It’s amazing how much hustle and bustle there can be in a town supported by government spending.

I’m talking about the capital of Oregon and the town I’m spending Christmas at, Salem.

Here, the government with its four state penitentiaries and state offices is the number one employer. That’s not the only way Oregon State supports its people, though. One out of six Oregonians are on food stamps. And unemployment benefits are way up.

God forbid you try and drive the streets in December, though. A three mile drive to the other side of town could take you 45 minutes.

I shouldn’t be shocked, though. After all, this is what a 7%-11% variable state tax produces: A false sense of normalness.

You see Oregon, like much of the US, is suffering a structural problem in its economy. The problem is that the state hasn’t fully switched over to new types of jobs.

Everything here is a little dated, down to the advertising. The state used to get a lot of support from timber mills. But that changed in the 80′s. From oregonlive.com…

Since the 1980s the lack of a national forest plan is a major reason Oregon has had 200 timber mills close, causing some 50,000 people to lose their jobs. Much of rural Oregon has been economically ruined. Many rural towns used to have a lumber mill. Now most are gone. Rural counties have been providing services for their citizens by using federal timber money in the county payments program that in 2012 will cease. Oregon will have to keep these counties afloat.

We have lost thousands of aluminum industry jobs because of plant closures. More than half of our pulp and paper mills have closed, costing thousands of jobs. Major steel plants have closed, costing thousands of jobs. Heavy construction has lost thousands of jobs. Machine manufacturing plants have closed, costing thousands of jobs. The high-tech industry has lost thousands of jobs. Transportation manufacturing has lost thousands of jobs. Oregon has lost thousands of food processing jobs.

The sad part is we’re still losing jobs, 120,000 since November 2007.

Oregon’s solution also mimics most of the US: create government jobs to pick up the slack from private demand. But that doesn’t work.

Politicians have dreams of power and grandeur. Years ago John Maynard Keynes gave politicians the idea that they could control the economy like a machine, through deficit spending and monetary policy. And they have been striving for it ever since.

Bush Jr tried by dropping interest rates to 1%, boosting stimulus spending during downturns, stating a war, and cutting taxes by over $1 trillion.

Today, Obama tries his hand at playing “god” by outdoing Bush Jr. In most regards, Obama is doing the same as Bush. He’s cutting some taxes, passing stimulus measures, and increasing military spending. But unlike Bush, Obama’s focus is on spending, not tax cuts.

He already passed a $787 billion stimulus package in February. He’s also promised to use some of the returned TARP cash to fund another stimulus program next year.

That’s on top of Cash for Clunkers and the hodge podge of other increased spending initiatives being passed, including the “Health” reform that purports to cut medical costs by adding a trillion dollars a year to health spending, without increasing the supply of doctors, hospitals and nurse by one iota.

I’m afraid that as long are people are worried about the economy, politicians will argue for more stimulus. And this stimulus will inevitably make its way back into the economy.

This makes it tricky to forecast the market.

If it weren’t for government intervention, the current rally would have ended long ago. It may not have even started, who knows?

But at some point, all of this cash flooding into the economy will lose its potency.

Is that point right now? It’s hard to say.

A quick look at the chart above of the Dow Jones shows my biggest concern.

You see, in previous issues James talked about how Quantitative Easing flooded the market with liquidity as the market began to move higher in March. Basically, the Fed poured cash into the hands of the primary dealers, probably with a wink and a nod understanding that they should use the “profits” from quantitative easing to buy the stock market. Our suspicion is based on the fact that the stock market bottomed at roughly the same time the Fed began buying Treasuries.

But here’s the problem. The Fed has stopped buying Treasuries and suddenly the stock market begins losing steam. By the first quarter of next year, the Fed’s QE program ceases completely.

Will the stock market drop as a result of reduced liquidity? It’s a risk that James and I think about, especially in this market.

As of now, though, the portfolio is still looking golden. No major news to announce this week, which is expected since Christmas is right around the corner.

Next week will be a light and short trading week since it’s a holiday. The Market will close on Thursday by 1 PM Eastern Time.

Be aware that light trading means we could see sharp moves up or down. But generally the market has an upward bias leading into the holiday.

Speaking of holidays, I hope you’ve got most of your shopping done. I finished last week by getting my Fiancé a digital picture frame and an iPod gift card for my nephew.

The bottom of my tree is getting packed.

Happy holidays!

Charles Delvalle.