.....debt growth throughout the broad US economy, exclusive of the asset backed securities markets (that is in clear deleveraging mode) and the Federal government (that is in clear leverage acceleration mode), has only slowed, but not gone into net contraction. As per the nearer term directional trends seen in the charts above, it appears households and the non-financial corporate sector are either in or will enter the process of net leverage contraction (deleveraging) very soon. Consumption, production and price deflation trends in a number of asset classes (primarily residential real estate and equities) has occurred up to this point against a backdrop of only slowing household and corporate debt growth. Just what will happen if/when household and non-financial corporate leverage begins to actually contract in nominal terms? THAT's the key question for us as investors over the quarters directly ahead. The markets have priced in sector implosion (financial sector) and the potential for a recession of a mid-1970's/early 1980's magnitude. But, the broad deleveraging process has really just begun. We have a very hard time seeing this process truncated in the quarters ahead. The potential clearly exists for a multi-year reconciliation process. Have the markets already priced in a multi-year deleveraging process, with specific emphasis and implications as per consumers? That we do not believe has happened, except maybe in the Treasury market. You already know we will be monitoring and discussing these very issues as we move forward. Deleveraging is not done. As you can see, it has barely begun.

Moving Toward A New Normal?...We all know by now that Microsoft missed its 4Q 2008 earnings a few weeks back. Moreover, for the first time in their history that are beginning to reconcile labor costs, as are so many firms domestically. But probably THE most important aspect of the Microsoft announcement we believe simply did not receive enough headline attention, and it had absolutely nothing to do with earnings or layoffs.

Getting to the point, we want to quickly cover a very brief comment made by Microsoft big cheese Steve Ballmer with the earnings report. Without sounding melodramatic, we have to hand it to Ballmer in a big way. As we see it, his comments were absolutely spot on regarding what we believe is one of the key macro themes of the moment. We're convinced by these simple comments that he gets it in a very big way. Sorry if you have already seen these comments, they are just so dead on we had to reprint them.

"We're certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to a lower level of business and consumer spending based largely on the reduced leverage in the economy."

We never thought we'd say it, but BRAVO Mr. Ballmer. You hit it right on the head thematically, baby. We're moving to a "new normal" for the economy and corporate profits. That's EXACTLY what is occurring, as far as we are concerned, and this is the exact set of circumstances the equity markets are in the process of adjusting to and discounting right now....

http://www.safehaven.com/article-124...

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