Obama Warns of Irreversible U.S. Economic Slump Without Government Action

Futures are indicating a lower open for American markets as traders wait to get initial jobless claims data from the Labor Department. Global markets sold off. Asian Markets declined about 3+% on average while European markets are down again about 1+% this morning. The media reported yesterday that layoffs in December were four times as high as a year ago. Friday will be the day for official unemployment numbers. This week will set the tone for the month that will set the tone for the new administration.

Yesterday's losses wiped out most of the previous three days' gains. But the volume was lower than on the preceding two days saying buyers went to the sidelines perhaps in hope of buying at a lower price. But we should be a little concerned with the amount of the price drop for such low selling pressure. If it took people by surprise that would be fine because those people will come in again this week. But what if the stock market does not like President Obama and we start a sharp decline as happened the day he won the election? Will the media let that happen? Can all the media's adulation of him even make a difference? President elect Obama made a speech about how bad the economy is and he looked sweaty like the weight of the world was on his shoulders. Can he handle the presidency? Does he know that creating fear and distrust is what destroys national economies?

We are currently at 7.3% unemployment with 10% unemployment projected for 2010… six months after the economy is recovering. That compares with American unemployment at 25% to 30% and European unemployment over 50% in the 1930s. We have not had 9% unemployment since 1997. The media is still tying to make it look bad now and one trick they use is to quote unemployment in populdation rather than percentages. Then because today America employs almost as many women as men and because our population grew they can claim we have as many people unemployed now as during the depression. The media knows how to lie using statistics and so they could easily damage confidence again and hurt the markets. But it could backfire at this point. It could make this week look terrible and the fear could spread and another panic could occur when Obama is sworn in as president. In that case the month could end at the recent lows and that would be a very bad indication of how the economy will be under the new administration.

So you see the media is playing with fire if they continue to spread depression fear to help Obama at the expense of Bush. The only thing we have to fear is fear itself and we hope the media and Obama know that by now. Therefore we can expect the media to continue to slow down their negativism and switch to optimism as we approach inauguration day.

Doug Kass who recently spewed extreme negativism switched sides yesterday. He now says the sentiment in stocks is so low that it is dangerous to sell stocks short and the optimism with bonds is so high now that people should move from bonds to stocks. That would be good for stocks but interest rates would rise in order for the Treasury to be able to fund deficit spending and the stimulation package. Right now the stimulation package seems like a good idea but it could cause a new unsustainable bubble and it could eventually backfire by raising the cost of debt. If for instance the bubble causes a swelling of state and federal employees and they lay off military personnel and close military bases as President Clinton did, then the government entitlements would cause greater accelerating deficits and we would be at a much greater risk of terrorism. American military weakness, the appearance of military retreat/defeat, and spreading mid-east poverty due to low oil prices could put terrorists on the offensive. Any corruption and failure in the new administration will engender the use of the race card and we could be back to 1960's riots and bombings. With the media so closely tied to the Administration both could go down the drain together.

So as investors we need to know the risks, the rewards, the exit strategy, and the trigger points for timing exit decisions. It is never easy and if we think it is we probably are already broke and deluding ourselves. Another concern we should have is that media negativism right now could abort the current rally and set in motion an earlier end to the new administration's honeymoon with the markets. We are watching that closely and we are halting further purchases except for special situations.