The markets have built a full head of steam around a consensus that the U.S. economy has bottomed and will begin to recover during the second half of this year. My own reservations about this conclusion should be clear from previous weekly comments – the greatest of these reservations is the large extent to which prior economic recoveries have relied on the expansion of debt-financed economic activity such as housing starts, capital spending, and other forms of gross domestic investment, as well as sustained automotive demand (beyond a brief Cash for Clunkers jolt). Debt-financed economic activity typically leads broader economic activity by nearly a year. It strikes me as hopeful to expect this at present, in the face of continued deleveraging pressures, fresh highs in mortgage delinquencies and foreclosures, and a huge second-wave of adjustable rate mortgage resets on Alt-A and Option-ARM mortgages that were initiated at the peak of the housing bubble (which will become pressing beginning in November and December, and will continue through 2010 and 2011).
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