Whats up with this market?

Given that both of my short positions in JP Morgan and Washington Mutual utterly failed last winter, I have no trading capital left. So, unfortunately until I decide to fund the account again I am just left to giving my general opinion (for what it is worth) on whats happenin.
I thought it was worth writing my take on the market selloff from earlier this week. Most of my friends, clients, colleagues, etc. know me as a bear as I tend to be pretty negative on the prospects of the US economy in general over the coming few years. Much of my discussion in the blog post has focused specifically on the expected bursting of the housing bubble and the probable fallout in the homebuilding and banking sectors as a result of this shakeout. So I should not have been surprised but I received quite a few phone calls on Tuesday asking me what the hell was going on with the stock market and whether or not it was going to continue. I will try to spell out my answer to this question in as logical a format as I can.
So I guess the first question going forward is what is happening with the economy and how is that filtering through to stock prices and market action? Generally economic expansion as defined by postive real GDP growth in the 3-5% range annually is considered an important factor for a healthy stock market. When real GDP growth goes negative for two straight quarters we get a recession and even if real GDP growth slows in the 1-2% range it is often enough to send some tremors through the markets.

Right now there is a major ideological battle being fought between the bulls and the bears over the state of the US economy. Real GDP growth for Q4 2006 was recently revised downwards from 3.5% to 2.2%. I expect that Real GDP growth will turn negative before the end of 2007. The major driving force here can be illustrated pretty simply with the GDP formula. GDP = Consumption + Investment + Government Spending + Net Exports (Exports - Imports).
In the USA, consumption accounts for something like 70%. As illustrated by the negative savings rates of the American populace (that is in aggregate we not only save ZERO of our incomes, we actually borrow and go into debt so that we can spend more than our income), I believe that the American consumer is between a rock and a hard place. One of the major reasons that Americans were able to keep consumption high over the past several years was by cashing out their home equity by refinancing their mortgages. As real estate prices now moderate and even decline that source of funds for consumer spending will disappear.
With the major input into GDP expected to decline over the coming few years (consumer spending) it is not that hard to make the jump to a recession and a bear market in stocks. As a result, I believe that any further rallies or resumption of the bull market in equities we have experienced since 2003 should be sold in order to redeploy the funds into cash/money market and / or precious metals or mining stocks.

Other than the metal and cash I am not a big bull on anything this year. I think there will be lots of money to be made in shorting the financials. People have already made a killing shorting the subprime lenders over the past several weeks as it has become clear that subprime lending was a total ponzi scheme. The next stop are the Alt-A lenders, soon to be followed by the prime lenders (re: WFC, WM, and CFC). The economy hitting the skids should not be inflationary it should in fact decrease demand for most commodities over the short run (including oil and natural gas). As a result I do not think the energy play will treat people well over the coming 6 months - 1 year.

The reason that I am backing the precious metals (still) is just the idea that the Fed will have to cut rates sometime this year. I am firmly in the camp of Bill Gross who expects a Fed Funds rate of 4.25 ( a full 100 basis points lower than current) by December of 2007. These low interest rates should help accelerate the run on the dollar which should further benefit gold and precious metals shares.

Thats the long and short of it.

Best regards,
Ben Green