Uh Oh... "It's Coming in 2008"
By Dr. Steve Sjuggerud
August 10, 2007

Talk about a bold call...

When interest rates were 15% back in 1980, Steve Leuthold wrote an extraordinary book predicting that interest rates in America would fall to 5%.

Nobody believed him... everyone thought inflation would run away from us and that we were doomed. In his book, The Myths of Inflation, Leuthold also predicted inflation would fall to 3%.

He was right on both counts. These bold predictions were extremely optimistic. So when Steve Leuthold makes a bold prediction – whether it's optimistic or pessimistic – I listen.

Steve Leuthold is one of my favorite investment analysts. Last year, DailyWealth's Tom Dyson trekked up to Minneapolis to meet with The Leuthold Group. In the process, the group put us on its client mailing list. We appreciate it (If you're looking for a good money manager in this rough time, you may want to get to know these guys... visit www.leutholdgroup.com).

In its latest missive, The Leuthold Group sizes up recessions since World War II. The evidence presented, based on one statistic, is decidedly negative... This indicator has only been wrong once (in '67). And the indicator is signaling that recession is coming in 2008...

The indicator is relatively simple... when long-term interest rates dip below short-term interest rates, it's a bad sign. The chart here tells the story... The blue line is the ratio of long rates to short rates. When it goes below zero, recession sets in roughly less than a year's time:

The indicator has just flashed again. If it's right, recession should be around the corner. With the problems in the real estate market, compounded by the subprime lending problems, it shouldn't be a surprise if we do see a recession.

Why would long-term rates ever dip below short-term rates anyway? Under normal circumstances, you'd want to be paid more for lending money for a long time than for a short time. Here's why it can happen...

The Federal Reserve controls short-term rates. But long-term interest rates are left up to the free market. What the free market is trying to tell the Fed is "Lower rates now!" When the Fed doesn't listen, short rates go higher than long rates, stifling the economy and pushing us into recession.

Leuthold also looked at the '40s and '50s and found that, even though the Fed kept interest rates artificially low, whenever the ratio of long rates to short rates got extremely low, recessions hit. In all instances, stocks turned down before the recession set in.

Leuthold sums the study up by saying if stocks stay weak, and we combine that with the inverted yield curve, the likelihood of recession in 2008 is "quite high."

We hate to be bearers of bad news... but it's our job to share the facts with you, as they relate to your investments.

We do operate on the idea that there is always somewhere in the world to make money.

So in future editions of DailyWealth, we will show you how to protect and grow your money – even if Steve Leuthold is right and recession hits in 2008.

Good investing,

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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