We've noted in past emails that a number of leading indicators have moved into areas that typically signal the move into the mid-cycle of recovery. In fact some in China have moved past and they do appear to be experiencing a slowdown. So what does all this mean for us going forward? An excellent question that we are asked quite often.
Two months ago when Greece was the headline we felt that the macro economic outlook was more positive than the markets were forecasting. We continue to believe that the dangers of a double dip are overblown, however, we now think the macro risks are higher than they were two months ago. The fiscal tightening in Europe, the UK, and Japan has been more aggressive than we thought it would be, and the US seems to be headed for stronger belt tightening as well. In addition, inflationary pressure in China are slightly greater than we thought they would be two months ago.
While fiscal tightening has ratcheted up, we continue to believe that sharp tightening will not happen until bond yields rise and politicians are forced to make some very unpopular decisions. We all know that politicians do not like to make serious cuts that may damage their chances of re-election, and currently mortgage rates are at all time lows and the Fed continues to hold the line on rates. Another positive is that corporations have been spending and while they've not been hiring at a rate we would like them to, they are still sitting on a lot of cash that needs to be spent. So far this has offset somewhat the negative effects of the housing and employment situations. The evidence of this lies in, among other things, the gap between business confidence and consumer confidence. I don't think I need to tell you which one is higher!
To sum up, we are still positive on a long, slow recovery and feel that we will avoid the double dip scenario. However, the macro risks have risen somewhat over where they were two months ago. Stay tuned.