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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: LTK007 who wrote (63526)	2/8/2007 3:33:57 PM
From: MulhollandDrive	Read Replies (1) \| Respond to of 116555

sounds to me like hoey thinks goldilocks rules....even the weather had perfect timing<g> dreyfus.com This is RICHARD HOEY of The Dreyfus Corporation with a market commentary on February 5, 2007. We believe that current economic trends are best understood as the sum of (1) a sustained multiyear expansion, (2) a moderate midcycle slowdown from early 2006 to late 2007, and (3) a brief winter growth rebound for several months in the middle of that slowdown. A period of very warm winter and rapidly declining energy prices came at a perfect time to mitigate risks that the sectoral housing recession might have had large spillover risks to business and consumer confidence. We believe that the overall result has been to reduce downside risks to the economy. We are optimistic about the sustainability of a long global economic expansion. World productivity is rising due to an upward trend in the proportion of the world's labor force that is tooled with modern technology and efficient business practices. The expanding supply capacity of the world economy is limiting cyclical inflation pressures, permitting major central banks to retain an accommodative monetary policy. We believe that Federal Reserve policy is at the high end of neutral. We cannot yet identify any major central bank with an aggressively restrictive monetary policy. During 2006, real GDP growth in the U.S. surged at a 5.6% rate in the first quarter and then averaged 2.7% over the last three quarters of 2006, only slightly below the probable long-term trend growth rate of real GDP of about 3%. It might have been a few tenths slower if the weather had been normal. Note that economic growth managed to run only slightly below the 3% trend growth rate over the last three quarters despite housing weakness and an inventory slowdown. This is consistent with our view that the outstanding stock of financial liquidity was so ample after several years of easy Federal Reserve policy that Fed tightening would not create a major liquidity constraint on the economy. The U.S. economy is experiencing a sectoral housing recession and an inventory slowdown, but there is no sign of a broader economy-wide recession. Past housing sector recessions were triggered by a move to excessively high interest rates, which also depressed other sectors of the economy. Not this time. In this cycle, the affordability problem that generated the sectoral housing recession was created by past house price increases rather than excessively high interest rates. As a result, most of the economic weakness has occurred in the housing sector. The midcycle slowdown was temporarily interrupted for several months by a winter growth rebound, largely in response to the warm weather and rapid energy price decline. The result was a brief run of statistics that overstated the economy's underlying strength. For example, personal consumption spending in current dollars in the fourth quarter of 2006 grew at an unexceptional 3.6% pace, which translated into strong real growth at a 4.4% pace due to an unusual quarterly price decline of 0.8% as energy prices dropped sharply. We expect the midcycle slowdown to resume over the next six months. With housing vacancies at multiyear highs and mortgage rates now above their lows, we expect that the absorption of housing inventory will occur at a slow pace. Housing completions should fall in 2007 as building projects are completed in an environment of low housing starts. As a result, housing-related layoffs should increase and the unemployment rate should rise moderately. We believe that core inflation has already peaked and that it should drift down to the upper part of the Fed's 1% to 2% comfort zone for core PCE. The inflation rate of core PCE has begun to decelerate in recent months. This is confirmed by a slowing in both the market-based core PCE and the Dallas Fed's trimmed mean measure of overall inflation, which includes food and energy but excludes extreme components. The rise in core inflation between 2005 and 2006 was due to rising rents, but there are already early signs of a slowing in the pace of rental inflation. This is understandable given the excess supply of houses and condominiums. We expect that continued housing weakness should also reduce the risk of wage inflation by easing the tightness in the labor market. We are relatively optimistic that a major wage acceleration can be avoided due to (1) global competition, (2) a slight easing of the labor market, and (3) the potential to absorb some wage pressure due to the already elevated level of profit margins. One encouraging trend is that the participation rate of the population in the labor force has stopped declining and begun to tick up. This indicates balance in the labor market as the supply of labor has been expanding in response to the improvement in demand. What's the outlook for monetary policy? Core inflation should drift somewhat lower and housing-related layoffs are likely to drive the unemployment rate up somewhat by late 2007. As a result, our most likely case is that the Fed will ease moderately in the second half of 2007 in a "prolonged pause and eventual ease" pattern. However, a "prolonged pause" at 5.25% for all of 2007 is quite possible if further economic weakness is limited and labor market pressures remain relatively tight. The Fed is likely to be cautious in gaining confidence in any easing of the labor market because initial estimates of job growth have shown a persistent pattern of major upward revisions. What is the outlook for the currencies? We are not a supporter of the theory that a major decline in the dollar is inevitable in response to a high current account deficit. Rather, we believe that the current currency outlook is more complex, combining a multiyear uptrend in Asian currencies with cyclical fluctuations in other currencies. The Chinese RMB and the other currencies of non-Japanese Asia are undervalued and have favorable fundamentals. The Chinese authorities are likely to permit a gradual multiyear upward revaluation of the RMB by 3% to 5% a year, with a current bias towards the upper part of that range. Other currencies of non-Japanese Asia are undervalued and should also trend higher. We believe that the Japanese yen is undervalued from a long-term perspective. However, it has questionable short-term fundamentals. Given low Japanese yields, Japanese investors are investing abroad to obtain higher yields while leveraged institutions are heavy borrowers of the currency to obtain cheap financing. The yen has remained in a declining trend for an extended period of time. One cannot rule out a final decline, as has often occurred at the end of major multiyear currency trends. However, we believe that medium-term fundamentals for Japan are relatively favorable and that it will eventually join other Asian currencies in trending higher. A phase of limited cyclical dollar weakness against the euro and the pound sterling appears likely in response to relative monetary policy and shifts in relative interest rates. Overall, we believe that the midcycle slowdown is resuming after the winter growth spurt, that core inflation has begun a downtrend and there should be cyclical weakness in the dollar but its magnitude is likely to be limited. Mr. Hoey's comments are provided as a general market overview and should not be considered investment advice or predictive of any future market performance. Mr. Hoey's views are current as of the date of this communication and are subject to change rapidly as economic and market conditions dictate. Contact Dreyfus or your advisor for current information about Mr. Hoey's views of the economy and the markets.

To: LTK007 who wrote (63526)	2/8/2007 3:45:44 PM
From: Haim R. Branisteanu	Respond to of 116555

RE moves in 7 to 9 year cycles - this time it was much longer with a parabolic rise in 2003 trough 2005/6 depending on markets. (Last was from 1988/9 to 1993/4 were they started stabilizing and in 1995 rising) At a steady inflation rate the "real inflation adjusted" home price will be cut in half as it was in 1992/3/4 period. This was before the Clinton administration tampered played with the CPI and AG invented the FED PUT. Therefore it would be hard to predict how home prices would behave or if they will repeat their cycles of the last 60 or so years. On must keep in mind that "money" which we use as common tender is falling in value around 3% to 4% a year at rate which is the difference between the real inflation and the reported inflation and is reflected in the commodity prices. Therefore even steady home prices are actually falling in value around 3% to 4%. After all wages are always "RISING" and this is the trick that FNM is trying to apply and bail out its default mortgages that 15 ago had no chance but to foreclose. The whole ponzi scheme will explode when the citizenry will lose faith in paper money or better called confetti and I do not see this anytime soon.