Friday, December 17, 2010

Green lights for a stronger recovery

The first chart shows the level of the Index of Leading Indicators, while the bottom chart shows the year-over-year change in the index. Two things stand out: One, the index is moving higher and showing absolutely no sign of any economic slowdown. Two, as the top chart suggests, the growth in the index over the past several decades has been impressive, and not at all like the stagnant conditions which prevailed during the great equity bear market of 1965-82. In other words, the index is a big green light for continued expansion and prosperity.

With the sea change in the direction of fiscal policy that began with the November elections and which has been confirmed now with the extension of the Bush tax cuts for everyone and for capital, plus the defeat of the last-gasp-of-the-big-spenders Omnibus spending bill yesterday, the private sector has a very good chance of generating a stronger recovery in the years to come. The private sector has been oppressed for years by increased regulatory burdens; investors and businesses have been reluctant to invest given the threat of a massive increase in tax burdens; and the huge increase in inefficient government spending and transfer payments has been a drag on overall productivity. Looking ahead, all of these headwinds should be reversing, or at least slowing down dramatically.

This amounts to a giant Christmas present for investors in equities and corporate debt. At the same time, it is a death knell for investors in Treasury notes and bonds, since they have been priced to a very gloomy economic growth outlook.


John said...


I am positioning myself for just such an occurance.

I have been reading your forcast for 2010 made in December of '09 and I think you did very well. You were a little off on a couple of things but you nailed what was most important to me...returns in the equity markets. Your 10 - 20% range was right in there...and a little conservative for smallcaps and emerging markets. I'm looking forward to your forcasts for 2011.

My comments will be few from now through new years eve. Many family commitments, as I am sure you will have. A very happy and safe holiday season to you and all your loved ones. I will be reading your posts as I have time.

Bill said...


How significant is the Euro-Zone issue regarding the recovery? It seems as though the governments never seem to do enough to quell the "crisis" Don't you think stocks would be much higher if this problem were under control?

CDLIC said...


What is your prediction for the longer term--1,5 and 10 years-- regarding debt: private, corporate, county, state and federal?

Scott Grannis said...

Bill: sure, it would be better to have the euro debt crisis resolved, but that is going to take time. Meanwhile, I welcome anything that makes it harder for governments to expand, and that is what this crisis is all about: too much spending. The euro debt crisis is forcing governments to tighten their belts, and in the long run that is a very good thing, provided, of course, that budgets are not balanced on the back of taxpayers but rather through spending cuts.

Scott Grannis said...

CDLIC: My crystal ball doesn't work too well past a few years. For now, Treasury debt is still very unattractive. I imagine there will be a few states that go belly up, so I would be reluctant to buy, say, California munis even though yields are relatively high. Corporate debt, particular high yield debt, looks attractive and should be a good investment over the next few years. The economy will be growing and liquidity will not be a problem, and that is a good formula for producing very low default rates.

septizoniom said...

your post is at odds with itself.
and you amatuerishly fail to analyze the components of lei.