Post-recession America may be saddled with high unemployment even after good times finally return.

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring — in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” — is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

via ‘Great Recession’ Will Redefine Full Employment as Jobs Vanish – Bloomberg.com.

Forever is a long-time. It’s shocking to see experienced policy-makers and journalists talk about “forever.” We came out of the “Great Depression” and World War II and enjoyed a period of relative peace and prosperity for over 60 years afterward. Forever is for the universe. We should worry about making the immediate future more secure. Fretting over “forever” takes our focus away from the here and now.

Image by aloha orangeneko via Flickr

Since Friday, you have been hearing members of the financial media yell, “Sell in May and Go Away!” And, most assuredly, over the last two years, it would have been quite wise to heed that advice.

The months following May, both in 2007 and in 2008, were harrowing experiences for stock market investors. After a brutal summer in 2007, the stock market recovered briefly, going to a new all-time high in October, the Dow reaching just a shade over 14,000 early in the month.

In the year and a half that followed, stocks plunged 50 percent from that peak, while the big winners of the prior bull market, the financials, suffered far larger declines, on average, some going all the way to zero!

Despite the strong seasonal tendency for the stock market to peak in April, bottom in October and then rise for the subsequent six months, that pattern was obliterated in ’07 and, again, in ‘08.

But there is reason to believe that this year, the seasonal pattern might break, thanks to a number of factors that have not been at play in recent history. If this is a new bull market, which I believe it to be, then either a cyclical, or secular, move will trump seasonality in the stock market!

That is why I have been building a portfolio of bank, asset manager, homebuilding, tech and media stocks that I expect to do very well over the next 2-5 years, with some adjustments, of course, along the way. As I discuss, in greater detail, in my new investment newsletter, Insana Weekly Insights, www.insanainsights.com, there are a host of reasons why this rally may last through May!

It appears we are at an important turning point in the stock market, and maybe, just maybe, in the economy as well.

I actually am growing increasingly convinced that this is the time to make long-term investments that will benefit from a rebound in the economy.

The stock market leads the economy by a minimum of 4 months and a maximum of about 12 months, before the recovery is apparent to Main Street, not just Wall Street. Investors need to be invested BEFORE a rebound is obvious, or the economy’s upward movement will have been all but factored in.

I have been quite impressed by the market’s strength, its composition, its willingness to ignore bad news and its powerful move off the March 9th lows … up nearly 30% in only seven weeks. While we’ve been faked out before, during this 18 month bear market,  this bull run appears different than recent bear market rallies.

Although a pullback is always possible, maybe even imminent, when the soothsayers say, “Sell in May & Go Away,” this year, I say, “No Way!”

Interestingly, the financial markets may be providing that proportional emotional, and financial, response while the media, metaphorically speaking, continue to roll in the mud. On this, more later.

However, proportionality is, indeed, urgently required in the reporting of this emerging health crisis, both with respect to the human toll and the potential global economic consequences of a breakout.

First, the swine flu, to date, has most severely impacted Mexico’s residents and has been a much more mild phenomenon elsewhere around the world. As yet, we don’t know why.

I am no epidemiologist, so I will not venture to speculate about medicine, contagion or mutation. However, the milder form of the flu, reported in the U.S., doctors tell me, is easily treated with anti-virals and has been, generally, identified earlier in patients here, than in Mexico.

Indeed, in Mexico, there are more than 150 deaths reported, while none have been reported here. (*** New*** California examiners are reportedly looking into 2 Southern California deaths that may be linked to swine flu, but that has yet to be fully confirmed.) 

Meantime, according to some published reports, as many as 2,000 people are suffering from severe penumonia, south of our borders. So, it remains a relatively localized crisis, not yet a global pehnomenon.

By comparison,  in the normal course of an average ”flu season,” an estimated 30,000 people die of the common flu virus  annually. 

So, is this the type of pandemic that can truly thin the human herd and bring the global economy to its knees? Not quite yet, it seems. This is not remotely as severe as past pandemics, like those that created long-term adverse conditions, both in the human sense and in the economic sense, as well. 

Still, it is wise to be vigilant. Consider the following: according to the National Archives, the Spanish Flu pandemic that killed an estimated 20-100 million people in 1918, frighteningly, began in similar fashion.

 According to the Archives, an outbreak in spring of 1918, known as “the ‘3-day fever,’ appeared without warning. Few deaths were reported. When the disease surfaced again that fall, it was far more severe. … Some victims died within hours of their first symptoms. Others succumbed after a few days; their lungs filled with fluid and they suffocated to death.’”

Depending on the actual number of deaths, which vary from report to report as stated, some 20 million to 100 million people died from the Spanish flu. The high-end estimate means that as much as 5.5% of the global population (estimated at 1.8 billion at the time) succumbed to the virus. Some 330 million people worldwide would have to succumb today to equal the death toll from ”the grippe,”‘ as the Spanish flu was then called.

Here in the U.S., the National Archives says 25% of the U.S. population was infected from 1918 – 1920. Today, that would mean 75 million Americans would fall ill. Certainly, Mother Nature has shown us that anything can, and will,  happen in a complex eco-system, but we’re just not there yet.

While not wanting to whistle past any metaphorical, or real, graveyards, proportionality in media reporting is  of the utmost importance today. Recall the false global alarms set off by the 1976 swine flu scare, or the outbreak of Legionnaire’s disease,  also in 1976. Recall also the pandemic fears that populated the media with repsect to  SARS and the Avian flu, of more recent vintage. Thankfully, the risks were all dramatically overblown.  All of these proved to be managable and were, ultimately, contained.

Indeed, despite the knee-jerk sell off in financial markets around the world yesterday and, again, early this morning, the markets may provide a useful guide to, what I consider, an expert view on the magnitude of the threat.

Investors around the world, as I have always believed, make very informed judgements about events like these. True, the markets have now taken down economically sensitive and travel-related stocks, under the assumption that global growth, travel and trade will be adversely affected, if, and only if, the swine flu reaches a full-blown pandemic.

But, the markets are recovering from the flu fear rather quickly … recognizing, thus far, that the hardest hit areas are likely to be the flu’s place of origin, Mexico, and in other developing countries, most of which are ill-prepared to handle an outbreak of nearly any infectious disease.

As a market consequence, the makers of anti-virals like Tamiflu, etc., , like Roche and Glaxo-SmithKline have been bid up in the markets, owing to the  expected increased demand for their drugs.

Having said that, my friend and very well-respected economist, David Kotok, of Cumberland Advisors, notes that a worsening of the swine flu contagion could cut global growth by as much as 2.2%, at a time when the world can ill-afford such a setback, if trade and tourism  should collapse. A plunge in oil prices, airline, hotel and cruise-ship stocks,  yesterday, signified such market-based concerns. Economist, Ed Yardeni, also a friend, cites a World Bank study from October, 2008, that says a 1918-style pandemic that takes 71 million lives would devastate the global economy, costing more than $3 trillion! (That is a worst case scenario analysis)

To an untrained medical eye like mine, I am assuming, regretably, that the human toll could rise, but the economic toll may, ultimately, be over-estimated. From an investor’s perspective, the stocks beaten down by the bug may very well represent buying opportunities.

After 25 years of observing and participating in the financial markets, I have learned that some people find the economic analysis of health-related crises to be crude and cavalier. But for those of us who make our livings assesing risk and reward, the current risk asessements may be overblown, if only in market terms.

It is during periods of emotional stress, financial distress or human duress when markets are most inefficient. Assuming our medical community is more efficient than the markets, this scare will likely drive the weaker hands from the herd, and leave the opportunities in the hands of those strong enough to withstand the fear and survive the scare.

President Obama at the Summit of the Americas (Pete Souza/White House)

It’s a fascinating thing to hear Latin American “Leaders” at the Summit of the Americas pound the U.S. for creating chaos in the world. The land that time forgot can’t remember that for all the faults of the U.S., at least the U.S. lives up to its potential and most of its commitments, while Latin American Narco-states impoverish their people, supply the world with drugs, or in the case of Fidel Castro or Hugo Chavez, enrich themselves, at the expense of the poor they purport to protect.

And that was just this last weekend.

A few weekends ago, it was equally fascinating to hear Nicolas Sarkozy, the president of France, the son of privileged European aristocrats, himself a wealthy, thrice-married entrepreneur, declare, at the protest-plagued G-20 Summit, the age of Anglo-Saxon free market capitalism to be over.

Threatening to storm out of the Bastille if his wishes for stricter regulation for hedge funds and other financial interests were not met, Sarkozy had his way with the other 19 member nations, giving France, and the rest of “Old Europe” a moment in the sun.

Unfortunately, President Barack Obama, felt the need to bend not only his will, but also his knee, to a group of countries who, despite their constant lecturing, are in far worse shape, economically, and politically, than the system and the country they constantly criticize.

(Sarkozy’s brother, Oliver, incidentally, is a member of senior management at the Carlyle Group, the world’s biggest private equity firm, with $90 billion in assets. One wonders if France’s Sun King lectures, or berates, his well-respected brother like he does the company, the country or the system that employs him.)

Instead of apologizing for the Bush years and its shortcomings, President Obama should have narrowed his focus to the G-20’s stated agenda and acknowledged that the deregulation of financial markets and the associated, and utter, lack of supervision went entirely too far. There is no shame in admitting past mistakes like these. Accepting the premise that America is the only country to blame for the world’s current economic and political ills simply goes too far.

The President, in addition to his unnecessary act of contrition, should have vehemently stressed to his allies, that no U.S. president, nor institution, forced once-venerable European economies, or financial firms, to emulate the American model, nor were they forced to surpass their American counterparts by diving headlong into entirely unregulated areas of finance, like the unfettered use of complex derivatives, or excessive amounts of leverage.

In fact, in that regard, the European model leaves much more to be desired than the American one. While U.S. financial institutions including  commercial and investment banks, insurance companies, broker/dealers and others, levered their balance sheets by over 30 times to enhance their profits, European banks were, on average, 50 times levered!

And while it’s true that U.S. lenders purposely lowered their standards to achieve a political, rather than economic, goal of maximum home ownership in an “ownership society,” the real estate bubbles in the U.K., Spain, Ireland and other areas of the world were taken too much farther extremes than here in the U.S. of A.

And most assuredly, U.S. firms engaged in irresponsible practices in a wide variety of ways and in many different markets, but so did European, British, Asian and Latin American firms, all with the same, if not more, disastrous results.

European institutions, alone, are now saddled with a reported $24 trillion in so-called “toxic assets,” a multiple of our own bad debts. Furthermore, we may never fully know the depths of the coincident banking crises in Japan, China, Russia and Latin America.

While the U.S. firms lack “transparency,” the buzzword of this debacle, firms around the world are far more opaque than our own. President Sarkozy has conveniently forgotten the massive fraud perpetrated at Societe Generale, not to mention the troubles at Calyon, UBP and other noble French firms.

Likewise, consider that UBS, one of Switzerland’s two biggest banks, is bigger than the Swiss Central Bank, or that DeutscheBank, Germany’s largest, has a balance sheet equal to 80 percent of Germany’s Gross Domestic Product. If you think our banks are too big too fail …!

One can clearly see that while America may have pioneered the use of excessive leverage and the irresponsible use of arcane financial products, there were willing followers directly behind us, happy to risk even more than we were, without the slightest hint of American coercion.

And with the reluctance of Europe’s finance officials and central bankers to take the dramatic steps necessary to purge the systemic risk posed by their own institutions, the world economy remains uniquely vulnerable, thanks, not only to our own, and the rest of the world’s overindulgence, but also to Europe’s unwillingness to recognize that they, too, are at the root of the rest of the world’s economic problems, as well.

The G-20 Summit, it is said, has, at long last, enhanced the influence and prestige of the faltering European Union, of China and of other developing nations. And while it is undeniably true that the Bush years were not years of economic or political enlightenment, it, however, remains true that the American, rather than the Bush, model is vastly superior to the economic models employed by both our allies and our rivals.

As a result of this just declared “New New World Order,” ordained at the G-20 Summit, should we now emulate the social democratic European model of “capitalism?”

The European economy suffers not only from the excesses that we do, but also from rigid and statist constraints that have kept the economy from reaching its full potential since the end of World War II, save for a few brief intervals in the recent past.

Is “Eurosclerosis” a thing of the past? The answer is a resounding “No!” Europe’s structural, or embedded, unemployment rate is far higher than our own, in both good times and bad. Their productivity is far lower than ours while their “superiority” resides in just a handful of companies. More important, their less-than-unified political and economic institutions remain part of an Ancien Regime, with little power to fashion concerted and coordinated policies that foster growth or widespread prosperity.

Having disposed of the European model, shall we, instead, follow the Chinese model of command and control, capitalism, with its purported economic freedoms but lacking in freedom of any other kind? Was Deng Xiaoping right when he suggested that it doesn’t matter what type of mousetrap we employ, as long is it catches mice?

Do the anti-capitalist and anti-globalization protesters wish to bring their economic displeasure to Tiananmen Square? I suspect that rather than having faces painted with fake blood to bring attention to the economically disadvantaged of the world, real blood would be spilled, and the protesters would be suddenly worrying entirely less about their livelihoods than about their lives.

How about the Russian model? In a country that never met a dictator it didn’t love, Vladimir Putin has plundered his nation’s ample resources to enrich himself and a lucky few. His net worth is presumed to be somewhere in the neighborhood of $75-100 billion, making him, potentially, the richest man in the world. And critics say our brand of capitalism benefits only a handful!

Those who oppose this oligarchy wind up in a gulag, or worse. (Bernie Madoff, who reportedly “managed” and, subsequently, lost billions of Oligarch dollars, may soon find out how Russians really feel about “property rights!”)

The U.S. should not give in, so quickly, to the temptation to bow our heads after the passing of an embarrassing chapter in our modern history. There is much to criticize about the previous president and his policies. But history will dictate his place in our modern world.

However, it was the U.S., after suffering that terrible blow on 9/11 that, through a well-timed and well-designed economic intervention, kept, not just the U.S., but the world economy, out of a prolonged recession that the terror attacks might have prompted.

And while it is true that the worst elements of deregulation led us to the precipice of economic catastrophe, this of our own making, it is, again, the U.S. whose policies are leading the way back.

It may be a long and winding road, but the world’s biggest economy is still the only economy strong enough to carry the world on its shoulders.

Atlas may have shrugged, but the world should remember, he’s still the only man capable of shouldering the burden.

Today’s figures signal deflation, or prolonged price declines, is the bigger danger, and underscores Fed Chairman Ben S. Bernanke’s call for inflation to remain “quite low for some time.” The Fed’s record injections of cash into the economy have spurred warnings from some economists, including central bank historian Allan Meltzer, that consumer prices will surge.

via U.S. Economy: Consumer Prices, Industrial Production Decline – Bloomberg.com.