Loose-Cannon Mode
Obama’s announcement of a spending freeze last night shows why the market has sold-off: The Massachusetts Massacre has thrown the Democrats into “loose cannon mode” where they flail around wildly trying to figure out what the voters want.

I would be shocked if our government ever actually reduced its spending. Clearly they (both Republicans and Democrats) are going to spend, and spend, and spend – right off the cliff of national bankruptcy.

So, I don’t think the budget “freeze” itself will have much of an impact on the economy, and is probably just a trial balloon for some last-minute edits to tomorrow’s State of the Union speech.

But the market does not appear to have much confidence in our new “Random Style” of government.

Flipper Flattened
I tried to warn those poor dolphins back here:

“…the Vix is telling us that everybody has rushed to one side of the boat to look at the cute dolphins, and the boat is about to flip over crushing said dolphins under thousands of pounds of fat, blubbery tourist flesh.”

…but the glutenous bullish tourists were so obese that the poor fish never stood a chance. It was a hell of a splash though, was it not?

I have never posted this particular chart before, and now seems like a good time to discuss it (click to enlarge):

This is the detailed version of the smoothed chart that can be seen here. Each dot represents the annual growth rate of federal withholding taxes as of that day.

The first thing to notice is that at the bottom of the last recession in 2002 (marked “2H02″), it took a solid six months for the data to stabilize before it began to move upward. After the economy ceases to recess, businesses still don’t hire until they are forced to do so by increased demand. And the time spent in such a purgatory can be substantial.

In 2003, the growth rate flattens out (marked “Tax Cut”) because there was a payroll tax cut passed into law. Economically, it wasn’t really needed because the economy was already expanding via an historic housing boom.

The growth rate at the peak of the cycle in 2006 crested around 8%, which was 2% below the peak of the dot-com bubble which exceeded 10% six years prior. That was a lower high. And in 2009, the growth rate plunged well below the trough of 2002. That’s a lower low.

So this chart, with its pattern of lower highs, and lower lows, paints a picture of long-term decline. I’m worried that our decline will continue until the USA reverts to a pre-NAFTA trade policy and brings the factories home.

In The Nineties, we had a massive internet-building boom, and an industrial base. In The Zips, we had a massive house-building boom, phony though it may have been. What massive project do we have now that will provide millions of new jobs? Does anybody see anything?

(Note: subscribers to The Daily Jobs Update can see the real-time version of this chart at the bottom of this page.)

Joe Sixpack is not happy about having his job sent to China. And he is not happy about our brand new Jobless Economy. He yearns for the good old days of a mere Jobless Recovery. But being faced with infinite unemployment, Great-Depression style, mounds of federal debt and the consequent higher taxes and/or inflation in the future, he has retaliated by putting an end to the Kennedy Dynasty in Massachusetts.

President Obama got the message. And now he is trying to get out in front of the populist tide democrat-style, which means persecuting big business.

So, as traders, it is time for us to think about how this tectonic shift in American politics will play out. A couple of things come to mind:

The IWM was only down 1.96% today while SPY was down 2.20%. Perhaps small-caps will outperform since the dems will get more bang for their populist buck by harassing higher-profile large-cap companies. Example: George’s BBT had a good day today while GS got hammered.

I think it’s safe to say that if the Fed were to raise rates before the mid-term elections in November that a White House goon squad would open a can of Vince Foster on Bernanke, and his body would be found in a Maiden Lane dumpster.

If you have populist predictions, please post them in the comments.