Vulnerable Powerhouse?

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Advice to our chosen representatives busily primping and posturing in preparation for next year's election: Think twice before you make any irrevocable decision to retain your seat. And we render that counsel fully aware that it will take a great effort for all but a few of you to think even once about seeking your constituents' approval (or, for that matter, anything else).

Rest assured the suggestion is free of partisan bias and springs solely from a humanitarian concern that you may have aged parents or small children dependent on you for support, especially in these trying times. And, with due respect, of course, it's difficult to imagine just what kind of employment your present job, no matter how long its tenure, has equipped you to do to earn enough in the real world to clothe, feed and provide shelter for yourself, much less a family.

Lest you think we're jesting or indulging in some adolescent mockery, our doubt is based on the sober findings of a New York Times/CBS poll released late last week. And what it showed is that 12% of Americans gave Congress a thumbs-up for the way it is performing its sacred duty. That miserable pittance of the population matches the all-time low registered in the poll during the onset of the Great Recession back in October 2008.

If we've still failed to get your attention, perhaps the fact that all of 6% of the registered voters queried said that most members of Congress deserved to be re-elected, while 84% were in favor of putting someone new in office. There's always a chance, to be sure, that citizens will change their minds between now and next November, but if we were you, we'd hedge our bets on such a miraculous change of heart by making sure the next bill on unemployment benefits extends them to ex-congressmen.

While they're at it, given Mr. Obama's sinking ratings by the citizenry on his handling of the economy and the persistence of high unemployment, perhaps our solons might proffer a dollop of sympathy and assure that those benefits cover ex-presidents as well.

WHATEVER INGENIOUS SCHEMES the financial sages devise to avoid any of the looming calamities that threaten the European Union's cohesion or, if worse came to worse, its very existence, inevitably depend on Germany, whose industrial strength and work ethic seemingly have acted as an impenetrable shield against the malign fiscal forces bedeviling so many of its neighbors.

Yet, for all its well-deserved regard, as we've had occasion to note, Germany has not enjoyed complete immunity to the ills that have laid low some of the EU's more vulnerable members and a goodly slice of the global economy. That's hardly a surprise, nor has it gone unremarked. But it's one of those inconvenient truths that fail to make much of a lasting impression.

One reason may be that by comparison with so much of the so-called developed world, the German economy appears positively robust, and while real second-quarter GDP growth wasn't exactly gangbusters, it racked up a more than respectable 2.8% gain over the comparable stretch last year.

This is by way of a brief prologue to ruminating aloud on a recent piece by Nancy Lazar, Ed Hyman's savvy sidekick at ISI, who incidentally has made some pretty darn good and timely calls this year on various international economies and markets. Her trusty regression model sees German GDP growth declining over what's left of this increasingly bizarre and often frustrating investment year and slowing to roughly 1% in the second quarter of 2012.

In no small measure, Nancy says, the causal agents of this loss of momentum are the lagged effects of higher short rates and wider corporate spreads. She cautions, moreover, that her model may well fail "to capture all the problems emanating" from those pesky peripherals (you know, notorious spendthrifts like Greece, Portugal, etc.). Recent surveys of business expectations and manufacturers' sentiment support this unwelcome prospect of slackening growth in what remains the economic powerhouse of Europe (which, given the less than ebullient current condition of the Old World, is not much of an accolade) .

German exports have lost some of their zest, logically enough, since something like 68% of the total, according to Nancy, goes to the rest of Europe, which is seriously flirting with recession. The damage overall has been contained by reasonably buoyant Asian demand, but Nancy sees the rise in exports, which came in at a brisk 3.1% in July, easing to 2% or so.

The slippage in Germany's corporate profits is destined to manifest itself in a flattening of capital spending. As it is, she reports, many German companies are investing overseas to take advantage of lower costs. Meanwhile, a growing reluctance by banks to make mortgage loans is starting to weigh on the country's residential construction, which rose 3.7% in the June quarter, a rate, she believes, that's likely to slow to something like 2%.

While in contrast to the decidedly less than rosy job market in our own blessed nation, German employment has been gratifyingly strong, Nancy expects that to weaken as well. Real disposable personal income has started to give ground, with higher inflation the culprit, eating away at consumer confidence in the process, which implies a further erosion of already restrained consumer spending.

Germany continues to voice its determination to save the euro (at least whenever France's president, Nicolas Sarkozy, pops into town for a photo op). Trouble is, Nancy observes, its insistence on fiscal responsibility translates into truly tough terms that countries in extremis won't have a snowball's chance in hell of meeting. And it's no secret that the natives are growing restive and tired of watching their hard-earned euros go down the drain of impecunious and too often financially irresponsible neighbors.

Which reinforces our conviction that the latest exertions by the consortium of central banks to keep the floundering members of the currency union from a fate worse than debt may afford some temporary breathing room at best. But hardly a permanent fix for a crisis that could rear its ugly head again before this tumultuous year calls it quits.

The stock market finally rallied last week and did so, not unpredictably, when bearishness was unusually pervasive. What ignited the rally was the decision of leading global central banks—from England, Japan, Switzerland and the good old Fed—in concert with the European Central Bank to toss a bunch of dollars at hard-pressed European banks to keep them in the chips, through the end of the year anyway.

The move aimed not least at easing fears of an epidemic of old-fashioned bank runs breaking out on the continent and concerns, too, that the impact might well make its way around the globe. Equity markets, including we're happy to report, most definitely our own, bounced back smartly, paced, as you might expect, by badly battered and bruised financial shares. Even the shocking revelation that a rogue trader at UBS had cost the already beset institution some $2 billion, its entire second-quarter earnings. failed to still the euphoria (except, needless to say, for the stock of the big Swiss bank, which was supposedly recovering from earlier credit mishaps).

What added a bit of fuel to the bullish fires was Friday's disclosure of an uptick in the U. of Michigan consumer sentiment survey in early September to 57.8, from 55.7 in August. By contrast, a less than exciting report on August retail sales (flat and a bit lower adjusted for inflation) and disappointing initial soundings on manufacturing in the greater New York and Philly regions failed to even nick enthusiasm.

Yet, even while the Dow and the other indices kept the winning streak alive at week's end, there were signs that more than a few bulls decided to cash in profits or were reluctant to carry longs over the weekend, as declines outnumbered advances in the final session.

For what it's worth (that's at most a rhetorical question, so please, no estimates of what it's worth), we think last week's advance, for all it was spirited and gave a lift to some deeply depressed shares, was just one of those reprieve rallies that are a correction designed to right a momentarily oversold market. It wasn't a signal of a fundamental shift, if only because what inspired the selling—the euro crisis—is still very much alive and kicking.

At the same time, meanwhile, our own wobbly economy shows few signs of bracing up. And, if anything, jobs have not gotten noticeably more numerous or easier to find, and the income squeeze on working stiffs continues pretty much unabated.

The latest monthly report put out by our old friend and smart-as-a-whip market watcher, Steve Leuthold, avers there's still significant downside market risk and suggests an ultimate bottom for the S&P 500 somewhere around 955-995; it closed Friday at 1,216.01.

As the report says, historically, non-recession-related bear markets, which presumably is what we've been experiencing, are shorter in duration than recession-related bear markets, but the magnitude of the decline is roughly the same.

Alas, as it wryly points out, "Losing the same amount in half the time is little consolation."

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Germany's ruling parties have just been hammered recently.

Sarkozy's approval rating is deeper in the tank.