Analysis of Fundamentals

I was rather cryptic a few days ago describing how I think about the economy and how I try to determine its most likely trajectory, so here are the basics. "IT" means the world economy.

Where is IT now ? A solid base of activity and trade exists worldwide with increasing freedom and trade.

Where and how strongly is IT moving ? Worldwide and even in the US alone, growth is still positive, but less positive that before.

A system in motion will continue in motion unless acted on by sufficient outside forces to alter its path.

What are the forces on IT ? Current fed policy is still restrictive as is ECB and Bank of England policy. China seems to be trying to find a restrictive level of policy. Fiscal policies are roughly neutral, and the US trade deficit is still adding to the global monetary base. Recent Fed and ECB policies on credit lending are positive forces in relieving credit market problems [ref. Fed's TAF, ECB's policies].

What transition events are occurring and will they amplify or cancel ?
1. Overbuilt US housing market causes loss of incomes [construction activity falls] and credit market cutbacks [loan losses].
2. Overbuilt financial industry in structured markets, hedge funds and derivatives cause losses and fear.
3. High energy prices cause a shift in investment and consumption patterns.

Items 1 and 2 are connected, but different and have amplified each other. How do these amplify and induce changes in the rest of the economy ? Low income people are hurt by 1 and 3. Rich Wall Street scammsters are hurt by fallout from 2. Real estate speculators are hurt by 1 and 2. Overspending consumers are hurt by 1, 2 and 3.

What supports exist to restrict changes ?
A. Jobs are still "OK", but growing less. But people still have jobs on average.
B. Export trade is growing.

Item A helps cancel item 1 and keeps item 3 within limits. Item B does the same. The restrictive Fed policy amplifies 2 - a bad situation. The TAF helps 2 a bit. Growth in world monetary base might be somewhat neutralized by the flow of $ to places like the oil states where the money might be used less actively.

So what is the main problem - obviously it's the combination of (I) weakly constrained effects of item 2, viz., financial panic risks and (II) the still restrictive global force of tight money policies by central banks. This is why I say that the Fed must cut rates now to a low neutral or even stimulative level of under 3.25%, which is 100 bps below the current overnight rate.

So I am a bull and think this is a bull market correction. IFF the Fed acts, then this is a great buy point to load up ... and I will go heavily long. I like to be 200% long on the big dips so have a lot of buying power ready .. waiting.

PS: GE good earnings, meets "Street", reaffirms 2008 guidance. No world recession.