2. Interest-rate sensitivity.

In March, investors were vastly underestimating the simulative effects that extremely low short- and long-term government-borrowing rates would have on the economy. High financial-services penetration and high levels of leverage in the US magnify the interest-rate sensitivity of the economy. Low rates provide fuel for investment and consumption in an economy where credit can be delivered through a wide array of mechanisms. In addition, refinancings increase disposable income for businesses and consumers that are highly indebted.

However, interest-rate sensitivity works both ways. And this means that as interest rates inevitably normalize -- i.e., long-term government bond yields move beyond 4.25% and above -- a major stimulative factor will be removed from the economy.

High levels of consumer and business leverage has put the economy between the proverbial rock and a hard place. Normalization of financial markets and an uptick in growth will essentially dampen the rate of recovery through the effects that an increase in interest rates will have on an interest-rate-sensitive economy.

The result of this conundrum will be sub-par growth and increased macro volatility.

3. The end of the Obama honeymoon.

Public confidence in the ability of the government to engineer solutions to the economic crisis was a key to the rally in financial markets since March. Conversely, an erosion of public confidence in government should have the opposite effect.

In my estimation, President Obama’s approval ratings are eroding and will continue to erode as his domestic initiatives are likely to get bogged down in Congress. The timing of universal healthcare proposals and cap and trade initiatives couldn't be worse. The public has little appetite for grandiose spending and tax schemes in the current context of economic crisis. Obama’s stubborn dallying on these untimely issues, his lack of focus on providing real solutions for the economy, and his delegation of economic leadership to the economic ignoramuses in Congress that are, in any event, dominated by special interests, will cost him dearly in terms of public approval.

Tragically, Republicans provide absolutely no alternative whatsoever -- either in terms of ideas or leaders. Thus, at a time when bold policy-making is needed, the US is faced with a political stalemate characterized by irrelevance and incompetence. The decline of public confidence in the president will be a proxy for the public’s loss of confidence in the government’s ability to provide workable solutions for the nation’s crisis. This will negatively affect consumption and investment patterns.

4. The mess in Europe.

Europe is in trouble -- and more than is realized. Government debt in Europe is far greater than in the US. The demographics are dismal. Entrepreneurial growth dynamics are non-existent. Property values are significantly more overvalued than in the US. The corporate sector is considerably more leveraged than in the US. The banking system is much more leveraged than in the US and capitalization levels of banks are grossly inadequate. The monetary and fiscal mechanisms in Europe to counteract the economic crisis are lame.

Furthermore, the multi-party parliamentary systems of most European nations are dysfunctional. Europe is essentially one year behind the US in terms of the bursting of the property bubble and the financial-system crisis. Thus, these twin crises will accelerate in Europe in the second half of 2009 and 2010. In addition, the rate of contraction in European economies is already surpassing that in the US, and unemployment will be greater. I expect the focal point of the global financial crisis to gravitate towards Europe in late 2009 and early 2010. The inability of European institutions to effectively deal with the crisis may trigger political and social unrest not seen in many decades.