Economic Data is not Pretty

Well the Initial Claims of 626,000 today were not pretty. I think the 4-week average runs around 585,000 now. My guess is we are in for another negative surprise tomorrow with the Non-Farm Payroll number. It really shows how the surveys are just guess-work. I'll talk about my thoughts on forecasting sometime but needless to say I am not a believer.

On to my point. Interest rates are going to stay lower for longer than most people believe. Inflation is dead (at least for the next couple of years) and deflation is a real concern. Data such as capacity utilization and output gap should be watched carefully. Some other points for low rates for longer include:

1. Job losses continue and will probably peak in the back half of 2010.
2. Economic growth is going no where fast. Consumer spending and private investment have fallen off a cliff.
3. The global economic system needs to purge the overcapacity. So far this hasn't happened. Consolidation should happen in manufacturing in China and financial services in the U.S. and Europe but so far nothing. Slack in the system limits pricing power.
4. A wave of protectionism is in our future (or here already) - this will prove deflationary
5. Housing prices have not bottomed (still too much supply)

The list is endless. I continue to hear talk about inflation and rising rates but have a hard time getting there with the type of environment we are in. I continue to focus on "recession proof" / defensive sectors, balance sheet strength and reducing market exposure (via pairs trades or market shorts). On the household side even with mortgage rates and borrowing costs grinding lower the trade is to use your lower interest expense to pay off debt not to incur more. Uncertain times warrant deleveraging. Be careful out there.