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Blogging was light yesterday, and probably will be today, since I am scheduled to deliver a presentation to the Orange County Chapter of the National Association of Purchasing Managers this evening in Irvine. I'm putting together a nice collection of charts and bullet points, and hope to make them available following the presentation.

My main points:

Expectations were simply abysmal one year ago, but now they have greatly improved. The market expected a deep depression, and instead we got a moderate recovery. But the market's expectations for the future are still very cautious: 2-3% growth, low inflation, and the risk that we get another collapse.

Friedman's Plucking Model of growth suggests that given the depth of the recent recession, we should expect very strong growth for the next several years—6% or more per year. From a supply-side perspective this is unlikely, however, given today's rather awful combination of expanding government, a major expected increase in tax burdens, inflationary monetary policy, and protectionist rumblings.

Offsetting these negatives, there are many encouraging developments in the economy that reflect a V-shaped recovery. Corporate profits are strong. Swap spreads are back to normal. Capex is strong. Manufacturing is rebounding. Housing looks to have bottomed. Money is abundant. Mortgage rates are very low. The labor market is no longer contracting and is poised to expand.

The market is downplaying these positives, however. PE ratios are below average. Credit spreads are at or near recessionary levels. Business investment hasn't increased from where it was 13 years ago. Global industrial production is still way below its 2008 high. PE ratios are below average. Equity prices haven't budged since 1998. The unemployment rate is very high.

On balance we should expect a modest/moderate recovery, with 3-4% growth and a rising inflation trend. Given that the market's outlook is more pessimistic than this, it makes sense to be bullish on equities, corporate and emerging market debt, and commodities. T-bonds and MBS look like the most vulnerable asset classes.

The outlook could improve significantly as we get closer to the November elections, since there are likely to be significant and positive changes to fiscal policy that come out of the election. The key to a more bullish outlook is to cut spending, keep taxes low, and tighten monetary policy. This of course runs directly counter to the consensus, which fears that the withdrawal of fiscal and monetary stimulus would doom the economy. On the contrary, I think fiscal and monetary stimulus are part of the problem.

Source: Bullish on Equities, Commodities, Corporate and Emerging Market Debt