Thursday, January 10, 2008

New Years Predictions

Well, I had hoped to get to these a little earlier this year, but between work and procrastination, it just didn't happen. At least I get the benefit of seeing what a few others have predicted, so I get a few categories to think about I may have missed otherwise. With that said, here we go:

1) Housing

You have to be stuck in a time warp to have missed all the discussion of sub-prime and housing prices dropping around the country. Keeping in mind that all real estate is local, and areas like Manhattan will not feel the same impact as, say, the Inland Empire in California, I predict housing will continue it's slide all year. However, to go beyond that, I'll extend my prediction to say that housing won't bottom until at least the end of 2009, but most likely not until sometime in 2011.

2) Recession

We are already in one, and anyone who says we are not is definitely doing crack with their morning shot of Kool-aid. Falling home prices have already cut off the "piggy bank" lines of credit known as Home Equity Loans (what equity?). It was these same MEW's that helped support the 'boom' in the economy over the past several years. With no spare money to burn anymore, things are getting tight for the consumer. As a result, we are already seeing reports of higher balances on credit cards coupled with increasing rates of default on those same credit cards, auto loans and other lines of credit. The consumer is tapped out. And as the consumer is 70% of the US economy, there is no doubt their forced cutback in spending will impact the economy as a whole. We saw it during Christmas, and automakers are already reporting weak sales. So no surprise here perhaps. However, to go beyond that, I will predict that unlike many pundits out there, this recession will definitely be worse than the last one we felt in 2002. This one will hurt, and growth will remain slow for some time to come.

3) The "Credit Crunch"

As I write this today, the news on Wall Street is that Bank Of America may step up to buy Countrywide Financial. As if their initial stake in CFC wasn't enough at $18-20/shr, now they want to double down their bets at $6/shr? What are they smokin' over there? Smart money says wait till it goes bust and pick up the pieces at the fire sale afterwards. Stupid is as stupid does I guess. But I digress. The news is also reporting that both Merrill Lynch (bullish on sub-prime?) and Citibank are seeking BILLIONS in more investment money from Middle East investors. This would be Citi's second tap of funding. It still may not be enough even this time around.

The big problem (to quote a Bill Gross column at PIMCO) is "Where's Waldo"? The current credit crunch has been exacerbated on mainly three fronts -- poor lending standards, rapidly dropping values of structured assets tied to housing financial products, and the lack of transparency in the markets as to who is holding what bad debt and how much of it. It is the last front we have yet to cross to "clear the air" and bring more transparency to the markets. Until that time, the players in the financial world will continue to be reluctant to lend to each other. In addition, the fear of the unknown will continue to keep credit tight. There is NOTHING the Fed can do about this. NOTHING. And while the markets may cheer on rate cuts, the response is too little too late at this point, and most likely wasted bullets on the part of the Fed. They should have cut earlier. Then again, they should have enforced better standards (along with Treasury) and reserve requirements much sooner on in the process of the growth of the housing bubble. Unfortunately, Mr. Greenspan said you could never see a bubble until it was over, and Mr. Bernanke inherited an ungainly mess as a result.

The "Credit Crunch" will continue well into 2008 and will claim at least one major bank and or brokerage house before it is all over. (Can anyone say Washington Mutual?)

4) The Markets and Investing

Over the past year, the place to be was in commodities, certain segments of the energy sector, shorting the dollar, long on gold, and holding foreign stocks. And while I personally have never been a 'gold bug', I believe that the (in the end futile) actions of the Fed to lower rates against a backdrop of rising inflation will again be a boost for the yellow metal and most probably silver as well. In addition, I believe that while the dollar may at some time stage a rally, the trend will remain intact for the dollar to continue to fall. Should we see a significant downturn in the economy, I don't believe the rest of the world will remain 'decoupled' from the US, and stocks in emerging markets could show a reasonable decline. Should this happen in China, I would see it as a buying opportunity, but probably not in 2008. As to energy, typically it is the oil service stocks that do best in a bull energy market. This has been the case all of last year, and I do not expect it to change. Those companies with the resources to drill deep water, and the expertise to seek out and bring to light black gold will do best. Even the oil majors seem relatively cheap compared to their 'energy' worth. And finally, as I already mentioned gold and silver, I think we will continue to see a bull market in wheat and corn, mostly due to our misguided energy policy here in the US and the widespread (and bass-ackwards belief) that ethanol will save us somehow.

5) Elections

I expect the Democrats to solidify their positions in the House and Senate. Should Hillary Clinton be the nominee, I expect her to lose the general election unless the Republican nominee is simply too unpalatable to the far Right to get them to turn out and vote. Should Barack Obama win the primaries, I expect him to go all the way. On the Republican side, I have no clear favorite at the moment, and personally think it won't make much difference in the end. With a recession hitting, the momentum is with the Democrats & it is their election to lose. I should also add that should they make it a 'clean sweep', I expect their policies to further exacerbate the recession thru higher social spending and greater taxation.

6) Employment

Job growth turns negative by the end of the year. And who seriously believes the phony-baloney numbers about unemployment the gov't puts out anyway? They use a birth-death model that everyone knows has serious flaws. In fact, while Wall Street was laying off people, they reported a net gain in financial employment. Go figure. And where did all those laid off construction workers go? Can't find them anywhere in the numbers either. Frankly, the .3% jump last month in the unemployment numbers is the tip of this cycle's iceberg. I won't pick a number, but you can be darned sure it is gonna get much worse.

7) Energy

Any respite in prices will most likely be temporary. The reality is multi-dimensional but goes something like this: 1) middle east producers are consuming more of their own product while 2) recognizing they have a finite supply that is fetching far more than they thought they could get without killing the world economy which is 3) continuing to grow and demand more energy resources at a time where 4) it is getting harder to find and secure stable output because 5) much of the energy we do find is in either geographically inhospitable or politically unstable places and 6) we are not replacing what we use leading to a deficit in production. . I see energy prices continuing to rise.

8) Inflation

Up, up and awaaaayyy....

9) Interest rates

Their goin' down down down, their goin' down...

10) Taxes

California recently reported they expect to see a budget shortfall of $14+ BILLION dollars this year. This is the same state that expected a budget surplus not long ago, and was out floating bonds for non-essential projects and services. I expect to see this play out across the country. States everywhere that rode the boom times of the housing bubble will now suffer in the aftermath of it's deflation. I expect there to be tax increases in an attempt to make up these 'shortfalls', and for the first time in a long time, I predict the voters are going to turn out in mass to protest these taxes at the polls by voting against those who raise them.

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