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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Financial Forecasts Date: 3/1/2006 4:12 PM
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A web site calling itself The Financial Forecast Center (found at http://www.forecasts.org/index.htm ) is offering 6-month forecasts for the following items: the major stock indexes, money rates, the US General Economy, and some key currency rates.

My guess (from looking at their charts) is that the forecasts are made using neural nets, which means they have to be regarded with extreme skepticism. (GIGO, right?) Not that good work can't be done with neural nets. But getting the imputs right is tough, and if the information were of genuine value, it wouldn't be free. So the forecasts should be treated as guesses worth exactly what you paid for them.

But a couple of their forecasts might be of interest to fixed-income investors. They imply that the Fed will hike at the March meeting and then go into a holding pattern, which is close enough to conventional wisdom as to be unsurprising. (I've seen guesses that there will be two more increases and then the Fed will hold. The price of crude seems to be the current, key variable with the usual economic reports paying a supporting role.)

But –-and this is potentially important and is suggested by other market observers as well, namely Chuck Butler of “The Daily Pfennig”— they forecast that the Three Month LIBOR Rate will continue its steady climb, until by July it is 120 basis above where it is now, or a yield of 5.97% versus a Three Month Treasury Rate of 5.4%. That's a difference that could be significant if it happens. If the US continues to have large borrowing needs and its interests rates aren't competitive, then they aren't going to be able to borrow as easily as they have been doing. This suggests that the Fed will have to match the rates offered by Europe's Central Banks or try to force them to lower their rates. But my guess is that Europe won't accommodate the US at the jeopardy of their own economies, and they will appeal to the Maastrict Accord as the excuse. Thus, the US will be forced to keep hiking, which will trash the stock market (and, therefore, the economy) and we will end up with stagflation and plenty of blame all around.

Caveat: The preceding is just very wild, Wednesday afternoon speculation as I try to figure out my moves with respect to TIPS and I-Bonds. Inflation is headed upwards, but I'd like to see a larger fixed rate before I start buying. At this point, I'm simply trying to identify the catalysts that would make that happen. An interest rate differntial that favored Europe over the US might be enough. But, as I say, I'm just guessing at this point, and I'm not ready to start betting real money. I want to see more data.



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