Just one week ago, I asked the question, "Will the Recovery Have Legs?"  What I absolutely did not expect was the very real possibility that our "recovery" may be so short-lived in 2010 that we don't even notice it.  This past week was more than a little scary, and I believe we are entering an important moment.

Who would have seriously predicted just two weeks ago that the Democrats would lose their super majority with a Republican winning Ted Kennedy's Senate seat in Massachusetts?  Ironically, along with the surprise, the Democrats can no longer jam through the health care bill which was so emotionally tied to Kennedy's very own crusade.  And now, a young and inexperienced President can celebrate his first year in office with the fact he needs to change direction before he's really even begun. Clearly, this is a major challenge for an inexperienced President, but I wonder if he understands this is a tipping point on so many levels.

Not only was his push on health care and alignment with the Democrats in Congress a huge mistake, it was also a major drain of political capital.  While he has already softened his position, he has not demonstrated the awareness of how he needs to pivot to avoid rattling the markets.  In fact, he seems to believe that changing his focus from health care to punishing the banks is the answer.  Perhaps the timing was just coincidence, but can you believe he would sermonize on "never again will the American taxpayer be held hostage by a bank that is too big to fail".  Are you kidding me? We're trying to build confidence in the recovery not threaten it with saber-rattling.

In the very same week, Warren Buffet comes out and says "the tax on banks just doesn't make sense", and two additional Democrats on the Senate Banking Committee announce they plan to vote no on Bernanke's confirmation.  Really?  Is Congress so oblivious to the fact that a "no confidence vote" on Bernanke is completely irresponsible right now?  So, in spite of very solid earnings announcements from a host of companies, the equity markets sell off and will probably end the week with the Dow off by nearly 5%.  Sure the markets have gotten out ahead of themselves and were bound to experience some correction, but you'd at least expect that to happen based on some economic news.  The data looks good, but our leaders look terrible and that's the problem.

Obama had best figure out that punishing the banks and tongue lashing them in public is even more stupid than trying to push through a massive health care plan when we just went through the Great Recession.  Forget the political consequences for Obama and the Democrats, we can't afford more destabilization.  Somebody in Obama's camp better help him pivot and change direction or we're not going to like what's on the other side of this tipping point.

Let me know what you think.    

As we all know, the recession is technically over and we're expecting a much better year in 2010.  While unemployment is expected to continue to rise for the next few months, most of the experts predict the unemployment rate to peak and for the recovery to begin this year.  We're certainly hoping for a solid recovery, but you have to ask yourself, "Will the recovery have legs?"

Needless to say, the past two years have been a roller coaster with most of the ride plunging downward.  In 2008, we began to see the effects of the real estate bubble bursting, but it was clearly the tale of two stories.  During the first half of the year, the stock market tried to hold on in spite of the write-downs in financial services.  In addition, investors and consumers remained in a state of denial as the presidential election approached and the talk of a soft landing prevented the economy from tanking.  But we all know what happened in the second half of the year as we held on during what felt like financial armageddon.

Similarly in 2009, the first half of the year was devastating as the Great Recession took hold and unemployment raced towards 10%.  Somewhat surprisingly, the financial and stock markets rebounded quickly, and companies began to see the bottom as businesses across the board stabilized, albeit at levels down on average 30%.  The tremendous amount of stimulus and support from the Fed helped as well and companies came up off the carpet to exceed expectations in the second half of the year.  As a result, 2009 was much like 2008 in that the first and second halves of both years produced very different results.

So, here we are in 2010 with talk of a recovery and unemployment peaking and hopefully beginning to come down.  The financial services sector is clearly in much better shape as large bank CEOs are defending plans to pay out large bonuses once again.  The consumer was surprisingly resilient over the holidays, and the year over year comparisons should allow the stock market to hold onto it's gains and continue to rise - at least for awhile.  Companies are also getting back to work and investing again as productivity improvement positions them to perform very well when revenue growth comes back.  As a result, the first half of 2010 is set up for success, but I think the real test will be the second half of the year and the first half of 2011.

My belief is the recovery will run out of steam and the second half could be scary.  As the Fed executes it's exit strategy, companies will be conservative and unemployment is unlikely to change much.  Sure companies will stop laying people off, but jobs will not come back in any noticeable way this year.  As a result, sustainable growth is likely to be difficult to achieve and the emphasis on these risk factors will probably shake the confidence of investors leading to a correction in the stock market.  While my crystal ball may not be 100% accurate, I'd be very surprised if the second half of the year is as strong as the first half in 2010.