It became apparent over the past two weeks that the only way to hit the reset button on the global economy is for Western capitalist governments to act like their socialist counterparts and recapitalize their financial systems.

There had been the hope earlier this year that sovereign wealth funds in Asia and the Middle East would do so, but they have been badly burned by buying too soon in December and January, and their government overseers have demanded that they put their money to work at home before wasting it abroad.

We can see the evaporation of hope for help from outsiders in so many ways. Natixis, a major French bank, recently announced that it was doing a new rights offering at a 60% discount to its shares’ current market price. U.S. brokerage Lehman Brothers (LEH) has been in talks with bankers at home, Korea and Japan. (See also: "Lehman and Wamu in Death Pact.")

And meanwhile came word this week that cash flow is so constrained at Citigroup (C) that executives have banned color copies and curtailed offsite meetings, among other cost-cutting moves.

If financial companies cannot fight their own way out of this mess, and they aren’t getting more help from overseas anytime soon, then massive, direct injection of domestic government assistance to offset the grinding process of deleveraging—or shedding of debt—may be the only hope.

We can only pray that the markets will accept this as a solution, because otherwise rising risk premiums and shrinking loan levels could put off a real economic recovery for quite some time longer, prolonging our current 14-month bear market for at least another year.  

Job Losses Mounting

I entered the work force in 1980 into the face of what later became known as the "Reagan recession." After graduating from grad school at Columbia University, I sent a resume out to 200 newspapers. I got two responses: One in a small town in western Wyoming, and the other at a much-beleaguered (and now defunct) Los Angeles daily. At the time, unemployment was 9% on its way to 10.5% a couple of years later.

In that context, recent news that the nation’s unemployment rate blasted over the 6% level last month for the first time in five years doesn’t sound so bad. Employers trimmed payrolls by 84,000 in August, according to government stats, pushing job losses so far this year to 605,000 and the unemployment rate to 6.1%.

Employment is a trailing economic indicator—i.e., you can’t use it as an omen of the future—as companies tend to cut jobs only as a last resort once they realize orders are not coming in as fast as planned. And current losses are nowhere near as bad, so far, as past recessions in large part because there has been so much more outsourcing of the supply chain since the last big slowdown and because undocumented workers on construction projects are not picked up in government counts. (See also: "Recession Creates a Vicious Cycle.")

Still, we can say that sustained monthly job losses is characteristic of recessions, so that is the value of getting a grip on the stats.

Here’s analysis from our crack employment analyst Philippa Dunne:

• Although the headline number was a loss of 84,000 jobs, private employment was down by 101,000. In the past year, the private sector has lost 758,000 jobs, an average of 95,000 a month. This is mild compared to previous recessions, but we’ve never seen eight consecutive months of job loss outside recessions. There seems to be no reason to hesitate about using that word anymore.
• More than half of August’s private sector losses came in goods production, with construction off a surprisingly modest 8,000, and manufacturing off a surprisingly hefty 61,000. Private services had a pretty bad August, falling by 44,000; over the last year, it’s been adding an average of 19,000 a month. Wholesale trade was off 11,000, and retail off 20,000. If there’s a structural shift away from private consumption underway, we should see more weakness in trade in the coming months.
• Transportation, information and finance all had modest losses. Temp firms lost 37,000 in August, and nearly 250,000 over the last year, which is not happy portents for the future. Among the few positives: health care, up 27,000 (below its average over the last year) and mining (which includes oil), up 12,000. Our old standby, bars and restaurants, is fading, up just 2,000. Government added 17,000—also below its average over the last year and almost all of it in local.
• Before seasonal adjustments, private employment was off 153,000. It’s quite possible then that actual job losses were worse than reported, since the model has problems at cyclical turning points.
• Average hourly earnings rose a strong 0.4% in August, or 3.6% for the year. August’s yearly gain is the highest since March, though it’s running over 2% behind the recent inflation rate. A year ago, earnings were rising about 2% more than inflation, so there’s been a swing of 4 percentage points in real earnings. With unit labor costs so well behaved, we don’t see any inflationary pressures coming from the job market.
• The unemployment rate rose a sharp 0.4 points to 6.1% (and pretty cleanly: 0.373 before rounding). That’s its highest level in five years. In the 703 months since 1950, there have been only 21 instances of larger monthly increases, putting August’s jump at the 97th percentile, two standard deviations above the mean. This comes on the heels of May’s 0.5 point increase, the 12th-highest since 1950. Over the last year, the jobless rate is up 1.4 point—not in the upper reaches of the historical record, but still at the 88th percentile. For a recession that seems mild—and isn’t even a recession in the minds of many analysts—this indicator is looking harsh.

So in summary this is the eighth consecutive weak employment report, and the forward-looking components (temp and retail employment and the workweek) forecast more of the same.

With the unemployment rate rising so sharply, there’s almost no chance the Fed will be tightening anytime soon, especially with oil off $40 from its peak.

The only question at this point, says Dunne, is whether the downdraft will accelerate, or just continue eroding slowly.

Smokin’ Deal

Amid all the bad news lately it was great to finally see one of the companies that I have recommended get a big merger bid.

UST Inc. (UST), the smokeless tobacco and wine maker on our April list, soared to a new all-time high in the past few days following news that the company has received a bid from Altria (MO). Shares opened more than $13 higher last Friday morning, jumping about 22% to trade around $66, and then leapt another $2 once it turned out that Altria was bidding over $10 billion to value UST shares at around $70.

Analysts have been expecting a deal between the two for some time now, as UST owns around 60% of the U.S. smokeless tobacco market and its Skoal and Copenhagen brands have been in much higher demand than Altria’s leading cigarettes labels, which include Marlboro.

With any luck, this is the harbinger of things to come in the market now that prices have fallen so low. If the dollar keeps rising, I expect to see a lot of purchases of foreign companies by U.S. companies, which could really put a spark in the broad market. (To learn more, check out: "Is a Dollar Comeback in the Works?")

Gross Profit

It’s a curious fact that many fund managers these days put out commentary that is very illuminating. Yes, they talk their book. Sure, they have an ax to grind. But some of them are so smart, and knowledgeable about how the world of investments work, that you just have to pay attention.

We got a lesson on that earlier this month when PIMCO chief Bill Gross went on Bloomberg television at around noon to talk about a letter he had mailed out to clients. His interview was no different than the letter, but it had a thousand times more impact. That’s why I subscribe (for free) to his publications, and you can do the same at the PIMCO website.

So anyway in case you missed it, Gross said he believed the U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami." He said that in a desperate and prolonged effort to deleverage their books, banks, brokers and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities. "Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami," he said. "If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury."

Is it just a coincidence that a new government deal to take over FNM and FRE surfaced in the news just a day later? Probably not.

Gross’ argument was that the government needs to replace private investors who either don’t have the money to buy new assets or have been burned by losses. Of course, he includes himself in that category, as PIMCO is believed to have invested $4 billion so far in distressed mortgages. And when the FNM deal went down, PIMCO earned a huge profit right away.

Gross said sovereign wealth funds and central banks are reluctant to fund financial firms after losses on $364 billion in investments they made to support companies that have announced $500 billion in writedowns and credit losses.

One reason Gross’ comments had such influence—it was credited with sending the Dow down 100 points last Thursday after it was already down 200—was that he offered a bleaker view for the prospects of the world’s financial markets than in previous notes in which he has had called on lawmakers to support housing by refinancing loans with government-issued bonds.

The fund manager warned that if the government doesn’t take action, yields on all debt assets will rise and volatility will increase, adding that the declines will not end until sellers have depleted their assets and sufficient capital has been raised. Most notably, he then concluded: Unless "new balance sheets" emerge as well, i.e., new buyers who haven’t been burned—prices of almost all assets will drop, even those of "impeccable" quality.

His reasoning: "There is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning."

In effect, this was Gross’ equivalent of the famous "they’re nuts—they know nothing" rant by Jim Cramer last August, complaining that the Federal Reserve needed to flood the market with money to prevent Armageddon in credit markets.

It took the Fed a month to start to come around to Cramer’s point of view, though it really only acted with full power six months later. Thankfully, it didn’t take Treasury that long to follow Gross’ advice this month, though I think we have not yet seen the end of the credit crisis.

To learn how to make big short-term profits of all the volatility that Gross’ views, and government actions, have caused, check out my Trader’s Advantage service by clicking here.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.