My Comments: The source of this headline is a free weekly investment newsletter called Cognitive Concord. I don’t know what that means exactly and am unsure how the author came to be called what he claims to be his name.

But the ideas are good ideas and well articulated. And since I don’t have the intellectual capacity to be express things as well as he does, I will share them with you from time to time. Here is the source link: http://cognitiveconcord.com/

by Jeffrey Dow Jones

Economic data in the first quarter was relatively good. What we’ve seen so far from the second quarter is a sharp contrast, highlighted by a weaker season of earnings announcements and a major slowdown in China.

At the beginning of the year, I predicted that the U.S. would flirt with recession. But I’ll be honest, the exact way in which the year has played out has been very different than I originally expected. We’ll see how the rest of the year unfolds, but on this one at least, it looks like I might be right for a different set of reasons. That happens all the time. Predicting the future is difficult to do, but predicting how it’ll get there is ten times more difficult.

Anyway, Bill Gross is now saying that the U.S. is nearing a recession. Lakshman Achuthan and the ECRI reaffirmed their recession call and went so far as to say we’re in a recession right now. Even the crowd that was bullish at the beginning of the year are bringing down their forecasts.

First quarter GDP appears to be settling at 1.9% real. And consumption, particularly durable goods consumption, was revised downward. Consensus 2012 real GDP was around 1.8% at the start of the year and my prediction was that it’d be below even that. If Q2 comes in somewhere just a smidgen above 1% as many are estimating and Q3 and Q4 are weak like the first quarter, I will, astonishingly, have been correct and all of this recession talk will have been justified.

(Let’s not get too excited, though. Once again I called at the beginning of the year for rising rates and once again, it appears I will be spectacularly wrong! At this point, you guys should probably be taking the inverse of all of my advice about future trends in interest rates.)
One of the things I’ve noticed is that the semantics of “recession” have changed. It’s not just about negative GDP anymore. This is a good thing. In truth, the business cycle is much more complicated than the headline GDP growth rate. A recession is simply a contraction in that business cycle.

At present, I think that the only people who really care about this debate are policy wonks and people who watch Bloomberg.
Most of the world doesn’t care. Consumers and Small Business feels like they’ve been stuck in a recession for years. Government workers and municipalities are all hurting big time and their economic future contains zero optimism. Yet there are a handful of companies that are knocking it out of the friggin’ park right now. Earnings margins for S&P 500 companies are gigantic. Stock prices have rebounded accordingly².

This is entirely a function of the post-crisis response, with policy makers engineering a type of environment that is incredibly favorable for certain bodies while others have been left in the dust. Industry shorthand is that large corporations, the very rich, and the poor, have all been OK. Those in the middle have little good to say about the last 3 years.

I’m comfortable making one more long-term prediction today: the next decade will be about re-building the middle class. I haven’t a clue how it’ll happen. I haven’t a clue what the catalysts are going to be. But I feel very, very confident that in time we’re going to arrive at that equilibrium. And my guess is that it’ll come at the expense of the beneficiaries of the last few years. My guess is that in 2022, the United States will be a slightly less awesome place to be very rich, poor, or a large corporation than it was in 2012.

Investors should position their long-term portfolios accordingly. Load up on strategies that can benefit from this big backdrop of de-leveraging. Overweight companies that are geared toward delivering value to the middle class. Overweight companies that provide technologies and services that allow the middle class to do the stuff they like to do, but better and cheaper.

Like it or not, this is the path of the future.

²And for the record, this is the single biggest argument against owning a medium/long-term portfolio of stocks right now. What happens if profit margins revert to historical norms? The market is reasonably priced given current earnings margins. But when you normalize earnings, the market isn’t cheap at all and could be in for a rude awakening. There’s money to be made by those who can identify the changes in the macro backdrop that will impact this record-profit environment. This is one of the questions I spend the most time contemplating.