The US economy is the next 9/11 (page 2 of 2)

Since there has been a close correlation between the refinancing index and retail sales a significant slowdown or even decline in consumption is only a matter of time.

Aside from poor employment gains, negative real income increases, mortgage credit which is driving home prices higher and hence consumption, but which will inevitably slow down in future, there are some more reasons to be cautious about the American economic outlook.

Tax cut impact over

The impact of the tax cuts has ended, consumer debts are in the stratosphere and will become burdensome the day interest rates will rise and the stock and bond market are not suggesting anything else than economic weakness. Bonds have, as we expected, rallied from their June lows by about 10% while stocks of economic sensitive companies have performed poorly.

I am always interested in the performance of economic sensitive stocks such as retailers, high tech and auto companies as a lead indicator for the economy, which is incidentally far more reliable than all the hogwash Wall Street publishes and one has to endure watching CNBC.

Recently specialty retailing stocks have been acting poorly while high tech stocks have tumbled. General Motors, about which one used to say that it closely reflects the health of the US economy is hovering just above its 52 weeks low and it looks as if its price will shortly break down.Certainly not a very encouraging sign for the economy and the stock market!

In sum, I still regard the upside potential for the US stock market to be limited and would sell strength rather than buy weakness. Still with a Bush victory now likely, the strength in the bond market, and the oversold position of high tech stocks, some additional gains are a possibility.

However, bonds are now no longer over-sold and their upside potential appears to be limited too. We still like selected commodities such as Corn and Coffee, and especially Sugar and Orange Juice. Gold should be accumulated continuously, as it is the only sound money.