If he's correct, that's bullish for a number of sectors: durable goods, homebuilders, banking.
There are some signs, however, that housing may be slowing. Mortgage applications have dropped. Inventory of existing homes for sale has increased. And we see the most marginal of buyers -- the interest-only, adjustable-rate borrowers -- have decreased their frenetic activity. Whether this merely represents a decrease in speculation or a genuine plateau in home sales remains to be seen.
Oil, interest rates, inflation, housing: These are all pretty well known. What other economic issues might have an impact? Here are some lesser-discussed issues worth watching in the second half:
Federal deficits: The initial reduction in deficits this year gave some hope that a bad source of inflation might be getting under control. Commentators have suggested that the deficit will continue to improve over the next few quarters.
There's less to that improvement than meets the eye. No less an authority than Congressional Budget Office Director Douglas Holtz-Eakin, a Republican and former administration economic adviser, dispelled the idea that deficits are going away any time soon. "These are the good ol' days," he told
The Wall Street Journal. "These are the best of times. After this, it gets worse."
Plus, if the conflict in Iraq gets any messier, we may see an increase in funding -- and that would make the deficit worse.
Return of the long bond: Everyone in America has refinanced at record low rates -- except for the U.S. itself. When the 30-year comes back sometime in the second half of the year, Uncle Sam will finally improve his finances and save money on his interest payments.
This may have some unfortunate side effects, however. Lack of supply has kept demand for long bonds high, and rates low, even spilling over into the 10-year. Once the 30-year re-enters Treasury auctions, don't be surprised if rates perversely start ticking higher.
Employment: Has remained stubbornly intractable. Outsourcing; weak demand; corporations afraid to put quarterly numbers at risk; and uncertainty about next year -- those and other structural issues have caused anemic job creation.
Indeed, out of the past six months' data, the majority of what little good numbers we've seen is courtesy of some financial legerdemain. Sleight of hand hedonics (like the BLS birth/death adjustment) and not actual job creation, have been responsible for occasional stronger data points.
Watch for this to change. Without true, organic job creation, any recovery is doomed.
Trade deficit: With the monthly deficit now topping $50 billion regularly, this year's foreign trade deficit is on target to beat 2004's record $617 billion.
The fundamental issue is one of structural imbalances: How long can any country consume in excess of what it produces? The argument, grossly oversimplified, is whether you can remain solvent if your family's household budget spends more than it brings in.
The political hot potato was put onto the back burner after a recent private meeting between Fed Chair Alan Greenspan, and Sen. Charles Schumer (D., N.Y.) Big Al got Senator Chuck to throttle back his invective, postponing for now the debate on punitive tariff legislation. But this may rear its head again in the fourth quarter.
The U.S. dollar: After a long fall, the dollar has spent the past eight months gradually regaining strength. While all eyes have been on China, it's the economic weakness out of Old Europe that has been the reason for the greenback's firming.
The key is what the Asian powers do. If they decide to replace their massive dollar reserves, then watch out. That's when the dollar will take a big tumble. My personal expectation is that the dollar eventually ends up considerably lower, but the timing is murky.
The big bet by newbie currency trader Warren Buffett may be further upside down before it pays off.
Barry Ritholtz
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