March Madness Begins

Basketball wise, but also geopolitically. Middle East revolutions continue and protests overnight in Saudi Arabia spark fear that a major oil producer may enter the same chaotic fate of its neighbors and counterparts. With the Mid East you just never know.

With the Mid West the same could be said. State budget fights continue to highlight the debt burdens that the US is facing locally and federally. Even Repulican plans appear as a joke with cuts of $60 billion while a $1.6 Trillion 2011 deficit looms.

All that being said -- things are fairly on course and (barring a Mid East oil disaster) crunch time is upon us. The ultimate questsion in charting the next step for the US economy in the near term and its longterm growth (for those of us concerned with retiring, etc) is right now -- what will the politicans do with the budget and what will the Fed do to support (or wean itself from) the economy?

The hope = (1) no oil shock + (2) a long term budget proposal that will reduce deficits and restructure entitlements (I'm talking years long term here; while immediate cuts and action are necessary, anything absolutely drastic at the federal level may shock this fragile economy into contraction, esp with considering my next point) + (3) very slow Fed weaning (this means continuing its Treasury purchases and low rates; when the Fed disappears from the Treasury mark in June, there will be effects and higher rates, but minimal and slow weaning is good and necessary; rate hikes can come later).

Is inflation a concern? Somewhat but mostly at the energy level (gas). Considerable economic slack and low housing costs/rents will keep inflation subdued and from truly crippling family budgets for the time being.

Finally, keep an eye on what some call The Rule of 10. The economy tends to suffer when the 10 year Treasury rate and the price of gas hit and/or exceed 10. Currently, gas is at 3.50 and the t-rate is at 3.5. Gas could easily hit $4 or beyond with Saudi concerns. And the end of Fed purchases in June could take the t-rate above 4%. Something to be mindful of.