I start this week's letter somewhere over Kansas on the way to Lake Louise outside of Calgary, Canada. I have been giving a great deal of thought to a speech I will do tomorrow and have decided to make the speech the subject of this week's letter. I have been given no particular topic other then to talk about something that I find of interest, but to keep it to 40 minutes and 20 minutes for questions.

Today's letter may be one of the more controversial, or at least debatable, letters I have written in some time. I take a very out of consensus position on interest rates. As promised last week, we deal with the question, "What ever happened to the Muddle Through Economy with the GDP is growing at 7.2%?" Is it time to abandon the concept? I think this week I will leave you a few things to think about, so let's get started.

First, let us recall Keynes' bon mot when asked about why he changed a previously stated position, he replied "Sir, the facts have changed, and when the facts change, I change. What do you do sir?"

How can I talk about a mere Muddle Through Economy when manufacturing is rising, the Phillie Fed Index skyrockets, housing and new home construction is on fire, economists are predicting a healthy 3.5%+ GDP next quarter, unemployment claims dropped, the stimulus from tax cuts and mortgage refinancing is just now kicking in, business confidence indicators are rising, The Index of Leading Economic Indicators has risen for the 4th straight month, the dollar is rising and the stock market is predicting a healthy future, etc., etc.?

I promised in my January 2003 forecast I would re-visit my predictions, giving you a mid-year update. Faster than I can believe, that time is upon us. Once again I dare to venture where wiser minds will not trod: into the territory of economic predictions.

This week we will visit one of my main themes for the last two years: the Muddle Through Economy. This is a summary (and first draft) chapter on the topic from my book-in-progress. I also, with a great deal of trepidation, set out my thoughts on the US economy for the rest of the decade. Making predictions is a scary thing.

(To those who sent in book title suggestions, we are slowly sifting through the almost 1,000 book titles that were submitted. In a few weeks, I will narrow them down to three and let you decide which is the best.)

In most issues of this weekly letter, I spend our time together looking at specific trees and various flora, commenting upon how they affect the overall economic forest. Today, it is time to drop back and look at the forest as a whole, given that we may be on the precipice of events that could change the very character of the forest in which we live.

I am going to do so as a way to frame what I think of as the rationale for my economic world-view. I believe we are in a Muddle Through Economy for a long period of time, and probably the rest of the decade. I have had more than a little criticism of this belief, on scores of websites and in letters from readers, either from those who would suggest that it is Doom and Gloom, or from those who think it naively Pollyanna. I prefer to think of it as neither of the poles, but as a more straightforward and realistic assessment of our future. It is lonely in the Muddle Through middle, and I enjoy the few who share the space with me.

We cover the globe, currencies, the US economy, bonds, stocks, deflation, inflation, gold, oil and more!

For the last three years, making annual predictions has been relatively easy, at least as compared to this year. You try to discern the dominant theme for the year and then everything else usually flows from there. In 2000, it was an over-valued stock market. In August of 2000, the interest rate yield curve went negative, and as I wrote at length at the time, Federal Reserve studies (among others) showed that a recession always followed a negative curve by about 12 months. I saw no reason for that not to be the case this time. I suggested strongly to readers that the safe move was to get out of the stock market entirely at that time.

Today we are going to look at the world economy, muse on why the dollar is holding its own and when and why it will drop. Then I make a few comments on the current stock market rally. Finally, in a departure from the normal letter, I am going to close the regular e-letter, but add a PS in the form of an essay on the risk of derivatives for those who find the subject interesting.

The US Muddles Through

The world economy is clearly not healthy. Let's look at the US, and then we will go around the world. The US economy grew at 3.1% for the last quarter, which ahs been loudly trumpeted by the cheerleaders on Wall Street. But digging down into the details, we find that if you take out the explosive growth in automobile sales caused by 0% financing, the growth was only 1.5%. The predictions are for a weak holiday buying season. Car sales are now down. Housing was down 11.4% in October, capacity utilization is almost back down to recession lows and the trade deficit widens. Retail store sales are slightly down.

Today we return to our assigned task of trying to find some patterns in the data to help us determine the direction of the economy and the markets. There are lots of bread crumbs on this trail, so let's see what conclusions they lead us to.

First, the evidence mounts that we are still in what I call the Muddle Through Economy - a slow growth, no-new-jobs type of recovery that seems to be alternately teasing us with potential for growth and frustrating us with weakness. Weakness is winning.

September is the month set into my personal rhythms, and that of my generation, as a time to reflect upon the past and look to the future. The first week of school was always a time for review and to get a sense of what we would be looking forward to in the new school year. Even though school has been in session for several weeks, to those of us who went to school in the 50's and 60's, it does not feel right until after Labor Day.

With that cycle in mind, it seems that we should briefly look at the broad investment themes that have been so much a part of this letter, and speculate as to their future usefulness. That will give us a launching pad to look at some very disconcerting economic news from around the globe, and see how it all fits into our personal investment portfolios. Pay attention, class. There will be a test.