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The Week

Poverty and unemployment: The American dream is dead Add to ...

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Jobs and poverty Two new reports this week illustrate the death of the American dream in the wake of the housing bust, the financial crisis and the recession.

The first, from the Brookings Institution, shows that the number of people living with poverty climbed by more than 12 million from 2000 to the end of the of the decade, bringing the overall number of impoverished Americans to an all-time high of 46 million.

That means more than 15 per cent of America's population lived below the poverty line, measured at $22,314 for a family of four, the group's study says.

"As the first decade of the 2000s drew to a close, the two downturns that bookended the period, combined with slow job growth between, clearly took their toll on the nation’s less fortunate residents," Brookings said.

A second report, from the Pew Charitable Trusts, notes that by the third quarter of this year, about 32 per cent of America's 14 million unemployed had been without jobs for a year or longer.

This spans age groups, education levels and industries.

"Long-term unemployment continues to cut across nearly every industry and occupation," Pew said.

Even in fields with relatively low overall unemployment rates, workers who lose their jobs are remaining jobless for a long time."

These reports come as the Federal Reserve warns of stubbornly high unemployment levels, which sits at 9 per cent. According to the U.S. Labour Department Friday, the U.S. economy created 80,000 jobs in October, and the jobless rate actually dipped from 9.1 per cent, but that's nowhere near what it's going to take to ease the crisis.

Worse, updated forecasts from the Federal Reserve this week projected unemployment at 9 per cent to 9.1 per cent this year, 8.5 per cent to 8.7 per cent next year, and 7.8 per cent to 8.2 per cent in 2013.

"While America's firms are lean and mean, with lots of cash on hand, growth is struggling against three rather strong headwinds: the European crisis, fiscal tightening, and a moribund housing situation," said senior economist James Marple of Toronto-Dominion Bank. "Until these are lifted, job creation is unlikely to reach the cruising speed necessary to materially bring down the stubbornly high unemployment rate."

The global jobs crisis Leaders of the G20 meeting in Cannes this week agreed global unemployment levels are "unacceptable." What do they plan to do about it? Strike a task force.

I believe they do understand that the world could be looking at a lost generation, but their final statement, while acknowledging the problem, failed to address it.

"We firmly believe that employment and social inclusion must be at the heart of our actions and policies to restore growth and confidence," the G20 statement released Friday said. "We therefore decide to set up a G20 task force which will work as a priority on youth employment."

An earlier draft version said this task force would "provide input" to a labour ministers' meeting next year. While unemployment levels are "unacceptable," so, too, is waiting until 2012.

In Canada, Friday's report on the labour market from Statistics Canada showed unemployment among youth inching up to 14.1 per cent in October. That's more than 400,000 young people who can't find work, and it's far, far worse in other countries.

As the International Labour Organization noted last month, there are more than 75 million young people without work around the globe.

"In the current context of economic instability, young men and women face increasing uncertainty in their hopes of finding a decent job," the ILO said. "... Political pressure to prevent the disheartening of a 'lost generation' is likely to increase over the short term and governments may be forced to shift priorities."

Canada's overall numbers showed a loss of 54,000 jobs in October, with the unemployment rate climbing back up to 7.3 per cent.

"Canada’s employment picture had been a surprising success story in 2011, at least up until this nasty result for October," said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"The pressing question now is whether this steep pullback represents a correction from that surprising strength, or the start of a new dismal trend? Given that the U.S. economy appears to be still plugging ahead, albeit gradually, we suspect the former. However, no question, this is an extremely loud warning shot for the economy."

Outlook grim The economic outlook for the United States and Europe has been growing bleaker. This week, their central banks made it official.

In Washington, as it held its benchmark rate steady again, the Federal Reserve cut its outlook for growth and projected unemployment would remain at crisis levels.

Its statement Wednesday was certainly more optimistic than expected, the Fed saying that growth had strengthened in the third quarter. But it also warned it expected a "moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually."

The central bank also slashed its outlook for economic growth, now projecting 1.6 per cent to 1.7 per cent this year, 2.5 per cent to 2.9 per cent in 2012, and 3 per cent to 3.5 per cent in 2013.

A day later, Mario Draghi moved forcefully in his first week on the job as the new chief of the European Central Bank, cutting his benchmark rate by one-quarter of a percentage point while warning of a mild recession ahead.

Mr. Draghi has now undone half of the damage wrought by his predecessor, who hiked rates twice in the midst of the euro crisis in what many see as a policy error.

"The ECB’s surprise rate cut is certainly welcome amid a sharply weaker outlook for Europe, as the sovereign debt crisis continues to weigh on regional activity," said senior economist Benjamin Reitzes of BMO Nesbitt Burns.

"The incoming president might be making a statement with this unexpected move, perhaps signalling a change in tack by the historically hawkish central bank. Looking ahead, Draghi declined to comment on whether rates are 'appropriate,' responding that the ECB never pre-commits to any policy moves. This suggests that unless conditions improve meaningfully (doubtful), another rate cut is probable in December."

What the G20 didn't do All in all, you'd have to agree that the leaders of the G20 held another summit in another lovely spot, this time on the Riviera, and managed to accomplish virtually nothing.

Their final statement, issued Friday, makes all the right noises, but in the end says little. They talk about co-operation and action plans and progress, but there's nothing new to make us all sleep well at night.

"Today, we reaffirm our commitment to work together and we have taken decisions to reinvigorate economic growth, create jobs, ensure financial stability, promote social inclusion and make globalization serve the needs of the people," said the statement released Friday.

It goes on like that. Some others:

"We have made progress in reforming the international monetary system to make it more representative, stable and resilient."

"We affirm our commitment to move more rapidly toward more market-determined exchange rate systems and enhace exchange rate flexibility ..."

"Recognizing that economic shocks affect disproportionately the most vulnerable, we commit to ensure a more inclusive and resilient growth."

"We reaffirm that the G20's founding spirit of bringing together the major economies on an equal footing to catalyze action is fundamental and therefore agree to put our collective political will behind our economic and financial agenda, and the reform and more effective working of relevant international institutions."

Leaders of the euro zone had hoped to possibly scrounge some money from the IMF, but no new funds were committed.

"As expected, the G20 summit concluded today without agreeing anything of substance," said Andrew Kenningham of Global Economics in London.

"Euro zone leaders were effectively told to get their own house in order, something they have conspicuously failed to do so far, and were given only very vague pledges of increased IMF support in future."

The Greek tragedy Shenanigans in Greece took up a lot of time and energy this week, and markets gyrated with the twists and turns. And there were many.

"Given that the world population hit 7 billion this week, roughly 1 out of every 620 people are now residents of Greece … and that one person is causing a lot of excitement for the rest of us 619," said Douglas Porter of BMO Nesbitt Burns. "If the implications of this week’s events were not so potentially serious, it would have made for great comedy."

Here's how the week played out for Greece's embattled leader, George Papandreou:

Euro zone leaders had agreed to a broad crisis plan that would see Greek bondholders take a 50-per-cent haircut, force banks in the monetary union to boost their capital levels, and enhance the region's bailout fund, known as the EFSF. Under the plan, Greece's debt-to-GDP level would fall to 120 per cent by 2020.

But Mr. Papandreou faced enormous opposition, and decided to put it to the test, throwing the plan into doubt with a pledge to hold a national referendum - on the crisis accord. Basically, what he was saying was "put up or shut up."

That did not sit well with his colleagues in the monetary union, or investors around the world, and he was told on the eve of the G20 summit, by Germany and France and in no uncertain terms, that Athens would get not one more euro in bailout money until he settled the matter.

Mr. Papandreou also called a confidence vote in parliament, which he survived late Friday. Next, this weekend, he was discussing a broader government, though the opposition was balking.

"Today’s passage of the confidence vote and approval of the new €130-billion bailout program by the Greek parliament renders a sigh of relief, but this week’s political theatrics merely highlighted the fragility of the current environment across Europe," said economists Beata Caranci and Martin Schwerdtfeger of Toronto-Dominion Bank.

"A series of risks and obstacles continue to loom around the implementation of the measures agreed upon by European leaders on Oct. 26. On Monday, markets will focus once again on these enormous impending tasks."

It hasn't been the easiest time for Italy's Silvio Berlusconi either. He had made promises to the EU about needed reforms, in areas such as pensions and the labour market, but you wonder just how much his colleagues trust his government given that he had to agree at the summit to allow in the IMF every three months to monitor the progress.

As the euro zone's third-largest economy, and its most-indebted, what happens in Italy is far more important to the markets.

"With total Italian debt standing at €1.9-trillion and rollover requirements of roughly €560-billion over the next two years, Italy is too big not only for the EFSF, but potentially even for the IMF," the TD economists said.

"Furthermore, Italy has a debt-to-GDP ratio of 120 per cent, projected nominal growth of 3.4 per cent and a primary fiscal balance barely in positive territory. The longer yields on Italian debt hover at 6 per cent, the more Italian sovereign solvency will be called into question by market participants. It is for this reason that Italy must show a strong commitment to fiscal discipline."

Ms. Caranci and Mr. Schwerdtfeger believe the end result still must be a Greek bankruptcy, hopefully a managed one.

"Since the onset of the crisis we have argued that Greece is insolvent and that fiscal tightening, through its negative impact on economic growth, would prove self-defeating," the said in a report.

"Today’s confidence vote does not change that conclusion. Thus, it is of outmost importance to manage an orderly Greek default – most likely through a series of debt swaps. Failure to do so could drag Italy into the fray and both the European and multinational financial infrastructure are ill-equipped to deal with that event. If we were to get to that point, it would be up to the ECB to play 'lender of last resort.' As much as Mr. Draghi and the rest of the ECB board might resist that idea, the alternative would be far more indigestible."

Quakes linked to fracking Researchers have linked the controversial practice of fracking to two small earthquakes in Britain in April and May.

It was always believed that shale gas drilling was behind the temblors near a Cuadrilla Resources project near Blackpool - the first in April measured 2.3, the second in May 1.5 - but the study released this week said it likely triggered them.

"The seismic events were due to an unusual combination of geology at the well site coupled with the pressure exerted by water injection as part of operations," Cuadrilla said in a statement.

"This combination of geological factors was extremely rare and would be unlikely to occur together again at future well sites. If these factors were to combine again in the future local geology limits seismic events to around magnitude 3 on the Richter scale as a 'worst-case scenario.'"

Cuadrilla published the report, which cited a pre-existing, brittle fault.

"The repeated seismicity was most likely induced by repeated direct injection of fluid into the same fault zone," the report says, adding that "the probability of a repeat occurrence of a fracture-induced seismic event with similar magnitude in the Bowland basin is very low."

It recommends the company monitor just such an event of between 0 and 1.7 per cent, after injection, until levels subside, and stop injecting water if it tops that higher level.

Fracking, which is also known in the industry as fracing, is hydraulic fracturing, which uses water, sand and chemicals or gases to bust underground rock formations and push natural gas to the surface. It has helped change the face of the natural gas sector, though it remains mired in controversy.

Cuadrilla's chief executive officer, Mark Miller, said the company is pleased that the report found "no threat to people or property" in the area, adding "we are ready to put in place the early detection system that has been proposed in the report so that we can provide additional confidence and security to the local community."

Boosting CPR Analysts believe William Ackman just may give Canadian Pacific Railway Ltd. a kick in the caboose.

Mr. Ackman's Pershing Square Capital Management LP has assembled a stake of 12.2 per cent in the railway, and is now expected to push for change. As The Globe and Mail's Jacquie McNish and Brent Jang reported, Mr. Ackman met this week with senior officials of the railway.

CIBC World Markets analyst Jacob Bout boosted his price target on CP shares to $65 from $60, noting that Mr. Ackman "has a notable activist reputation, often working with executive teams to improve performance by shaking up management or divesting assets."

Similarly, RBC Dominion Securities analyst Walter Spracklin hiked his target to $80 from $66, speculating on several outcomes.

"We consider there to be significant constraints toward effecting major change at an operating level or in terms of major changes to capitalization," he said. "However, we believe there are significant avenues in terms of potential asset sales/reorgs, depending on their extent. In terms of a potential sale of the company, we see a sale to a strategic player as unlikely, although to a Canada-based pension/infrastructure player could be possible."

UBS Securities Canada analyst Tasneem Azim did not change her price target on the shares, but did speculate on what Pershing's involvement could mean.

"To the extent that Pershing is able to effect change at a pace faster than what we currently assume in our forecasts, we estimate that every 100 basis points improvement to the [operating ratio]translates into 25 cents upside to EPS, which represents $3.25 of value at our target multiple of 13x," she said in a research report.

"That said, this may well be a case of much ado about nothing if it emerges that sufficient marketing and operating initiatives to drive [operating ratio]improvement are already in place. In essence, the question of a structural improvement in CP’s [operating ratio]remains one of 'when' rather than 'if,' in our view."

CP said it would listen to what Pershing has to say, and is open to what its shareholders think, but it defended itself in the face of criticism.

“CP has positioned itself for long-term growth with its customers through a ramping up of resources across our network, enhanced network capacity, more people power and more locomotives,” the railway said.

In the markets The S&P 500 shed 2.5 per cent this week, and Toronto's S&P/TSX 0.9 per cent as the euro drama played out. But, noted Robert Kavcic of BMO Nesbitt Burns, that was nothing compared to Europe, where the German and French markets fell by more than 6 per cent.

"It’s not exactly top of mind these days, but there’s still an earnings season going on," Mr. Kavcic added. "With about three-quarters of S&P 500 companies now reporting, 72 per cent have beaten earnings expectations, in line with the prior quarter and still comfortably above normal levels."

Best line of the week From @DwightGarner via Twitter on Halloween night: "Kid at our door in a suit and tie. 'What are you?' we asked. Him: 'The 1 per cent.'"

Quote of the week Commerzbank chief financial officer Eric Strutz on resolving Europe's debt crisis: “We have now had 18 summits. The last ones were more encouraging that the first 15. But I feel we will have more summits .”

Required reading this week Faced with the daunting task of staying profitable over the course of two-year wind-down, Zellers Inc. prepares for its final holiday season. Marina Strauss reports.

There's a lesson for Canadian policy makers in the story of the ill-fated bridge to link Detroit and Windsor, Ont., Barrie McKenna writes. National priorities in Canada are often fringe topics south of the border.

In what has been called an “articling crisis,” 12 per cent of Ontario law school graduates were unable to get articling jobs in 2011. A new task force is mulling a range of reforms, Jeff Gray reports.

The most important executive east of Montreal isn't a McCain, a Sobey, or even an Irving, but a compulsively overachieving engineer from Mumbai whose first job as a teenager in Canada was washing dishes for minimum wage. Gordon Pitts reports on Mike Asher.

Canada’s oil sands companies warn that a U.S. rejection of the Keystone XL pipeline would slam the door on their plans to expand exports into the lucrative American market. Nathan VanderKlippe, Shawn McCarthy and Carrie Tait report.

What to watch for next week Watch the shares of Groupon Inc. to see whether they carry through on the momentum from their dot-com-era-like debut Friday. A discount at the restaurant, perhaps, but not on Groupon stock. After pricing the $700-million (U.S.) IPO at $20, the shares surged in their initial trading Friday by almost 56 per cent, though then settled back, closing just above $26, still a huge deal for those who got in. Next up, Facebook?

Canada's trade deficit is expected to have narrowed slightly when Statistics Canada reports Thursday on its reading of exports and imports. "With exports hampered by a downshifting U.S. economic recovery and a legacy of an appreciating C$, Canada’s trade balance should fi nd itself in the red for the eighth straight month in September," said Emanuella Enenajor of CIBC World Markets. "But the deficit could actually be a bit better than the balance of prior months, helped by a weakening C$ that helped to boost industrial product prices. And while energy exports have been lagging recently, August’s stunning boom in energy sector production suggests higher resource exports could be in the pipeline for September."

Trade numbers for the United States will be reported at the same time Thursday, but America's trade deficit is believed to have widened slightly. Senior economist Sal Guatieri of BMO Nesbitt Burns: "Firmer oil prices and a pickup in consumer spending likely lifted imports for the first time in four months. Exports should continue to trend upwards, albeit at a more modest pace than earlier this year given weaker global demand and a firmer greenback. Despite the expected deterioration in September, net exports improved moderately in Q3, supporting GDP growth."

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