Recession clouds darken 2007 outlook

Long time sine I wrote the last lines of my last article... consider it a X-mas break. Now we'r back on track, and this time is to write a little bit about U.S. slowdown and how it can turn into recession.

Most economists expect slower growth and no downturn, but some recent signals are flashing red.

The economy is stumbling at the end of 2006, setting off alarm bells that growth might not just slow next year but that the nation could tumble into a recession.

The recent trend of slower growth is not expected to be reversed any time soon. Home building and the broader real estate market are both already in a recession by most accounts and are expected to stay there well into next year. Manufacturing could soon follow.

While most traders are still expecting the economy to avoid a full-blown downturn next year, many of us say (at least) the odds of a recession have risen.

Even the more optimistic analysts are looking for a slowdown in growth in gross domestic product (GDP) to between 2 and 3 percent next year, from 3 percent or better this year.

Many don't think there'll be a recession, but at least you have to have to have in mind, as we do, that the risks have risen.

Some of the Christmas spending wasn't as strong as anyone'd hope, and I think we have not reached the bottom in housing yet.

With the yield curve in the shape it is now, the economy is more susceptible to shocks. For example, if oil went to $80 a barrel, or there was a sharp drop in the dollar, the U.S. could fall into recession, in my opinion with no chnce of recovery.

Not all declines in manufacturing lead to recession. But if the economy is going to go down, it's going to be led by manufacturing and construction.

On the other hand, others look at continued strength in consumer spending, even at the end of a year that saw record energy prices, coupled with low unemployment and rising exports and they say the chance of a recession next year is pretty slim.

So as I usually say, now it's your turn to look at this situation and think. You can always add some feedback to the article... hope you do!!

Till my next post.

Happy New Year and my best wishes.

Cheers to you all.

Doubts on the Dollar

A longtime dollar bull has qualms, but strictly short term.

On Friday, the U.S. dollar plunged to a new 20-month low vs. the euro and 14-year nadir vs. the British pound. Plus, the dollar dropped to its lowest level in almost four months against the yen. The dollar's decline was blamed for the "crisis mentality" that had the stock market staggering the past week.

Rapid money growth in Europe means higher European interest rates and a lower U.S. dollar.

A scary new monetary phenomenon double-digit money growth is sweeping the developed world. In Britain, for instance, money growth is now 14.5% above a year ago. Sweden's money supply is up 14.4% over last year. For the entire euro region, the broad measure of money is up 8.5%. In Australia, the growth rate is 11.2%.

Here is what some investors expect: Interest rates in Britain and the euro region will be raised. In the short run, currency markets are all about interest rate returns. Therefore, as interest rates rise in Europe.

I expect a near-term decline in the U.S. dollar as higher European interest rates will make the euro more attractive.

DO NOT FALL PREY TO THE PESSIMISTS' SCARY DOLLAR BASHING ... The more you know about other countries, from Europe to China, the better the U.S. looks. For (the pessimists') gloomy scenario to come true, foreign investors would have to find an alternative to the U.S. dollar. Some day, that might happen. But that will take many years. Meanwhile, a slightly lower dollar will be good for the U.S. trade deficit and hard on Europe's exports.

There will be renewed talk about China selling its huge dollar hoard. But that is nonsense. China is "diversifying", but it is not selling dollars. China is buying higher-yielding dollar-denominated investments and cutting back on buying U.S. Treasury obligations. It is not in China's interests to see the dollar plunge! That would damage China's trillion dollars of reserves and cause enormous problems for China's trade.

You may think... Oh yeah?

That could seem to acknowledge that China's pegging of its currency to U.S. dollar is a purely political decision.

Which means:

• China might change its mind, not necessarily with any warning;


• China might simply lose control of the situation. The underlying market forces might break loose.
  

This scenario worries some observers... What about you??!!