May 31, 2010 Patrick Oliver-Kelley

janus

There are glimmerings of hope, but the economy remains Janus Faced: for every good, there is a bad.

Housing prices have stopped going down and new home sales are beginning to show signs of life. But much of the positive is accounted for by the need of home buyers to get in before the incentive programs end shortly. Factory orders rose briskly, especially for commercial aircraft. But the unemployment rate is, though slowing, is stubbornly showing few signs of improvement. Bank lending remains on the sidelines. Most of the short term government incentive programs are drawing to an end, thus what signs of positive may prove ephemeral. The real test will come when interest rates are tightened. The negative consequences of our profligate past, will haunt us for a long time.

Questions remain of the Euro. The trillion dollar package created to shore it up is the ECB nuclear option likely to focus speculation on the Euro’s viability. Is it enough? Is it too complex, too many moving parts? Italy and Spain have announced measures to cut spending, but the Euro continues to weaken against the weakening dollar. We think the rate will approach par to the dollar.

Concern for particular sovereign debts continues, especially if Greece were to default on its debt though it now has a three year holiday. And the question remains, will Greece accept three years of austerity, imposed from outside? Street riots would suggest, NO! Fears of a wider sovereign debt crisis cannot be ignored, nor dismissed. Ineffective remedies limiting speculators continue to dodge the real issues of government spending excess. Fiscal discipline must return. As for the fear of contagion, is California our Greece? It is bigger, much bigger, and that is the problem: potential weakness there, and here.

The conclusion is that our best wish can be for only a moderate of US economic growth, but too, that implies a longish period in which the market can continue to build confidence and ultimately wealth.

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