Am I good or what? One day after I predict that Iraq will descend into civil war the Shiite "Golden Dome" mosque is bombed and the headline on the Drudge Report says something like "bombing threatens civil war." Since this sectarian line has been crossed I have a hard time believing that a civil war in unavoidable.

The next day something happened that I think will really cause the economy to tumble and that is that Al Qaeda finally figured out that they could cause a lot of damage by bombing a Saudi oil facility, apparently they picked a good one, one that produces 7% of the world's oil. Image what would have happened had the succeeded. Osama has declared that he'll keep trying. My money is on him achieving his goal (not that I wish him success). Two nights ago I was playing pool with some friends and I was talking to an artist guy. He said he loved being an artist but he was going to take his savings and put it into real estate. I was aghast. Now is a horrible time to invest in real estate!! I spent the next hour telling him so. Then thanks to some illicits I spent more hours explaining to my friends (who are investing in real estate themselves) why the economy is going to tank. Now I know I'm annoying but a big part of me feels the need to shout from the rooftops "Save your money! Don't invest in real estate! avoid REITs! Get out of debt! The party is over!" Needless to say, nobody wants to hear it. Why would they? If I had my life savings in real estate the last thing I would want is somebody telling me the sky is going to fall. I realize this and I do try to show restriant, I swear I really do.

As a last thought (and to punctuate a possibe reason why the economy will tankify)let me leave you with the cover of Fortune Magazine which screamed at me tonight at the local Safeway:

"It is the instinctive wish of most American businesspeople, even those unlikely to be directly affected, that General Motors not go bankrupt. True, some people will say, "They had it coming to them." But the majority will be more practical, telling themselves that the company is so central to the economy, so sprawling in its commercial reach, that bankruptcy--"going into chapter," as restructuring folks say--is ominous almost beyond contemplation. And yet the evidence points, with increasing certitude, to bankruptcy. Rick Wagoner, GM's 53-year-old chairman and CEO, may say, as he did in a January interview with FORTUNE in his aerie of an office high above the Detroit River, "I know that things will turn around." But he cannot know that. He may not, deep down, even believe it himself...."

I have a sick need to predict the future. I don't quite understand it. No matter, here's some more predictions for the next ten or so years:

• Hillary Clinton will be the next President.
  
• The U.S. government will become increasingly paranoid, personal freedoms will erode further, outdoor police cameras will be in most U.S. cities and roving drones will spy on citizens.
  
• Air travelers will submit to bio identification (fingerprint and retina scans).
  
• Massive layoffs in high tech, finance, insurance and manufacturing will cause the Bay Area, Northeast corridor, and Southwest to have a huge housing crash.
  
• Religious fervor will reach a fever pitch. Many religions will predict a second coming and will foolishly give a date.
  
• Iraq will become a civil war with US troops caught in the middle, unable to leave and ineffective.
  
• San Francisco will suffer a 7+ earthquake.
  
• A major terrorist event, larger than WTC will happen on U.S. soil.
  
• Avian Flu will continue to be in the news. The U.S. Government will go overboard in trying to stop it with quarantines, cullings, bans on movement, air travel, and mandatory mask wearings.
  
• The opinion of the U.S. abroad will continue to slide downward.
  
• The Euro will replace the dollar as the currency of exchange for oil.
  
• A major news organization (Fox?) will be exposed for having been operating as a PR arm of the Pentagon.
  
• Congress will flip to the Democrats in 2009.
  
• Protectionism will be on the rise and there will be large tarrifs on Chinese goods.
  
• Oil, gold and other commodities will go down in value.
  
• Successionist movements in California, Arizona and parts of New England will gain a toe-hold.
  
• Hobos will once again ride the rails.
  
• Abortion will be illegal.
  
• A massive penal colony will be created to house the growing number of prisoners.
  
• The labor movement will stage a comeback.
  
• Iran and Israel will officially go to war.

I've given much thought lately to the phenomenon of economic bubbles. There are many kinds of bubbles and it appears that we humans are very fond of creating them but we don't have a lot of knowledge about them. A couple of bubbles that stand out are the bubbles in the stock market, housing market, consumer prices and credit. It is my firm belief that bubbles burst, which often comes as a shock to those that thought the end could never come. We Americans haven't seen a lot of bubbles bursting because we've been riding up the side of huge bubbles in the four areas I just mentioned. When the bubbles burst money becomes tight, layoffs occur, small businesses go under, home owners find that their mortgage rates, which they thought were low, have actually increased in terms of real interest rates (the money they are paying back is more valuable than the money they borrowed). When the U.s. experiences its next recession, it will probably cause much of the world to fall into a recession as well since the U.S. fuels the world economy (we're the ones buying everything).

Back in 2001-2003 we saw the stock market fall. As this happened people started using the "D" and "R" words, deflation and recession. The Fed then lowered interest rates and that sparked a credit and housing bubble and the stock market rebounded. The Dow Jones is right back where it was in 2000. I remember what it was like in my city, San Francisco, in 2003. It was different. Nobody went to restaurants, cabbies complained of lack of fares, it seemed like the streets were more deserted and many of the artists and musicians left because they were no longer being supported in their craft. The party was over and all that were left were the people cleaning up.

Now the city has rebounded and restaurants are doing fine, cabs zoom around full of passengers and the arts are back (although not as powerfully as in 2000). But we're still in a bubble, just an extension of the first one or another wing of it but it's still the same bubble. The stock market because it is more liquid than the housing and credit market will be the first to drop. It'll happen suddenly and will catch us all off guard. This is what happened to the market in 1929, Black Monday. Everything was fine until the market dropped 300 points over two days. This time the market will drop and keep dropping, credit will be next as businesses cannot pay back their loans, banks will stop lending money. If businesses cannot get loans, they'll stop hiring and stop inventing and that will lead to an unemployment rise. The same will be true for housing: defaults on home loans will rise and banks will stop lending.

When the Fed sees this, they will do two things, drop interest rates and start printing more money. If the situation gets bad enough interest rates will drop to near zero. When this happens printing more money has no effect and we are in what is called a liquity trap which is the catalyst for a deflationary death spiral. The deflationary death spiral is a condition where prices are dropping. This sounds like a good thing and if you don't have a lot of money it is, sort of. The problem is that prices are falling for a reason. The reason is that people don't have money to spend. They don't have money to spend because: a) they've been laid off b) their assets (stocks, house, etc.) are worth less then they thought they would be c) dollars become the most valuable investment therefore it pays to hang on to them. People also begin to expect to pay less as time goes on so they'll hang on to their money, it becomes a self fullfilling prophecy. Small businesses cannot compete in this atmosphere where they are not getting paid enough to cover development of new products. Low cost retailers are the only ones doing business. Expect Wal-Marts, Costcos, Goodwill, etc. to do the bulk of the business.

The only thing worse that a deflationary recession is an inflationary recession, that's where you're paying more and more and getting paid less and less. I don't think this is what is going to happen. I think we're in for deflation and I don't think there is anything the Fed can do about it. I've heard that the only thing they can do is increase the money supply early on and keep promising that the supply will keep increasing in the future. The reason they will not do this is two-fold: 1.) they have to do it early on and therefore have to do come forecasting. At the time, it would seem irrational and will destabilize prices, which is something that central banks loathe to do 2.) If the fed increases the money supply it will be a temporary fix. Because it is a temporary fix investors will not be convinced that dollars today is more valuable than dollars tomorrow so no investing will occur. The new Fed Chairman, Bob Bernanke, is someone who is accutely aware of deflation. He once said that if necessary the Fed would "drop dollar bills from helicopters" to make sure it doesn't happen. But as I just pointed out he would have to start that process early (when it seems irrational) and keep doing it into the long term, two things that I don't think are going to happen.

I'll leave you with three charts which I think illustrate my point about bubbles. The first is the Dow. We are in the apex of the second wing of a very large bubble. The next is the Consumer Price Index since 1913. This is index of what consumers pay for a host of items. It's been skyrocketing and notice that every time it pulls back a recession occurs (the shaded area). The CPI is also a pretty good measure of inflation (the opposite of deflation). The last one is the credit bubble. What goes up does go down, we just haven't seen it in a long time.

Dow Jones Industrial Average

Today the Dow Jones Industrial Average hit 11,120 points, marking a five year high. I was glad to see this happen because I had bet a Pacific Exchange option trader that before the month of February was over that the Dow would close above 11,100, he owes me a six pack of beer. I now believe that the DJIA has hit the high water mark and that it's all downhill from here. How low will it go? I'm going to say that by this time next year we'll see Dow 8,800.

• Pottery Barn 2 Lindsey Double Drape Panels 63" L White


• 2 New Pottery Barn Hanna Standard Pillow Shams - White


• Pottery Barn Kids white quilt - twin in EXCELLENT Cond


• Tomy Gearation Preschool with 11 gears


• NORTH FACE WOMEN SZ MED. BROWN FLEECE ZIP UP


• Baby Einstein: Baby Wordsworth First Words - Around The House
  

...it appears our punk rock hero is now a domesticated daddy who dabbles in Pottery Barn merchandise. At least he's not paying retail.

I beat you to it Chuck. Sitting around bored, decided to do the Amsterdam t-shirts. Order with impunity boys!

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