Too Many Lurking Nightmares

05/07/2010 05:12 am ET | Updated May 25, 2011

Myths die fast on Wall Street. If you follow enough of them, like the craze of the early 2000s, or the 2003-2006 real estate bubble, you can easily follow them into the poorhouse. Many, in fact, have done just that.

Now, there's a new one: the jobs myth, so I hear from Olivier Garret, the CEO of Casey Research, an economic and investing consulting firm out of Stowe, VT. That myth got added fuel from Friday's employment report, which showed that February job losses totaled just 36,000, a big drop from the early stages of the recession when jobs were shrinking at the rate of 750,000 a month.

Actually, some economists say, had it not been for February's snowstorms that pounded many areas of the nation, we might well have seen a six-figure employment gain. To many investors -- and here's what Garret says is the myth -- namely, that last month's jobs report was further evidence that the end of the employment mess is in its final stages, that the road to economic recovery is clearly at hand.

The New York Times, for one, buys this rosy view, declaring in a lead story in its Saturday edition that last month's flat jobless rate of 9.7%, the same as it was in January, is a sign the worst of the slump is past. That may be so, provided, of course:

-- You're not one of the estimated 29 million Americans looking for work or one of the 8.4 million persons who lost their jobs since the recession began.

-- You're not one of the financially strapped homeowners who owe more on their houses than they're worth (about 25% of the household population), a growing number of whom who are simply telling the banks to go to hell by walking away from their homes and renting.

-- You're able to convince yourself that the surging number of vacant offices, retail outlets and restaurants that are located within walking distance of the New York Times' Manhattan offices are a mirage.

--You're not interested in borrowing any money.

In response to Friday's jobs news, many eager investors went on a spirited buying spree, in the process driving up the Dow 122 points. If you were one of the buyers, you goofed because you bought a pig in the poke. Or simply seen by Garret, there are too many looming nightmares out there..

For starters, contrary to general thinking, he sees a slowing, not a growing economy, with 2010 GDP flat to down and the unemployment rate at year end in excess of 11%. What's more, he views the market as currently overvalued and sees a number of prospective crises -- chief among them higher interest rates, severe losses in commercial real estate which would play havoc with bank balance sheets and spreading sovereign debt woes -- any one of which, he believes, could knock stock prices down about 25% from current levels.

Of particular concern, Garret looks for continued deterioration in the construction and real estate sectors and views the regional banks as especially vulnerable in commercial real estate, which he rates a multi-trillion-dollar problem that could affect us all. In this case, he says, the public will rebel at the idea of the government bailing out the banks again, "and there will be no easy solution to this problem." Garret figures these assets on which banks hold loans are down about 25% from their acquisition costs between 2004 and 2007.

What about the plunging number of layoffs? Isn't that an economic plus? Garret is skeptical of the latest jobless count, which is up 17% from a year ago. One reason is his belief the numbers were inflated by the start of the hiring -- which began about 2.5 months ago -- of 1.4 million temporary workers to conduct the 2010 census. He notes that's roughly three times the 450,000-500,000 workers hired to conduct the 2000 census. With new technology, he observes, he would have expected greater efficiency and the hiring of fewer people, not more people.

"I think there may be a lot of game playing right now by the Administration to make things look good," he says. "It's the beauty of statistics and it could be a deliberate attempt by the government to distort them in an election year."

The key sectors of the economy that have provided growth, such as real estate, construction, retailing and services, as Garret sees it, are now in the dumps. and he expects them to remain there for quite a while. Toss in the inability of states and municipalities to hire, factor in the likelihood they'll look to increasingly cut costs and that, he observes, will worsen unemployment.

Making matters worse, Garret sees present modest inflation ballooning into a 4% to 5% rate by year end, spurred by money printing and government stimulus and spending. "This year, we're going to see an end to the deflation that we had in 2008 and 2009," he says.

Given his bleak outlook, Garret figures the stock market is poised for a major retreat. As such, he feels that any long term investor who buys a stock now is buying at a high point. He notes that he personally has unloaded the majority of stocks he owned and is very heavy in cash and precious metals. In particular, he likes silver and favors Silver Wheaton, a Canadian company traded on the Big Board (SLW) which acquires and resells silver.

"It ain't over till it's over," Yogi Berra once said. Garret agrees and that's precisely what he's saying when it comes to the hefty deterioration in the economy, in the jobs market and in stock prices.

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