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Critical Economic and Market Commentary 06/29/10

Economic and Market Update: Critical Juncture.

Both the economy and the markets are at a turning point. The markets are reacting to the reality that a V-shaped recovery is a pipe dream. The big question now is whether we are simply in a slow growth atmosphere or a downright negative growth environment, a.k.a. deflation.My Crystal Ball

My longtime readers will know my position as I have been warning of deflation for the last several years. I will not go into too much detail on the subject here, as I will discuss it comprehensively later this week in my newest special report, “Economic Tsunami, the Second Wave – How to Prepare Your Portfolio.” However, the primary trend of the economy is pointing toward a deflationary spiral, which is a bad omen for stocks.

  1. Consumer spending will not increase – the natural cycle of the aging population is to spend less.
  2. Home prices will continue to decline – there aren’t enough people in the generation behind the Boomers to absorb the supply.
  3. Bank lending continues to decline – lending and credit is the lifeblood of the economy. Without new lending, it is virtually impossible for the U.S. economy to grow.
  4. Tax increases – we are about to see the largest tax increase in U.S. history coincide with drastic state spending cuts.
  5. The massive “deleveraging” continues – which is by definition deflationary.

These concerns lead to my biggest fear: that growth will come in much less than expected. This wasn’t helped last week when the government revised its 1st quarter GDP down to 2.7%. This was followed by a decline for the 2nd quarter GDP estimate down from 3.5% to 3%. Put simply, that’s not good. I do not believe that personal consumption and aggregate demand are anywhere near what the markets are hoping for, and as I mentioned in my June 16th commentary, everything hinges on the next GDP number, which will be released at the end of July. If those numbers are good and people are spending again, we are in for a new multi-year bull market. If the numbers are disappointing, as I expect, this rally is toast. 


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