bonds

All a matter of timing. There was a fall-off in manufacturing for a long time and yet it wasn't a technical recession until the 9/11 attacks sealed that fate. There were clear signs that the economy was slowing improving just prior to the attacks and we probably would have seen a GDP slightly above 0 in Q4 without the huge affects of the attacks. Business and people literally stopped living for a week after the attacks and never really regained their balance until the end of the quarter and yet there was only a modest negative drop and it was a one quarter drop. That speaks volumes about the strength of the economy in the face of a staggering blow that had people plopped at home in front of TVs and not working for a long time. I wasn't about to say that recessions won't occur from time to time, its just I think the Fed timed things fairly well and the economy was working from such a strong position a recession when (and if) it did happen were very difficult to bring about.


To answer the rest of the questions, its time for a very important lesson of sorts. I think a lot of people, the world around really, are missing this important point. Bonds and currency are the main worry right now of a lot of pundits. However they are so caught up in backwards thinking it just amazes me. There are about 140 countries in the world I believe (give or take a few) and probably all but 10-20 could be manufacturing based economies provided the capital is invested in them. However, there are about 20 countries that can be service based. Somehow the union leaders and some idiots in our government are under the impression that service based economies are bad things. Nothing could be further from the truth. Service economies are the hallmark of wealth in the world. Any country that spends too much time or consideration (capital) of maintaining a strong manufacturing sector is asking for trouble. I can't believe this point is being missed, even by the Bush administration right now. Think about it, the hallmark of a service economy is two things, a strong currency and low interest rates. Well there you have the US economy and it has been that way for quite some time now. Yet we have idiots saying this is a bad thing!!! Seems economists and the government have done a terrible job of explaining things so maybe I will give it a shot. The simplest way to look at it is that service economies offer the best return on capital. Generally this is because of two things. One is that they allocate less resources in capital intensive activities such as manufacturing. Manufacturing is terribly inefficient as far as return goes, way too much money is tied up into capacity that gets obsolete very fast these days...and to save that original investment more money is put in to chase after it! How come people miss this point? Are we after efficiency or giving people a job? Ridiculous really. Second is that its a lot harder to copy a service than it is to copy manufacturing. Anyone can make steel, a car, assemble things. All these things can and should be sent elsewhere, but they aren't in the name of saving jobs. Services are very exclusive however and the US does this far better than most of th world. Fortunately we have done a much better job of shipping off these low return processes than the rest of the developed world while keeping services for ourselves, hence our much better returns on capital and why the money keeps flowing here. Europe is so hopelessly attached to their job creation machines they have little hope of matching our returns on capital anytime soon and further many of the important service functions in Europe are run by American companies or depend heavily on American expertise. So getting to Ray's question/assertion, no improved economy doesn't necessarily mean higher interest rates if the currency doesn't collapse. As long as we focus on being a high-intellect service economy, our cost of capital will stay low as there is less need for heavy investment and our currency will stay strong meaning the Fed won't have to try to defend the Dollar. Will it work out? Well there might be some peaks and valley as always in the global economy, but hopefully people in high places will figure it out and be forward thinking instead of looking back on the old economy and trying to defend the times of the past.

Well, I agree with all you say except the recession. Goverment numbers are crap..so I don't rely on those. The govt. puts out whatever is convenient. It is clear the country was in a recession. In fact, the fact that the market dropped was pricing in future slowing of the economy. The market is a great leading indicator or economic strength.


As for the other stuff you wrote...I see your point but knowing that won't help you make money in the market.