The economy seems to be slowing. Will this be a mid-cycle slowdown as it has been the last two decades or will it evolve into a recession? In either event, does it presage a bear market in equities? Or is this just another oversold buying opportunity, a gift courtesy of panic selling because of the Israeli-Lebanon situation? If you follow the markets with any sense of history, we do in fact live in interesting times.

But before we jump into our main topics, let's turn our eyes to Israel and Lebanon.

This week's events have made it clear why as investors you need to be able to get a handle on world events. My single best source for commentary on geopolitics is George Friedman and Stratfor.com. ABC News recently said they are able to predict world-changing events in ways that no one else can. They are consistently ahead of the curve with their thoughtful analysis of events all over the world. I caught up with George this afternoon and discussed the situation with him.

This week we look at a very intriguing new book by good friend Andy Kessler called The End of Medicine , subtitled "How Silicon Valley (and Naked Mice) Will Reboot Your Doctor." As long-time readers know, Andy ran a high-tech hedge fund which went from $100 million to a $1 billion and got out more or less at the top with his client's money (and his) intact. Since then he has written a series of very fun books on the inside world of investing, all of which are on my recommended list.

But with The End of Medicine he turns his eye to trying to find the next new thing which will drive the markets, or at least a segment of them, to new highs. This is a very well-written story in Andy's sarcastic, witty, and easy-to-read style, but the message is also one of how fast the world of medicine is going to change in the next ten years. The changes are happening in labs and fabs all over the world, but under the radar screen of almost everyone. This is a story that we can analyze from two angles. First, there is the investment aspect to it. There is going to be a 1990s tech-size run in our future. Finding the right ways to play it will be as difficult and interesting, not to mention rewarding, as the last big tech run.

Secondly, this is going to dramatically change the way we approach our personal health care. In many ways, this is going to be a more profound, intensely personal change in lifestyle than anything the tech world has given us. Before we explore some of the implications, let's look at exactly what Andy has found. (You can get The End of Medicine at www.amazon.com.)

Thursday saw a powerful response by the markets in stocks, bonds, commodities, and currencies to the communique from the Fed after its recent two-day meetings. Clearly, some were interpreting the communique to mean that the Fed had finally come to an end of its interest-rate-hiking ways. The immediate spin was quite "dovish" in terms of future rate hikes and concern about inflation.

That has become a pattern in the last year. The Fed releases its minutes, the immediate spin is that we are ready for a "pause," and the market rallies. Then we start to listen to the speeches from Bernanke and various Fed governors and are shocked - shocked, I tell you - that nothing has really changed and they intend to keep on raising rates in a measured manner.

But is yesterday something different? Can we see a glimmer of hope that the Fed is ready to pause? Is that the way to interpret the mere three paragraphs of content? As a surprise to no one, I take a contrarian view, just as I did with the May release. So, this week we parse the Fed release, take a look at the yield curve, and glance over our shoulder at Japan. Maybe it will give us a clue as to whether this week was a sucker's rally or the beginning of a bull run.

This week we will venture into the always hazardous area of making my semi-annual forecast. I make some non-consensus projections as to the economic climate for the next six months, and of course look at Fed policy. We will also quickly review my beginning of the year (2006) forecast and see what changes should be made. I also point you to a solid resource on gold and gold stocks at the end of the letter. It will be a very interesting letter, I think.

But first, a quick note on today's reversal by the District of Columbia Court of Appeals on the SEC requirement for hedge funds to register. If you read the brief 19 page ruling, it is clear that the Court did not buy into the argument of the SEC about the meaning of the word client, which was the legal basis for the SEC to require hedge funds to register. While I am neither a lawyer nor the son of a lawyer, it appears to me that they did not offer any other suggestions for the SEC to take another tack in their effort to regulate hedge funds. It will be interesting to see if the SEC tries to appeal what the court felt was such a clear cut case.

Is the Fed right to be worried about inflation, or is that so last quarter? What do musty old academic papers suggest about Fed policy? And can we translate that into something that gives us a clue as to why markets around the world are in seeming lockstep on their way to the exits? (Quick, guess which market has done the best in the last month. No peeking!) Whatever happened to the diversification of our portfolios? This week we look at a wide range of topics trying to get some insights into where the markets are headed this summer.

First, let's look at the world equity markets. I had my new assistant, Micah Davis, do a search for how the world equity markets have done this year from their recent peaks. All in all, we looked at 64 markets. I assumed we would have at least a few up markets. There always seems to be some market somewhere that can buck a downtrend.

Interestingly, all 64 markets are off their recent highs. Two-thirds of world markets are down 10% or more, with Middle Eastern markets in free fall for the past few months. Indeed, they seem to have been a warning sign of trouble, as they have led the way down.

The Fed tells us that whether or not they continue to hike short-term rates is now dependent upon the data. Since that has always been the case (I mean, has there ever been a time when they ignored the data?), what they are really saying is "We are not really sure what we are going to do at the next meeting, so we will look at the recent data and make up our minds at that point."

I actually find that rather hopeful. In the past, it has been typical for the Fed to just keep raising rates until the economy is on the way to or already in a recession or a serious slowdown. Since the economy has been doing just fine of late and, as we will discuss later, inflation is running high enough to make a Fed governor uncomfortable, then past performance would indicate that they would continue on their rate-hiking mission.

It takes 12-18 months for interest rate hikes to actually have an effect on the economy. Thus, there is a considerable amount of lag time between Federal Reserve interest rate actions and the results being seen in the economy. So, not only will the Fed be looking at current data, which reflects actions taken over a year ago, but they will be analyzing forward-looking projections as well.

This week the US Federal Reserve raised interest rates once again, for the 15th straight time. As everyone knows by now, the press release at the end of the meeting suggests that they will raise rates at the next meeting. But after that? Like children in the back seat of the car on a long trip, the markets keep asking "Are we there yet?" We look at that answer and more as we ponder what goes on in a central banker's mind.

First, let's look at the actual FOMC statement. I think, given the background we will discuss in this week's letter, there are nuances that we can find which will give us a few clues as to future Fed policy. I step out on a limb here, or maybe it is better to stay I remain far out on the limb where I perched myself two years ago. It should make for an interesting letter.

When the Fed statement is released, I typically get a copy within a short time and read it to see if anything is really new or different. Then I put it aside, knowing that early the next morning, Art Cashin, head floor trader for UBS and de facto sheriff at the NYSE (you see him on CNBC every day on Ron Insana's show) will send me a word by word analysis of the Fed statement as compared to the most recent past statement.

"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.