August 24, 2010 Patrick Oliver-Kelley

The global economy slumbers. Except for Germany and its nearest trading partners Austria and the Netherlands, and the UK and France, the world economy is weak: Stimulus programs are running out; Businesses are not hiring; Consumer confidence continues low; inventory restocking has begun to slow down; and consumer spending is weak. The German economy is firing on all cylinders reporting a nearly 9% annualized rate. Someone out there in the world economy is still spending. Exports to China for infrastructure equipment and luxury automobiles lead the way. The rest of the Eurozone is less encouraging, with Greece, Portugal, Ireland and Spain showing little progress. It is too soon to be sure the Eurozone is back on its feet, though there is anecdotal evidence that Germans have begun to spend more liberally.

Fears of a double dip recession because unemployment remains around 9.5%, the third straight month of no growth makes the economic outlook is unpromising. Unemployment Insurance claims reached 500,000 last week. There is scant evidence of life in the housing market. Banks remain unwilling to lend. Consumer Confidence and spending indices remain at a five month low. Demand for autos is anemic and world trade shows little fire, layoffs continue across the board. Retails sales showed an actual decline for the month and consumer confidence continues to hit new lows. Corporate America is flush with cash but shy to hire. Increased production seems to be met with its existing workforce. But one glimmer of hope, there has been an increase in hours worked by presently employed, a prelude to hiring new workers.

Rich-world trade has recovered. So long as protectionism can be held at bay, there is hope. Urging China and India to commit to deeper cuts in their tariffs on manufactured goods imports and bringing services in to the discussion, would be helpful. Keeping markets open will stimulate recovery.

It will be a hard slog, but do not expect the American recovery to grind to a halt. Economic value originates in ideas. America has no shortage of those.

From a portfolio view, the end of the bond market is here. Interest rates can go no lower which means the next move in rates is up, and that is not good for holders of bonds. Can a strengthening stock market be far behind?

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