Fed Chairman Ben BernankeThe new FED chairman, Ben Bernanke, aka Helicopter Ben, will have to EARN the trust and faith of Wall Street. My opinion is that academicians do not fare well in the real world; but, we will see how well the successor to Alan Greenspan does. All eyes and trigger fingers are awaiting his first response to weak data.

Banking liquidity will continue to decline as loan demand outstrips deposit growth. The Banks will bid up the CD rate and the FED will follow. The 10 year – 2year spread is expected to have its first major stop at –30 basis points.

The Federal Budget Deficit will increase each quarter as the year progresses. Remember that the revenue from remitting offshore earnings back to the U.S. expires in 2005. The hurricane relief spending will finally be on stream; and well, it is an election year!!!

Pensions, pensions, unfunded pensions – we will hear about this topic all too much and none of the facts are pleasant to deal with. We all know about GM’s $31B in unfunded pension liabilities, but did you think about the consequences of State & Local governments unfunded liabilities. For example, the Michigan Public School Employees retirement System has unfunded pension and retiree medical liabilities of $22B. Shall I list more? The decision on the accounting treatment for pension liability reporting will hopefully be completed.

Foreclosure.com reports that, as of December 26^th, that there are 122,842 houses in foreclosure, 164,483 in pre foreclosure procedures, 500,695 with tax liens outstanding, and 43,221 FSBO (for sale by owner). My forecast is that on December 26, 2006 these numbers will have doubled or tripled. Is Colorado typical? Denver is expected to have 14,461 foreclosures this year, up about 2,000 from 2004 and the most since the 17,122 of 1988. Or is Dallas-Ft. Worth typical? Here, Dallas county experienced, in October, 1 foreclosure for every 226 households; in Tarrant county, the number was 1 for every 217 households

The U.S. economy will experience ‘Stagflation’ for at least the last 3 quarters of the year. What is Stagflation? My definition is when at least 50-66% of revenue gains come from price changes. For one thing, the level of inventory profits in October was $65B, on a base of $1286B of inventories, and these are not reported as inflation by the federal bean counters until realized. Money supply growth, higher imported goods prices, excessive credit growth, and inventory accumulation are the necessary and sufficient ingredients for the expected stagflation.

The value of the Chinese currency will overshadow the old line currencies as the year progresses as the important number to watch. China‘s plan for their economy in 2006 is to stimulate domestic consumption. The value of the Renminbi, now at 8.0759, down from to 8.11 in August, is expected to break 7.90 in 2006. Ask Walmart if they think they will be able to pass on their increased cost of goods sold to their customer profile.

Commodity inflation will continue at a slower place than in 2005 but all you have to do is watch the growth of industrial production in China, India, and Eastern Europe and you know that these 1950 type economies want GOODS FIRST and services second (excluding cell phone service of course)

The trade deficit in 2006 will worsen sharply as the up leg of the inventory cycle results in the expected goods imports. The U.S. economy does not have the physical or labor capacity to meet its final demand for goods and services. Sad to say, the situation of the oil industry’s lack of refining capacity can be repeated over and over. Just look at the list of imported items each month.

Saving the best for last, quality spreads in the bond market could well increase by 50%. On 12-23-03, BAA - 10 year spreads were 344 basis points versus 184 basis points now.

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