A Dark Year Lies Ahead.

UNITED States economy, 2001-2009; ECONOMIC forecasting; STOCK market bubbles; BUSINESS cycles; HOME prices; RECESSIONS; PRICE deflation

Analyzes the economic outlook for the United States in 2006 and mentions the author's 2005 forecast. On a total-return basis, Treasury bonds beat the S&P 500, the Dow and the Nasdaq. The issue of shorting Regional Bank HOLDRs Trust, didn't pan out; it gained 2.9% in price. But the author recommends that investors stay short. The author predicts that the current housing weakness will develop into a full-scale rout. Median home prices need to fall 29% to return to their normal relationship with rents and 35% to relink with the Consumer Price Index. The Fed will tighten until housing drops and will seriously invert the yield curve in the process. The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin. China will suffer a hard landing precipitated by the U.S. recession and the Chinese central bank's efforts to cool an overheated economy. Weakness in the U.S. and China will spread worldwide, dragging down stocks universally. Treasury bonds will rally further this year. The dollar will remain strong. North American energy is an attractive investment. The global deflation could start this year. U.S. consumers might start a saving spree this year.