The FED cuts

A interesting observation regarding the rate cut earlier this month:
Ben Bernanke himself made a clear statement that he will take immediate action once it becomes clear that output growth is threatened.

Bearing this in mind it definitely could be a sign of a weaker US economy ahead. Given the magnitude of the numbers involved the often citated "wealth effect" is likely to be the dominant factor behind US citizens cutting their consumption expenditures in the coming months.

Of course it is very interesting how fast this will happen. The stock market right now shows no signs of an imminent recession - being close to all time highs.
But to put it into a nutshell I strongly believe that the stock prices with P/E ratios that are based on historical record margins and an almost 17 years ongoing economical boom (with one small interruption) are not reflecting the true state of the US economy.

A rate cut will not change the underlying trends and problems that threaten to hamper future growth. And it certainly will not solve problems like weak peronal balance sheets that seem to become a mass phenomena.

Conclusions:

- Odds of a US recession in 2007/Q1 2008: 60%
- Odds of a US recession in 2008: 75-80%
- Another round of rate cuts: 90-99%