The Ignorant Investor

This morning I read a presentation by Merrill Lynch economist David Rosenberg on the current state and future prospects of the U.S. economy for 2006-07. Its a very readable and straightforward effort. Key points, based on my reading (granted, I might have got what he was saying wrong, so caveat emptor rules here:

1) Current factors indicate disinflationary environment rather than inflationary- the risk of high inflation from energy is outweighed by anemic wage growth and weak labor markets. The idea that government statisticians are massaging the data seems improbably given that all other industrialized economies have low core inflation.

2) The current economic numbers are being misinterpreted- the economy is slowing down, not continuing to boom. People are stressing current numbers rather than leading indicators.

3) Cheap credit fueled high consumer spending, which accounts for huge percentage of GDP. High debt service costs will cut into consumer spending as the home equity debt craze fades under new, tighter credit standards. Slower economic growth is likely.

4) The housing boom is unsustainable and is already losing steam. Prices have risen so far from the historical mean that we could see equally large declines in prices in a new buyers market.

Bottom line, Rosenberg says, is that there is currently about a 30% chance of a hard landing in 2007. This could rise even higher if the Fed continues to tighten into the summer. Rosenberg thinks that the Fed is overstating economic growth and may well overshoot, leading to recession.