Unfortunately for many people, payroll is one of the costs being slashed.  Profits are rising because companies are getting more output for each hour of human labor.  The result is a strangely inconsistent economy in which unemployment stays stubbornly high but stockholders and corporate executives prosper.  In theory, rising productivity is good for everyone in the long run.  Profits will be plowed back into new ventures that create more jobs.  The time lag between these steps is frustrating; for now, prosperity is back for some but not others.

Matters could always be worse, of course, and we are appropriately grateful in this Thanksgiving week.  Retailers are gearing up for the traditional Black Friday sales push.  To some degree, this is an exercise in mass perception-changing.  Consumers have learned that prices will get even better as year-end approaches, so they must be enticed into stores with unbelievable bargains.  Retail marketers use Black Friday to put people in a buying mood.  Their success (or lack thereof) will be measured in real-time as Friday’s sales figures are divulged.  However, the real measure of success will be if consumer spending increases are sustained through the end of the year.

The U.S. economy, as measured by Gross Domestic Product, grew at a 2.5% annual rate in the third quarter.  This may keep employment rates steady and build a little optimism, but it in no way qualifies as “recovery.”  Years of easy credit can be squeezed out of the system only with time.  Nonetheless, the process is underway, and for this we are thankful.

Note:  The following discussions are based on the ‘Edge Charts’ that accompany this article and are available in our free weekly newsletter.  They depict both the relative strength and absolute strength of ETFs representing various market sectors, styles, and geographic locations on an intermediate-term basis.  Each grouping is sorted (top to bottom) by relative strength.  The magnitude of the displayed relative strength momentum (RSM) value is a measure of absolute strength/momentum, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.  Long-term and short-term strength may be significantly different than what is represented here.

Sectors: Utilities and Financials both entered intermediate-term downtrends and remain at or near the bottom of the pile this week.  At the other end of the scale, the relative order was unchanged.  Energy, Materials, and Consumer Discretionary are still the places to be along with Technology.  The biggest change for the week came in Financials, which lost momentum as the European sovereign-debt crisis flared up in Ireland.

Styles: The order of the Style categories did not change one bit since our last report.  Small Growth is still on top, and Large Value is still on the bottom.  The recent compression between the best and worst categories reversed itself.  Last week the best Style category was 17 RSM points ahead of the worst.  This week, with Small Growth at 38 and Large Value at 10, the difference is 28 points.  This suggests that demand for risk assets is on the increase – a trend that bears watching.  (Note:  Style rankings are based on ETFs tracking Russell Indexes).

International: We have a new triumvirate in place at the top of the Global Edge chart.  The U.S., Canada, and Japan are in a three-way tie for first place.  Japan was, you may recall, the lowest-ranked world market for a long time and was second-to-last as recently as a week ago.  Now there is an outside chance it could move into an undisputed lead within days.  The U.K. benchmark made a similar journey in the other direction, dropping from the #2 spot last week all the way to #8 in today’s ranking.  If these moves are sustained, they will represent a major change in worldwide relative strength.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

When I first read the book, the world was still in the midst of the 2008-2009 financial crisis.  I thought it offered solid advice, but I was second-guessing myself, thinking perhaps I was just caught up in the panic that was gripping the nation and the world.  So I recently pulled it down from the shelf and read it again, this time without needing to offset the strong emotions so prominent during the crisis.  And you know what, it makes even more sense now!

The first page of the first chapter gives away Martin’s economic forecast.  In his view, a second Great Depression is inevitable.  The culprit: staggering amounts of debt, both public and private.  The unsustainable housing bubble could not last, and the resulting implosion will give us years of economic stagnation.  Martin’s question is not whether we will have a depression, but how bad it will be.  The parallels he draws to the 1929 crash and the Great Depression are chilling.

Unlike many other analysts, Martin is less concerned about inflation than deflation.  If you are heavily in debt – which our society most definitely is – inflation is actually helpful.  You get to pay off your debt with depreciated dollars.  Deflation means the opposite, and the combination of heavy debt and price deflation is deadly.

Martin advises,

 ”Debt alone is usually tolerable.  People can pile up debts year after year, and as long as borrowers have the income – or as long as they can borrow from Peter to pay Paul – they continue making their payments.  Life goes on.

“Deflation – falling prices and income – is also not all bad.  It makes homes more affordable, college education more achievable, a tank of gas easier to fill.

“It’s when the debts and deflation come together that the wheels are set in motion down the path to depression.  That’s what happened in the 1930s, and that’s what’s beginning to happen this time as well.”

Martin goes on to explain in clear, concise language the implications for real estate, stocks, bonds, banks, currencies and more.  Every chapter includes practical tips on how to protect yourself and even thrive in any depression.  The book ends on a hopeful note; he explains how the difficult times will force all of us to adapt new and better habits.

The Ultimate Depression Survival Guide is a quick read, at just over 200 pages, and is available through many sources.  Additionally, Martin has generously agreed to donate all his royalties to charity.  I highly recommend it, especially for beginning investors and others who feel overwhelmed by the financial news.  If Martin is right, the time to protect yourself from depression is now.  This book tells you exactly what to do and how to do it.

Disclosure:  My company has a consulting agreement with Weiss Research and I am the editor of one of their publications, International ETF Trader.  I am also a regular contributor to their Money & Markets newsletter and web site.

At the same time, the jobless rate dropped from 10.2% to 10.0%.  Put the numbers together and you may notice something strange.  How can the unemployment rate drop while jobs are still being lost – albeit not as many as expected?  It’s all in the definitions.

In order to be considered “unemployed,” a person must answer in a phone survey that he/she is able to work, wants to work, but cannot find work.  Specifically, if you haven’t looked for a job in the last four weeks, you are not considered unemployed.  You are instead “marginally attached.”  In November 2.3 million were in this category, up 376,000 from a year earlier.

Of those who are unemployed, some 38.3% have been so for six months or more.  Moreover, the number of people who want full-time jobs but are currently working only part-time rose by two million in the last year, to about 9.3 million.  These people are “employed” but not exactly thriving.

The drop in the jobless rate is certainly a step in the right direction, but celebration is probably premature until we see actual employment growth.  Financial markets appeared to grasp this concept today; major benchmarks barely moved.  The main reaction was in the dollar, gold, and related equity sectors.  On the surface, this makes sense.  We know the Federal Reserve is watching unemployment; improvement on this front raises the odds of higher interest rates – good for the dollar and bad for gold.

On the other hand, given the magnitude of the gold rally and dollar downtrend recently, a correction is not so unexpected.  The jobs report may simply have been a convenient trigger for events that would have unfolded anyway.

Even with this well-known data, the market is going up. The S&P 500 is sporting a mostly gentle uptrend from March to October. The market thinks we’re recovering. Bernanke and company have said as much. However, given that we have the toughest job market in a generation, to me it seems a little premature to declare recovery – at least a strong one.

I’m not alone in my assessment. CNNMoney.com’s Editor At Large Paul LaMonica recently said, “Repeat after us. There is no strong recovery without job growth. There is no strong recovery without job growth. Why does Wall Street not get that?”

A good question. Why is the market going up while jobs are going down?

It makes even less sense when you consider the nature of unemployment. It goes back to demand. When companies experience demand for their products and services, they will seek to meet that demand. If meeting that demand requires more labor, they will hire. It’s ECON 101. If companies hire, then unemployment goes down. People return to Starbucks to order their Double Skinny Lattes.

But that’s not what is happening. Instead, companies are cutting jobs. Why does the market go up while this is happening?

To this humble market observer, it seems that most of the buying pressure is coming from earnings. Quarterly profits have been good, often better than expected, primarily driven from falling operating expenses. Operating expenses are falling because many large companies are…you guessed it…cutting jobs. There are other factors, but job cuts are definitely helping the bottom line.

In recent days, Sun Microsystems (JAVA), The New York Times (NYT), Dell (DELL), St. Jude Medical (STJ) all shed jobs to stabilize their businesses. And these companies aren’t even banks. We just crossed the 100 barrier for failed banks in the US this year. I’m not sure where all those employees have gone, but they aren’t helping keep unemployment rolls under 10%.

Despite the slumping jobs market and rising stock market, I am often reminded of economist John Maynard Keynes’ aphorism. “The market can stay irrational longer than you can solvent.” This may be one of those times.

While the US government, under both Bush and Obama Administrations, spent unprecedented amounts to “stabilize” the economy, such spending only accounted for 24% of the deficit. The real problem was a drop in tax revenue. Corporate tax receipts plunged a staggering 55% and personal income tax revenue dropped 20%.

Despite efforts to stem entitlement spending, the costs of those programs are still going up, adding more pressure to the federal income statement. The White House Office of Management and Budget projects 10-year deficits will total $9 trillion. These numbers can change dramatically, of course, based on economic conditions, war spending, and the prospects for health care reform.

So what does all this have to do with the investor? As you know, budget deficits lead to government debts. Much like the citizens who elected them, politicians have grown accustomed to spending more than they make. However, long-term debts degrade the productivity of an economy. As more taxes are used to pay the interest and debt, less is spent on infrastructure, healthcare, or business development.

If you believe that runaway debt is a bad thing for an economy, you should consider investing outside the United States. After all, the US economy is the biggest debtor nation on the planet. These days, it’s as easy to buy China as it is to buy the S&P 500. Here’s a 2008 list of countries with their total debt (public and private). I’m not recommending any country in particular, but here are some facts to consider.

(Data Courtesy of The World Factbook & Wikipedia)

Today the Labor Department reported that the Consumer Price Index rose 0.2% in September and fell -1.3% in the last twelve months.  This was no great surprise, since it was the seventh consecutive month of negative year-over-year CPI.  September is a special month, however, because it is the end of the federal government’s fiscal year and is used to determine inflation adjustments for the next year.

By law, Social Security payments cannot go down – but they don’t have to go up, and this year they won’t.  This may come as a surprise to retirees who have grown accustomed to getting a “raise” each year.  The last year without a COLA was 1975.

Even more aggravating, health care was one of the few CPI categories to actually go up in the last year while much of the decline was related to energy costs.  Retired people, of course, are often above-average consumers of health care and below-average consumers of energy.  Their cost of living hasn’t dropped, negative CPI notwithstanding.

President Obama and members of Congress are keenly aware that senior citizens won’t like this development at all.  They are therefore seeking to defuse the political explosive environment with a one-time $250 payment to all Social Security recipients.  This would be in addition to the $250 “economic stimulus” payments sent to the same group earlier this year.

These payments will largely offset the lack of a Social Security COLA this year, and some seniors may actually come out ahead.  Nonetheless, at least one lobbying group is already whining that it’s not enough.  The younger workers who pay the bills are, apparently, not their concern.

According to data published in USA Today, the government gave a total of $365 billion to 700 different banks under the TARP program.  The Treasury received preferrred stock from these banks which is supposed to pay a quarterly dividend.   Now we learn that 33 of these banks simply decided not to pay dividends this quarter.  American International Group (AIG), which also received TARP money but is not technically a bank, also failed to pay its dividend.

A Treasury spokesperson claims that the banks are contractually permitted to skip these payments – and of course the federal government respects their rights.  This is laughable.  The federal government is probably the least contract-respecting institution in the world today.   The rights that need to be respected are those of the taxpayers whose capital is being used to prop up institutions that would otherwise have collapsed. 

Why are these institutions stiffing us?  From their point of view, why not?  They were handed free cash at a time when their very existence was being threatened.  Of course they took it.  Maybe now their existence is threatened again due to loan losses and they need to conserve cash.  Or maybe they would just rather use the TARP money for other things.  We don’t know.  What we do know is that the odds the government will  make a “profit” from TARP are not high.

AIG alone owes the Treasury $69.8 billion, according to Reuters.  The automotive industry owes $80 billion.  The 600 banks that haven’t yet repaid their TARP money owe a total of $134 billion.  I, for one, feel sure that the AIG and automotive “investments” will be near-total losses.  One of the dividend-skippers is CIT Group (CIT), which owes $2.3 billion and is probably going to file bankruptcy soon.   This will wipe out preferred shareholders like TARP. 

None of these numbers include the various other bail-out programs and Federal Reserve lending facilities.   The bottom line is that billions (and probably trillions of dollars) have been transferred from the public to politically favored industries like banks.  Most of it is probably never coming back.  A shocking number of people appear to be okay with this.  They say it is distasteful but necessary to save our capitalist system.

No, no, no.  This is not capitalism.  If it were capitalism, incompetent and unprofitable businesses would cease to exist.  Their directors, managers and employees would lose their jobs.  Investors would lose their investments.   This is what happens in industries that lack the ability to extract capital from the public with the government as intermediary/collection agency.  Call it whatever you like, but it’s not capitalism.

The final insult: if you happen to owe money to one of these deadbeat banks, do you get the right to skip payments?  Does your lender simply shrug and tell you to pay when you feel like it?  I didn’t think so.

Speaking with ABC’s This Week, former Fed Chairman Alan Greenspan talked about how unemployment will be “penetrating” the 10% barrier. Greenspan typically recites government/Federal Reserve talking points on economic matters. When he says unemployment will hit 10%, expect it – and then some. However, he isn’t telling the whole story. As we mentioned earlier, his numbers do not include marginally attached workers, those working part-time for economic reasons, or discouraged workers.  Add those categories and the broader unemployment rate was 17% in September. You can expect even more when Greenspan’s traditional 10% comes to pass.

Most economists regard unemployment as a lagging economic indicator.  This means rising unemployment does not necessarily mean the economy is getting worse. The economy could be improving even as employers lay off more workers.  Greenspan is clearly from this school of thought.  In the same show where he predicts 10% unemployment, he suggested we’ve emerged from the recession and said he expects 3% GDP growth for the 3^rd quarter. No doubt consecutive quarters of contraction will eventually give way to growth. But unemployment “penetrating” 10% is usually not considered a positive economic indicator – especially for the unemployed.

Maybe unemployment is a lagging indicator, but rising unemployment certainly does not suggest optimistic employers.  Basic economic common sense suggests when employers expect opportunity in their business, they hire. When they are fearful of the future, they scale back. Since labor is one of the bigger expenses for most businesses, jobs are often cut in economically difficult times. In other words, negative business expectations result in rising unemployment.

Of course, employers can be wrong. But they are also the “boots on the ground” in the economy. If businesses perceive difficult times ahead, they contract and cut costs however they can. Most do not stop to ask Alan Greenspan if their perception is a lagging economic indicator.

Investors should take note of this trend. Official unemployment is now in the early-1980’s range and Alan Greenspan thinks it will continue to rise. Construction, manufacturing, and retail trades are suffering the most. The impact is spilling through the economy.  Think about this before you make any bullish bets.

The G-20 promotes global cooperation between the largest economies in the world. Although decisions are officially non-binding on the member states, members consult each other on major economic decisions. The group has loose ties to the World Bank, the International Monetary and Finance Committee, the Financial Stability Forum, and other international institutions.

G-20 economies comprise 85% of global production, 80% of world trade, and two-thirds of the world’s population. Current member states are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union.

One of the more significant results of the Pittsburgh meeting was the announcement that the G-8 is no longer the primary international economic forum. On Friday, G-20 leaders declared the G-8 has been superseded by the G-20 as the main economic council of wealthy nations. This illustrates the ascent of emerging markets. China will soon overtake Japan as the world’s 2^nd largest economy while Russia, Brazil, India, and other ‘2^nd tier’ economies are growing quickly.

Another event relates to a two-word declaration in the event’s final statement. Speaking on the global financial crisis and how the G-20 responded to it, leaders inserted a blunt “it worked.” They may have spoken too soon. Continued high unemployment, banking sector instability, and the injection of trillions in economic stimulus into the global economy could create more problems.  Of their seemingly premature conclusion, one former chief economist of the International Monetary Fund said, “it’s hubris.”

Finally, the G-20 wanted to be seen as moving past the global recession. They addressed global climate change. President Obama spoke about a “transition to a 21st-century clean energy economy.” No timetables were set and no decisions made. However, the fact that G-20 leaders addressed the topic underscored current momentum for action on cap-and-trade, carbon restrictions, and other green initiatives. Worldwide action on these goals, for better or worse, is gaining momentum

There is no doubt the Federal Deposit Insurance Corporation is running out of cash to pay the depositors of failed banks.  Its insurance fund had only $10.4 billion as of June 30.  While ostensibly a private entity, FDIC has a $100 billion line of credit from the U.S. Treasury.  But since we’re all against bailouts, isn’t it better to let the industry pay to save itself?  Yes, but that’s not what is being proposed here.

Where to begin?  First of all, there are no healthy banks.  They differ only in the degree of their sickness.  Fractional reserve banking is at best a kind of managed instability.  The reason FDIC is running out of money is that banks as a group made stupid business decisions motivated by greed.

Now if we had an actual free market economy, mismanaged businesses would be liquidated.  Banks, however, are not subject to this discipline.  Quite the opposite: they routinely reap huge rewards while sticking taxpayers with the bill if losses get too big.

The plan described by the Times is not a way for the banks to save themselves.  It is a cleverly-disguised way of transferring money from the general public to the managers, creditors and shareholders of certain politically-favored banks.  Here’s how it works.

First, the banks borrow money from the Federal Reserve at near-zero interest rates.  We don’t know how much they borrow or their exact terms because the Fed won’t tell us.  Second, the banks will give this money to the FDIC.  Third, the FDIC will give the banks government bonds in return, at an unknown interest rate that will almost certainly be more than zero.

What happens then?  The FDIC will have cash to bail out failed banks, the remaining assets of which will be sold to larger banks at deeply discounted prices.  The banks pay each other interest on the government bonds they got from FDIC.  They also get to count those bonds as risk-free capital.  Bankers will get bonuses.  Bank bondholders will get paid.  Common bank shareholders will get what’s left.  Taxpayers will cover any losses.

Exactly how does this differ from having the Treasury simply give money to FDIC so it can do its job?  Depositors get paid off either way.  The Treasury is still deeper in debt either way.  The difference is that the new debt will be processed through banks in such a way as to let them make more money.

The audacity of this idea is breathtaking.  Will they get away with it?  Maybe, maybe not.  For the most part, the people who actually comprehend what is happening are the same ones who will benefit the most from it.  Organized opposition will be scarce.  Once again, banks win and you lose.