It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

True, retail sales fell 0.4% in December and fourth quarter real GDP probably grew at only 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.

It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.

A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year - real GDP expanded 4.4% at an annual rate between April and September.

With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.

Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications.

Some large companies outside of finance and home building are reporting lower profits, but the over-reaction to very spotty negative news is astounding. For example, Intel’s earnings disappointed, creating a great deal of fear about technology. Lost in the pessimism is the fact that 20 out of 24 S&P 500 technology companies that have reported earnings so far have beaten Wall Street estimates.

Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probablility of recession this year is 10%. This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.

Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect ftorm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire “house of cards,” otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.

For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problem spread like wildfire.

This outlook is both perplexing and worrisome. Perplexing , because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recentl estimated as $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of the total U.S. assets.

Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.

In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover’s tax hike pased in 1932, and then FDR’s alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup of grace. No wonder thousands of banks failed and unemployment ballooned to 20%.

But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.

These monetary conditions are not conducive to a collapse of credit markets and financial intitutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.

Which brings up an intersting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to buld a better system that is stronger and more reliable.

Pumping massive amounts of liquidity into the economy and pumping up government speding by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.

The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it’s the development that ivestors should really worry about. It reads just like the 1970’s.

The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consisten canary in the coal mine for recessions, are nowhere near a level of concern.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying , and there is still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. DOW 15,000 looks much more likely than DOW 10,000. Keep the faith and stay invested. It’s a wonderful buying opportunity.

Steamboat Springs — Tim Kitching and Bruce Hill were so taken by the Cowboy Downhill last year that they went out of their way to see it again.

“We’re in Breckenridge (on vacation) this year, so we hired a car and came up for the 34th Cowboy Downhill,” said Kitching, of London. “Seven thousand miles for the Champagne Powder and the Cowboy Downhill — and the Fat Tire.”

Hill, of Inverness, Scotland, also fancies the curious Steam­boat staple.

“I love the way they have no fear — either no fear or no brains,” Hill said of the cowboys. “Every single one of them collapses at the first jump.”

As one of few cowboys who wasn’t strapping on a pair of skis or a snowboard for the first time Tuesday, Ray Thurston might take issue with Hill’s comment. Thurston, a bull rider from Tabernash, is a former J3 Junior Olympic Alpine racer and champion of the 2007 Cowboy Downhill. He stayed upright throughout a swift run in the dual slalom race and became a two-time champion with a time of 25.63 seconds.

But shortly before that performance, two of Thurston’s friends said that when it comes to the Cowboy Downhill, people like him are the exception, not the rule.

“We’re the crowd pleasers,” Dusty Shipp said of himself and Jeremy Sparks, who are both from Wyoming. “We crash a lot.”

“Me and Dusty, we’re the epitome of this thing,” added Sparks, who guessed about 5 percent of the event’s 70 cowboys were capable skiers or snowboarders. “They need to have two sections: one for pros and one for bros.”

The dual slalom race won by Thurston was followed by the Cowboy Downhill’s most crowd-pleasing event: a mass-start stampede pitting all the cowboys against each other in a chaotic race down Stampede. Shawn Hogg, a bull rider from Odessa, Texas, won that event.

The course for both events is accentuated by a large jump in the middle that claimed more than a few rookie skiers and riders, including Miss Rodeo Arizona, Katie Hill, who won the title for best wreck. It was only her second time in a pair of skis.

It also was Texan Jerod John­ston’s second time on skis. His first time was Monday. After a less-than-graceful showing in the dual slalom race, Johnston was happy with his performance considering how new he is to the sport.

“I wiped out pretty good,” Johnston said. “I was nervous as hell, but I impressed myself.”

With all the crashes that took place Tuesday, numbing influences were welcome. Bud Light sponsored the event, and it didn’t take much effort to get plenty of frosty beers into the hands of competitors.

The Cowboy Downhill is scheduled to coincide with the National Western Stock Show and Rodeo in Denver each year. In addition to being a member of the Professional Rodeo Cowboys Association or the Professional Bull Riders Association, participants must be entered at the stock show.

In addition to these requirements, participants must wear chaps and cowboy hats. Some additional cowboy flair was thrown into the dual slalom race. Once through the course, racers had to lasso a Steamboat Ambassador and saddle a horse before crossing the finish line. Cowboys loosely followed those requirements, with most simply throwing a rope at the ambassador and a saddle at the horse in a mad dash for the finish.

As one participant told a Cowboy Downhill announcer after his race, “If you ain’t cheating, you ain’t trying.”