How has another year come and gone so quickly? It seems like someone hit the fast forward button. And once again, all too soon, it is time for me to demonstrate my masochistic nature and write a forecast issue. Rather than going into details on every topic, I will try and stick to the big picture and leave the fine points for later letters.

Each year as I do this forecast, I look for a theme. What will be the driving factor which will set the stage for the economy? In 2001 it was the coming recession; in 2002 it was a weak recovery and the beginning of the Muddle Through Economy; in 2003 it was Surprise and Transition. In 2004 it was the Silver Lining Economy; in 2005 it was the See-Saw Economy. Last year it was The Gripping Hand, as Bernanke had the economy in his interest rate gripping hand. Who knew in January 2006 how far he would go? For masochists, you can go the archives at www.2000wave.com and read those forecasts.

This year the theme is The Goldilocks Recession. As outlined in the past few months, I think the US will have a mild recession or slowdown in 2007. That premise leads to a lot of other follow-on forecasts. Why the theme? Remember that after finding things were just right, Goldilocks ended running out of the house when the bears came home. And I think the housing bear will finally come home in 2007.

The stock market liked both the retail sales and the inflation numbers that were released over the last two days, with the Dow posting successive all-time highs. This week we look behind the headlines and a little deeper into those numbers to see if there is some justification for the exuberance, as well as offer some thoughts on valuation and the recent meeting of the Fed. And I know it will shock you that once again there is a change in the way the government collects its data. It should make for an interesting letter, so let's jump in.

It is getting lonelier to be in the bearish camp. I noted this morning on CNBC that Mark Haines introduced good friend David Kotok of Cumberland Advisors as a former perma-bear. Last summer, David invited me to his rather famous Shadow Fed fishing weekend in Maine, where economists, as well as money managers, some press, and the occasional official figures get together to fish, eat, drink, and talk economics. A very eclectic group by any standard. I took my 12-year-old son Trey and we had a blast. In fact, I was instructed by Trey as we left to be nice to David so we could get invited again.

I had occasion to be in my car this morning, listening to CNBC, when the host of the show (Bob Pisani, a very nice gentleman on the few occasions I have had the opportunity to meet him) was arguing with a modestly bearish guest. Yes, there are a lot of reasons for concern noted by bears, but the market is clearly disagreeing with their pessimistic views. Stock indices are hitting cycle highs and seem poised to go higher. He and many other optimists seem to be of the opinion that since the market is going up, it is telling us that the economy is ready to find a Goldilocks "Ahhh, this porridge is just right!" soft spot on which to land.

However, as I remember it, the end of the Goldilocks fairy tale is not so sanguine. The final lines are "Just then, Goldilocks woke up and saw the three bears. She screamed, 'Help!' And she jumped up and ran out of the room. Goldilocks ran down the stairs, opened the door, and ran away into the forest. And she never returned to the home of the three bears."

But Bob makes a good point, which should give us pause. How does one argue with Mr. Market? Shouldn't the collective wisdom of hundreds of millions of investors give us reason for concern when they clearly disagree with our own modest insights? Fighting the trend is never a good way to stay alive in today's markets.

The markets have closed up for five straight days. So much for my concern that either the economy might be slowing down or that if the economy does not slow down inflation will be a problem forcing the Fed to take action later this fall. Clearly, the majority of investors think we are in a Goldilocks scenario. In fact, Ed Yardeni uses that term in an interview with Mark Gongloff at the Wall Street Journal Online . Mark then contrasts my views with Ed's in an excellent piece called "Soft Landing: Many See a Goldilocks Market, While Others See Stagflation Light."

That interview will be the basis for this week's letter, as it serves to contrast the tension between those who see the markets rising to new heights and those like myself who see problems. I am in the smaller group, at least for now.

But first, there is an interesting pattern developing in the markets, called a "W" formation. While I normally do not talk about technical charts and patterns in this letter, I think this bears (pardon the pun) looking at. This is from good friend Bill King in his daily King Report :

This week I write from Grand Lake Stream in Maine. It has been a long time since I have taken a week off from writing, but I think this is the week to do it. But that means, gentle reader, that you get an upgrade in quality, as my friends (thanks, Louis!) at GaveKal have graciously permitted me to use one of their most recent newsletters, where they talk about the recent inflation numbers, survey the markets in Japan and discuss Chinese growth and taxes. It is an interesting letter, and I trust you will enjoy it. I will return next week. You can find out more about GaveKal at www.gavekal.com.

Authors: Louis-Vincent Gave, Arthur Kroeber,
Anatole Kaletsky, Pierre Gave

Which is the greater risk: inflation or recession? The markets may be struggling for an answer, but Ben Bernanke has made up his mind: he isn't worried about either!