Out Of Synch?

My view for some time has been that we would have a period
of slower economic growth and lower inflation over the 2nd
half of 2006. Inflation potential has diminished significantly
although you cannot take it for granted, since the acceleration
of inflation in this cycle has been driven by commodities prices,
which are inherently more volatile than the broader economy. I
foresaw slow economic growth but no recession in the cards.
In the US, recessions begin after the economy has hit effective
capacity, overheats and undergoes a liquidity squeeze engineered
by the Fed and carried out by the banks and credit markets. No
such conditions hold sway today. There is still idle capacity,
inflation is set to cool and the banks have money to lend.

As expected, the leading economic indicators have weakened, not
enough to signal a downturn, but enough to raise eyebrows. My
view has been that lower inflation would boost real incomes,
confidence and spending before the ax fell. The inflation
primarily reflects hoarding and not overheat. I am
staying with this view and will sweat it out for a while.

To compound my felony, I have posited that 2007 would see a
stronger economy, re-ignition of inflation, and an end to the
"pause" period by the Fed. Next year is a between elections year
and may be an ok time for the Fed to go after inflation further.

Unlike most observers, I expect the stock market to progress in
a reasonably steady manner through the end of this year into the
beginning of 2007 before a top of consequence ensues and the
broad market falls by 15-20% as the environment turns hostile.

The more standard view of the market's prospects is for a rather
weak September and early October followed by a rally of substance
that could carry well into 2007, if not beyond.

One lovely thing about this business is that you get to see whether
you were right or not and to what extent.

I wrote this little screed because it was on my mind and I knew
it would bug me every time I sat down to write something. I am
going to let go for now and re-visit the projection around the
end of the year.