So CNFM is walking, probably hoping that Lynas will fold for lack of funding.”

Byron has A LOT more to say on this matter… for his full report on rare earths investing, click here.

  “The quotes about coupon ‘savings’ hit the nail squarely,” a reader writes, referring to another bit of reader mailed we posted Friday. “Look at real costs, not hyped-up apparent savings. As income and need press available cash, the ‘unit’ price of an item begins to mean something to a lot of people and they begin to actually pay attention. Decades ago I began noting the myth that a bigger package is cheaper. Price per unit seems to have an optimum package size. Larger and larger packages often are increasingly higher priced per unit just to take advantage of those who look at nothing else than size. Very small packages suffer, of course, because there really are some economies of scale and minimum production costs per package. I stopped shopping at Sam’s Club long ago because there were no ‘unit’ prices and I was threatened by a store manager for calculating the ‘unit’ prices. I eventually began buying at Wal-Mart again but am wary of the marketing ploys.”

  “How about an article,” asks another, “about the hidden inflation of companies putting less and less product in their packages and then selling at the same price?”

The 5: Ask and you shall receive… we’ve hit that before, here.

  “Just an aside to the reader about being unable to afford a Sunday newspaper,” writes the last reader. “The $1 to $1.50 a Sunday paper may cost vs. $30 plus in coupons — I don’t know, but that sounds like a pretty good potential return on an investment. We’ve been coupon clippers for almost 4 decades — it is the only way to go regardless of your income level!”


Ian Mathias

The 5 Min. Forecast

P.S. Want to hear the latest and greatest on the U.S. financial situation from “The Chief” himself — plus some portfolio allocation advice? Click here to listen to Addison Wiggin’s interview with the New York Times, hot off the virtual press. 


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