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Two Important Questions

China: China's economy, too, though on tap for +7% to +8% real GDP growth in 2012, seems to be growing ragged around the edges.

What Is the Market Outlook?

Europe: I have argued that there are ample tools to ring-fence Greece. I still believe this to be the case. An ECB cut in interest rates, moves to infuse more liquidity (more aggressive purchase of sovereign debt) and the possibility of implementation of some sort of bank deposit guarantees would go a long way in calming market fears. On the last point, over the weekend Italy's Mario Monti floated the idea of an ECB-backed pan-European bank deposit guarantee program.

U.S.: I remain convinced that domestic economic growth is on track for muddle-through growth (of about 2% real GDP). Housing is poised for a surprising growth spurt in 2013-2014 that could have an important marginal impact on GDP, and other durable expenditures continue to track well below trend line growth (as pent-up demand will be unleashed). The case for buying America remains solid. The U.S. is, by far, the best house in a bad neighborhood. The political tide has started to take a more pro-market and pro-business slant with the steady improvement in the odds that Governor Romney might be elected President in November. Intrade's probability of an Obama victory has gone from 61% to 56% in the last two weeks, and the other polls indicate a tightening Presidential race. Importantly, the swift drop in gasoline prices (and other commodities) provides something of a tailwind for both the American consumer and for U.S. corporate profits.

China: A soft landing is still my baseline expectation for China.

Why I Remain Bullish

I had expected a garden-variety drop (of 5% or so) from the April highs. I was wrong, as a correction far worse developed.

A large share of the responsibility falls on a deepening of investor skepticism and fear concerning the long tail of debt contagion risk in the eurozone. The magnitude of the $4 trillion loss in the world's stock markets must be weighed against the size of Greece (only $325 billion-$350 billion in GDP and about $15 billion of reported corporate profits, which is less than JPMorgan Chase is expected to earn in 2013).

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