the markets get interesting....

Just look at the headlines. Bloomberg proclaims that "Stocks Fall on Dollar Declines" "Thanksgiving Weekend Spending Rises 19%", "Crude Oil Rises Above $60", and my favorite "Homebuilding Shares Rally Amid Housing Slump."

These headlines are rife with contradiction and confusion, and where there's contradiction and confusion, there's opportunity.

The dollar has dropped for five days straight. This drop has wiped out the 22% profit I just took on the Pound last Wednesday. Darn. If only I had waited a week... Well, I think the economy will be much stronger than these declines indicate and I'm sticking with my bets against the Euro and the Yen. Whether or not we will have a recession in 2007 is something that we will only know in 2007. What we can do now is put all these articles on one side or the other.

The 19% spending rise and the rally in homeowners' shares proclaim faith in the economy. However, with the market predicting a rebound in the housing market in six months, I think this foolish optimism is a great shorting opportunity for ITB. (Never mind, it's already down 2%).

The dollar decline and the rise in crude prices are on the side of a slowing U.S. economy. However, crude creates a contradiction if it's placed on either side of the equation. For example, if the economy slides into a recession, there will most certainly not be enough demand to cause a rise in prices. If the economy has a soft landing, then the dollar will strengthen, keeping oil prices somewhat in check. Does it make any sense to predict a renewed takeoff in oil price? I don't think so, at least not for next year.

Having tried to disentangle the arguments, let me hazard a guess at the direction of the economy with a reason why I believe that. I think the economy will not go into recession, and will rebound strongly because of the massive amount of worldwide liquidity we are currently experiencing.

Almost everyone is predicting that the Fed's next move will be to lower rates, except the Fed. Why doesn't anyone believe Bernanke? Having tried and succeeded in being infinitely more clear about his intentions than Greenspan, Big Ben's reward is to be ignored by Wall Street and second-guessed by everyone who thinks they know more. Well, I think Big Ben's cautionary statements about inflation are worth paying strict attention to. I believe that Big Ben's a man of his word.

In conclusion, the credit cycle is the biggest, widest picture we need to look at. This is what's driving global liquidity. When does the credit cycle contract? When the most diversified credit becomes shaky and topples. These things are caused credit swap derivatives, and they are responsible for encouraging investment banks to continue a global lending spree of trillions of dollars.