RDQ Economic Update

Fears of a double-dip recession in the U.S. appear to be dominating investor sentiment on both sides of the Atlantic. We think these fears are overblown.

Consumer spending growth has been steadily firming and wage and salary incomes have accelerated recently. We think the focus on anemic payroll creation rather than the solidly growing hours worked data is misplaced.      

Another indicator to receive significant attention is the drop in the ECRI weekly leading index. However, it appears this decline has been largely driven by the drop in equity prices.

We have underscored the importance of manufacturing to the dynamics of the recovery and the latest data suggest that manufacturing growth was robust in June.

We think the role of government ‘stimulus’ has been significantly overstated and that an emphasis on curbing spending does not threaten global growth. We are far more concerned about the scheduled tax hikes in 2011 and the negative impact they will have on incentives—unless a political backlash in the November midterm elections forces a rethink in Congress.

The declines in equity prices and long-term Treasury yields in the second quarter have run counter to our investment themes for this year. We think these moves are due to a rise in risk premiums because of uncertainties about Europe. It may take a few months, but we expect the growth data will eventually lead to a second-half rally in equities and a rise in yields.

One theme that has continued to work is the growing investor distrust in fiat money. We expect gold prices will rally further in the second half of the year as central banks keep the monetary throttle wide open.

Source RDQ

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