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It’s not the overnight sensation that Smoot Hawley was in 1930, but the anit-globalization steamroller now appears to be advancing with the same relentlessness as the real estate slump covered here yesterday. According to a 2006 German Marshall Fund of the United States poll, 59% of Americans now believe free trade costs more jobs than it creates. The newly Democratic Congress is clearly leaning into the swing away from support for liberal trade policies. Senate and House leaders plan to address voters' financial anxieties with “help for workers hurt by trade.”  Keep an eye on Ohio’s newly elected Democratic senator Sherrod Brown who “wants to renegotiate long-settled treaties such as NAFTA and give Congress a greater role in writing new trade agreements.”

As the latest issue of The Elliott Wave Financial Forecast explains, technology and global market forces are conspiring to produce excess supply in a wide range of areas. Nowhere is the oversupply more pronounced than in the global labor market. As the January issue notes, the longer these forces build, the more extreme the glut; this one’s been building since the early 1990s when China emerged as an economic power and capitalism took hold in Eastern Europe, Russia, India and just about every other country. Over the last 15 years, Harvard Professor Richard Freeman estimates the global labor pool has more than doubled to 2.9 billion.

The first evidence of a change is a U.S. House vote to increase the federal minimum wage by 40% to $7.25 an hour. After almost 10 years at $5.15, the vote wasn’t even close. More than 80 Republicans sided with the Democrats to pass the measure, 315-116. As Stephen Roach of Morgan Stanley puts it, “The pendulum of political power is now in the process of shifting to the Left.  No, the increase in the minimum wage is not going to break the back of US cost control.  However, there is a good chance this action could well qualify as the proverbial canary in the coal mine -- the beginning of what could be an important and enduring increase in labor’s slice of the pie in the rich countries of the industrial world. Needless to say, any such shift from a pro-capital to a pro-labor climate could prove to be a very challenging outcome for world financial markets.” A week ago, Venezuelan stocks fell 19% after Venezuelan president Hugo Chavez announced plans to nationalize the nation's utilities and phone companies. Russia just took control of a giant oil project from Royal Dutch Shell, and Ecuador's president-elect is threatening a debt restructuring. In South Korea, U.S. negotiators are trying to complete a trade deal in the face of a vocal protest movement (shown in the picture above) and an increasingly hostile Congress. This action goes hand in hand with a rising American desire to “level the income gap” between rich and poor, a burgeoning trend that is covered in the last two issues of EWFF (see December’s entry in Additional References below).

As recently as mid-October, Socio Times observed that the spin on globalization was still largely positive, but this once “unstoppable force of nature” is suddenly looking a lot shakier. It hasn’t given way completely because social mood as represented by the stock averages is still rising. But the events of recent days in Asia, South America and Russia amidst weakening commodity markets, which are integral to many developing economies and the rally from 2002, express the potential for a reversal of extreme proportions at any time.

December 2006, EWFF
The New Era of Wealth Destruction
Back in November 1999 when Bill Gates’ net worth equaled 1% of U.S. GDP, pundits latched on to a growing gap between the rich and poor. The Elliott Wave Financial Forecast said not to worry, these situations invariably take care of themselves:
In the 1930s, the wealth distribution problem was “solved” by a falling market and tax rates of better than 90% for the wealthiest Americans. In the second half of 1999, the same social forces can be seen stirring, as the “growing gulf between the haves and the have-nots” has suddenly become an issue. The seeds of a new social movement were visible in a rash of headlines like this one: “Income Inequalities Reach ‘Grotesque’ Gap, U.N. Says.” A bear market is nature’s way of redistributing wealth, but apparently, at a trend change as big as this one, people just cannot wait to get in there and lend a hand.

The timing of the last wealth disparity alarm makes a more important point. They tend to arrive at big peaks. The first order of business for the new Democratic-led Congress is raising the minimum wage. The consensus surrounding the first increase since 1997 shows that politicians are “beginning to address the growing wealth disparity.” A raise is the one item on the Democratic agenda that President Bush says he can accommodate. At this approaching peak, even the rich are starting to resent the rich. Over the course of the last two weeks, The New York Times has run a series of stories on how the “Very Rich Are Leaving the Merely Rich Behind.” “The moment has arrived for a battle” between the rich and the superrich, says another Times article. The “divide has emerged” due to “windfalls tied largely to expanding financial markets” and a newfound belief that “making money out of money” is a crass way to make a living. This headline points to the driving sentiment behind the collective angst over wealth: “Rich Now Envy the Superrich.” As The Elliott Wave Theorist pointed out in 1997, envy plays a big role in the very biggest peaks. In 1999, The Elliott Wave Theorist reproduced a Newsweek cover that identified the “Whine of ’99” as “Everyone’s Getting RICH But Me!” At the follow-up top now forming, the cry is a less comprehensive, “Some people are getting even richer than me!” But it’s the same basic emotion, one that will guide the proceedings as the social mood turns down. In the words of Emmanual Kant, envy “aims, at least in terms of one’s wishes, at destroying others’ good fortune.”

The global scope of the issue is evident in a stream of reports from around the world. “Economic Gaps Grow in Mexico,” says a recent headline in the Austin American-Statesman. While 47% of Mexicans live on less than $4 a day, “Mexico’s wealthiest residents inhabit a parallel universe of fortified mansions, posh shopping malls and separate movie theaters. They live in surreal mini-cities of gleaming, geometric towers. And most are breathing a big sigh of relief that next week conservative Felipe Calderon will be sworn in as president instead of Andres Manuel Lopez Obrador, who vowed to end the privileges of Mexico’s elite.” Obrador lost and continues to contest a close election, but radical populists have taken control in Bolivia, Venezuela and Ecuador. In Nicaragua, Daniel Ortega, the socialist leader who battled the United States from 1979 to 1990, just won re-election. Recent headlines extol the dangers of expanding “wealth gaps” in Asia, Africa, Afghanistan and the Mideast. According to a recent World Bank report, China’s poor “grew poorer at a time when the country was growing substantially wealthier.” This is nothing new, as the article points out that the gap has been growing since 1980. What’s new is the recognition and growing desire to “do something” about it. In the Persian Gulf, where the condition is almost as old as the world’s reliance on fossil fuels, the ruling elites are addressing the issue head on. Here’s the latest from the Arab News agency:
Fair Distribution of Wealth Assured
JEDDAH, 15 November 2006 — Crown Prince Sultan, deputy premier and minister of defense and aviation, yesterday emphasized the government’s plan to ensure fair distribution of wealth by establishing new development projects all over the Kingdom.

Ironically, one of the biggest projects is the encouragement of stock ownership and the establishment of exchanges throughout the Mideast. Like the Dubai Financial Market, these markets are all getting hammered. So far this year, Saudi Arabia’s main index is down 60% while Qatar is down 44% and Jordan is off 36%. Government efforts to spread wealth are always counterproductive. The harder it tries, the more it ruins. Locking the less wealthy into stocks in a bear market will be the last nail in their coffin.