As King Solomon is reported to have remarked...'There is nothing new under the sun'...And much later legendary stock trader Jesse Livermore commented...'There is nothing new on Wall Street.' And this is the summary of a panic written by Walter Bagehot, influential economist/banker and editor of The Economist, during the mid-Victorian era in his essay on Edward Gibbon...'Much has been written about panics and manias ... but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money ... the money of these people, the blind capital as we call it, of the country is particularly large and craving; it seeks someone to devour it, and there is plethora, it finds someone, and there is speculation, it is devoured and there is panic.' As long as the wind blows, as long as the grass grows, human nature will remain unchanged.

It is when the canary stops singing that you need to worry.

Not deathly quiet yet, but the tune is clearly no longer so bright and upbeat.

Consumer confidence is key: There are several surveys of consumer confidence, and when they all turn down then usually we see a fall in consumer spending.

If consumer spending goes down, then we are in a recession. If consumer spending holds up or increases, then no recession. I hate to oversimplify, but it really is that simple.

Now variations in business spending (real investment in inventories and plant and equipment) do matter a lot because they fluctuate greatly. Changes in investment frequently trigger either recessions or booms. Note that new home construction is counted as investment; it is way down. Thus I do not look for a boom in investment spending to keep the economy going in the face of declining spending by consumers.

Last year I forecasted a recession in 2007; I might have been right then.

Note that government deficits are expansionary, but here it is change in the size of the deficit that has the most fiscal effect, and because the deficit is not increasing, I do not look for expansionary effects from fiscal policy this year.

So long as consumers keep charging more and more on their credit cards (and clearly, increases in credit-card debt cannot indefinitely outpace increases in nominal income in percentage terms) the economic expansion will continue. If consumers spend less, then yes, we are going to into a recession, and it could come quickly.

It's strange how the financial headlines (Bloomberg) these days are so eerie and contradictory:

Lehman Brothers Closes Subprime-Mortgage Subsidiary, Fires 1,200 Employees

U.S. Stocks Rally on Speculation Takeovers Will Pick Up, Economy Will Grow

Citigroup, JPMorgan, Bank of America, Wachovia Tap Funds From Fed Window

U.S. Notes Fall on Speculation Fed Rate Cut Will Be Held to Quarter Point

Mortgages Lead Biggest Rise in Late Loan Payments Since 1990, FDIC Reports

Lehman, Accredited, HSBC Shut Offices, Fire Employees Amid Subprime Rout

Capital's Discus Hedge Fund May Lose $407 Million After Sentinel Collapse

So stocks go up 145 pts on the Dow on speculation that merger mania is coming back. What I want to know is what information these traders are acting on. 'cause I couldn't possibly go long on stocks based on the news that I'm hearing. I now expect that when some actual good news appears again, stocks will crash.

-Don