This week I spoke to a small group of businessmen/entrepreneurs about the current economic environment, and after my presentation one asked me whether I didn't have any good news for them, with a kind of gallows humor laugh. And I tried. But upon reflection there is more I could have said, so this week's letter will be what I should have said to be a little more encouraging.

The group was a Vistage group in which my daughter Tiffani participates. This is an organization of 12 businesspeople (in this case all CEOs of small businesses) who meet once a month to share and learn about better business practices, accountability, planning, and all the aspects of running a business. Every person I have ever met who has been involved in Vistage has had good things to say about it. I have watched it help Tiffani a lot. She truly runs our business now, allowing me to read and write and travel and speak. I am a very lucky man and proud Dad.

I have particularly watched my partners at Altegris really truly transform their business model through their involvement with Vistage. First the CEO, Jon Sundt, joined, and now the partners have all joined Vistage groups focusing on their roles in the business. Sundt was always a good businessman, but the level of professionalism of his whole company has gone up a notch. It is a pleasure to watch them grow, and they give Vistage a large measure of the credit for their success. In fact, when I went to the Vistage web site to get the link, I saw a brief video of Sundt talking about his experience. ( http://www.vistage.com/) I am proud to be their partner.

If you have a business and could use some help and professional mentoring, you should look into finding a Vistage group that works for you. They match businesspeople in different industries but with roughly same size businesses. In tough times you need all the help you can get.

I talked to them about the current economic environment and what I saw coming down the road. Long-time readers know that I think we are in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That is what you get when you have a deleveraging environment resulting from a credit crisis. It is what happens when the Debt Supercycle ends. We start the journey to the New Normal and it just takes time.

Sometimes I feel so low-down and disgusted
Can't help but wonder what's happenin' to my companions,
Are they lost or are they found, have they counted the cost it'll take to bring down
All their earthly principles they're gonna have to abandon?
There's a slow, slow train comin' up around the bend.

- Bob Dylan

The question before the jury is a simple one, but the answer is complex. Is the US in a "V"-shaped recovery? Are we returning to the old normal? A great deal hinges on the answer, and this week we look at some of the evidence before us.

But first, a follow-up thought to last week's letter. I wrote about why countries can reduce their private debt, reduce their public debt, or run a trade deficit, but not all three at the same time. If a country wants to see its government run a fiscal surplus (or small deficit) and at the same time its private citizens want to reduce their leverage (common desires throughout the developed world), it must run a trade surplus. That's a simple accounting statement. If you did not read last week's letter, you can get to it by going here.

That brings up the deepwater gusher in the Gulf. That it is an unmitigated disaster is an understatement. There is the possibility of the oil getting into the Gulf Stream and going around Florida and landing upon the Atlantic coast. We will be cleaning this up for years.

I am at the moment on a plane to Italy, but if memory serves me right, we run about a $300-billion-dollar trade deficit just in energy purchases. Our trade deficit has been coming down in most other categories but is fairly steady with respect to oil. And as noted above, if we want to get to a place where we are in control of our government deficit, we must reduce that trade deficit.

Bluntly, we cannot hope to balance the fiscal budget without getting a handle on our energy policy (unless consumers and business elect to go into more debt against the current trend - there must be an accounting balance!)

Casey Stengel, manager of the hapless 1962 New York Mets, once famously asked, after an especially dismal outing, "Can't anybody here play this game?" This week I ask, after months of worse than no progress, "Can't anybody here even spell financial reform, let alone get it done?" We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big to fail, we risk a repeat of the credit crisis. The bank lobbyists are winning and it's time for those of us in the cheap seats to get outraged. (And while this letter focuses on the US and financial reform, the principles are the same in Europe and elsewhere, as I will note at the end. We are risking way too much in the name of allowing large private profits.) And with no "but first," let's jump right in.

Last Monday I had lunch with Richard Fisher, president of the Federal Reserve Bank of Dallas. Mr. Fisher is a remarkably nice guy and is very clear about where he stands on the issues. My pressing question was whether the Fed would actually accommodate the federal government if it continued to run massive deficits and turn on the printing press. Fisher was clear that such a move would be a mistake, and he thought there would be little sentiment among the various branch presidents to become the enabler of a dysfunctional Congress.

But that brought up a topic that he was quite passionate about, and that is what he sees as an attack on the independence of the Fed. There are bills in Congress that would take away or threaten the current independence of the Fed.

I recognize that the Fed is not completely independent. Even Greenspan said so this past week: "There's a presumption that the Federal Reserve's an independent agency, and it is up to a point, but we are a creature of the Congress and if ... we had said we're running into a bubble and we need to retrench, the Congress would say 'We haven't a clue what you're talking about.'"

Long-time readers know I do not have much time for Senator Chris Dodd. He has threatened the viability of the Fed by holding up appointments, actually risking the ability of the Fed to get an emergency quorum if the need arose. His current proposal to give the President the ability to appoint the president of the New York Fed is likewise a wrong-headed political power grab. He has openly proposed to have the presidents of the local districts appointed by the board of governors. These presidents are the only real check on the board.

Last week I wrote a letter to my kids trying to explain what Greece meant to them. Reader Ken V wrote: "Great letter, John. Now you should write one for the adults who are retired and don't have the long future your kids do. If the US becomes Greece, things won't recover in time for much of the rest of my life to be more than one grim, dreary period. What is your investment advice for those with roughly a 10-year horizon, not 30-40-50 years?"

A very good question Ken, and one that was asked more than a few times. So today I will touch on that thorny issue, as well as look at the employment numbers for what we see about the potential for an actual recovery.

First, let me say that what I am not doing here is giving you, gentle reader, specific advice. To be able to do that I would need to have specific knowledge of your situation, assets, location, needs, health, etc. But what I will try to do is give you a general assessment of what I see for the economy over the next few years and what the investment climate might look like. I am also going to refer to a lot of previous letters I have written, for those of you who want to do further research.

"Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that 'this time is different.' That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy."

- This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)

When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. "The subprime problem will be contained," said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There's just so much to talk about.

But first, I want to give you a chance to register for my 6th (where do the years go?!) annual Strategic Investment Conference, cosponsored with my friends at Altegris Investments. The conference will be held April 22-24 and, as always, in La Jolla, California. The speaker lineup is powerful. Already committed are Dr. Gary Shilling, David Rosenberg, Dr. Lacy Hunt, Dr. Niall Ferguson, and George Friedman, as well as your humble analyst. We are talking with several other equally exciting speakers and expect those to firm up shortly.

Comments from those who attend often run along the lines of "This is the best conference we have ever been to." And each year it seems to get better. This year we are going to focus on "The End Game," that is, on the paths the various nations are likely to take as they try to solve their various deficit problems, and how that will affect the world and local economies and our investments. We make sure you have access to our speakers and get your questions answered, and you'll come away with excellent, practical investment ideas.

This is the season when pundits feel compelled to make annual forecasts. I will make mine, as I traditionally do, in the first letter of January. But already we have seen a wide range of forecasted outcomes. Are we going to grow at 5-6% or at 1-2% or dip back into recession? Why such disparity? I think part of the reason is a basic disagreement on the nature of the just-lapsed recession. Today we explore that issue. Then I point you to a way to help those who are desperately in need and only wish they had our problems. For those interested, I enclose a picture of my new granddaughter.

And finally, I start the process of getting ready, after ten years, to actually buy some stocks. Yes, it is true. Am I throwing in the towel and becoming a bull, or do I just see an opportunity? Stay tuned.

I did a very interesting one-hour show this week with Tom Ashbrook on his National Public Radio syndicated radio show called On Point. About 20 minutes into the show, Professor Jeremy Siegel of Wharton came on, and we had a pleasant debate and lively Q and A with listeners. Jeremy of course was the bull, expecting that next year the US will grow by 5-6%. I was the "bear," expecting growth in the 1-2% range. You can listen in at http://www.onpointradio.org/2009/12/an-economic-warning. It's also available as a podcast on iTunes ("On Point with Tom Ashbrook") for a few more days.

I have liked Jeremy the times we have been on the same platform, and we have traded emails over the past few years. He is a consummate gentleman. He is also the author of Stocks for the Long Run. His thesis is buy and hold. Long-time readers know that I find such thinking to be wrong, if not dangerous. I believe that stocks go in long cycles (an average of 17 years) based on valuations, and that we are still in a long-term secular bear phase. I want to see valuations come way down before I suggest that the index-investing waters are once again safe. That day will come. Just not for a while.

We are clearly starting to get some better data points here and there. But as I pointed out this summer, it is going to be a recovery in the statistics and not in the things that count, such as income and employment. This week we look at the nascent recovery (which could be at 3% this quarter) and try to peer out into the future to see what it means. We look at how recoveries come about, and why I am concerned that we will see a double-dip recession. Plus, I learned some new tricks courtesy of my new granddaughter, to whom Tiffani gave birth this week1 There is a lot to cover, but it should be interesting.

But first, a quick commercial nod to my subscription service, "Conversations with John." It was one year ago this week we launched the service, and we are pleased that so many of you have subscribed. As a bonus for renewing or subscribing, I am going to be doing a special predictions issue, where I will interview at least six analysts who have been right the past few years and ask for their specific predictions for the coming year.

For new readers, this is where I sit down with some of my friends and hold an in-depth conversation, generally 45 minutes to an hour, and post it on our web site, along with a transcript. We have had some fairly well-known names over the past year, and the reviews from subscribers have been excellent.

As a Holiday Special, we are offering a subscription at the special price of $129. Just click on the link and type in the code JM09 when asked to do so in the subscription process (at the conclusion of the process, not the beginning, but we're working on that.) This is a big savings over the regular $199 price.

Plus, when you subscribe you get access to the Conversation archives. That is worth the price of admission itself. And now, let's jump into The Statistical Recovery.

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, so this letter may print a little longer, but I think you will find it very interesting.

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let's look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we're in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

Unemployment is high and rising. But if the recession is over, won't employment start to rise? The quick answer is no. We look deeper into the Statistical Recovery and find yet more reasons to be concerned about near-term deflation. This week we consider all things unemployment and ponder the need to create at least 15 million jobs in the next five years to return to a full-employment economy - and the implications for both the US and world economies if we don't. Economic is often about what we can clearly see, and yet it is understanding what we can't see that gives us true insight. We start with a collection of facts that we can see and then begin a thought exercise to find the implications.

First, the unemployment rate is now officially at 9.7%. We are approaching the official high we last saw at the end of the double-dip1982 recession. In the chart below, notice that unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years. Also notice the rapid drop in unemployment following that recession, as opposed to the recessions of 1991-92 and 2001-02, which have been characterized as jobless recoveries. Unemployment was as low as 3.8% in 2000 and saw a cycle low of 4.4% in early 2007.

(For the record, all this data is available on the Bureau of Labor Statistics website. There is a treasure trove of data. They are quite open about what they do and how they do it. When I call to ask a question, they are quite helpful. How people interpret the data is not their fault.)

This week we further explore why this recovery will be a Statistical Recovery, or one that, as someone said, is a recovery only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle. This letter will print a little longer, but there are lots of charts. I have written this during the week, and I finish it here in Tulsa, where Amanda gets married tomorrow. (There is no deflation in weddings costs!)

Thanks to so many of you for your enthusiastic feedback about my latest Accredited Investor Newsletter, in which I undertook to examine the impact of last year's dramatic increase in volatility on the performance of hedge funds and to ascertain those elements that led to success in the industry, such as select Global Macro and Managed Futures strategies, as well as the challenges. If you are an accredited investor (basically anywhere in the world, as I have partners in Europe, Canada, Africa, and Latin America) and haven't yet read my analysis, I invite you to sign up here: www.accreditedinvestor.ws

For those of you who seek to take advantage of these themes and the developments I write about each week, let me again mention my good friend Jon Sundt at Altegris Investments, who is my US partner. Jon and his team have recently added some of the more successful names in the industry to their dedicated platform of alternative investments, including commodity pools, hedge funds, and managed futures accounts. Certain products that Altegris makes available on its platform access award-winning managers, and are designed to facilitate access for qualified and suitable readers at sometimes lower investment minimums than is normally required (though the net-worth requirements are still the same).

If you haven't spoken with them in a while, it's worth checking out their new lineup of world-class managers. Jon also tells me they just added yet more brilliant minds to their research team, making it, in my opinion, one of the foremost teams in the industry, focused solely on alternative investments. I invite you to have a conversation with one of their professional and seasoned advisors. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) Now, let's jump into the Statistical Recovery.