Thoughts from the Frontline

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.

This week we have seen a lot of conflicting stories on the economy: worries about an oil shock leading to a double dip recession and more deflation, a surprise increase in the Producer Price Index but only a slight increase in the Consumer Price Index. Unemployment claims went up, while retail sales were down while the Wall Street Journal says they went up. We examine what these could all mean this year, as my Muddle Through scenario faces some stiff winds. We also look at the long term implications of a recent study on healthcare costs in the US. For my large and growing international readership, this has implications for you as well.

Sometimes it is the small things that lead to big changes. Today we briefly look at one paragraph in Greenspan's latest speech, then move on to Europe and Iraq. I want to suggest some small things that could lead to changes in global politics and the world economy just as significant as the fall of the Berlin Wall. My theme for 2003 was Surprise and Transition." I think we are getting ready for our first true surprise. Again, there is a lot to go over, so let's get started.

Today I discuss one of the most dangerous threats to your retirement and then we listen to a few seasoned pros tell us why the market is not going up. It should make for an interesting session, so let's get started. I got the following email from a reader yesterday which so upset me I decided to make it the lead for this week's letter. Quote:

This week I had the pleasure of talking with Nobel Prize economist Dr. Harry Markowitz. We discuss that conversation, and how it ties in with my continued unease with deflation, Paul McCulley's recent essay, the lack of candor from the Federal Reserve, the implications of the dollar bear market, Iraq and more. It will make for a fast-paced e-letter this week, so let's jump right in. Markowitz received his Nobel prize for a 1952 essay which marked the beginning of Modern Portfolio Theory. Very simplistically, he said you can reduce the overall volatility of your portfolio by diversifying your investments among a group of non-correlating asset classes. When one asset class (such as stocks) was going down, your diversification into bonds and real estate would help hold the value of your portfolio steady.

How, more than a few readers ask, can the economy continue to Muddle Through if I am right about the market eventually dropping another 40% before we get to the end of the secular bear market cycle? Won't such a massive destruction of wealth mean a depression? We look at that question, some thoughts on earnings, the world and a whole lot more this week.

No sooner is my Muddle Through 2003 forecast out, than we get a barrage of data which gives cause for concern. Can we still Muddle Through with an increase in taxes (you read that right!), higher oil prices, more medical costs, and a slowing world economy? Is the Fed actually winning the War Against Deflation? We look at all that today, plus I answer a few critics of my forecast.

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.

This week we are in for a very special edition of the Millennium Wave Online. I have persuaded my good friend Bill Bonner of Daily Reckoning fame to give us a special preview of his new book "The Soft Depression of the 21st Century: How to Survive the Crisis of Degenerate, Mass Capitalism," (working title) due out in September. In it, he and fellow Daily Reckoneer Addison Wiggin, argue that popular democracy, aging populations and bad economic theories doom the US and other Western economies to follow the Japanese model, with recession, bear markets and failing consumer spending over the next 10 to 15 years. (Heavy stuff, I know... )

"The ability to see that some things cannot be foreseen is a very necessary quality." -- Jean Jacque Rousseau. It's the season when so many analysts participate in a group masochistic ritual: the annual yearly predictions. Like lemmings, they rush to the edge and leap. That they are so often wrong does not seem to deter them from making the same mistake the next year. And there they differ from lemmings, in that they live to repeat the act every year.

As we come to the close of the year, my Christmas gift to you is an analysis of some very interesting research on the connection between demographics and the stock market. It falls in line with much of our recent investigations, and adds a further piece to the puzzle as to where the eventual bottom of the stock market lies and when we might get there. For most investors, knowing where the stock market is going and when it will get there might be useful. Then I show you how you can get involved in the War on Terror from the comfort of your living room, while saving lives and helping the good guys.

Today we explore the very interesting differences between what the Fed told us about its last interest rate cut and what they actually said in the meeting. Then we look at my analysis of how Japan can have deflation when the money supply grows 21%, which will annoy the gold bugs among my readership. Then we look at why gold is really going up, and why it will continue to do so, which will make gold bugs happy. All that and more, as along the way we look at why it is so hard to predict anything with any sense of confidence.