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Green lights for a stronger recovery





The first chart shows the level of the Index of Leading Indicators, while the bottom chart shows the year-over-year change in the index. Two things stand out: One, the index is moving higher and showing absolutely no sign of any economic slowdown. Two, as the top chart suggests, the growth in the index over the past several decades has been impressive, and not at all like the stagnant conditions which prevailed during the great equity bear market of 1965-82. In other words, the index is a big green light for continued expansion and prosperity.

With the sea change in the direction of fiscal policy that began with the November elections and which has been confirmed now with the extension of the Bush tax cuts for everyone and for capital, plus the defeat of the last-gasp-of-the-big-spenders Omnibus spending bill yesterday, the private sector has a very good chance of generating a stronger recovery in the years to come. The private sector has been oppressed for years by increased regulatory burdens; investors and businesses have been reluctant to invest given the threat of a massive increase in tax burdens; and the huge increase in inefficient government spending and transfer payments has been a drag on overall productivity. Looking ahead, all of these headwinds should be reversing, or at least slowing down dramatically.

This amounts to a giant Christmas present for investors in equities and corporate debt. At the same time, it is a death knell for investors in Treasury notes and bonds, since they have been priced to a very gloomy economic growth outlook.

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