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3Although this may not be a bubble yet,we are certainly on track for one. Liquidityexpansion will continue to drive the cycle forthe foreseeable future, creating risk of a violentcorrection particularly in emerging markets,gold and other commodities.The Federal Reserve recognizes signsof froth in foreign markets, but has made itclear that it will not alter course well into 2010.The Fed will err on the side of excess liquidityin order to deal with the more sensitiveproblem of high unemployment. Furthermore,letting banks and consumers rebuild theirtattered balance sheets through a broadreflation of financial assets is in everyone’sshort-term best interest.It is difficult to gauge how widespreadparticipation by the U.S. financial sector is inthis nascent speculative mania. However, it isclear from the Dubai default that emergingmarkets are becoming increasingly vulnerable.If this turned into a panic sell-off, shockwaveswould trigger another round of losses at certainU.S. and foreign financial institutions. Howsevere the damage would be is anyone’s guessat this point.
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The challenge with interpretingindicators for the U.S. economy is that fiscalstimulus, bailouts and monetary policy havecreated a totally artificial picture. While it istrue that we can expect these interventions tocontinue through 2010, their impact has likelypeaked. Policy makers are becomingincreasingly hemmed in politically and willneed to start demonstrating that they have acredible plan to rein in deficits in order to keepa handle on interest rates. With that proviso,we provide a look at some of the indicators weare following.The U.S. economy officially returned togrowth in the last quarter largely thanks toresilient retail sales. “Cash for clunkers” and
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