On Sunday the NYT ran an interesting op-ed by former Congressmen and Reagan’s budget director, David Stockman.  The article has an extremely pessimistic outlook for our country and economy; you might even think you were reading Zero Hedge and not the NYT (the only difference is Stockman recommends holding cash as opposed to gold).

He highlights some huge problems facing our nation – the most discouraging is our government’s inability to do anything about them.  Below are a few paragraphs that sum things up.  The whole article is worth your time and attention (link).

The future is bleak. The greatest construction boom in recorded history — China’s money dump on infrastructure over the last 15 years — is slowing. Brazil, India, Russia, Turkey, South Africa and all the other growing middle-income nations cannot make up for the shortfall in demand. The American machinery of monetary and fiscal stimulus has reached its limits. Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence. The new rulers enthroned in Beijing last year know that after two decades of wild lending, speculation and building, even they will face a day of reckoning, too.

THE state-wreck ahead is a far cry from the “Great Moderation” proclaimed in 2004 by Mr. Bernanke, who predicted that prosperity would be everlasting because the Fed had tamed the business cycle and, as late as March 2007, testified that the impact of the subprime meltdown “seems likely to be contained.” Instead of moderation, what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices — a form of inflation that the Fed fecklessly disregards in calculating inflation.

These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism.

That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.

Below are a few excerpts from Tim Duy’s article about the strength of the economic recovery.  Go check out the full article, charts included, here.

The economy has proved to be very resilient.  We have weathered external demand shocks, external financial crises, and even fiscal contraction, and all the while economic activity continued to grind higher.  Looking back, it seems that the biggest risk the economy faced was the Fed’s start/stop approach to quantitative easing.  That problem appears solved with open-ended QE linked to economic guideposts.

At the risk of sounding overly optimistic, I am going to go out on a limb:  The recovery is here to stay.  Not “stay” as in “permanent.”  I am not predicting the end of the business cycle.  But “stay” until some point after the Federal Reserve begins to raise interest rates, which I don’t expect until 2015. This doesn’t mean you need to be happy about the pace of growth.  But it does mean that a US recession in the next three years should be pretty far down on your list of concerns.

His take is based on strength in (1) industrial production, (2) retail sales, (3) the housing market, and (4) employment.

What does this mean for the market?  Good question, nobody can be sure – but its certainly possible to see equities contract while the underlying economy continues to improve.  Just read the previous posts highlighting John Hussman’s bearish take on the markets.  Whatever the markets do, lets hope the economic recovery stays intact and at least provides a buoy should Mr. Market freak out.

Also, lets take into account the forward looking nature of equities, after all any real investor worrying about fundamentals should be thinking a minimum of 3-5 years out (despite the majority of Wall Street focusing on the next quarter or two).  This will put fundamental / value investors in the uncomfortable position of factoring in the Fed’s exit well ahead of the rest of the market, if not already.

Tim’s bottom line:

Bottom Line:  The US economy is less fragile than commonly believed; it has endured a series of shocks over the last three years without major incident.   I am claiming neither that equity prices won’t stumble, nor that we should be happy with the pace of activity.  But I do think that a recession is unlikely before the Federal Reserve begins raising interest rates – something not likely to happen for two years.  While long-run predictions are dangerous, for the sake of argument add up to another two years for tighter policy to reverberate through the economy and you are looking at sometime around 2016/2017 when the next recession hits.  That’s the timeframe I am currently thinking about.