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Some thoughts before heading out into the wild

Early tomorrow we leave for a safari/excursion that will take us to Victoria Falls in 8 days, at which time I hope to be back in touch with the world. I haven't had much time in any event, as our itinerary has been pretty full.

From my limited perspective the world hasn't changed much in the past 10 days, and I doubt it will in the next week. If anything, corporate profits continue to impress on the upside, and the passage of time is undoubtedly healing a lot of wounds, as it tends to do. Key financial indicators like credit and swap spreads have settled back down, and Europe seems to have avoided a banking crisis. The U.S. economy is facing headwinds, to be sure: misguided fiscal policy is soaking up a lot of the economy's productive resources (i.e., transfer payments) and thus holding back productivity and job growth; and uncertainty regarding the future of monetary policy and the future of tax rates is keeping a lot of investors and projects sidelined.

These headwinds are serious, but they are not a reason for the economy to slide back into recession. Recessions don't happen easily, and the U.S. economy has proven to be very resilient and dynamic in the face of adversity (recall that the recession of 2001 was mild, and it ended soon after the time that 9/11 happened). The Fed has dumped a trillion dollars of reserves into the banking system, but that hasn't resulted yet in a meaningful increase in the money supply because a) lots of folks are deleveraging and have no interest in borrowing from banks, b) many banks are still reluctant to lend, and c) credit markets are still shell-shocked from the events of the past several years and are not yet back to normal (and regulators are impeding progress, thanks to the new financial regulations pouring out of Congress). But the important measures of money supply (currency, M1, and M2) are all growing and show no signs whatsoever of any contraction or slowdown that might prove deflationary or choke off growth. Residential construction has fallen so much that it can hardly pose a risk to the economy going forward. Confidence in general is still low and there are lots of bears out there, but that just means that good news (or simply the failure of bad news to turn up) becomes a more potent force to the upside.

The economy's problems are slowly fading, and the policy outlook is likely to improve significantly as November draws closer—this is the biggest thing on the horizon right now.

Meanwhile, jobs are now being created, albeit slowly, but they are no longer being destroyed. Those who are working are doing just fine, as productivity has been quite healthy. Much of the world is doing pretty well, and some places, like China and India, are growing like weeds. Commodity prices show no sign of flagging demand. The yield curve is very steep, and that makes it easy for bank profits to mushroom; plus, a steep yield curve has been a very reliable predictor of recoveries. Finally, I know that unemployment is quite high in S. Africa, but I've been very impressed with the general level of prosperity I've seen here.

Housing starts weak but still better than last year


I'm in Johannesburg now and traveled overnight to get here from Cairo and we've been out in the country touring all day, so I can't spend much time on this. Housing starts were weaker than expected, but they are still up 15% from their lows of last year. I still think we've seen the bottom in housing. Construction is so far below the level needed to keep pace with new family formations that inventories are being worked off and this will almost guarantee stronger construction activity in the years to come. I haven't expected to see a strong recovery in housing in any event—I've been calling for a gradual increase over the next year or so—so this data looks to be consistent with that.