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How much of a disappointment was Friday morning’s BLS Non-Farm Payrolls report? Yes, 18,000 new jobs is still a positive number. But Thursday’s much-better-than-expected ADP report set us up for a letdown today. Here’s the way I described the situation on Thursday evening in a note to a group of our portfolio subscribers:

“A strong day for the broad market was just what the doctor ordered to shake off all this sovereign debt malaise, right? It's nice to see the S&P 500 above 1,350 and I have to admit I am surprised at this strength...but I'll take it! That ADP jobs report certainly helped too. Coming in twice expectations, this gauge already has Wall Street economists upping their forecast for tomorrow's BLS report. The consensus before today was around 100k new jobs and now we are getting new estimates north of 150k based just on the good news from ADP.

"Needless to say, tomorrow should be an interesting day in the market with the rubber band stretched like this. Tension between bulls and bears, especially after a period of consolidation and doubt, is exactly what propels markets. We could launch higher tomorrow on a good jobs number, or we could fall hard on a disappointing one that confirms the slow-down is entrenched. I am not of the school that says ‘bad number = good news because QE3 will come and save us.’”

What’s Wrong with the Economy?

There is always so much confusion about the economy and the stock market and what government should or shouldn’t be doing to facilitate their growth. I am not confused and I think I can help, so I am going to quickly describe some of my views of the markets and the economy in very simple terms.

Fair warning: I will use general observations over statistics, which will actually make it easier for you to argue against my ideas if you disagree with them. It’s often harder to argue with a misused piece of data.

Mine is an optimistic view that is also conservative. In other words, while I think some things are structural problems that will continue to haunt -- and there are always compromises to be made between ideals and the realities of human nature -- I am bullish overall on American ingenuity, productivity and capital markets.

There is nothing wrong with the economy. It is working amazingly well, and mostly because the global economy is still humming and emerging markets (EM) have sustained demand for American products and know-how. Even though the U.S. is still a powerhouse engine of global demand and growth, our up and coming peers in Asia, Europe, South America and Africa were not derailed in their middle-class dreams just because of our crisis.

Who really thought in the spring of 2009 that we would see the recovery and growth we have seen for the last two years?

As an arm-chair economist and trader, I thought so, and a few real economists and large fund managers I pay attention to did. In the spring of 2009, I told investors in interviews on CNBC and FOX Business and Bloomberg that what we had before us was a systemic, generational banking crisis that just handed us a generational market buying opportunity.

EM vs. QE

I knew I had an extraordinary opportunity to advise investors at the recession lows of 2009 to buy long-term positions in cyclicals, energy, technology and biotech, recommending Caterpillar (CAT - Analyst Report) at $40, Foster Wheeler (FWLT - Analyst Report) at $19, "buying all the dips" in Apple (AAPL - Analyst Report) and backing up the truck on the iShares NASDAQ Biotechnology Index ETF (IBB - ETF report) at $65 and "putting it away." The IBB recommendation was a conservative, long-term, no-brainer to me. Little did I know how big the biopharma M&A tsunami of 2009-10 would be as well over $100 billion in deals were done!

Later in 2009, as the animal spirits of our economy caught fire again from the EM, I became interested in buying materials and commodity stocks again, especially as I grew to understand the global dynamics of population growth, urbanization and food demand.

Not even Warren Buffett was so optimistic (of course, that’s not saying much since his “long-term” is so much longer than anyone else’s). Most investors were not so optimistic, I think because they had so much guilt about quantitative easing (QE) and its explosion of debt. Or they just wanted to be able to say “I told you so!” if another unsustainable credit bubble emerged.

We needed QE and the TARP program and everything else that Bernanke and Paulson did in 2008 and 2009 to stave off financial collapse. As I’ve said for nearly three years, in the midst of a fear-driven credit crisis where contagion could spread systemic breakdowns in all sorts of financial institutions, it was always about confidence first and foremost.

And if you don’t understand why QE2 or any other flavor of monetary and fiscal support was still needed two years later, then you don’t really understand the depth and severity of the Japan deflationary spiral. I have been writing about the steady hand of Bernanke for over two years and recapped many of those ideas in a series of articles you can find in my June 30 piece “Summer Pullback Over? Not So Fast.”

But in the end, while QE got us out of the ICU, it was the EM that nursed us back to health.

QE Next Will Not Create Jobs

My satisfaction with Bernanke doesn’t mean I want to see any form of QE continue indefinitely. I still believe that deflation is the worse of two evils, as I think he does. And so I will accept a further round of QE if he thinks it necessary to prevent said evil.

But, it may not do much to create jobs. That should be evident to all. What’s missing in the jobs equation is a full-blown recovery in housing. Most economic recoveries form a self-reinforcing feedback loop with construction industries and jobs.

And QE has always been intended, at least by half, to prevent a further collapse in housing. That part of the patient still could put us back in the ICU. And that’s why many of my articles for the past two years about the economy and FED policy have had some variation on the theme “Bernanke’s Eye on Housing.”

What About the Deficit and the Debt Ceiling?

I don’t pretend to be smart enough to know what to do about the budget and debt spiral. Will there be a political stalemate in Congress that derails our economy?

I tend to be more sanguine than most on this issue after a decade of listening to economic doomsayers preach about the death of the dollar, etc., whether due to Japan and China selling their Treasury holdings or a downgrade to our AAA rating.

And after Paulson and Bernanke reacted with bold and creative initiatives during the 2008 crisis (remember how they had to keep reinventing what the TARP was for...when it was really just about restoring confidence), I know there are many backroom conversations going on to prevent another disaster.

The heads of central banks are always having private conversations about market sentiment and perception. In the fall of 2008 when they orchestrated a lowering of interest rates around the world, I coined the term “global central bank” or GCB. They know it’s a confidence game and they are not about to lose this round over the stupid U.S. debt ceiling.

Stalemates and Double-Dips

What is going on now is letting Congress “work it out of its system.” Let everyone grandstand and politicize it to their advantage. You don’t want the impression of a master plan that’s already been advised by “wise men” behind the scenes.

This is like when you give your teenagers new rules about the car. You have to let them fuss and complain about it for a while before full implementation. Not a great analogy, but you get the idea. Since we need Congress for this one (Bernanke can’t create a solution by himself this time), we have to let them bitch 'n moan.

For these reasons, I think we avoid a long political stalemate, which would, of course, be disastrous for the market. Hopefully smart economists and investors are busy educating congressmen and women what happens when you rip confidence from the biggest economy and debtor in the world. It’s all relative in a global economy, but it’s still a U.S.-centric globe, as we learned 2 years ago.

This said, a short stalemate in August will still take market down...until some form of certainty is known and believed by institutional investors. I would recommend reading what the boys from PIMCO or Blackrock are saying and doing now.

I like to go to their much bigger macro-investing brains when I don’t have a clue. So, while I am pretty sure we won’t see a double-dip recession -- and I still think we see the S&P at 1,500 by second quarter next year -- I will just be looking ahead for more specific clues in the second quarter’s earnings reports for the strength of our ability to get there.

Kevin Cook is a Senior Stock Strategist for Zacks.com

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