"The U.S. outlook is all about the property market, which has been the wind beneath consumers' wings this decade." Paul McCulley, Managing Director, Pimco

The world seems to be breaking down into two camps: those who, like McCulley, think housing is critical to the growth of consumer spending and believe the housing market may be in for some rough weather, although the forecasts vary greatly from a mild frost to blizzard conditions. On the other side there are those who think the housing market is in fine shape, will not be in for anything more than somewhat less growth and the American consumer will figure out a way to continue to spend more than he makes.

"Central Bankers of the World, Unite!" That at least seems to be the theme from the central banker's playbook. The US Federal Reserve, The European Central Bank and now even the Bank of Japan all seem to be in a mood to tighten the global money supply. What does this mean? We explore that thought and look at the US saving rate (or lack thereof), foreclosure rates and more.

But first, I want to once again mention that I along with my partners Altegris Investments will be hosting our third annual Strategic Investment Conference in La Jolla, California next May 18-20. As usual, we have a powerhouse lineup of speakers. Martin Barnes of Bank Credit Analyst, Dennis Gartman, Richard Russell, Louis-Vincent Gave, Mark Finn and my personal (as well as someone called Oprah's) doctor Dr. Michael Roizen (who wrote the RealAge series of books and the recent blockbuster bestseller You - The Owner's Manual). With this lineup you can expect not only solid information and some fun, but some very serious debates. One of my rules in designing a conference is to get speakers who are going to help make me a better investor and analyst. I think we have done that and more this year.

This week we will look at a few very interesting items that did not make it into last week's forecast, as that letter was already overly long. Bernanke's arrival, the importance of the housing market to the economy, the length of the recent rally and a note from good friend James Montier on why it both pays, and is painful, to be a contrarian. I include a quick note to some of my fellow brokers at the end of the letter along with a few places to visit on the web for fun. I think we will find a few tidbits to enlighten us.

But first, I must issue a correction and an apology to Elaine Garzarelli. Business Week showed her as the most bullish of forecasters, predicting the Dow to go to 14,000. In an attempt at humor, I asked her what she was smoking? She wrote me a very polite note, saying that she does not normally forecast the Dow and the Nasdaq. "Based on the S&P 500 forecast my staff took the percentage change forecast for the S&P and applied it to the Dow for the Business Week article. I was in Europe." And she noted in a hand-written comment, "I unfortunately do not smoke or drink."

Once again it's time for me to demonstrate the foolhardy part of my nature by putting to electronic pen my forecast for 2006. I spend more research time on this one letter than on any four or five combined, simply reading hundreds of pages of research, looking at mountains of data all in an effort to try and catch the gist of the markets. It is a daunting task, but one to which I actually look forward, as it challenges the mind like few other endeavors.

If I go into as much detail as I usually do on each topic, there is the potential for this e-letter to be much too long. Therefore I will try and take the larger picture, make specific and shorter predictions and save the details and the arguments for later issues. Let's begin by quickly reviewing how we did last year.

"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand now, it is more likely than not that it will be a financial crisis rather than a policy foresight that will force change." - Paul Volker

How long can the United States continue with an ever rising trade deficit? How far can debt rise? Will it end, as Paul Volker, former Chairman of the Fed stated above, in a financial crisis? Will it end as a soft depression as Bill Bonner suggests or is it different this time as the team at GaveKal project.

"Our analysis leads us to believe that recovery is only sound if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own." -- Joseph Schumpeter

How do we interpret the words of Schumpeter? Is the Austrian School of Economics right? Should the Federal Reserve have allowed the US (and thus the world) to go into a deep recession in 2001-02? Did we just postpone a Day of Reckoning only to have one in the future which will be even worse? What about gold? We look at these questions and more as we continue looking at the "debate" between the gentleman from GaveKal and Bill Bonner and Addison Wiggin.

What is the relationship between housing prices and stock market forecasting? What will happen if the housing market begins to falter? Exactly what did Greenspan say about housing at Jackson Hole? We explore these topics and a whole lot more and hopefully we can tie them all together by the end of this letter as we meditate on the potential risk of the recent housing boom.

Let's start with forecasting. Every few weeks I get a wonderful letter from good friend James Montier, who is the global equity strategist of Dresdner Kleinwort Wasserstein. James is an expert on behavioral psychology and investing. This week's letter is lamenting the rather poor track record of forecasting by economists and analysts.

Looking at a recent magazine covers one is left with the impression that the whole world is concerned about US real estate prices. This is borne out by the fact that if you go to Google and type in sex you get 78,000,000 hits. If you type in real estate you get 110,000,000 hits, which makes housing about 40% more interesting than sex. Is there a greater sign of a bubble? But if you type in housing bubble you get "only" 1,120,000, so there is not much worrying going on. While the above facts do not constitute a scientifically valid study, they make a fun launching point for this week's letter. Are we in fact in a housing bubble? How long will prices continue to go up? Will they start to fall, or even crash, and when? We explore all this and more.

Today we take a final look at the housing market. Are we in a bubble or is it merely a period of overheated prices which will cool off? Is it the right time to buy (or sell) a home? If there is a bubble, how would we spot it?

A little full disclosure. Thinking about the housing markets for the past few weeks has been somewhat more than an academic exercise. I sold my last home a little more than four years ago, for family reasons unrelated to valuations or markets (time to downsize). I decided to lease for a time. My thought was to wait until a recession created a drop in values in the type of homes I wanted, and accompanied with low rates, would buy that perfect home. We would get the deal of the century. I persuaded my wife to go along with such an idea.

This week we once again look at the US housing market. We explore what may be the prime contributor to spiraling home prices. (I bet this once catches 95% of you by surprise, but in hindsight, you will all nod and think to yourself that is what you suspected all along, just as I did.) We look at the relationship between income and housing prices, and even find a new ratio to suggest when it is a good time to buy homes. It will make for interesting reading.

But before we delve too deep into the data, indulge me for a [very] brief commercial. I was happy to learn a few weeks ago that my book, Bull's Eye Investing, remained for the second month on the New York Times Business Best Sellers List, moving up to #9. The new rankings for June will be out soon, and I hope we keep the momentum. One reader, A Keith Murphy from New Jersey, recently wrote on Amazon.com: