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One way to explain what’s happening in global markets that may paint a clearer picture is by making an analogy. Let’s for a minute imagine that  the global economy is a cancer patient, that Central Banks and governments are the team of doctors, and that the various liquidity injections, emergency lending facilities and government stimulus programs are the chemotherapy being used as the treatment.

Cancer is an appropriate metaphor in this example, especially if you consider all the consumer debt and toxic assets on bank balance sheets that built up over the decades to be like tumors that grew unchecked. And much as a person with cancer, the economy survived and even thrived for a time but eventually, as the malignancy gradually displaced more and more  normal tissue, serious symptoms began to ensue.

Left without treatment this patient would surely have died, much as the economy would have if not for all the emergency measures which have been implemented since the onset of the financial crisis. And make no mistake about it; the world as we know it came frighteningly close to ending after the collapse of Fannie Mae, Freddie Mac, AIG and finally, Lehman Brothers.

Now, here’s the thing about chemotherapy-it’s actually a poison designed to kill living tissue (healthy and malignant). Of course, the goal in administering it is to kill off the bad tissue at a faster rate than the good but unfortunately, that isn’t always possible when for example the malignant cells are widely dispersed among the normal ones.

There’s something else about chemotherapy as well-even when it works as designed, no patient can stay on it forever. You can only take so much poison into your system before it becomes overwhelmed. But with luck, the chemo kills the cancer while leaving enough normal tissue intact and from there, the patient can begin the recovery process (which essentially means regenerating more healthy tissue to replace what the chemo destroyed).

I already mentioned that as far as the economy is concerned, the chemotherapy that’s been administered consisted of liquidity injections, special lending facilities and government stimulus programs (in the U.S. alone, it’s estimated that about $11 trillion has been either lent, spent or guaranteed). However, I left out one crucial element in all this-Bernanke’s infamous 60 Minutes interview on March 15. To my way of thinking, the Fed admitting on national television that it was    (“electronically”) printing dollars was the strongest form of treatment that could have been given. Not only that, I’m firmly convinced that Bernanke said what he did out of sheer desperation.

Why? Because all of the emergency measures had been put in place months before the S&P bottomed at 666 on March 9. To that point, everyone had been watching to see if the November 2008 low would hold and when it didn’t is when I believe that Bernanke decided to drop his biggest bomb.

So, the purposeful depreciation of the dollar is the real chemotherapy that has gotten this patient turned around. But just as with the real thing, dollar depreciation has the potential to kill a lot of healthy tissue as it seeks out and destroys the malignancy. And just as it’s important to withdraw this type of treatment from a patient at the right time, it will be just as important for the Fed and other Central Banks to gradually remove the excess reserves that have been created.

In the meantime, the big question is where things are headed to from here and as you might have guessed, I have an opinion on that. As far as I’m concerned it seems obvious that the next target for U.S. stock markets resides at the levels they were on just prior to the collapse of Lehman on September 15, 2008 which for the S&P is just above 1200.

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Leonardo Sbardelotto

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In a letter to clients which quickly went public Thursday afternoon in N.Y., former investment bank Goldman Sachs (GS) warned that September’s NFP (scheduled for release at 08:30 EDT) would show a loss of 250,000 jobs, worse than the 200,000 it previously estimated. The S&P fell 0.92% in the last hour of trading as the dollar gained against the PEAK currencies (pound, euro, aussie and kiwi).

GS chief U.S. economist Jan Hatzius cited the Monster index of on-line hiring, the ISM employment index, consumers’ assessments of job availability, and the total number of individuals receiving continuing claims for unemployment insurance (including those for extended benefits) as reasons for upping their earlier assessment. Economists had been estimating the loss of jobs to be 175,000.

As far as the unemployment rate is concerned however, the bank maintained its 0.1 percentage point increase.

This sets up an especially interesting situation for traders, because it’s possible that the “news” of a higher loss of jobs has already been priced in. That could mean that a surprise to the upside (meaning less jobs lost than thought) is likely to be followed by the rapid ascent of stocks (and commodities) in conjunction with the PEAK currencies against the USD.

That being said, the NFP is a notoriously difficult report to estimate, primarily because the Bureau of Labor Statistics (BLS) uses something called the “birth death ratio” in its calculation of monthly job creation (or loss as the case will probably be). This ratio has nothing to do with the births and deaths of persons; it’s basically a guesstimate of how many companies (and their associated jobs) actually opened up shop or closed their doors over the previous month.

What’s also likely to hurt the September jobs number (to say nothing about October) is that basically all of the car manufacturers said sales fell in September as the “cash for clunkers” program ended. Companies reported on Thursday that September deliveries were reduced by 23% from August to the second slowest rate this year.

In any event, it will take years for the unemployment rate to return to anything that resembles normal (say 5%). For example, the economy would need to create about 15 million jobs over the next 5 years in order to get there, an average of 250,000 per month, but the problem with that becomes evident when looking at previous average monthly job creation numbers:

The best year since 1989 was 2006, with an average monthly growth of 232,000. If you average the ten years from 1999, you get monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. In fact, the best ten year period (1991-2000) yielded an average of only 150,000 a month.

With that, what are the chances of seeing a double dip recession at some point along the way? Back in 1937 (when the economy was in the process of recovery from the great Depression), Congress and President Roosevelt decided the thing to do was to balance the budget, which had gotten terribly out of whack as the government ran large deficits and pumped money into the system just as it’s doing now. So, they raised taxes and created another recession which basically lasted until war production ramped up in the early 1940’s.

Now, the Obama administration is intent on making the economically suicidal move to raise the top tax rate by 10% as it lets the Bush era tax cuts expire. Popular myth is that those who pay the highest tax rate are Wall Street fat cats but the reality is that 75% of them are the small business owners, the ones who are responsible for the large majority of new jobs that are actually created in the country. Taxing them will lead to fewer jobs being created (as they will have less to invest) and of course, less consumer spending.