With the consumer sector unlikely to fuel a US recovery, that leaves the corporate sector as the engine of growth. At first glance, this would seem to be a safe bet. As I mentioned in early September,the silver lining of todays slow growth environmentcontinues to be the strong financial position of many US companies. But heres the catch: The domestic corporate sector relies on the US consumer. To continue growing over the next few years, companies need consumer spending to pick up. This leads us to the great economic Catch-22 of our time, So, where does that leave the US recovery?

In recent weeks, a number of market watchers and media headlines have declared that the gold bubble is finally bursting and the gold rally is over. I disagree. First, Ive never believed that gold was in a bubble. Second, I believe that prices for the precious metal are likely to remain high for the foreseeable future. As I pointed out in a recent post, Why Gold Prices Are So High, there are three long-term factors supporting gold. 1) The negative real interest rate. 2) Gold tends to do best when fiat currencies depreciate. And 3) Uncertainty over the endgame of the US deficit.

In August, US personal income fell for the first time in nearly two years. One reason for the drop: A slowdown in transfer payments. Transfer payments are government payments to individuals and include everything from Social Security to unemployment benefits. This chart a stark illustration of just how dependent disposal income has become on such payments. Thanks to generous growth in transfer payments in the past 50 years, the payments now account for 20% of disposable income. But transfer payments have been slowing in recent months as fiscal stimulus from the federal government wanes.

Of all the economic reports coming out this week, Im most closely watching for the latest US weekly jobless claim numbers and the new leading indicators data, due out Thursday. Both will give further confirmation on the near-term state of the economy. As Ive mentioned before, I expect that the US economy is most likely going to experience an anemic expansion, rather than another recession. Recent economic reports have so far confirmed my view. I believe the new data this week will similarly show that the while the US economic recovery has stalled, the economy is not contracting.

Some market watchers are interpreting the fact that US consumer confidence remained extremely low last week as a sign that the chances of a sustained recovery have diminished. In my opinion, however, theyre focusing on the wrong numbers among the slew of economic data released Thursday. The right numbers to focus on: new figures from the Federal Reserve that confirm that while economic activity is stalling, we are not yet seeing credible evidence of a double dip.

In a speech last Thursday evening, President Obama outlined his American Jobs Act, a $447 billion package of tax cuts and government spending he hopes will help stimulate the slowing economy. It calls for reduced payroll taxes, extended unemployment benefits and increased spending on infrastructure to help put people back to work. Without passage, I believe the US will suffer significant fiscal drag in 2012 and the economy will face more headwinds. However, while the proposal could spur some growth, it does nothing to fix the longer-term fiscal problems facing the country.

Earlier this month, as part of my changed view of emerging markets. I initiated an overweight view of Brazil and noted that I am paying close attention to Chile. As promised, here are more of my thoughts regarding these two emerging market countries.There are a number of reasons why I like Brazil. First, from a valuation standpoint, Brazil looks attractive relative to both its own history and to other MSCI ACWI countries. I am not yet establishing an overweight view of countries in Latin America beyond Brazil, but I am watching Chile closely.

You dont have to be a fan of profligate government spending to recognize the enormous paradox the United States faces in getting its economic and fiscal houses in order. The US economy is driven largely by consumptionroughly 70% of GDP comes from personal consumption. A large and growing percentage of that consumption is dependent on federal transfer paymentsdirect government payments to individuals. Yet as the US tries to get its deficit under control, these payments could be cut. That in turn could have a significant impact on disposable income and economic growth.

In recent days, a number of market watchers have issued warnings about economic data and events that could roil markets this September. Investors might also want to consider an additional headwind: The seasonal pattern of equity market weakness in September. While most easy-to-find seasonal patterns fall apart when subjected to a bit of scrutiny, this seasonal pattern does appear to be both statistically significant and fundamentally justified. Most academics attribute the September weakness trend to a combination of tax-loss selling and window dressing ahead of the fiscal-year end.

Despite economic weakness, one sector of the economy continues to perform well: Corporations. Today, corporate profit margins are near record highs. But as concerns of a double-dip recession persist, many market watchers are wondering how much longer high profit margins can last. Answers to this question often focus solely on expectations for rising input prices. But I agree with the major conclusion of a new BlackRock Investment Institute paper-profit margin sustainability is more related to overall economic activity than it is to input costs alone.

Of all the economic numbers coming out this week theISM is the most important, in my opinion. First, its a good leading indicator of economic activity in general. The reports new order component, in particular, tends to be highly correlated with the next quarters GDP and is the most relevant number for predicting future economic growth. Second, the report is not subject to revisions, meaning what you see in the initial report is what you get. Finally, the report is extremely timely. Its one of the first snapshots well get on how the economy reacted to market volatility in August.

Brazil looks attractive relative to both its own history and to other MSCI ACWI countries. The MSCI Brazil index is currently trading at 1.4x book value, versus its average of 2.1x book value over the past five years. In addition, from September 2008 to July 2009, the OECD composite leading indicator for Brazil was lower than it is today; yet the Brazilian market appears cheaper today than it did during that period on average. While Chile is starting to look interesting and we currently hold a neutral view of it, there is no need to rush in.

In recent days, market watchers from Bill Gross to Morgan Stanley have warned of the high possibility of a double dip recession for reasons ranging from more regulation and policy errors, to slowing consumption, weak economic data and the likelihood of further fiscal tightening. While I do believe that the odds of a double dip have risen since the S&P downgrade of US debt, I still think the most likely outcome is a sluggish recovery, not another recession. Whats my evidence? Leading indicators and retail sales data in the US and abroad.

Investors are facing an unprecedented situation. Virtually all the major advanced economies the US, Japan and Europe have simultaneously undergone a significant fiscal deterioration, thanks to the after-effects of the financial crisis and worsening demographics. In addition, investors are wrestling with the implications of the recent US downgrade by S&P, as well as a slowing economy. Markets are rattled and many are wondering: what is the new riskless asset? A new index called the BlackRock Sovereign Risk Index provides just such a framework.

Traditionally, investors looking for more defensive country-specific exposure would have opted for equities of developed world countries, while the stocks of emerging market countries would have been considered more risky options. However, lately many emerging market countries have actually become more attractive places to invest than parts of the developed world. Why are some emerging markets now more attractive? One reason is that certain countries within the developed world are at the epicenter of the recent global sovereign debt crisis.

Given last weeks extraordinary volatility, my call this week focuses on the overall market today. Essentially, I still believe the odds favor slow but positive growth; equities look inexpensive; and volatility appears too high. While I would continue to expect subpar growth, leading indicators arent suggesting that were heading back into a recession. For instance, in the year leading up to the 2008 recession, leading economic indicators fell or were flat in 11 out of 12 months. In contrast, leading indicators have risen in 11 out of 12 months, including the most recent.

While I think that market volatility will be higher in the second half of the year, the current level looks too high to me. In fact, I think that the panic is overdone unless you believe were headed back into another banking crisis or severe recession, both of which I would argue are unlikely. Back in May, when the VIX Index otherwise known as the fear gauge was trading at around 17.50, I highlighted that it looked too low. Now, according to my latest analysis, volatility levels in the 40-plus range are way out of line compared to where leading indicators suggest they should be.

The downgrade simply reaffirms what everyone already knew. The US fiscal situation has deteriorated rapidly since 2008. More troubling, it also reiterates that the current structure of the large US entitlement programs and the narrow nature of the US tax base mean that after a brief respite, deficits will likely get much worse in the latter part of the decade. While last weeks bi-partisan deal to raise the debt ceiling alleviated the near-term pressure, the deal explicitly did not address entitlement programs and taxes, the longer-term more troubling challenges for the US fiscal situation.

With the inventory build no longer driving the economy, growth is now reflecting real end-user demand. Unfortunately there isnt much of it. Personal consumption is by far the largest component of the economy, accounting for roughly 70% of economic activity. As everyone is well aware, the consumer has been on strike for much of the past three years. Consumers can spend from income, accumulated wealth or borrowing. For much of the previous decade, consumers were able to compensate for the lack of real income gains. Unfortunately, those factors cannot be relied on today.

While the deal is a step in the right direction, there are still some potential risks for the market related to it. First, theres the chance that the deal did not go far enough and could ultimately help lead to an eventual downgrade of US debt. Though credit agencies Fitch and Moodys both confirmed the federal governments AAA rating Tuesday. Theres also the risk that the cuts in the deal are too frontloaded to one or two years from now and will dampen an already fragile recovery. In fact, on Monday and Tuesday, US stocks traded lower despite news of the debt deal.

I started the year with a bias for developed market equities over emerging market equities. Year-to-date, developed equity markets have outperformed emerging markets by roughly 4%. I had two main reasons for favoring developed market equities. Emerging market equities looked expensive relative to their developed market counterparts and I felt that emerging market inflation would be a more persistent problem than the market was discounting. Now, however, these major rationales for broadly favoring developed markets no longer hold.

I continue to hold a negative long-term view of US Treasuries. That said, given the anemic state of the economic recovery and the growing risk aversion in market places, Treasuries may not necessarily sell-off in the near-term after a US debt downgrade. My view on Treasuries has a longer-horizon and is based on low real yields and a deteriorating fiscal picture. Finally, even if US debt is ultimately not downgraded in the coming weeks, investors need to realize that the US fiscal situation is an ongoing chronic problem that is unlikely to be fully addressed in the near term.

At an emergency meeting Thursday, European leaders backed a rescue plan for Greece that was generally in line with what the market had been led to expect. Ultimately, I believe the news supports the case for risky assets such as equities and hurts the case for more risk-averse investments such as the US dollar and US Treasuries. I think that the risks facing the Italian market are more than adequately reflected in the valuations, as the country currently trades at just 9 times forward earnings and 0.8 times book value, one of the lowest valuations among developed countries.

While the recent June non-farm payroll report offered yet another reminder of the fragile and sluggish nature of the current recovery, we continue to believe that equities offer better prospects than fixed income. A combination of high margins, low inflation and some top-line growth will continue to support stocks. For the most part, the largest companies are cheaper, more profitable and more diversified than their smaller counterparts. In fact, US and global mega-cap companies remain one of the few unambiguously cheap asset classes, trading at roughly a 15% discount to the broader market.

This week, our first call focuses on the ongoing drama over the US debt ceiling and its implications for the US Treasury Market. While the clock continues to tick towards an August 2nd deadline for raising the debt ceiling, Congress and the White House are still nowhere near a compromise. Next, heres a quick update regarding our view of China. While we remain, for now, neutral on China, and hold a negative view of emerging markets in general, our stance on China is starting to shift to a more constructive, or positive, view.

The ongoing challenges facing the consumer ? a weak labor market, anemic wage growth, too much debt and a stagnant housing market ? have been well documented. To our thinking, these issues are not likely to be resolved in the near-term. Yet despite the long litany of problems, investors continue to favor US retailers. We believe this enduring faith in the willingness and ability of the US consumer to spend is misplaced.

While Washington debates raising the debt ceiling and cutting spending to achieve $1 to $2 trillion of savings over the next decade, it?s worth pointing out that these savings may never materialize because the existing official budget numbers are too optimistic across several fronts.

In a recent mid-year update to our 2011 outlook, we noted how equity market volatility is likely to rise further in light of continued near-term weak economic growth. Already, spring?s unusually placid markets have given way to heightened volatility. The most recent cause has been anxiety over Greece, but investors are not at a loss for things to worry about. This is a sharp departure from just eight weeks ago. In April, the VIX Index, which measures implied volatility on S&P 500 options, the ?fear index? hit its lowest level since early 2007. Investors had a blindly optimistic world view.

This week, our attention first turns to European banks. Since February, the sector is down more than 15% versus a 3% drop for global developed markets. Back in February, our thesis was that European banks were not taking adequate account of the ultimate hit they were facing due to write downs on European sovereign debt. While we are still advocating a negative outlook for European banks, we believe that much of core Europe now appears very cheap, and is reflecting a lot of bad news. In particular, we continue to believe German equities look attractive for long-term investors.

While many market watchers on Thursday focused on the higher-than-expected latest weekly domestic initial jobless claim data, we believe the key figures released Thursday were the Chicago Fed National Activity Index and Purchasing Managers Index (PMI) figures for Germany. The US initial jobless claim applications in the week ended June 18 increased 9,000 is clearly another sign of the decelerating recovery. Still, that the May Chicago Fed National Activity Index came in at -0.37, well below expectations of -0.05 but above April?s -0.56 reading, is especially important.

While we believe the recent economic slowdown represents a deceleration rather than a reversal of the global recovery, there are certain events that we believe could turn the current fragile recovery into a failed one. In particular, we believe investors should pay careful attention to events in the Middle East. Why? We believe that the most serious risk to the global economy is another spike in energy prices. While the events that began in Tunisia earlier this year were both unexpected and unprecedented, the world is now aware of the political fragility of large parts of the Middle East.

Last month, we described why we believe that over the long term, there?s a case for the outperformance of equities. But what does the slowing recovery mean for equities? While we have been arguing that the summer is likely to be characterized by higher volatility, we believe that absent a dramatic economic slowdown, equity markets still appear reasonable. The fact that equity valuations reflect much of the bad news should help cushion the near-term downside for stocks. And long-term, equities still appear to better reflect the world?s risks and worries than their pricier cousin, bonds.

On Tuesday, the Commerce Department said retail sales in May fell less than expected. If you look behind the numbers, however, the new retail data clearly shows a deceleration in consumption.

The recent recession has been, and will continue to be, very different from the typical post-World War II recessions. Since there are so few recent examples to guide us, it?s important not to draw conclusions about the current recovery just by examining the last 50 years or so. Taking a longer-term perspective is key and that?s precisely what economists Carmen Reinhart and Kenneth Rogoff do. While the book came out in 2009, it is especially relevant to today?s investors as it helps put the effects of the recent credit crisis in the right historical context: a very long-term one.

On Wednesday, the Federal Reserve Board released its latest Beige Book report, which provided more color on the recent slowdown and indicated the recovery is likely to be anemic and uneven. According to the report, which is a summary of anecdotal information from each Federal Reserve Bank on its district?s current economic conditions, ?economic activity generally continued to expand since the last report,? though it did slow somewhat in four of the 12 districts. In particular, ?some slowing in the pace of growth? was noted in the New York, Philadelphia, Atlanta, and Chicago districts.

Call #1: Maintain Underweight US Retailers. Last week, the main monthly gauge for manufacturing activity and May?s non-farm payroll report both came in weaker-than-expected and both confirmed that the economy is experiencing a dramatic slowdown. Call #2: Neutral Emerging Market Bonds. The other implication of a slower global economy is that bonds should do better relative to stocks. Given what appears to be a case of extreme over valuation, we would still advocate a negative view on US Treasuries, but we are now changing our view of emerging market bonds from negative to a neutral stance.

This week, our attention turns to the recent slowdown in the global economy and what it means for investors. Over the past month, both equity and commodity markets have staged a modest retreat. One potential cause of the slowdown is the lagged impact of higher commodity prices, which have historically acted as a drag on growth. Late last year, we advocated an overweight to Australian equities, which we then reiterated in early April. Since the initial call, iShares MSCI Australia Index Fund (EWA) has gained around 6.5%. We are now changing our view to neutral for a number of reasons.

With global equity markets up over 100% from their 2009 lows, many investors are questioning whether it is time to lower their strategic allocation to stocks. While there are no shortages of risks facing global equity markets, overall we find that most markets are fairly valued and arguably already reflecting some of the risks ? particularly higher inflation and interest rates ? that are likely to challenge the global economy. We believe that over the long term, equities are still likely to produce higher nominal (inflation-adjusted) and real returns than other financial assets.

The federal government is limited by law as to the amount of debt it can issue. Currently the debt ceiling is 14.3 trillion, an amount that was exceeded last Monday. Fortunately, the government can operate and pay its obligations through various accounting mechanisms. These mechanisms will allow the government to continue to function and avoid defaulting on its existing debt through early August, after which point the government could theoretically default on its Treasury obligations, something that has never happened in US history and would obviously be catastrophic for financial markets.

The news in Europe continues to be mixed. On the plus side, the core countries in Europe continue to post strong economic growth. We had more evidence of that this week with solid GDP results from both Germany and France. The problem of course remains the periphery, particularly Greece. Greek debt was downgraded again and markets are now convinced that Greece will need to restructure. US market volatility has been its lowest since 2007, with the VIX Index ? which measures implied volatility on S&P 500 options ? hitting a four year low of below 15 in April. We believe this is too low.

Friday Congress and the White House agreed to cut $39 billion in federal spending to avoid a shutdown. The agreement would fund the government for the remainder of the fiscal year, which ends on September 30th. In other words, after weeks of partisan debate, Congress and the White House were able to reach an agreement on 1% of the federal budget. What remains to be settled are three more serious and contentious issues: the imminent breach of the federal debt ceiling, the 2012 budget, and the long-term solvency of the three main entitlement programs Social Security, Medicare, and Medicaid.

While we remain underweight emerging markets in general, one emerging market is looking particularly cheap. While we would be concerned about having a long-term overweight to Russia given that country?s political situation, from a short-term perspective the market looks interesting. We first mentioned Russia as a possible play in early February ? since then the benchmark index is up nearly 7%, but Russia still looks cheap trading for less than 6x earnings. Also unlike China or India, which are negatively impacted by higher oil prices, Russia is a natural beneficiary of the spike in crude.

As Europe continues to muddle along, much of the bad news has been discounted in with the exception of the banks, which are likely to continue to remain under pressure. S&P cut Portugal?s rating two notches as its parliament rejected the government?s new austerity measures, prompting Prime Minister Jose Socrates to resign. Meanwhile Moody?s downgraded 30 small Spanish banks with mostly negative outlook following the earlier sovereign debt rating downgrade. However, despite the banking issues, Spain has been able to continue financing its debts.

Last week, world equity markets suffered their sharpest correction since August of 2010. Unrest in the Middle East and sovereign debt issues in Europe are contributing to the spike in volatility, but last week?s sell-off was primarily driven by the earthquake in Japan and related concerns over the safety of its nuclear power plants. The events in Japan are unlikely to detract from global growth, or change the market dynamics favoring equities. In fact given the recent flight to safety and accompanying drop in nominal bond yields, we reiterate our preference for equities over bonds.

Call #1: Underweight European equity market (with emphasis on banks) Call #2: Overweight developed (with preference for large/mega cap) vs. emerging markets. Year-to-date, emerging markets are down roughly 1.5% while developed market mega caps are up roughly 5%. Our view is reinforced by the recent market volatility and growing unrest in the Middle East. In this type of environment, large, quality companies are likely to prove more resilient.

The overall economy is demonstrating impressive resiliency to higher oil prices ? as evidenced by the recent strength in the ISM manufacturing and services surveys ? but investors should not be too complacent when it comes to the consumer sector. Even though labor markets are staging a slow-motion recovery, the US consumer still faces multiple headwinds, including anemic wage growth, too much debt, and a still fragile housing market. Oil crossing the $100 threshold will not help.

Recently, silver prices have benefited more than gold from the economic rebound. The relative gap between gold and silver suggests that it may be time for a pause in silver?s run. One of the many ironies of markets last year was the extent to which inflation occupied investors? attention, despite its near universal absence. While inflation has recently accelerated in emerging markets and a few developed ones, inflation was and is still largely absent in the developed world. Yet, record low inflation did not stop investors from worrying about it.