Treasury yields fell Friday, with the 2-year note hitting a record low 0.55%, after the government said U.S. GDP grew a weaker-than-expected 2.4% in the second quarter.

Get used to both more weak economic data and lower Treasury yields says, Yves Lamoureux, investment advisor at Macquarie Private Wealth.

"If you're looking at leading [economic] indicators, they are pointing down," he says. "There's no doubt the next quarter and the one following are going to be disappointing." (On Friday, the ECRI said its weekly leading index rose to 121.1 for the week ended July 23 from 120.6 the prior week; but the index's growth rate fell for an eighth-straight week.)

With the economy slowing, the "secular bull market" in Treasuries should continue, Lamoureux says, predicting 30-year bond yields will fall as low as the average of comparable debt in Japan and Germany, which is currently 2.575%.

Furthermore, he argues the high rates of the 1970s and 1980s were the "black swan" resulting from the Fed's mismanagement of the money supply. Excluding that period, Treasury yields have mainly been in the 2-4% range since the 1900s; Lamoureux calls that the "natural equilibrium" for yields, while expressing faith the Fed has learned its lesson of the 1970s.

"I believe the Fed won't make the same kind of mistake again," he says. "From a long-term perspective, inflation is coming down. You will not get a big inflation shock."

Lamoureux's reasons for why Treasuries are still a good buy (and not in a bubble) also include:

Financial deflation: While the price of many goods and services continue to rise, Lamoureux estimates there has been a 2-4% annual contraction in the money supply since 2008. In other words, deleveraging is overcoming the expansion of the Fed's balance sheet.

Diversification: Treasuries are "the only asset class that compensates you" if stocks go down, he says, calling U.S. debt the "last diversifier left."

A survey conducted by the Associated Press found that economists predict that economic growth will slow to less than 3% and unemployment will remain high in the second half of the year. The study's conclusion comes in the wake of a series of disappointing financial news.

The Commerce Department reported this morning that GDP grew at a 2.4 percent rate in the second quarter, down from 3.7 percent in the first quarter and below previous estimates.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, says that while he generally agrees with the AP's findings, he does not believe we are in the midst of a double-dip recession. When he sat down with Aaron Thursday, they discussed the economy's strengths and weakness and what to expect as we head into 2011.

No Double-Dip Recession

Bethune says that a decline in growth, like what we what are seeing now, is to be expected after a period of expansion. The economy naturally slows, condenses and recalibrates after a recovery. In these situations, it is very rare for conditions to deteriorate enough to lead to a second recession where output actually starts declining.     
   
Consensus Too Bearish?

Despite harsh recent news, the Dow Jones is still hovering around 10,500 and the S.&P. 500 is over 1,100, well above the lows of 2009. The debt crisis in Europe seems to have subsided and the euro is strengthening against the dollar. With these positive indicators, Aaron asked Bethune if investors are being too bearish.

"A good way to look at this right now is that we don't suffer from excessive optimism," he responded. "And that could also be a danger if we think things are going to unfold better than what is really realistic."

Bethune goes on to say that there is a possibility that growth will pick up, but probably not until next year. In the short term, he says that investors are wise to be cautious.
 
Reasons for Optimism

A study released by the Milken Institute, an independent economic think tank, was far more optimistic...

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Provided by Business Insider, July 30, 2010:

Awesome story from Bloomberg about how, well, awesome it is to walk a way from your underwater home.

It tells the story of Ralph Ronzio of Orange County, CA, who bought a condo, and then a house (when he and his fiancee had kids), tried renting out the condo, but then couldn't cover the cost of the two mortgages.

So what did he do?

The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage. When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.

“I bought myself an iPad,” he says.

Ok, take 5 seconds and jeer at the guy for being a walkaway, and then splurging on himself.

And then after you do that, consider what a drag the housing market remains on the economy, and how good it will be when (eventually) all this is over.

___

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The countdown has begun. The Bush tax cuts don’t expire until the end of the year but Fox Business News has begun airing "countdown" segments, as of late, claiming the end of tax cuts will lead to the “Largest Tax Hike Ever.”

Hyperbole?

Certainly, but taxes will be a major issue on the campaign trail this midterm election. President Obama says he wants to keep the tax cuts in place for all except the top 2% of households earning above $250,000 annually. Republicans say allowing the cuts to expire as scheduled would hurt small businesses that file individual tax returns.

Even Democrats are conflicted.

As reported in the San Francisco Chronicle, Obama economic adviser Christian Romer and her husband David recently published a report claiming: "tax increases appear to have a very large, sustained and highly negative impact on output" while "tax cuts have very large and persistent positive output effects." 

Romer later seemingly switched positions, writing in a blog, "extending the high-income tax cuts would provide very little job creation in 2011."

Tech Ticker interviewed Brian Bethune, IHS Global Insight’s chief U.S. financial economist about this subject. “Any tax increase no matter what form, whether that’s personal income tax or corporate taxes, effectively creates a drag on the economy,” he says. “This could really be a damper on overall spending.”

Echoing statements Federal Reserve chairman Ben Bernanke made to Congress last week, Bethune tells Aaron, “it would probably be a good idea just to extend for another year just to avoid creating a shock for the economy.”

“You do not want at this phase of the business cycle to create any discouragements for entrepreneurs or small businessmen or self-employed people to expand what they’re doing to invest to hire more people,” Bethune laments.

Treasury Secretary Timothy Geithner seems to disagree. Making the rounds on the Sunday talk show circuit last weekend, Geithner said since the end of tax cuts would only effect 2-3% of the population they would help shrink the deficit without hurting the recovery.

On ABC This Week Geithner said: “We need to make sure we can show the world that we’re willing, as a country, now to start to make some progress bringing down our long, our long-term deficits… I do not believe it would have a negative effect on growth.”

The countdown continues but the debate has just begun.» More

About 1.7 million American homeowners received foreclosure warnings in the first half of 2010, up 8% vs. the prior year, according to RealtyTrac, which predicts more-than 1 million American households are likely to lose their homes to foreclosure this year.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, says the lack of job growth and overall sluggish economy account for the trend. While that may seem self evident, Bethune disagrees with those who say foreclosures are a "good thing" because they help clear the market. Supporting that view, RealtyTrac says foreclosure rates were down in 9 of the 10-worst hit metropolitan area even as foreclosures were up in 75% of the country, overall.

But very high affordability rates suggest there is "no significant overpricing" for housing anymore, Bethune says. One big part of the affordability picture, fixed-rate mortgage rates, are now at the lowest levels since 1971, when Freddie Mac started reporting data.

As a result, the economist says the government should continue to "try to mitigate" foreclosures because of the negative consequences they have on both pricing and sentiment in local markets.

"As long as we keep accentuating what is a difficult situation, than that becomes a self-fulfilling prophecy," he says. "If people's expectations are that the housing market will continue to weaken, then it will weaken."

Bethune is far from wildly bullish on the economy, as detailed in a forthcoming segment. But he does believe "we are seeing a turn" in the economy citing leading economic indicators such as low interest rates and high corporate profits. "So let's not throw in the towel here and say ‘we're wasting our time'" trying to prevent foreclosures.

We didn't have time to get into specific policy recommendations, but Bethune says the government should encourage banks to restructure loans and mitigate foreclosures as much as possible.

Retail stocks were among the big winners of 2009, rallying as the economy strengthened and consumer confidence rose. But now, as unemployment remains high and fears of a double-dip recession persist, the major stores are again struggling.

Vera Gibbons, columnist for WalletPop, says retailers are using both innovative tactics and old fashion deals to entice wary consumers to spend. Until the job market improves and people regain confidence in the economy, retailing will stay weak, Gibbons says. Until then, deals and originality will dominate the retail landscape.

"Retailers are treading water and they are thinking 'if consumers aren't feeling confidence, how do we get them back into the stores?,'" Gibbons says. "So they are coming out with new initiatives to drive traffic."

With unsold merchandise stacking up and the critical back-to-school season upon us, Gibbons tells Tech Ticker what retailers are doing to combat the slide. (See: The New Normal: Americans Cutting Back — Even If They Don’t Have To)

Let's Make a Deal!

In an effort to both lure apprehensive shoppers into stores and convince them to purchase merchandise, retailers are using generous promotions, according to Gibbons. For example, with the purchase of any backpack, Staples is giving away gift cards worth the price of the item, essentially a 100% rebate.

Big-box stores are offering similar money back deals while Kmart and Sears are emphasizing their reward points systems. "They are pushing the loyalty programs," Gibbons says, noting consumers have a wide variety of options of where to spend their money. To succeed, retailers need to think outside the box and generate fresh concepts that their competitors do not have.

Consequently, shoppers are seeing many exclusive, one-of-a-kind and private label products. JCPenney, for example has added about 20 private labels since 2006.

"Everybody's really trying to differentiate themselves to get consumers to spend because if you can get something at one place that you can't get at another, you really have to separate yourself from the pack," Gibbons says.

Wal-Mart Banks on Banking

Retailers are not relying on bargains alone to revive business. Some big name brands are experimenting with banking, a new phenomenon. Wal-Mart has added banking centers at some of its locations. They are designed for the convenience of those who do not have or like to use debit or credit cards.

Sam's Club is now granting small business loans, which Gibbons says are geared particularly to women, minorities and others who would have difficulty getting a traditional loan from a bank. About half of the firm's members and the bulk of their revenue comes from small business owners, so the loans benefit both parties.

"These are sort of the more creative things that the retailers are doing," Gibbons says.

This week's grim report on consumer confidence confirmed what's obvious to many: Americans are fearful about the state of the economy.

A recent survey by Deloitte and Harrison Group shows that 80% of Americans surveyed are focused on cutting back. Of that group, 55% say they haven't been directly affected by the recession but have changed their spending habits nonetheless. The survey further shows Americans are:

• -- Delaying gratification (and purchases, especially of big-ticket items.)
• -- Buying generics and "private label" vs. better-known (and more expensive) brands.
• -- Cooking from scratch instead of eating out or buying prepared meals. Rather than keeping the pantry stocked, Americans are also only buying what's necessary, as results from grocer SuperValu this week attest. (SuperValu's net-income fell 40% from a year ago and its CEO said: "We are not optimistic that somehow the economic environment turns the corner any time soon.")
• -- Cutting costs with "extreme couponing" -- CouponMom.com now has 2.5 million users, for example -- and the use of loyalty programs at various retailers.

In the accompanying video, I discuss the survey and the sinking state of consumer sentiment with Vera Gibbons, a columnist for WalletPop.

"The main thing here is people just don't have jobs. And if they have jobs [for many] it's part-time work, it's contract work," Gibbons says. "The key catalyst to get consumer spending would be jobs and job creation, and that's been alluding us in this recovery."

This morning's jobless claims numbers provide further evidence of that fact. At 457,000, the lastet weekly tally was a touch below expectations but the prior week was revised up to 468,000. The key four-week moving average fell slightly but is still elevated at 457,000.

"GM not shutting auto plants as is typical this time of the year is still a distortion but it is surprising that claims aren't lower because of it," writes Miller Tabak strategist Peter Boockvar. "Thus current levels still remain a concern at this stage of an economic recovery."

Given that, it's no surprise Americans are cutting back and spending less -- even if they don't absolutely have to.

From The Business Insider

Good morning. Here's what you need to know:

* Asian indices were mostly up in overnight trading with the Nikkei a notable exception, down 0.59%. European markets are up in early trading and U.S. futures suggest a higher open.

* Toyota looks set for another massive recall in the U.S. that will effect 412,000 cars in the country. The recalls effect Avalon and LX470 models and are due to steering problems.

* Chinese steel producer Hebei Iron and Steel increased its production 26% in H1 2010 over H1 2009. It's production is now larger than the entire U.S. steel industry, which has left some to label the manufacturer "too big to fail" for the Chinese state.

* UK Prime Minister David Cameron has accused the Pakistani government of having elements within that aid in the export of terrorism. The Prime Minister has had to defend his remarks in advance of his meeting with Pakistani President Asif Ali Zardari.

* Volkswagen has seen its profits jump to €1.25 billion in Q2 2010, a dramatic increase over the €283 million achieved in Q2 2009. The Audi division had the largest earnings contribution offering operating profit of €1.33 billion.

* Royal Dutch Shell beat analyst estimates raking in profit of $4.53 billion in Q2 2010. The company saw a 94% increase in profits over the previous year's second quarter.

* Sanofi-Aventis looks set to launch a $19 billion takeover of biotech firm Genzyme. Earnings for Sanofi-Eventis increased 8% with sales increasing by 5%.

* Santander reported a decline in Q2 net profit of 8%, a result, they claimed, of the unstable situation in the Spanish market. The company claimed the Brazilian and UK markets, where they are also heavily invested, continued to be highly profitable.

* Avis is outbidding its competitor Hertz for the acquisition of Dollar Thrifty car rental, valuing the company at over $1.3 billion. Hertz can still match the bid made by Avis, according to previous agreements.

* Goldman Sachs has banned the use of profanity in employee emails after its role in this year's financial crisis hearings. The company plans to use screening tools to control corporate swearing.

The Fed's Beige Book survey provided some relief from the recent drumbeat of downbeat economic news - including Wednesday's durable goods report.

"Economic activity has continued to increase, on balance, since the previous survey," according to the Fed.

But David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, isn't buying it.

"The economy is in the process of slowing down," he says. "Whether or not we have a ‘double-dip', it's going to be some pretty tough slogging as far as the overall economic backdrop."

Rosenberg's chief concern is the "post-bubble credit collapse," which continues apace. Meanwhile, "there's still no signs we have true organic growth" but the Fed is reluctant to re-expand its balance sheet and more government stimulus is politically unpalatable.

"If you get the tax increases next year, it's going to be a very tough economy and the chances of recession are much higher than the markets are pricing in right now," he says.

How high? Rosenberg says there's a 67% chance of a double-dip recession, up from 45% a year ago. His prediction is based on the sharp decline in the ECRI's weekly leading index, where the growth rate has fallen for 7 consecutive weeks.

Even while saying a technical double-dip isn't certain, Rosenberg makes a pretty compelling (and freightening) case that we're in a "modern day depression."

In a recent note to clients he made the following observations:

• -- Congress has extended jobless benefits seven times in the past two years and almost 50% of unemployed Americans have been looking for at six months.
• -- The FDIC has seized and shuttered over 100 banks so far this year and surviving banks are making money by cutting their provisions for bad debts. (Meanwhile, the household debt/income ratio is still near record highs of 120% and one-quarter of the consumer universe has a sub-600 FICO score.)
• -- A year into a statistical recovery, the Fed is still openly contemplating ways to stimulate growth.
• --- After two years of extraordinarily low rates and massive government stimulus, Treasury yields are at rock-bottom levels with 2- and 3-year notes yielding less than 1% and the 5-year yielding 1.70%.

"There's been a statistical recovery but" the NBER, the official arbiter of economic turns, still has yet to make the call, he notes. "Maybe we're not really out" the recession that officially began in December 2007.

Gluskin Sheff strategist David Rosenberg is one of the most vocal and vociferous bears on Wall Street. Rosenberg doesn't believe the recent rally - which hit a small air pocket on Wednesday - is sustainable.

"The market is overbought and there is a renewed sense of complacency in the marketplace that I think could get shattered pretty quickly," Rosenberg tells Tech Ticker in part 1 of this interview. Here in part 2, the strategist gives his recommendations for investing in a market he describes as a "meat-grinder":

Cash is Trash: Even if it feels safe to put your money under a mattress, "you can't be in cash" because of the Fed's ultra-easy policies, Rosenberg says.

Go for Gold: A longtime gold bull, Rosenberg says the metal is "looking very attractive" after falling 8% from the record highs reached on June 21. "It's a no-brainer" gold will rally again to new highs, Rosenberg says, putting a "conservative" upside target of $3000 per ounce on the metal. "Gold production peaked 10 years ago," he notes. "Tell me when production of fiat currencies will peak?"

‘SIRP' It Up: You've probably heard of GARP (growth at a reasonable price). Rosenberg advocates "safety and income at a reasonable price," or SIRP. "In a deflationary environment, yield and income are very important," he says, suggesting there is still value in credit market, BB-rated corporate bonds as well as the "high-quality sliver" of junk bonds.

Rosenberg is often criticized for having missed the big rally off the lows of March 2009, so many of you might dismiss him as a perma-bear. But he says that's an "unfair criticism," and details why in the accompanying clip.