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Thoughts from the Frontline

My View on the Last Half of the Year

July 2, 2011

Choose your language

We are halfway through the year, and what a ride it has been. Today I will share my thoughts on what the next six months could look like, and endeavor to keep it short and simple, as we have a holiday weekend. There will be more than a few charts. What does the end of QE2 mean? What can we expect from Europe? Is a commodity bubble getting ready to burst? Is it really a bubble? There is a lot to cover.

I recorded a PBS show a month or so ago, and it is airing this weekend on a number of stations around the country, so look for details at the end of the letter. Now let’s jump in.

We Should Be OK, Except…

The economy should be in Muddle Through range (around 2% growth), absent any shocks. For instance, today we had the June ISM number, which was stronger than most analysts expected, at 55.3. There was a lot of whispering that it could dip below 50. Some of the internal components were a little soft, though. New Orders were barely above 50. And Backlogs fell below 50. Exports fell to…

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Jon Parker

July 5, 2011, 8:24 a.m.

What struck me about the first chart, GDP and Payroll, was the anemic GDP in the last decade.  With all of the tax cuts AND deficit spending, why didn’t we see better economic growth?

julius corazo

July 3, 2011, 11:34 a.m.

excellent analysis and very well thought out prognostications, these are dangerous economic times indeed, too many moving parts that have to move in concert and in harmony, otherwise, if we experience any shock in the next 6 months, then there will be more pain and dislocation going forward, for investors, businesses, consumers and governments, which will make the Greece unraveling look like a picnic…hope we avoid these economic pot holes going forward, most people are already too stressed out as it is
p.s. It’s nice to read a business newsletter that has a family bent to it, I like your choice of the name Abigail, my daughter’s name as well…you do have great looking kids…
Happy 4th of July to your family and friends and your American readers! we just celebrated our Canada Day…

julius corazo

July 3, 2011, 11:20 a.m.

excellent analysis, very well thought prognostications, these are dangerous times we are in, too many moving parts that have to behave in concert and harmoniously…if we experience any external shocks, then there will be more dislocation and more pain for everyone, for investors, businesses, consumers, wage earners and governments alike…so here’s hoping we can avoid these scary economic pot holes going forward…
p.s. It’s nice to see an intelligent economic newsletter that has a family bent to it, you have great looking kids, I like your choice of Abigail, I have a daughter with the same name…
Happy 4th of July to your family and friends and all your American readers!...we just had our Canada Day…

Tony Dowell

July 3, 2011, 11:01 a.m.

Jim Rogers has an interesting perspective on Greek problem:
“It’s about Europe bailing out European banks, not Greece”.

Richard Sackler

July 3, 2011, 10:06 a.m.

Your analysis of the Greek situation is to the point.  But what wasn’t said was the implications of a default.  Greece would likely leave the Euro fairly quickly.  With that event, I imagine (I have no knowledge) that some or even most Greek banks would find that many of their Greek assets would be redenominated into a Drachma-like domestic currency (initially a 1:1 conversion) which would rapidly depreciate.  But their foreign obligations would remain in Euro.  If some of the most important Greek banks collapse (not a foregone conclusion) this might spread to other banks in the Eurozone.  Greece might even have to exit the common market if unless most of the private (non-banking) debt can be protected from forfeiture.  (I’ve assumed that once Greece exited the common market, they could protect Greek situated assets from seizure from the outside.) 
However, shocks aren’t limited to the Eurozone.  We have an even more urgent potential crisis brewing in the US with the stalemate on expanding the debt limit.  Some commentators are guessing that a market signal—whatever that may be—will be required to get thing unstuck.  Whether the market signal would turn into a hiccup or a major ungluing of credit markets world-wide.  Strangely, there isn’t much concern expressed by marketplace measures yet, so we would have to see this possibility as remote.

Amir Shaked

July 2, 2011, 8:34 p.m.

And let’s not forget our own, home grown, shocker - the inevitable removal of the fiscal stimulus in the form of a deficit that’s almost 10% GDP; what’s the significance, anyway, of 2.3% vs 2% GDP growth when this grown costs us 10% of GDP?

Valerie Peak

July 2, 2011, 7:08 p.m.

Enjoyed your artice, Tulsa for the 4th, and , having twins myself, can relate. Also, I may never had time to read to the end for some personal info. Thank you for writing and your wisdom! Happy independence Day!

Dave McKay

July 2, 2011, 3:54 p.m.

I think the “Fortress America” trade is the right trade for the near term future. I think long term municipal bonds and coupon clipping is the best idea. With a slowing economy, I don’t think long term rates will rise any appreciable amount, so no big hurt on your continuing bond values. And bolder investors can go with leveraged closed-end municipal bond funds at 7% rates.

Leverage costs are at record lows, and Bernanke won’t be raising short term rates (financing costs for closed-end funds) anytime soon. So, stay at home in your Fortress and do the carry trade, because right now the best carry trade anywhere is right in your home country. Meredith Whitney has been proven wrong and muni bonds are at great prices these days, even after the recent run-up.

andre therien

July 2, 2011, 11:56 a.m.

Great letter ! Succinct and to the point. The world economy and financial system are so vulnerable to any
external shocks, its scary. Time to buy insurance, whether it be Puts, the VIX or Shorts. Europeans are
terrified of defaults and the USA is releasing strategic oil reserves. There is an important message in these acts. Additionally, China is a bubble and Japan is a basket case. Great independence day to all you