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Poway,
You are right about invesntory build up and it probably explains why the durable goods numbers went down yesterday because manufacturers are probably waiting to clear inventories. However, even if you exclude the effect of higher inventory, the GDP number would come out to be closer to 2% which was closer to the consensus estimate by bloomberg. The same consensus for Q4 now is 2.6% I guess. BTW, Beige book pointed to moderate growth and didn’t show any frightening signs of recession, inflation and labour cost estimates were reduced, corporate profits hit record highs in Q3 (31.4%), buisness spending revised upwards, commercial construction revised upwards, etc. On the other hand, consumer spending was revised downwards and most of that contributed towards services which is good for jobs but bad for factories/retailers. So its a mixed bag.

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JG,
I went through the report this morning and you are right that it doesn’t equate to immediate soft landing but if you remove the 0.4% number due to added inventory, the number comes out to be the same 1.8% as expected by the consensus of economists. The same economists now predict Q4 GDP to be 2.6%. In general, no matter how you spin it, it is better news than the original 1.6% GDP number. But folks here have been trying to point out the same thing to ultra bears around that there are too many moving parts to accurately predict macro economic numbers. Yes, we are headed into 2007 very cautiously, there are signs of slowdown and possibly recession but don’t make predictions like GDP will be 0% in Q4 or SP500 will be 600 by Q12007.

Roubini is getting a beating on his blog for previously drumming up the fact that his forecast of Q3 GDP of 1.5% was closest and consensus forecast(1.8%) was wrong. I think Roubini deserves the criticism he is getting and cannot use excuses like high invesntories, imports, etc in the report today. The way he strongly pedicted 1.5% sounded as if he should have known and factored all these things into his prediction. If he didn’t knew about these, he should have been far more cautious in his predictions.

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“Then, the U.S. government would issue them dollars, which the C/J/B would attempt to exchange for RMN/yen/pounds”

JG, only FED has authority to print or issue dollars, not the US govt. The FED buys US treasuries and pays for those paper receipts or treasuries by dollars it has in its stash or that it has printed. This is how dollars are added to the system and the concept of “inflating” the economy with more money comes from this. When FED liquidates these bond receipts, it returns the paper receipts and asks US govt to return the dollars it had borrowed from FED. US govt does so by raising taxes, cutting spending, etc and hence takes money out of the system and thus the concept of deflation. The last method is rarely used as FED instead uses borrowing rates to control monetary policy.

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Gold picks up pace and reaches $645 an ounce (up 2% over long weekend), on dollar weakness. Gold is moving entirely on dollar weakness as inflation concerns seem to have gone away.

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Dolar plunges to 19 month low and is now hovering at $1.31, last seen in April 2005, before market started to take notice of US rate hikes. Analysts expect dollar to decline to $1.35 in coming weeks. The cause for decline is the poor shape of US economy thus increasing pressure on FED to cut rates. Futures market expects rate cuts to 4.75 next year.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a48eZpgdquMo&refer=home

I was expecting this rally but I slept over it as I forgot to put auto triggers for this at $1.29 (the ceiling at which eurodollar has kept bouncing off this year).

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Poway,
Roubini’s original forecast (in 2005) for recession was in actually 2006 that he moved to 2007. Anyway that wasn’t the point. My point was that Roubini is much better at providing the brilliant analysis disecting coming reports but I was getting bored of him focussing on his recession predictions. I don’t know why you got defensive about Roubini, I didn’t mean to belittle him. I used his example to make broader point that that everyone has a financial bias in their analysis and it maybe too harsh to blame only the mainstream economists for that.

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Poway,
If market timing has been difficut for you (and trust me it is difficult for everyone), why don’t you keep your big picture cautious look intact but let the market deide when it turns for itself. Do so by putting automatic stops in your investments. BTW, I believe a market decline of close to 20% atmost. That should be able to remove the speculation out of markets.

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JG,

The FED prints money and passes this money on to govt via buying US debt (trasury bonds). Once the govt has the money it needs for its huge budget, it spends that money on defence,schools,infrastructure,public services,construction,Fed mortgage,to pay salaries of govt employers, etc. So all that printed money eventually makes it back to the people and causes real inflation that should be 10%. This is why dollar has declined somewhat in proportion to the money supply inflation, but the core CPI hasn’t reflected that. So I am not sure about your original point, the money printed by FED does reach the public eventually.

Now, the core CPI hasn’t moved by 10% because it excludes housing, stocks, energy, food, etc. On top of that, China/Japan artificially set the price of their currency to protect their exports to the US thus keeping the price of most everyday items in walmart, from rising too much. Also productivity has increased tremendously thus keeping up the supply of everyday items, to the money supply.

However, this kind of inflation then shows its face by resulting in asset bubbles in asset markets where supply is limited (real estate, gold, oil,stocks,etc) but demand keeps rising with increasing money supply. Inflation in these assets then forms a bubble as speculators/hedgies/flippers join in. This is why you have seen the price of houses/stocks/gold/oil jump up by huge amounts in last 4-5 years but the core CPI hasn’t been able to reflect that. This is also why I believe that there is a solid ground beneath house/stocks/gold/oil prices. How can you encourage people to save money in such fiscally iresponsible policy? If I get a car for $10K at 5% APR but am getting 20% return from my fund/house then why should I not keep borrowing and buying?

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To be honest, everyone has some kind of vested interest. This is inherent in all of us and all economists, including Roubini. e.g I was disappointed to see Roubini recently, getting obsessed about his recession prediction and I mentioned that on his blog as well. This is probably because with markets motoring along, he has been getting more criticism for his position, from folks who have vested interest to believe in a soft landing.

Once you have established or taken an economic position, it is difficult for your ego, to change it based on incoming data as the instinct is that of denial. Most often, there is some data to help the denial as well. e.g Most of folks on this forum have positioned themselves finacially for a hard landing scneario. Most economists till now, have themselves and their funds positioned for soft landing. Maybe one side is more finanically motivated than the other but fact is that both sides have an embedded bias that clouds their judgement. Sorry I don’t believe ANYONE can come up with truly objective analysis. That’s why I believe in diversifying and risk management.

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We have to realize that at the core of all this is a liquidity bubble coupled with easy lending practices, around the world. G-20 conference urged nations to raise rates and I believe them. I think still there is too much liquidity in the system and it will still take 3 more quarters to clear that out (assuming central banks keep rates up). So I think a US recession in late 2007 or early 2008, instead of early 2007 as predicted.

What can lead to the “ugly” recession pointed by Roubini will be lots of defaults and banks suffering, causing lending standards to tighten and big job losses. If Fed lowered rates a lot (below 4%), it may help soften the recession. But a weak dollar will increase oil and commodity prices thus spiralling inflation again and Fed will not be able to lower rates. Lot of money has moved from commodities to stock market by hedgies in last 3 months and they will move back to commodities. If foreign investors also decided to pull money out of US because of dollar decline, it will cause markets to nose dive. If big job losses happened then it will change the psychology of the “resilient” consumer that hasn’t seen a real recession for quite sometime. This will be the “ugly” recession predicted.

However, the Fed as well as many investors and economists think/hope that dollar will slowly decline, commodity prices will rise again but not shoot up, housing may go bust only on coasts and not across the country, consumer will slowly increase savings and economy can move slowly back on track from <1% growth in 2007 to something around 3% in 2008. I believe it is difficult for this scenario to happen but UK has shown that monetary policy can help avoid recession.

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What made me chuckle seeing this post first time was that it mentioned a time frame as well as a bottom value for S&P500. I just hope not many people jumped on any predictions posted on a forum (many posts like this are posted every day on many forums). The only thing to trust and get a signal from is the market itself.

I learnt my lesson long back that you cannot time the market. You loose more money making opportunities sitting on the sides waiting for the melt down than what you make if you actually catch the bottom (once in blue moon). If you could time the market, it means you can beat the market. However, there is a reason that the best of fund managers with the best of tools available, fail to time the markets correctly and hence fail to beat it consistently.

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Poway,

Nobody ever said anything about beating index funds and I don’t think indexing vs not indexing was ever a question. The original point you raised was that 10% average return over long term is not realistic in markets and actually 5-7% is more realistic. Most of the other posters here corrected you by pointing to 20-30 year performance of S&P500 and many other funds that have been able to return more than 10% annually. A balanced portoflio has returned 10% or more over 30 years and has beaten gold,commodities,bonds,etc during this time.

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PD and L_Thek,
Let’s not put words in the mouth of others here. Nobody said here that they hate “America”. You seem to equate hating/criticising American foreign policy or White house or American president with America. In reality, you neo-cons probably hated President Clinton even more and trust me I have heard Republicans talking all kind of bad stuff about Clinton during his time. So suddenly, don’t pretend that you freakin care about “American president”, you only care about Bush because he is a REPUBLICAN NEO-CON president. So stop the rubbish comments of equating the political views of an American to treason. Each and every American has the right to criticise/question/hate American policies, American politicians, American govt.

Is anyone else also fedup of the extremist liberals and extremist neo-cons, constantly bickering & fighting in this country (one calling Bush a terrrorist and other calling him/her traitor for that)?? So much energy and time is wasted in frivolous debates that aren’t objective but personal. Get off your high horses and start from basics, make your congressman/senator/governor/president EARN your vote. If you do that basic stuff right, things will sort out on the big scale as well. End of rant !!

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gold_dredger,
If you want to apply taxes and inflation then apply it to all investments. Still, you will see that stocks beat gold, real estate, bonds, CDs, etc in the last 40 years (I accepted the convenient start window of 1966 that you chose when gold started to rally). Also, in those 40 years, the US economy has weathered an energy crisis or oil imbargo,rampant inflation,few blown up recessions, terrorist attacks, a fierce industrial competitor like Japan (similar to China now) and it wasn’t really the smooth ride that you paint it to be.

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Poway,
Actually the 3 year and 5 year return numbers that you quoted are annualized already i.e. FDIVX on average has returned 17% per year for the last 5 years for a cummulative return of close to double the original investment 5 years ago. Now I know why you maybe so bearish about stocks :).If you kept applying the same math, while searching for mutual funds for your retirement, you would always be seeing that most funds end up returning less than the 5.5% CDs (just kidding).

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