http://www.theglobeandmail.com/report-on-business/economy/economy-lab/david-rosenberg/too-early-to-be-crowing-about-the-us-economy/article1908662/

You can accuse me of being a permabear, but that label misses the point. I’m a capital preservationist, first and foremost, and a prudent strategist aiming for returns over a business cycle that will exceed what anyone can garner by relying on government bonds or a stock market index.

In the United States, the polls of purchasing managers, the consumer confidence surveys, and the consensus forecasts from the economics community have been hitting new highs for this market cycle. Since these data, which represent what is commonly thought of as market “sentiment,” have been so strong, the overwhelming view is that the U.S. economy is doing a lot better.

Granted, for now the economy is doing better than it was last summer, when a double-dip recession was a real concern. It took another huge round of fiscal and monetary stimulus to expunge the fear that the United States was sliding back into a downturn. But with house prices declining again, bank credit contracting again, and employment failing to keep up with either the growth in the population or labour force, it is more than just a tad premature to be crowing about how great the economy is doing.

The U.S. Congress looks poised to put the kibosh on further rounds of asset buying by the Federal Reserve Board. Not only that, but there is a spending rebellion going on within the ranks of the Republican Party, and the conservative wing is pushing hard for spending cuts now rather than later.

So by the end of the second quarter of this year, we shall see what the U.S. economy looks like without the life support provided by rampant fiscal and monetary policy stimulus. We had a taste of this environment last spring and summer, but alas, this has been rendered a distant recollection in most people’s minds. It’s amazing what a 25-per-cent jump in the stock market can do to one’s memory.

The Overbought, Expensive Stock Market

The stock market is at least as complacent now as it was at this time last year. It is also just as overbought and, in some respects, more expensive. Cast your mind back a year: The end of the first round of quantitative easing and signs that the first-quarter GDP was going to be the peak for the year, alongside debt problems in Europe, were all critical in engineering an unexpected stock market decline of nearly 20 per cent from last April through to the tail end of the summer.

Could we be in for a replay of that decline? At a time when there are at least three times more market bulls as there are bears, and bullish sentiment is at extreme levels, it will be interesting to see how things play out. All I can say is that the probable end this year to the second round of quantitative easing is likely going to be a very big deal.

This by no means suggests that investment opportunities do not exist for 2011. But the appropriate strategies are narrower in scope.

How to Play It

First, I recommend a core position in hedge funds that actually manage and hedge the risk in this post-bubble period of intense market volatility.

I also like the bond market, especially the high-yield corporate sector, as well as hybrid securities, such as convertible bonds, that offer a decent yield.

Investments that give you exposure to the Canadian dollar are good, and so is the resource sector, especially oil companies, which investors should be looking to buy on dips.

The commodity sector remains attractive because of reserves in the ground, ongoing consolidation in the industry, and the overall trend to rising prices (which may be interrupted periodically this year as China’s policy makers move to restrain their overheated economy).

I also see precious metals as a hedge against periodic bouts of currency and monetary instability in the U.S. and Europe.

While I am not a big fan of the U.S. equity market as an asset class on its own, there are stocks I do like. Large-cap blue chips, for instance, deliver stable streams of earnings, but have been ignored by the investment community. As a result, they trade at steep discounts to the overall market. These stocks have strong balance sheets and pay out consistent dividends. They offer very good value with very little downside potential.