Economic Indicators / Analysis

Economic Power Index
The EPI -- yr/yr % change in real wage + yr/yr % change in civilian employment -- jumped to a
strong 4.5 in Dec., its highest reading in several years. The basic EPI was only a paltry 1.3.
Extra hours worked and overtime added 1.2, and the temporary cut in the FICA payroll tax
added  about 2.0%. With further employment gains indicated in the months ahead, the EPI is
sufficient to underwrite a significantly stronger economy in 2011. However, the current EPI is
hardly as healthy as it looks viewed longer term. The payroll tax cut is only a 12 month deal, and
one cannot count on strong extra time hours each month along the way. What is still needed, is a
much stronger basic EPI, with healthier real wage growth and an acceleration in jobs growth.

Civilian employment rose modestly in Dec., but was only slightly higher than at the 2010 mid
point and is down from the Apr. '10 level. The leading economic indicators suggest the higher
payroll numbers are in the cards, but for the last 8 months, businesses have talked the talk about
hiring, but have not followed through. with the labor market weak, companies have also slashed
wage growth to buttress profits. If this does not change for the better, do not blame consumers if
they tighten budgets some. And, if you were wondering, well you can bet your ass that senior
managers did not walk away with 1.9% compensation gains on the year. Paid like rock stars.

Capital Slack Measure
High unemployment, low capacity utilization % and near zero short term interest rates all attest
to large idle resources in the US., and underscore the Fed's concern about slipping into a
deflationary period if the economy fails to respond more vigorously. The high amount of slack
also suggests the economy can expand for a good 4-5 years easily if there is further improvement
in the balance of supply and demand for goods and services including especially credit and
employment.

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Investors face challenging strategy issues in 2011. The Fed's QE 2 program expires at mid year.
The payroll tax benefit expires at the end of this year. Businesses need to step up hiring, and
the banks have to re-enter the credit market with sensible, expansive loan programs. Last year
was a poor recovery period, and the stock market p/e multiple was suppressed despite strong
profits on cost cutting. Bondholders saw handsome gains dissipate over Half 2 '10, and savers
were screwed yet again. Looking forward, my advice would be that you minimize the assumptions
you make (especially the grand ones) and srutinize your basic premises about the economic /
financial environment frequently. I am not calling for a turbulent, volatile year, but you will
need to get the basics right to do well. No coasting I think.