Over the past week, most of the economic news has been bad, but stocks have rallied. As I write this, stocks are mostly even for the day, even though the Labor Department reported this morning that unemployment claims reached a 26-year high. One possible explanation for this investor optimism is that investors believe government efforts to resolve current economic problems will be successful. While we all hope that is the case, this situation is unlike anything experienced in the past and no one is certain exactly how to fix what is broken.

A few years ago I bought a small gray horse. We named her Shelby. She had been captured as a wild mustang in Nevada and we spent several months getting her to calm down and tolerate human interaction. We had gotten her to the point where we could put on a saddle and lead her around with someone sitting on her back. But she remained moody and temperamental most of the time and we did not trust her to be ridden without assistance. 

My son came home from college and brought a friend along to visit. The two of them both were working part-time on ranches to help cover the costs of their schooling. They were both strong, strapping young men and when they learned that we spent several months working with the small gray horse and still could not easily ride her, they announced they would go out, teach her who was boss and get her ridden. While it sounded like a reasonable plan, those of us who had been working with Shelby had some reservations.

For a time their plan seemed to go well. Shelby stood calmly while they tied her to a tree and she barely flinched when they put the saddle on and tightened the cinch. But when my son tried to get into the saddle she pulled away from his friend. After three or four unsuccessful attempts to get mounted my son and his friend decided it was time to apply some muscle and impose their will on the little mare. 

A few minutes later I led an unsaddled Shelby to her corral while my son and his friend made a visit to the emergency room. While they were young and strong and had good intentions, their combined 300 or so pounds was not enough to offset Shelby’s 800 pounds of determination. Fortunately neither young man was seriously hurt and a few stitches was all they needed. 

I worry that the current economic situation could involve a similar mismatch. While Congress keeps proposing one bailout plan after another, in the end there is no guarantee any of them will be able to get the economy back on track. It is particularly disconcerting that many analysts, economists and other experts keep mentioning that there remains a possibility for total economic collapse.

We have not experienced an economic collapse in this country so most people have no idea what that entails. I lived through the economic collapse that occurred in Eastern Europe prior to and after the fall of communism. It would mean most of the population out of work and many others working without getting paid. It would mean closed banks and stores with very little inventory. Daily life becomes a constant struggle to earn some money and to find food or other needed items. Those kinds of conditions endured for five or six years in Russia. All the while other countries were supplying aid and assistance.

Unfortunately, there won’t be anyone to give assistance to us if the U.S. economy fails. Much of the world is already in much worse shape and this crisis is a black cloud threatening every corner of the globe.

This is traditionally a time of year for optimism. Right now in spite of our political affiliations, we all need to hope that President-Elect Obama and the members of Congress can come up with a plan that can restore economic stability. While we can take some encouragement from a Santa Claus rally in the markets, risk remains extremely high and the best course of action is to remain on the sidelines.
F.S.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.