As emailed to subscribers September 29, 2006

Much recent comment coming out of the US about a slowdown, even recession imminent. No doubt the yield inversion having something to do with this.

yld curve historical with LP dturns 8-06 (US figures)

A yield inversion, whilst must be taken seriously, is worse if the long bond yield happens to be going up, whilst the inversion is taking place - a sign of investor caution about future inflation. Presently, the long bond yield is on the way down. I think short rates will follow soon, without presaging a recession. However, an inversion is an inversion, and requires monitoring.

I do note, this indicator has become an obvious one now. And when something becomes so obvious, it effects (and permits) change. Indeed, nothing can change until it comes under observation. (Same could be said of the 18 year real estate thing too of course, tho this is far from obvious to market players presently, the reason why it occurs is even less well known.) Also, markets have a real habit of defying the forecasting herd. With so many watching the yield curve inversion pointing to recession, this time the market is just as likely to do something different, just to confuse the hell out of us all. I can't explain that statement scientifically, but long time traders will know what I mean.

I point out as well, the US stock market is again approaching all time highs in this the equinox month, 6 years from the last time. (half 144) The trend is definitely up, and the pattern of rising lows shows a build up of strength just below all time highs, in readiness for a break. Should the market carry through, that is the markets judgement of better earnings for 2007. Markets are never wrong on this. Never. (But we don't have a solid new high yet, tho i think it is imminent.)

Dow 1 month swing 8-06
spi 1 month swing 8-06

The trend is up on both. Until the prior swing lows break, the monthly trend is up.

The constant bearish reports of late could also have something to do with self interest: Chronic bears short markets at past highs, so they have an interest in amplifying any bearish news.

In my view, the real estate cycle will run its due time, and things have to happen to make this happen.

Roy Wenzlick, way back in 1936, had already noted that in the 18 year real estate cycle, from the low, residential prices recovered first, followed later by commercial prices and rents. At the top, subdivisions in raw land increase as cities expand. So, no surprises to see stock markets breaking new highs; means profits are improving, to which rentiers will put rents up when rental agreements come up for renewal, and the cycle repeats.

Wenzlick also noted that whilst all the action at the top was going on, (more credit, more subdivisions, increased building), foreclosures quietly started mounting. (In Australia, we call them mortgage defaults.) But it happens quietly and few see the evidence. Banks, finance companies and governments, especially if an election is approaching, do not want you to see the bad news.

The only threat presently on the horizon is if the Fed continues to raise borrowing costs for the remainder of the year. The chances of this are remote.

Remember too, oil is paid for in US dollars, with prices having been so high recently, even more dollars are being printed by the US to facilitate payment for it all. Those being paid for the oil have to put the money somewhere, and it goes into banks, swelling their deposit base equals more money to lend. More credit equals more business equals higher asset prices all round. Personally, I suggest we worry presently about something no one else is worried about and something that the current Bush administration does its utmost to keep off the front pages: America's mounting debt. Even more so, the threat the Euro poses to US dollar hegemony. News about the Euro threat is rarely printed in the US. More on this topic soon.

For 2006 and 2007, the trend I think for the business and real estate cycles is continuing up. But remember, the higher land price goes, the more debt taken on, the bigger the eventual bust. At least that is how it has happened in the past. Every 18 years on average.

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