The unemployment numbers came in today, and if you look under the hood of the data, it is worse than the headline loss of 4,000 jobs. Should the Fed cut the interest rates in two weeks? Will it make a difference? Are we headed into recession (as predicted here in my January 2007 forecast issue)? When do we see a bottom in the housing market? Are we there yet? We look at all this and more. It should make for an interesting letter, if I can get my jet-lagged body to cooperate.

But first (and quickly) let me mention that I will be at the venerable New Orleans Investment Conference October 21-25. This is the grand-daddie of all investment conferences and features some of the top investment analyst and minds in the country. Among the many speakers are James Grant, Ann Coulter, Lawrence Lindsey, and good friends Marc Faber, Dennis Gartman, Doug Casey. Click on the link and then click on faculty to see what is one of the highest quality gatherings of top-notch speakers at any conference anywhere. You should check it out, especially if you have an interest in gold and natural resources, as some of the top investment analysts in that area are always there. If you are there make sure and look me up.

And quickly, speaking of gold, it is soaring. It closed at over $700 today, in partial reaction to the awful employment numbers, which was not good for the dollar. But there is another interesting story going on in the background, pointed out to me earlier this week by that South African gold maven Prieur du Plessis. He points out there is a massive build-up of call options in the October and December Comex gold contracts, similar to a period in November 2005 prior to the gold price surging by more than 50%. Smart money? Maybe. But the recent 6% move or so may not be all there is in the "barbarous relic."

With the economy increasingly looking like it will slow down materially in the last half of the year, there is a drum beat for the Federal Reserve to cut rates. But how likely is a rate cut this year? We take a very different look at inflation to see if there is any room for the Fed to give a boost to the economy. We look over our shoulder at Japan and the yen carry trade and ask a heretical question: does the Fed cutting rates make any difference?

Last Monday, I used an excellent piece by friend and money manager John Hussman for my Outside the Box. Buried at the end in the piece was a throwaway line that really intrigued me and spurred some research:

"If you look carefully at the CPI figures (and tinker with the monthly numbers), you'll also discover that even if the figures average a 2% annual rate in the months ahead, the year-over-year headline CPI inflation rate will be pushing 4% by November. This is already 'baked in the cake.' Since Bernanke is clearly concerned with the inflation expectations of the public, as well as the Fed's credibility, that headline CPI figure may create some complications for cutting rates in the months ahead, unless resource utilization falls out of bed."

Is the subprime mortgage market collapsing before our eyes, or did we avoid a disaster as Bear Stearns stepped up to the plate with $3.2 billion to help its ailing funds? As we will see from the data, the problems in the subprime world are not over. The Fat Lady has not sung. But will the problems in this market contaminate the rest of the liquidity-driven markets? Is the party over? Not according to the high-yield markets. In this week's letter, we look at what could be the real problem in the next half of the year.

But before we touch on the credit world, I want to briefly look at a development in the oil markets which I find intriguing. Dr. Woody Brock, in a recent paper on oil prices, wrote a rather interesting sentence, to wit, that Iran would not have net oil to export in 2014. I found that rather remarkable. Woody is very serious and sober-minded even for an economist, not given to rash analysis, but this was certainly a new idea to me. I knew they were importing most of their gasoline, as they do not have a great deal of refining capacity. As it turns out, there is much more to the story.

I have said for years that I expect Iran to be the new friend of the US sometime next decade, as the regime is not popular and the country is growing younger. (Think China, once an implacable enemy.) I thought that the impetus would be the lack of freedom and knowledge of how the world is better off coming from the internet, but it turns out that it may be a desire for more freedom combined with economic problems which help bring about regime change, much as in Russia last century.

This week we look at the US mortgage market to see what fallout there is from the subprime mortgage woes. It is both less of a problem and/or more of a problem, depending on your perspective, as I predicted it would be last year. Score one for your analyst, which said score is needed as the stock market continues to rise in spite of my concerns in the face of a slowing economy.

This will be part of a speech I give next Thursday in Edinburgh, Scotland at the Credit Development Academy. While it will print out long, there are a large number of charts and graphs, so it is not as long as it appears. We also look at the recent move by China to enter the private equity world, and show that this is just the tip of the iceberg, while pondering how to interpret the recent housing data. There should be something of interest for everyone.

Clowns to the left of me,
Jokers to the right, here I am
Stuck in the middle with you!
- Stealers Wheel, 1974

The recent data on the economy is stronger than was expected. Does this mean that the slowdown we have seen for the past few quarters is behind us? Other data suggests the economy is weakening (witness the very slow 1.3% GDP growth last quarter). This week we look at the seeming disconnect in the data, briefly examine where the real stock market booms are happening, and re-visit the housing markets. It's a lot for what will be a quick letter (and lots of charts), as I am trying to leave town, so let's jump right in.

(And yes, I was supposed to finish a letter I started two weeks ago on black swans, but a technicality is holding up that letter. It will be resolved next week.)

This week we look at the growing disconnect between the US economy and the stock markets. One is slowing and the other is exploding to the upside. One of my mentors once said that it is the duty of the markets to prove the most-possible people wrong. So far, I am clearly in the wrong category. We will look at some explanations as to why, ponder if this can continue, and more. (I will conclude the letter I promised last week in next week's letter. There were still a few details I needed to get it ready.)

But first, a quick note. My daughter and associate Tiffani has prepared a photo tour of my recent trip to South Africa and put it on our website. You can click on the following link and see it, as well as find a link to the e-letter about my thoughts on South Africa. (If you do not have a cookie in your computer, you will get our landing page. Simply put in your email address and then either click the link again or hit the link to "Other Material by John" on the upper left-hand side of the page.) http://www.frontlinethoughts.com/africa.asp

This weekend I am in La Jolla at good friend Rob Arnott's conference. Princeton Professor Burton Malkiel, of Random Walk fame, will be one of the luminaries at the annual Research Affiliates Advisory Panel. So, with that thought in mind, this week we take a seemingly random walk through the data to see if we can discern a trend. How much debt does it take to grow GDP? You probably missed it, but the Bureau of Labor Statistics gives us data that contradicts the recent labor numbers. Why is consumer sentiment so moribund? And that recession I predicted for 2007? I have a few thoughts on that as well. It should make for an interesting letter with a lot of great charts and graphs.

But first, let's deal with something far more serious than the economy, and that is the terrible situation in Darfur, where government sanctioned violence and murder is literally meaning that hundreds of thousands are starving to death.

The conflict in Darfur, a region of Sudan located in the north eastern part of Africa, has been rising for the past 3 years. It is estimated that 450,000 civilians, (men, women and children) have been killed and approximately 2 million people who fled the fighting are now displaced, homeless, starving, and still being persecuted. Many are living in refugee camps but as the violence escalates and the camps are being attacked, aid workers are being evacuated leaving the people of Darfur with no where to go.... and NO hope of survival.

At the risk of being all subprime, all the time, this week we look at what I think are the real risks for the economy as a result of the subprime debacle. How can one side say it is a contained risk (and in one sense it is) and not a problem for the economy while another side says it will drag the US into a recession and thus be a drag on the world economy? The answers will give us a handle on the whole issue, as we look at how the problem developed.

But first, let me correct an error. Last Monday in my Outside the Box, we used a brilliant piece of work from Dr. Woody Brock on why we need more derivatives and that the real problem in the derivatives market is not the size of the market. If you did not read it, you should. You can read it at www.2000wave.com/otb.asp?otbid=490. I forgot to mention Woody's website, which is www.SEDinc.com. There is a lot of useful thinking there as sample material. I serve on an advisory board for an investment firm in Europe with Woody and have gotten to know his work through them. His research is some of the more cutting-edge and thoughtful that I read, and I encourage my institutional and larger-firm readers to look at his work. I think you will be glad you did.

Woody will be just one of the speakers at my Strategic Investment Conference in La Jolla next month (April 19-21), and he is as entertaining as he is insightful. I am also very excited to announce that Paul McCulley of Pimco fame has said he can attend. Paul is simply one of the best speakers on the economy anywhere. That gives us what I think is one of the strongest line-ups of speakers at any conference in the country this year.

This week we look at the yen carry trade, delve deeper into the mortgage lending world, and see if we can find a possible connection between them and the economy in general through something called complexity theory. As I have written for many months, I think the subprime mortgage problems are going to be the catalyst for a recession. We look at some ways that the contagion in this small part of the housing market could spread.

Bubbles have consequences far beyond their causes when they burst. That is because they encourage irrational behavior and expectations not just in the asset that is rising in price, but in surrounding areas. As an example, remember the internet bubble? There were 350 internet stocks at the end of 1999, comprising a mere 6% of the market cap of total US equities. But the NASDAQ dropped by over 70%. The damage was not confined to just internet stocks.

The massive build-out by the internet and telecom companies produced monster sales at technology suppliers all up and down the food chain. The rise in tech stock values created a mindset that infected all stocks, giving us the highest P/E ratios in history. It was a new era, we were told. And the internet in fact has ushered in a new era in the way many of us work and live. But that new era has to live in real-world valuations.

This week we look at the recent upspike in volatility, see if we can connect some dots with the recent slew of earnings downgrades and the problems in the subprime mortgage world, and follow the money as risk is being taken off the table. I don't "buy" the China problem, but there may be an Asian connection. Let's try and keep it simple as we try and see what's behind curtain #3 labeled "Which direction is the stock market headed?"

But first, if you have not signed up for my Strategic Investment Conference in La Jolla, California, April 19-21, this week's market action is a perfect reason why you should. Want to get the real lowdown on China? Come listen to one of the premier Asian investment experts, Louis-Vincent Gave, give us his on-the-ground view of Asia. Dr. Woody Brock, a regular at Davos (with a bio that is MOST impressive - I sit on a fund advisory board with him and I am excited about him coming to the conference, as those who attend will be!) will explain derivatives and a whole lot more. Dennis Gartman will give us the view inside the head of a trader. And then there's Richard Russell's take on the markets, Rob Arnott (one of the smartest investment minds in the world, in my opinion), as well as Dr. Mike Roizen (You, The Owner's Manual ) telling us all how to live longer. And your humble analyst will add his two cents. Right now, I am working on research and a new presentation on risk.

Because of regulations, the conference is sadly limited to those with $2,000,000 in investable assets. The conference is by invitation only, and we are required to verify each attendee's financial situation and suitability prior to their coming to the conference. I wish it were different, but we are very serious about playing by the rules. There will be a select number of hedge funds and commodity funds making presentations and available for questions throughout the conference, so you will have an unprecedented chance to learn about what the press calls the "secretive" world of hedge funds.