There are two forces that have been fighting the downturn in the economy (and ultimately the stock market) tooth and nail: the U.S. government and the Federal Reserve.

When the credit crisis hit, the government pulled out all the stops to turn the economy around. They bailed out Wall Street, banks, and private corporations and even tried to bail out the collapsing U.S. housing market. God bless their souls. They tried their best. But, in the end, they are politicians.

But, the theory of trying to save the economy and stock market with money we do not have and creating more and more debt is simply “kicking the can down the road.” The results from fighting the credit crisis are obvious when we look at them today: from the time President Obama’s term started to the time his first term ends, the U.S. national debt will have risen approximately 50%. The U.S.government, through its involvement in Freddie Mac and Fannie Mae, I believe, owns or guarantees half the residential mortgages in this country. The credit crisis has cost theU.S.dearly.

The Federal Reserve also pulled out all the stops. I’m a big fan of Fed Chief Ben Bernanke. If it were not for the actions of the Fed during the credit crisis, we could have easily entered Great Depression Part II. But the only weapons really available to the Fed for fighting the credit crisis and the anemic economy are lowering interest rates and increasing the money supply (i.e. print more money), both of which could cause us major inflationary problems down the road, and both of which are quick fixes, not solutions, to the structural problems of the U.S. economy.

Following the credit crisis of 2008 and stock market crash of 2008 to 2009, stocks rose approximately 17% in 2009, 9.5% in 201, and five percent so far in 2011.

The bear market rally in stocks that started in March of 2009 is getting tired and “long in the tooth” as they say. Looking at how the stock market has fared over the past three years, we see a pattern where each year the market is returning about half of what it did in the previous year. The bigger pattern is that, despite the efforts of the U.S. government and the Fed, the rally is nearing its end. The market senses that we are going from a credit crisis to a debt crisis.

Our government and the Fed have lost the war against the bear. The credit crisis, which I believe was due to lack of government oversight, based on a “they did it to themselves” kind of idea, was too overwhelming. Stocks have been propped-up the past three years not because the economy is improving, but because the government has taken on an enormous amount of debt and because the Fed has printed more money—actions that simply “kick the can down the road.”

But the stock market performance of the past three years is telling us that the road is coming to end…we’re running out of room to kick that can any further…and that reality will soon set in.

Michael’s Personal Notes:

This morning, the Labor Department announced job creation of 120,000 in theU.S. in November and the unemployment rate has suddenly fallen to 8.6%. Sound like good news? Actually, when we look closer, it’s actually devastating job creation news.

More than half the job creation in November came from retailers and temporary help, as retail companies got ready for the big retail sales push that starts in the U.S. just after Thanksgiving and goes through to Christmas.

The unemployment rate went down to 8.6% not because of U.S. job creation, but because 315,000 people left the labor force. These are people that have either given up looking for work or have gone back to school. The underemployment rate, which does include people that have given up looking for work and people who have part-time jobs but want full-time jobs, is holding at about 16%.

It’s more of the same when you look at November’s job creation numbers: 12,000 construction jobs lost in the U.S. in November, as the U.S. housing market still fails to recover. (Also see: So They Say the U.S. Housing Market is Getting Better? Read This.)

I’m sure we will see many a politician boasting that the jobless rate has fallen to 8.6%, that job creation is happening, and that “we are going in the right direction.” The focus will not be on the hundreds of thousands of people who have given up looking for work in the U.S.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks, which started in March of 2009. Phase II bear market rallies tend to last three to four years. We are getting closer to the end of this specific bear market rally, but it’s still too early to bet against stocks, as bear market rallies tend to end with stock prices rallying sharply (see Four Reasons Why the Stock Market Will Rise in December) before Phase III, the most damaging phase, of the bear market begins.

What He Said:

The year 2000 “was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold on to your seats, this is going to be a nail biter.” Michael Lombardi, Profit Confidential, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Tags: Bear Market Rally, credit crisis, federal reserve, job creation, retail sales, stock market, U.S. economy, U.S. housing market, U.S. national debt, unemployment rate