Fine, then. Uh oh, overflow, population, common food, but it'll do to

Save yourself, serve yourself. World serves its own needs,
listen to your heart bleed – dummy with the rapture and
the revered and the right, right. You vitriolic, patriotic, slam,

fight, bright light, feeling pretty psyched.

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine.

R.E.M. song from 1987

It’s not really the end of the world, but to read some of the analysis and data over the past week, it’s hard not to wonder if it’s not the beginning of the Endgame at the very least. There is more to cover than I can really do justice to, but we will just start. We HAVE to look at the US data first (briefly) and then on to Europe, where it will may be the end of the euro experiment, depending on two voting populations. Can you spell “Banking Crisis,” gentle reader? A nod to Bernanke’s finger-pointing speech, some links on the scourge of high-frequency trading, and we end on a positive note about the Boomer generation growing older. And, I answer the question that is burning in your brain: “How many years of US corn production will China’s dollar reserves buy?” Write your answer down now. This letter may print out longer than usual, as there are plenty of charts. Let’s skip the “but firsts” and jump right in.

Correct me if I’m wrong, but I seem to remember that one of the reasons for QE2 was to lower rates on the longer end of the US yield curve. Clearly, that has not happened? Today we look at come of the unintended consequences of monetary policy, turn our eyes briefly to consumer debt, and wonder about deflating incomes. There are a lot of very interesting things to cover. (This letter will print long, but there are a lot of graphs. Usual amount of copy.)

But first, the are some changes and upgrades being made to the database that houses the list of my 1.5 million closest friends. That means that some of you will be reading this on the website this week, rather than having the letter sent directly to you. If this letter doesn’t show up for some reason, you can always go to www.2000wave.com and get it directly from the website. We should be back on track by next week. Sorry for any inconvenience.

Second, long-time readers know I have an avid interest in biotech. I am also a serial entrepreneur on the lookout for business opportunities. Some have been successful and others have been learning experiences. On the biotech front, I frequently talk and meet with CEOs and scientists in the biotech space. In this process I have come across what I think is an amazing new product. I have personally been using it and love it! I bought the marketing rights. Next week I will introduce you to it. We are rushing to get the material ready before Christmas, and production efforts on the websites are not up to my normal standards. But since it only goes to my closest friends, I trust you will cut me some slack. And it is an amazing product. More next week.

You can be the judge as to whether I should have jumped at yet another opportunity. But rest assured, gentle reader, that my primary focus is on writing to you every Friday, and it always will be. That is what I love to do and what I seemingly do best. Now, into the letter.

I am in London finishing my new book, The End Game, which will be out after the first of the year, as soon as Wiley can make it happen. Working with my co-author, Jonathan Tepper, we are making good progress. We intend to quit (a book like this is never finished) tomorrow afternoon.

I am going to beg off from personally writing a letter this week, but will give you something even better. Dr. Lacy Hunt offers us a few cogent thoughts on the unemployment numbers. The headline establishment survey came in much better than expected, but the household survey was much weaker. In addition, Dr. John Hussman wrote a piece last week that I thought was one of his best, on liquidity traps and quantitative easing, and that’s included here, too. We are embarking on a course through uncharted waters. No one (including the Fed) has any idea what the unintended consequences will be.

I remarked a few weeks ago that the Fed is throwing an inflation party and not sure whether anyone will come. Last night at dinner, Albert Edwards of Societe Generale noted that not only do they not know whether anyone will come, they do not know what they will do if they do come, how much they will drink, or when they will leave.

My quick takeaway is the $600 billion is not all that much, and the buying is concentrated in the middle of the curve, where it is likely to do the least in terms of lowering rates (they are already low!), so also likely to do the least damage. Mohammed El-Erian thinks that if nothing happens the Fed will be forced to continue, which is a dangerous thing. I wonder whether they might just shrug their shoulders and say, “We tried, and now it is up to the fiscal side of the equation.” We shall see. It will be important to listen to the speeches of the Fed governors to get some idea.

Before we jump in, let me give you a few thoughts I am picking up in Europe. The yield spreads on Irish and Spanish bonds are blowing out even as we speak, as well as those on the rest of the periphery. While all eyes are on the Fed, the real action may be in Europe. We will visit that thought in the near future. Now, first to Lacy.

We are halfway through the year (where did the time go?) and it is time to make some predictions about the last half of the year. This week we look at what the leading indicators are telling us, size up a new indicator, drop in on banking data, and do a whole lot more.

Quickly, I will be on Larry Kudlow's show next Tuesday, which is at 7 pm Eastern. Larry has promised that we will spend some quality time on some of the current issues facing us. See you there! And now, let's jump in.

I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession.

This was not based on data, but rather on research which shows that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases. Christina Romer, Obama's head of the Council of Economic Advisors, did the research along with her husband, so this is not a Republican conclusion.

If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession - at least the way I see it.

I was asked at my recent speech in Milan, what sorts of things could make me wrong? There are a few. First, it could be that tax increases and cuts don't matter. Some very smart people (like Paul McCulley) feel that tax increases on the wealthy don't really figure into Romer's analysis.

The Fed has taken interest rates to zero. They have clearly started a program of quantitative easing. What exactly does that mean? Are we all now Japanese? Is the Fed pushing on a string, as Japan has done for almost two decades? The quick answer is no, but the quick answer doesn't tell us much. We may not be in for a two-decades-long Japanese malaise, but we will experience a whole new set of circumstances. In what will hopefully be a shorter holiday version of the e-letter, I will tackle these questions and more.

Most of us are familiar with the devastating hurricane that hit Myanmar (Burma) this last year, and the difficulty in getting aid to those who were suffering. My friends and colleagues at Knightsbridge were able to get in and help where others couldn't.

Knightsbridge International is a small group of volunteers who go to places that are definitely not safe but where the need for help is critical. Like the knights of old, who ran hospitals and relief efforts, these modern-day knights go to where the need is greatest. They took food and medicine to northern Afghanistan before the troops went in (very dangerous!). They went to rebel-held territory in Sri Lanka after the tsunami, when no one else could get medicine and other aid in. Whether it's driving in to rescue nuns in Rwanda (fascinating story!) or taking solar power to clinics in Myanmar, or water purification units and medicine to Darfur, they go where other groups fear to tread. They have no political or religious agendas, just the drive to get aid to where it can do the most good.

Leverage is an eight-letter word, which the markets now regard as twice as bad as the two four-letter words debt and pain (or fill in your own four-letter words). This week I try to give some insight into what is happening in the credit markets, some of it below the radar screen of most analysts. We will look at the potential for deflation and the Fed's response. There is a lot to cover, so let's jump right in.

I talked with a friend who runs a collateralized loan obligation fund, or CLO. There are a lot of these funds in the Shadow Banking System. Typically they buy certain types of debt, with a lot of it in the bank loan space. In the "old" days of the last few years, banks would make loans to corporations and then sell them to CLOs and other institutions, making a spread on the loan and a profit on the servicing business. Some funds would typically leverage up somewhat and make a decent return.

Today, many highly rated loans are selling for 80 cents on the dollar. There is nothing wrong with the collateral or the corporation which owes the money; there is just no one with ready cash to buy the loans. I asked my friend why he doesn't buy them, since they offer very good returns.

My Dad used to tell me there is no accounting for standards when looking at something that seemed odd. Today, we have faulty standards for accounting that are ripping apart the fabric of the world's economy. How can a security that has a high probability of full repayment be downgraded from AA to junk levels? What we will explore today tell us a lot about why we are in the crisis state of affairs. Since I wrote you last Friday, the financial landscape of the world has changed even more. And what will happen this weekend will change it even more. And our kids will be paying for it for a long, long time. At the end I offer a few thoughts on the events, and if there is time my thoughts on the new short covering rules. All in all, it should make for an instructive and interesting letter. We'll jump right in with no "but first."

I was invited to an invitation only presentation to a room of chief executives of a number of small Texas banks made by Rich Berg of Performance Trust Capital Partners this week (http://ptcp.performancetrust.com). He graciously gave me permission to go over the main points of his presentation. I think you will find it eye-opening to say the least. You probably have seen Rich, as he is all over the media lately.

Let's jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let's quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.

This week's topic was inspired by a discussion I had with George Friedman of Stratfor fame last night. He was suggesting the recession would be short and steep, and I of course think it is going to be shallow and with a long, protracted, and slow Muddle Through recovery. And it all hinges on how the Fed thinks about inflation.

There is considerable angst in the press about inflation and recession conspiring to bring us to a repeat of the 1970s woes of stagflation. And the economic data can certainly be interpreted as warranting such concern. This week we look at several different definitions of inflation. How can the Fed (in the form of both Fed chairman Bernanke and governor Kohn giving quite dovish presentations) dismiss inflation? Aren't they supposed to make sure that prices are stable? Just look at their European counterparts who talk tough on inflation and then "walk their talk."

There are those who suggest the Fed should do the same. There is no easy answer, but I will try to lay out the conflicting concerns and explain why the Fed is going to cut and cut again, as I have been writing for months. Let's put on our thinking caps, gentle reader, as we delve into some arcane but very important lessons.

After a wild week in the markets, there is so much to write about, it is hard to know where to start. The headline number says jobless claims fell 20,000. That would be good news, if it were true. Sometimes you need to look behind the curtain to see how these statistics are made. As we will see, claims were actually up by 26,000. I wrote in my annual 2008 predictions that the big story of the year would turn out to be credit default swaps and counter-party risk. I will admit to thinking it would take more than a few weeks for that to happen. And the Senate is hampering the ability of the Fed to work, and doing so for blatant political purposes, in an effort to reduce the independence of the Fed. There is that and a lot more to cover in what should be an interesting letter.

But first, let me briefly mention my upcoming 5th annual Strategic Investing Conference (co-hosted with my US partners Altegris Investments). It will be April 10-12 in La Jolla, and is shaping up to be the best conference we have ever done. Paul McCulley, Louis Gave, Rob Arnott, George Friedman of Stratfor, and several more well-known names who I expect will commit this next week are on tap, as well as some of the smartest hedge fund managers I know. Find out how these guys are taking advantage of the volatility in what is clearly becoming a bear market, and what you can do to join them.

Although it frustrates me, we have to limit attendance to investors with a net worth of more than $2,000,000, for regulatory reasons. Invitations will be sent out soon. If you would like to go and have not signed up for my free accredited investor letter, you can go to www.accreditedinvestor.ws and sign up. One of my partners from around the world will contact you. (Again, for regulatory reasons we have to talk with every individual who plans to attend, as private offerings and hedge funds will be presented, and we have to make sure that the legal requirements for such presentations are met.)

"Of his bones are coral made:
Those are pearls that were his eyes:
Nothing of him that doth fade,
But doth suffer a sea change
Into something rich and strange"
(The Tempest - Shakespeare)

The term "sea change" has come to mean a profound transformation ever since Will Shakespeare used it in The Tempest. I think this week we witnessed a true sea change in central bank policy, on both sides of the Atlantic. The stock market rejoiced over a 50 basis point cut from the Fed, assuming that it will stimulate growth and avoid anything more than a slowdown. In this week's letter, we ponder several questions. Why did the Fed decide to cut now when the rhetoric of just a few weeks ago was that of inflation fighting? What do they see? Are more rate cuts coming? Will they make any difference? And who is Frederic (Rick) Mishkin and why is he maybe the most important Fed governor you haven't heard of? There's a lot of ground to cover, and it should make for an interesting letter.

But first, I need to acknowledge an anniversary of sorts. Some seven years ago I put this e-letter on the internet, with (maybe) 2,000 names to send it to. Today, it goes out every week to more than 1,000,000 readers and is posted on scores of web sites and blogs. I have to confess with being a little (well, a lot) amazed by it all. It has changed my business practice in ways that I could not imagine seven years ago, and all for the better. Someone asked me what I will do when I retire. I told them I would read, write, travel and speak, which is pretty much what I do now, along with a few extra duties here and there.

But it is a great life and I want to thank you for allowing me to come into your home or office, and for recommending this letter to friends, which is the way the readership has grown. And because I want to keep writing for a long time and I want to keep you as a reader, I am going to make available to you a speech on how we can all live longer by Dr. Mike Roizen, who wrote You - The Owner's Manual (and You - On a Diet , and the other monster best-sellers in the series). He also appears on Oprah about six times a year. I am lucky enough to call him both friend and my doctor.