Economic & Strategy Review

Economic
Right now, I have long term US growth potential at a modest 2.8%
per annum. With a lower than historical growth profile, there was not
that much reason to expect a gangbusters recovery. However, in view
of the large stimulus and monetary easing programs, the recovery has
been a disappointment to date. Three of the four leading economic
indicator sets I follow have over-amped both the recession and the
recovery to date. They have been spot on with regard to profits, the
bounce of industrial production and the dramatic recovery of US and
global trade. But, they missed on the broader economy.

the recovery has been slow because the major sectors: households,
business and the banks have all been especially cautious. If there is
a single linchpin to a modest recovery path, it has been business,
which has been exceedingly slow to hire and which has kept inventory
investment very low -- up about 1% yr / yr vs a better than 9% gain
in sales.

Total US construction outlays for the US remain depressed. I have
not done much work in this area because I have been figuring that
there would be no recovery of consequence here until the middle of
2011.

Strategy
After a fabulous July, which nearly made my whole year, I went to a
100% cash position in early August (8/6 post). I do not have a good
enough read on the environment ahead to put chips on the table now.
I regard July as purely a case of "better lucky than smart", but I'll
take it.

Looking forward, I think it would be wise for me to look at ways to
tamp down the leading economic indicators I use. One example would
be sensitive materials prices which have been sharply affected by the
emergence of China as a major industrial power and the broad and
growing financialization of the commodities markets. Another
example would be to look more closely at the leading indicators in
comparison to the coincident indicators (That shows the over-amping
of the leaders clearly).

I am also going to have to do a better job of sorting out folks' sense
of caution from other data. As an example, I should have taken keener
cognizance of the puny level of inventory investment earlier.

Since I have been an investments professional for over 40 years, I
hope that my current travails serve to inspire you to remember that
if the game was that easy, well, we'd all be rich.