As our first chart below reminds, the trend in jobless claims continues to deteriorate, which is to say that the population of the unemployed is still expanding. Last week new filings rose to 455,000, the highest since 2002.

The news isn't any better for the ranks of the formerly employed who continue collecting unemployment checks. As the second graph below illustrates, continuing jobless claims jumped again for the week through July 26 to 3.311 million, an elevation that hasn't been seen since 2003.

The two trends are hardly surprising, given the broader perspective on the weakening economy, as we discussed yesterday. Expected or not, today's news for the job market will provide another jolt of bearish realism to those who think that a rebound from recent ills is imminent.

The economic weakening will get better before it gets worse, in other words. That doesn't mean the pain will get materially worse, although no one should rule out the possibility. But the general trend, at least, is clear. Only the duration and magnitude are in question.

The black line in the chart above, which runs through June 2008, is our broad measure of U.S. economic activity, comprised of 17 variables, ranging from nonfarm payrolls to retail sales to business loans. The index's biggest weighting (a bit more than 40%) is comprised of leading indicators, which are those measures (such as new building permits and disposable personal income) of economic activity that are considered as windows into the future. Another 30% of our broad economic index is made up of coincident indicators with the remaining 30% in lagging indicators. In short, the CS Economic Index is designed to measure broad economic activity, giving a modest bias to leading indicators.

With that in mind, we take no comfort from the relatively sharp decline in the leading component of our index (the red line in the chart above). As you can see from the graph, the leading indicators are signaling that there are more challenges ahead. In fact, the leading indicators have been flashing warning signs for some time now, although the downside momentum has only been bubbling since late last year.

The first order of business in digesting today's report on personal income and outlays is looking at the big negative: disposable personal income dropped by a hefty 1.9% (seasonally adjusted) in June. This is income that's left over after Joe Sixpack has paid his bills and so it's a key number about his capacity for running to the mall and picking up an extra TV. In short, this is the front line measure of the American economy's growth potential. GDP, after all, is overwhelmingly dependent on consumer spending. As such, the 1.9% drop in DPI--the first slump since April 2007 and the biggest decline since August 2005--looks ominous, as our chart below suggests.

But the DPI drop isn't quite as painful as it appears. Note in the chart above the large bump in May that precedes June's drop. The rise in DPI is courtesy of the government's stimulus checks. The stimulus is temporary, of course, and so its effects are beginning to fade. No great surprise. If we take out the anomalous jump in May's DPI, June's level of DPI is at an all-time high.

The key issue is deciding how much additional DPI fading awaits. Logic suggests we'll return to trend, short of another round of stimulus. By that reckoning, DPI will fall in the coming months, perhaps to the $10.6 trillion level for August or September. That not-unreasonable assumption means that the market has to brace itself for more red ink on the DPI ledger. Such declines will look troubling, but they won't signal much more than the aging effects of stimulus checks. Up to a point, that is. Indeed, one might reasonably think that DPI is due for some additional retrenching due to the various economic ills of late. In that case, DPI declines may run on for longer than the optimists expect.

Let's begin by noting that the big stumble last month came in commodities. The DJ-AIG Commodity Index, for instance, dropped by an astonishing 11.9% in July. That's the biggest month setback for the benchmark, as far as we can tell, based on records we can dig up going back to 1991. (Our ETF proxy in our table fared even worse, slipping more than 12% last month.)

Foreign stocks took it on the chin last month, too, although the pain was modest by comparison with commodities.

In the winner's column: REITs, which rebounded in July with a robust gain. Overall, we can say that REITs popped and commodities flopped.

The steep tumble in commodities was due mostly to oil's sharp drop last month. Since most commodities indices are heavily weighted in oil and energy, it's no surprise to learn that commodity benchmarks overall suffered in July. Unexpected? Hardly. Commodities generally have been rallying for years and the corrections along the way, at least on a monthly basis, have been relatively rare and quite mild for the most part. Taking some of the froth out of prices, particularly in oil, is long overdue and it wouldn't surprise us to see more of the same in the months ahead. Commodities generally are a volatile asset class, and if you factor that in with the record prices for many raw materials of late, it's no surprise to see downside volatility has finally come a-courtin'.

Today's release of the "advance" number for second-quarter GDP shows that the economy rose by a real annualized 1.9% pace in the three months through June. That's up sharply from the 0.9% rate in Q1. Is it time to break out the champagne and declare the slowdown over? No, not even close. The correcting and cleansing process for the economy has only just begun.

Our reasoning starts with the observation that Q1's 1.9% jump, while better than the previous number, is mediocre, at best, in the context of the last several years. More importantly, a closer look at the catalysts for Q2's rise raises questions about the future.

A key contributor to the latest GDP rise comes from consumer spending, which rose 1.5% in Q2. That's up from 0.9% previously. Good news, right? Yes, although one has to wonder how much of this is related to the stimulus checks that have been mailed out since May. Stimulus payments are a one-time boost and so they won't be juicing the economy forever. When the charm wears off, consumers will be left to spend their own money. The question is: how optimistic will consumers be from here on out?

Meanwhile, take note that most of the rise in consumer spending in Q2 comes from increased purchases in nondurable goods while spending on cyclically sensitive durable goods dropped sharply. Not an encouraging sign. Indeed, the 3.0% decline in durable goods spending in the previous quarter follows the 4.3% drop in Q1. Back-to-back drops like this are rare for durable goods, and so the trend suggests more trouble on the consumer front.

Adjusting the 10-year Treasury yield by consumer price inflation tells us what we already know: money is loose, and by design. The Federal Reserve has been intentionally pumping liquidity into the economy to cure the various ills that hound the American business machine. But with the real (inflation adjusted) 10-year yield plumbing depths rarely seen, it's time to ask (again) what it all means.

As the chart above illustrates, the CPI-adjusted 10-year yield dropped to -0.8% in June. That's the lowest negative real yield for the benchmark Treasury since 1980. Using last night's closing 4.09% yield and June's 4.9% 12-month CPI change, we remain at roughly -0.8%.

What does it imply? That depends on your expectations. It could mean that we're giving inflation the fuel it needs to take deeper root in coming years. Or, it mean be just the ticket to temper the economic contraction that's set to get worse.

No one really knows which scenario is coming. Rather than attempt the impossible, let's review how we're calculating real Treasury yields to gain a bit of perspective of where we've been and where we may be going.

For the chart above, we begin with the monthly average for the constant maturity for the 10-year Treasury, as per the St. Louis Fed. We then adjust that monthly number by the comparable 12-month trailing change in CPI, as reported by the Bureau of Labor Statistics.

A growing list of index vendors answer in the affirmative. Indeed, the last few years have witnessed an explosion of new benchmarks, many claiming the title of "new and improved" in one sense or another. Alas, it's too soon to make definitive judgments one way or the other, but that doesn't mean we can't consider the strategic possibilities.

In the latest issue of Wealth Manager, your correspondent did just that. The question before the house: What, if anything, can new indices bring to the asset allocation table? For some thoughts on possible answers, read on…

The basic argument goes like this: finance has been relatively unregulated over the past generation, in contrast to the 50 or so years following the Great Depression, when the first round of government oversight befell Wall Street. Lessening the regulatory strings that bound is at the heart of the current ills. The solution: ratchet up government regulation, just like in the old days, a decision that will inoculate the economy from similar bouts of trouble in the future.

Undoubtedly, some reordering of regulatory powers is in order. The fact that the government had to step in and bail out Bear Stearns, Freddie and Fannie and lesser names suggests that something's amiss. But let's be clear: rethinking regulation isn't the same as creating more regulation. And even the most-intelligent regulatory notions will come at a price.

New government regulations, no matter how well meaning or deftly conceived will spawn unintended consequences. History is clear on this point, as it's been proven time and time again. Market forces are always with us. Governments are inclined to suppress and re-engineer those forces to satisfy political demands. That's all well and good, and in a republic the crowd's demands, within reason, must be addressed. Still, the basic inspiration for action on this front is invariably one of manufacturing a free lunch of one sort or another. But there is no free lunch. Of course, that piece of information tends to be overlooked at the dawn of a new age of regulation.

Return doesn't lend itself to forecasting, at least not in the short term. But when we look further out in time, there's a bit of transparency at times about what's coming. Meanwhile, risk's a bit more reliable generally when it comes to seeing the future, and that small opportunistic opening gives us a leg up on being completely and utterly subject to Mr. Market's whims.

Shrewdly blending the little intelligence we can gather from the market in terms of risk and return forecasts offers strategic-minded investors the last, best hope for success in portfolio management.

One example: if stocks generally offer a relatively high dividend yield compared with the past, numerous academic studies show that the odds are enhanced for earning higher-than-average returns over the subsequent three to five years and beyond. Mind you, there's no guarantee, but the higher the yield, the better the odds. But we can't rely on this prospect alone, which is why we can't apply this concept to one or two stocks. Instead, we greatly improve our odds of tapping higher-than-average returns by diversifying.

In other words, buying a broad portfolio of stocks at a relatively high dividend yield further increases our chances for beating the buy-and-hold long run performance. Combining the two risk management strategies--buying when yields are high and diversifying the bet--offers more confidence of earning above-average returns than either strategy does in isolation of the other.

We can further enhance our prospective risk-adjusted return by taking the advice above and applying it to multiple asset classes. Once again, we must do so intelligently, by leveraging what we know about risk and it's slightly better odds (compared to pure return forecasts) for extrapolating the past into the future. That is, correlations and volatility matter when considering how to intelligently blend multiple asset classes for above-average results.

If we look to bonds, we know a lot in terms of how they compare to stocks. We don't what the returns of each are going to be, at least not completely, but their relationship tends to be fairly stable over time. One, bonds tend exhibit relatively low standard deviations and correlations compared with equities. Again, that information by itself isn't much help, but it becomes quite useful when combined with what we know about stocks, as per our review above.

Nonetheless, it's tempting to say that Tuesday's intraday low of 1200.44 for the S&P 500 certainly looks like the trough--for the moment. Yesterday's bounce skyward already has some pundits speculating that a return of the good ole' days is imminent. And, of course, there's a few select bits of news to support that notion, including a sharp drop in oil prices, a confidence-boosting announcement for the battered financials by way of a dividend hike for Wells Fargo, and some better-than-expected news on business conditions for three stalwart names in the Dow Jones Industrials.

Of course, we could easily counter the upbeat reports with bearish ones. In fact, that's always true. There's never a shortage of reasons to worry, or to hope. Depending on your mood, you can find corroborating evidence to support the forecast preference du jour.

Alas, there's virtually no chance of calling bottoms or identifying tops, at least not in advance, or ex ante, as the academics say. The rear-view mirror, on the other hand, is always reliably lucid. No wonder, then, that looking backward tends to have an oversized influence on investor sentiment today. The problem is that the past, sans an informed and thoughtful historical perspective, is of little help to the strategic-minded investor.

Indeed, developing strategic perspective is an unnatural act for the human species. That's not to say that it can't be learned. But the path of least resistance is one of extrapolating from the very recent past as a basis for anticipating the very near future. That may work for traders and sail boat enthusiasts checking the weather at sea, but it's bound to lead you astray eventually when it comes to finance.

Before we dive into what may, or may not happen, let's review the latest numbers. Consumer prices surged by 1.1% last month, the Bureau of Labor Statistics reports. That's the highest monthly gain since 1981. On an annual basis, CPI rose by 4.9% through last month--the highest since 1991.

There's no doubt what's behind the price hikes: energy prices jumped 6.6% last month, the government reports. The surge in energy costs spilled over into transportation, which climbed 3.8% last month. Food isn't lying low either, although its 0.8% advance in June looks modest by comparison with energy and transportation.

Today's update on wholesale inflation for June suggests that inflation may get worse before it gets better. The annual pace of producer prices was an astonishing 9.1% through last month--the highest since 1981. And there's no salvation in focusing on core wholesale prices, which rose by 3.1% for the year as of June--the highest since 1991.

No matter how you slice it, wholesale inflation has taken wing. We can only guess what tomorrow's report on consumer inflation will show, but it would come as no surprise to see higher numbers on that front as well.

No wonder, then, that we've become a broken record on the subject. Our only defense is that our recurring message is a reflection of the consistent rise in import prices, which we've written about regularly in the recent past, including here and here and here.

It's a fundamental relationship, and one that endures. No wonder, then, that a growing body of academic research (and a healthy dose of common sense) counsels that the relationship produces valuable clues for strategic-minded investors. In short, raise equity weights when yields are relatively high, and trim that exposure when yields are relatively low. Ideally, such shifts are done gradually, over time, to manage the risk that no one really knows if current yields will remain the apex, or trough, for the cycle.

There are other factors to consider in managing portfolios of course. For the moment, however, we'll focus on dividend yields, which are up these days, as our chart below shows. Indeed, some corners of the world's equities markets are sporting rather attractive yields, relative to recent history.

Europe leads the way among the globe's major regions, posting a 4.35% yield (based on the trailing 12 months) as of June 30, 2008. (All data is via S&P/Citigroup Global Equity Indices.) How high is 4.35%? It's the highest in at least 13 years. After factoring in the selling so far this month, the current trailing yield is almost certainly a bit higher today.