Tom

Interesting article. I think a key observation is that the top 20% of households by income account for 65% of the consumption. To me this raises the question of whether the economy can continue to grow even as most Americans suffer from unemployment or stagnant to declining real income – i.e., income growth in the top 20% or some subset may be enough to propel growth sufficiently to keep the market rising.

The labor market does appear to be stablizing, so a bounce off the bottom seems likely to me: an increase in spending by those with secure jobs, some rehiring by firms that over-reacted, continuing inventory restocking to accommodate demand and some increase in business investment (though probably to improve productivity rather than increase capacity, which in the long term will negatively impact employment).

Assuming businesses have cut significantly and have improved margins, growth translates to better earnings at a better than average rate.

It’s income tax refund season, which pumps over $200 billion into the economy.

The housing credit expiriation is driving increased home sales.

Also seems likely to me that 0% interest rates will continue for some time.

Against the positves there are any number of negatives:

Boomers account for about half of the consumption. They will probably need to save more if the want to retire.

Refund season is over and the housing credit just expired.

S&P earnings expectations become more ambitious starting next quarter and continue to ratchet up into next year. Maybe most of the upside is already priced in.

Alt-A and Option Arm resets starting to spike later this year. May be looking at another leg down in housing starting soon. CRE refinancing may put pressure on the banks given the poor fundamentals.

State and local governments need to cut, since revenue base is not coming back sufficiently to support expenditures.

Also questionable how long taxpayers will tolerate the hugh federal deficits. Not sure what’s driving long bond rates – can we continue to borrow at such high levels with such modest costs?

Europe and Japan have serious debt problems and aren’t likely to grow. Europe could double dip if austerity measures in southern and eastern Europe cause too severe a contraction.

China appears to be in a bubble – producing real estate and goods they may not be able to sell, given depressed growth in US, Europe and Japan. This could impact other emerging economies selling raw materials to China.

So, how does it all balance out. Darned if I know. Seems like a risky time to me, however, balancing what I imagine to be a limited upside against a potentially large downside.