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"As for the U.S., the slowdown appears squarely rooted in fiscal contraction. Sharp reductions in spending at the state and local level, combined with a downshifting in Federal Government defense spending in the first quarter (and ongoing) are the main reasons behind the current softness. Where many economists are currently seeing this as merely a temporary 'soft patch' related to weather and factors like Japan, we think they could be missing the bigger picture." (from the June 6th Report)Fiscal policy is a key component of economic health, and investors should take heed when policy is moving in the wrong direction.
"...[E]conomic weakness brought on by spending cuts has only intensified calls for more spending cuts and similar measures that are certain to reduce demand. This is exactly the wrong medicine for what ails the economy at this time. With households and businesses still seeking to reduce debt it is absolutely the wrong time for the Federal Government to be reducing its debt, too. However, both parties are of the same opinion when it comes to spending cuts, the only difference being the size of those cuts." (from the June 6th Report)
"The 2009 Federal stimulus offset a lot of contraction in state and local spending and investment. If it wasn't for that, the economy would have remained in a deep plunge for who knows how long. We avoided a depression because of the demand injected by higher Federal government outlays, but now the leadership in D.C. says that we need to cut and cut deeply. This time when the economy heads south there won't be any new stimulus to act as a safety net." (from the June 27th Report)Changes in fiscal policy often precede sharp moves in the markets. Investors that position themselves accordingly can see dramatic profits.
"With fiscal policy about to enter a pronounced contraction, the Fed may feel compelled to conduct another round of QE. And while that won't help the economy, it could boost certain assets like gold and stocks (and hurt the dollar). This is something we will be looking for." (from the June 6th Report)