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The Legs of Stability

October 19, 2011 – 5:09 pm

The economy is getting stronger. The statistics that report on the health of our economy have clearly moved up from the summer lows.

At the same time Europe and China are, or have clearly slowed, of course for very different reasons; Europe because of their debt issues and China because they want a slower economy dealing with inflation.

These are the three legs of stability in the world economy. The U.S., the largest economy is being pushed by the Fed feeding money into the system at a rapid pace and normally this shoveling money causes growth. The debt issue for the U.S. is not as critical at this stage and debt has become a national debate so something, weak though it may be in the short term, will be done to address it.

China as reported this week is growing at a 9.1% pace down from 10% or more last year. They withdrew their easing policies well over a year ago and began to tighten. That effort seems to have worked and there are now signs that they will start to loosen again thus trying to tease more growth out of an already growing system.

Europe started raising interest rates and tightening the money supply last year and into this year; a mistake. Now they are leaning on loosening again. At the same time they are trying to deal with a time bomb of debt.

So where does this leave us? In reading the tea leaves it appears two of the three legs, the U.S. and China, are stabilizing and prepared for better growth ahead while Europe is far behind in that process. On a three legged stool a weak leg is precarious for those sitting on the stool. It is still time to be cautious until we see more support for that weakest leg. We saw some possible hints that a repair kit is in the process this week but will that be a temporary repair? Most likely. Still any repair will provide stability, something everyone wants.

Good Trading
Steve Peasley

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