Things I like about the US Economy;

Recent surveys show CEOs and salespeople are feeling confident about the future,

Tax receipts are higher than anticipated in most states, indicating greater taxable activity in the private sector

Commodity prices are stable to flat

Interest rates are low and will remain low for at least a year

Things we are going to have to learn to live with in the US economy;

Higher than normal unemployment

Sluggish housing and real estate sector

Continual cut back in the public sector both in services provided and employee benefits

Things I worry about (domestic edition);

People running for office or actually in office who advocate the exact same policies that created the 2008 meltdown

Unreasonable belief in what Paul Krugman terms the “confidence fairy” (This is the theory that if we adopt austerity measures that slow our economy, small businesses will run out and hire people)

Moody’s Investor Service in an attempt to make people forget their incompetence and contribution to the financial crises will do something really stupid even for them. (downgrade everyone and everybody just to keep their name in the news)

Things I worry about (international edition)

Nothing has been done about the euro situation.

Everybody is in agreement about the solution to the Greek crisis except the Greeks

The political reaction to the bad choices the European and English authorities made when faced with stimulus / austerity options two years ago

The financial press seems surprised that Spain and England are slipping back into recession. Since the response of those countries to the financial meltdown of 2008 was to implement austerity measures, which means cutting government spending, there was no other possible outcome. It is not rocket science. The US chose stimulus first and today we have an economy with sluggish growth and an increase in the budget deficit, but we have the means to address the deficits and excessive federal spending. As I mentioned before the government must save the economy first and then it will be in a position to address the longer term structural issues. In the US the private sector is doing fine while the public sector is in contraction. The overall effect is enough growth to allow us to work on our large fiscal problems.

Things I believe about the US economy:

Unemployment will remain high. Perhaps we need to rethink our educational assumptions. As a country we think that if you graduate from a prestigious college after paying enormous tuition the world will greet you with open arms. Most employers will tell you that upon graduation, the student does not know how to do anything useful.

Real Estate prices are still in a correction and the final correction will surprise all of us who own houses. All it takes is a ride around the neighborhood to see sales are sluggish and all the press about an incipient recovery might just be the Real Estate agents pumping up the business

Interest rates and inflation will remain low. Occasionally there will be a spike in the price of a particular commodity but overall prices will increase modestly.

All these factors mean growth will be sluggish but unlike the Europeans positive.

Earlier this week the shareholders of Citibank rejected the pay packages granted by the board to the top executives. It is a non-binding vote but 55% of the shareholders basically told the people running the bank "we don't think you are worth it". Good for them. Citibank couldn't get the go ahead from the Fed to increase their dividend but they want to pay the head of the bank 15 million dollars. Why? This vote is great on two levels. First it tells the bank the shareholders are not going to be sweet talked into giving away money to executives who don't perform and second it indicates that shareholders are getting more involved in the working of the companies. Both trends are a signal that some good is coming out of the 2008 debacle in the financial sector.

Europe continues to bubble along. This week it is Spain's turn to be put under the microscope. The Spanish economy has close to 25% unemployment, Argentina just seized a significant part of a Spanish oil company's South American holdings, the Spanish banks are under pressure concerning their solvency, and the borrowing cost for the Spanish Government went up at the last auction. It is like a logic test; complete this sentence- Iceland, Ireland, Greece, Portugal, Spain ___. The winning answer is Italy. International investors have to be heading for the hills; the hills in this case are either London real estate or the US Government market.

There are indications that the NYC real estate market is showing signs of life. Recent statistics and news articles point to an increase in properties selling. This does not seem to be the trend in the surrounding suburbs where things are sluggish. Maybe the NYC activity is pent-up demand or the benefit of low interest which makes buying cheaper than renting. The unusual part of this scenario is Wall Street did not have a good year in re compensation and a pick up in NYC real estate would seem to be an anomaly.

Europe reminds me of an outing I once attended. The outing was for bond traders after a really nasty stretch in the market. I would walk up to a trader from another firm and ask " How are you doing?" and they would all reply "we are doing fine but I hear so-and-so is getting crushed" I would then approach so-and-so and ask the same question and get the same reply all the way around the room. The European countries are all in the same bucket and the European Central Bank has bought some time by increasing liquidity recently but by no means is any of it over. Stayed tuned and keep your helmet on.

As the presidential race starts in earnest I hope the conversation will be focused on big issues and big ideas. I saw an ad for Citibank in the Times over the weekend. The ad traced major efforts by the bank since it's inception in the 1800's. The print copy shows a time line and lists the bank's efforts i.e. financed the Panama Canal, supported the Marshall Plan etc. The bank's most recent accomplishment according to the ad is they are the first credit card approved for Google wallet. The bank apparently equates the Panama Canal with a credit card you can use with an electronic encyclopedia. Somewhere Teddy Roosevelt is rolling in his grave. We need to build for the future and invest in our infrastructure. Currently one political party's platform is to drill for oil everywhere and don't pay for birth control pills. The other party can't seem to articulate a reason why they passed health care reform or what exactly the Dodd- Frank bill means.

I have mentioned previously that the US economy paused or flattened out during the 1Q 2012. I think this is reflected in the current sell off of the stock market. I think economic activity is still some form of OK and will continue for the next few years. The Federal Reserve will disappear from the scene the closer we get to the election and since interest rates are so low there is nothing more for them to address. I don't think there will be any more quantitative easing nor should there be. They best policy is to let the economy recover slowly, accept the economic dislocations associated with this and build a solid foundation for the future.

The first quarter of 2012 is in the books. Stocks were up, oil was up, US Treasuries were down, car sales were up, US corporate debt was up and housing was sluggish. This scenario points to a consensus that the economy is in some stage of a recovery. I think this is true. Business people will tell you that while business is not where they would like it is definitely better than last year and they are hopeful about the future. At the end of the last administration and the beginning of the current one the executive branch and Federal Reserve chose to bail out the financial sector and stimulate the economy. Our current recovery indicates that these decisions were correct. The next part of the process should be getting our spending and borrowing under control. This is the tricky part of the equation given the current rancorous political environment and our addiction to low interest rates. Weaning the country and the government off these extremely low interest rates will be a difficult test for the Federal Reserve.

After 2008 the regulators (FINRA, SEC, Controller of the Currency etc.) always talk about "lessons learned" rather than dealing with their complete failure to do their jobs in a professional manner. What I don't understand is how can a MF Global situation occur in 2011 and why are the same people still in charge of the regulatory agencies?

Nobody contributed more to the financial crisis than Moody's Investor Service. Now Moody's is desperate to prove they are relevant and are taking every opportunity to make pronouncements about credit and sovereign debt without ever having established they possess any ability in these areas.

The US economy gave a good account of itself for the fourth quarter 2011 and the stats from that period are reflected in the current stock market. In the first quarter of 2012 the economy has clearly slowed or flattened out. The rising oil price based on uncertainty in the Middle East is causing the economic pause. I think this is a good thing. The longer and slower the economic recovery is the better we will be in the long run. We have structural problems and these need to be addressed. I believe the current administration was right to push a large stimulus bill early in 2009, without which we would not have an economy to discuss. I believe the opposition is right to resist further federal spending because it is not needed and the private sector needs time to work. Clearly the stimulus spending exacerbated the deficit and now that the economy is recovering we should address the deficit issue. I believe and have said many times both sides of the issue must be used to solve the problem i.e. lower spending and higher taxes. Anyone not willing to use both options is not serious about solving the deficit problem.

The above issues are coming together at the state and local level. Since 2007-2008 we have a blue print for financial institutions and what to do if they are insolvent. We do not have a similar plan for state and local governments if they become insolvent. The benefits promised to public employees are too large and are accruing at too rapid a pace. I believe before the final chapter is written the public will realize that not only should new employees not be under the same system but we cannot afford to pay the benefits already promised to retirees.  I don't think the math points any other way. As the public begins to realize just how much funding is necessary to get even with the benefits already promised I expect a rancorous public debate. We can't chase our tail forever on this issue. We, as a country need to think of broad solutions and ask the big questions. Why do public employees have pensions and not 401(k)'s and IRAs? If your life expectancy is longer should your retirement age be raised? If the state of NY pays for your medical insurance shouldn't you be required to be treated in NY?

It is going to be an interesting process, stayed tuned.

The Federal Reserve has kept interest rates at an all time low for years now. This fiscal policy is in response to the banking crises of 2008 and is an acceptable policy to try to stimulate the economy. This is a two edged sword like many policy choices. On one hand, the interest component of US Government debt is very low which is helping to contain deficits. On the other hand, any entity with a defined benefits pension plan will suffer because they need a certain level of return to make their plan work. It is acceptable for these plans to predict a certain level of return and base their contributions on these assumptions. What has happened over the last few years is that the level of return in the fixed income portion of the portfolio has been less than anticipated. The low returns are causing a shortfall which must be made up by increased contributions. This is true for GE and major corporations as well as states and municipalities.Last week a number of companies acknowledged this problem. Unfortunately the state governments which a year ago seemed like they were willing to face this issue are backsliding. California, where the legislature is unwilling to deal with the issue and NJ where the governor has suddenly resorted to pie in the sky assumptions are the most obvious examples. Make no mistake this issue is widespread, significant and still getting worse.

The Greek bail out will come to a head this week. In the next few days private investors will either agree to accept a voluntary haircut on their Greek bonds or not. Without 75% participation the deal will fail, Greece will default and the Credit Default swaps will be triggered. I have to believe that more than 25% of the Greek bondholders have some sort of credit protection and will not opt for a voluntary solution, which will cause a default. I believe this is priced into the market already.

Question of the week: Why is Mary Shapiro still head of the SEC?