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Making Sense of the Market


Sorting out the the varying news, signals, and predictions.

Because in my writings, I tend to balance various forces against others, some readers may get confused about where I stand at any given point.

Below, I'd like to summarize where I stand, bringing together various things I've written in the past few months.

1. In my estimation, a double-dip recession is quite unlikely in the US, based on endogenous factors. An exogenous shock would probably be required to derail the current economic recovery. Please refer to Understanding the Odds of A Double-Dip Recession and Could Higher Rates Kill Growth?

2. Macro and micro fundamentals in Europe are much worse than they are in the US. You think the US government has too much debt? You think that US companies have too much debt? You think US financial institutions are too leveraged? You think property values in the US are inflated? You think the US has demographic problems? You think the US has problems with its social security, health, and pension systems? You ain't seen nothing yet. Take a look at the situation in Europe, folks. Thus, fears of a US dollar collapse are misplaced. Please refer to Nine Post-Earnings Season Predictions. Readers may also refer Mike Shedlock's Dollar Torn Apart by Bears, which quotes my Buzz entitled "Dollar Bears With an Ugly American Accent."

3. There's a substantial risk that vulnerabilities in Europe, particularly emanating out of Southern Europe, could manifest into crises in cascading fashion in that continent. This could, in term, catalyze a second stage in the global financial crisis. Please read point number four in Ten Reasons the Countertrend Rally May Be Over.

The Chinese economy is quite vulnerable to crises emanating out of Europe on a number of fronts. In particular, the Chinese economy is far more dependent on exports than most experts realize. A collapse of demand in Europe, which is China's most important export client, would probably represent the "straw that breaks the camel's back" with regards to the Chinese economy. There's danger of a painful unwind of speculative excesses in China from overbuilding in real estate, to factory overcapacity, to commodity and stock activity. In addition to the articles cited above, please see Op Ed: Is China Your Daddy? and The US's China Syndrome.

5. A hard landing for the Chinese economy would have devastating impacts for global commodity markets and commodity-dependent emerging nations.
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