Earnings have rebounded powerfully since the very deep trough in 2009. This rebound has been driven by cost cutting and government stimulus (neither of which will be sustained) and emerging markets' growth, which we believe is likely to be sustained (though inflation in emerging markets presents a serious risk).

  

Our scenario work suggests that, despite the sharp rebound in earnings, growth is likely to be subpar as the rest of the cycle unfolds. Subpar economic growth is consistent with historical outcomes in the aftermath of a financial crisis. This history dovetails with a key assumption influencing our analysis-that the excessive private and public debt cloud hanging over the economy will result in continued deleveraging and therefore a lower level of consumption than would otherwise be the case.

  

Private debt has declined from its peak but remains historically high while public debt has spiked higher and will continue to increase given growing entitlement costs as baby boomers age. (8)

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INFLATION SPRINGS AHEAD
Consumer inflation increased by 0.4% in April after rising 0.5% in March. (You can cite food and energy costs - gasoline prices rose 3.3% alone last month.) Annualized inflation is the real story here: the federal government's Consumer Price Index has advanced 3.2% in the past 12 months. That is the biggest annual gain since October 2008. As for wholesale inflation, the Producer Price Index was up 0.8% for April; it showed an annual increase of 6.8% (the most since September 2008). (1,2,3)

GAINS IN RETAIL SALES, CONSUMER SENTIMENT
The Census Bureau announced that retail sales were up 0.5% in April; it also revised the March gain from 0.4% to 0.9%. The University of Michigan's preliminary April consumer sentiment survey came in at 72.4, better than the 70.0 forecast by economists polled by Reuters and the final April reading of 69.8.(1,4)

KEY COMMODITIES BOUNCE BACK
Last week, there was a bit of a rebound in precious metals and energy futures. Gold actually advanced 0.15% for the week; silver's five-day loss was 0.77%. Oil futures gained 2.5% for the week on the NYMEX, while RBOB gasoline futures lost 0.6%.(5,6)

BLEAKER OUTLOOK FOR MEDICARE, SOCIAL SECURITY
New reports from trustees of the entitlement systems project that Medicare's trust fund will be depleted by 2024 and that Social Security's trust fund will be exhausted by 2036 ... if no action is taken. (Prior respective estimates were 2029 and 2037.) By these forecasts, Medicare would only be able to pay out 90% of retiree hospital insurance costs after 2024; after 2036, Social Security would only be able to pay out about 77% of scheduled benefits.(7)