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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, July 28, 2009

US Economy -- Baseline

As a retired guy who no longer gets paid to do economic forecasting,
I do not do it. As readers know, I rely heavily on time tested
indicators to look ahead. But I do develop a baseline outlook on
an occasional basis, particularly after economic / markets watershed
events. No time like the present, then.

Basically, I think the US economy can experience an economic
recovery / expansion which can run 8 - 10 years from Q3 ' 09. This
expansion should averge 4% growth in the early part followed by a
multi-year run averaging 2.75% annually. I look for growth to be
well balanced between consumption and investment, and for a
solid base of export sales to be a key driver. So, I do look for an
eventual substantial recovery of employment and profits. I expect
the dramatic increase of entrepreneurship we have seen over the
past 15 years to continue and for the economy to grow ever more
diverse. I expect inflation pressure to return and to average
about 3.5% over this lengthy period. I see short term interest
rates recovering to a range of 3.o - 6.0% and anticipate that
bond yields will rise significantly. Following a strong 2 year
recovery period, I have corporate profits growth settling in at a
6.5% growth rate. Investor pressure to increase dividend
payout will eventually grow as retirement funds look for more
stable income.

The expected long duration of the expansion reflects the very large
build up of capital slack in capacity, employment and financial
resources and the length of time it will take to redeploy these
resources profitably.

There should be exceptional political battles to come as the Feds
face more market pressures to regain budget discipline and
re-prioritize spending against a revenue stream which cannot be
easily augmented by tax increases. The country is greying and
through increased geographic dispersion has grown more conserva-
tive politically (This is so even though the GOP has turned truly
and well stupid and is in need of broad new leadership).

I also suspect the Fed finally realizes that asset bubbles can be
every bit as damaging as high inflation and that monetary policy
will turn more balanced in the years ahead.

Finally, I would say that the 2007 - 2009 economic debacle will
serve as a reminder to all to pursue more balance in economic,
business and investment affairs. This fresh probity will of course
wear off with time, but not, I think, for a good while.

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