Thoughts from the Frontline

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.?

This week we further explore the variation in economic forecasts and then finish with Part Three of "How the World Really Works" from my friend, Art Cashin. Many thanks to him for allowing me to use his work so that I could get a little R&R this summer. Next week it is back to the heat of Texas and full weekly letters. I can't say enough nice things about Nova Scotia, but I will write some more about it later. This will not be the last summer I spend considerable time there. Yet, alas, I did leave this morning and am now on a flight from Boston to San Francisco. I downloaded numerous articles to read as fodder for this week's shortened commentary. I only had to go through the first two articles to get more than I needed.

What can we make of the huge variations in economic predictions by quite reasonable analysts? I briefly touch on the topic from my perch in Halifax where I am cool, if not calm or collected. We then go on to Part Two of Art Cashin's excellent essay on how the world of economics really works. For the last few days, I have been catching up with the reports which accumulated in my email inbox while I was in Cape Breton with my bride. I have been struck by the veritable chasm between analysts for whom I have a great deal of respect. I am not talking about market cheerleaders or professional bears, but those who simply try to sort out the ying and yang of the economy, with no axe to grind. There are those who see the economy recovering sharply and those who are clearly worried about future prospects. In a conversation with Dennis Gartman, no slouch himself at the forecasting game, I told him I could not remember a time when competent analysts disagreed so much.

This week as I am in Nova Scotia, where my bride "suggests" I will be far removed from any internet access, I am pleased that my friend Art Cashin is allowing me to reproduce a series he has been writing about in his privately circulated "Morning Comments" that I think you will thoroughly enjoy. Art's thesis, and I agree, is that we may be at a very important "tipping point" in the global economy. To help his readers understand why that may be, he has written an essay explaining how banking, money, central banking, interest rates and other factors "fit together." He has done a very good job of explaining this complex subject in simple terms. For those of you who already understand all these details, you will now have some simple ways to explain them to your friends or give to your kids. For the rest of us, it is nice to be able to see how the puzzle pieces fit.

This week we review what I learned on my trip to Geneva; we look at a way to invest in the Chinese Renminbi; I offer some thoughts on master strategist Paul McCulley latest essay; I ponder the implications of Bill Bonner's soon to be released best-seller; and, I get more concerned (and vocal) about Greenspan and Fed policy. It should make for a thought-provoking and interesting letter.

This week we look at what Greenspan really said and what he didn't say; the real reason why the bond market reacted so violently (not what the headlines would lead us to believe); what History tells us about the volatility of the bond markets and what we can expect in the future. It should make for a lively letter, as I wrap up the week early to catch a plane to Paris. Stay with me, as this letter is going to give you some real insight into the bond markets, a "secret" called the "6/50 Rule," which will help you as you ponder interest rates and your investment future. Let's jump right in.

Is this a critical time in the bond market or are we simply back to where we were a few months ago before the recent madness? If it was temporary insanity, what caused it? Why is the dollar rising? Why have the Japanese sold more foreign bonds in the past few weeks than in the past few years? Who is buying those bonds? If the money supply is growing at breath-taking rates, why is gold languishing? If the economic data is so dismal then why are stocks rising, setting higher highs with each run-up?

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 the Fed cut rates by 0.25% as I predicted, yet the long rates have risen by over 0.50% from the lows. The dollar rises, gold drops and the stock market declines. On Tuesday, I was a guest of Ron Insana and Sue Herera on CNBC's "Business Center." During the interview, Ms. Herera asked me, "What would you like to see the Fed do?"

This week I want to briefly look at some comments by Stephen Roach and Rob Arnott, two of my favorite analysts. Then we quickly segue into Part One of a series showing the relationship between stock market returns, P/E ratios, inflation/deflation and the economy. This is some of the more practical and significant research I have written about in the last few years, and I think you will find it very helpful in developing your own investment strategy.

It seems to be the economic silly season. This week we will explore some of the more absurd ideas to make their way to my reading material this week. I call these to your attention not to make fun of them (well, maybe a little), but because they offer an excellent opportunity for enlightenment. We will look at Japan's plans to tax cash (not profits or interest but actual cash in your bank account), Yahoo selling bonds with no interest, Greenspan buying insurance, Freddie Mac and the NASDAQ going to 14,500 by the end of the decade. We won't even have time to get to poor Martha Stewart.

Today we have a guest writer for Thoughts From the Frontline, as I am in Puerto Vallarta sipping margaritas by the beach. I asked my friend, Porter Stansberry, to give us his take on the recent (and very important) study which shows the US government is $44 trillion dollars in debt. I think you will like his easy reading style, even if the analysis is sobering. Then, to end on an upbeat note, I asked him to give you a free link to a recent study by David Lashmet, one of his analysts from the Pirate Investor, on new cancer treatment breakthroughs just announced last week at an industry meeting. We have all lost friends to cancer. There is real hope we may lose fewer in the near future. Now let's read Porter's thoughts: