I think the major danger is being missed by the media (and federal reserve indeed points to it rightfully), our 5% plus of GDP balance of payments is the most dangerous part in the picture, that will cause decline of the dollar (I see us reaching 1.18 euro soon), and as result ascend of gold and drain of international money from US denominated assets. The good thing however is that a sharp decline in the dollar "should" decrease the trade deficit, improve our export position and make us a little more competitive. As for debt, I don't think that debt should be measured in terms of its absolute value, but in terms of what debt service (interest and principal payments) is out of current cash flow. Right now, because of the low interest environment, I believe that interest payments on the federal level are close to a 10 if not greater years low (as percentage of the total budget). Similarly, debt servicing as percentage of consumer's disposable income while not at a low, is well under the 16% peak it reached in the 80' (the last figure I saw was around 14%?). Corporations have also used the low interest rates environment to replace high interest debt with lower interest debt.
Actually, sometime post the middle of the year, the surprise could very well be a cyclical bull move, quite a number of elements are in place for that:
1. Liquidity is probably at a peak.
2. We should be post resolution of the Iraq situation (if we are not forget about #1 above and #3, below <g>), and thus uncertainties may be removed.
3. Crude may (as a result of the resolution of the Iraqi quagmire, if resolved) get back to the mid $20/barrel, removing a major hindrance to consumer spending.
4. The low US dollar may revive some capex in Europe and Asia giving a boost to the technology sector.
5. Market valuations (if indeed we reach by then sub 1000 on the NAZ and around 6000 on the Dow) will be much more in line with sales, future earnings and the by then still low interest rates.
6. Visions of next year's elections, and the government pulling out all stops to force the economy on its legs, no matter what the future cost might be.
So, lets be flexible and not overstay the bearish outlook too long into the rest of this year....
Zeev
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