Sunday, January 01, 2006
Everyone else is doing it, why not here too? On this first day of 2006, a number of predictions are humbly offered to readers who happen by this blog looking to be informed, looking to be amused, or just looking.
Before getting to the predictions, a few qualifiers are in order. First, it is a firm belief here that predictions have no value whatsoever - they are purely for fun, devoid of worth. As it is sometimes unclear to readers of this blog (as well as to the author) whether any particular post is satire or an attempt at making a serious argument, this first caveat may prove useful in the future, should some of these predictions come to fruition.
In fact, this entire first qualifier could be quickly stricken from this post in late 2006, just before referencing it in an "I told you that was going to happen" sort of victory dance - a confirmation of clairvoyance, if you will.
But, that probably won't happen.
Secondly, this should not be construed as investment advice. If it is taken that way, then you should consider that the quality of the advice is commensurate with the amount which was paid for said advice.
Although, we do continue to recommend that everyone should own at least two one-0unce American Eagle gold coins - just so that the owner can occasionally hold them in one hand to appreciate the density and the weight, to admire the luster, and to hear the sound that is made when precious metal comes in contact with precious metal.
To that extent, this should be considered investment advice.
Off we go ...
The Housing Bubble Will Not Pop
Despite everything that bubble blog readers, writers, and commenters may feel in their loins, there are just too many willing lenders and too many dumb buyers out there. While 2006 homebuyers may hear something about a "housing bubble", it won't register until 2007, at which time, it might register in a very big way.
Housing is still affordable with all the wacky loan products available today and guidance is no substitute for regulation - look for wackier loan products in 2006 as the biggest fools achieve the American dream of home ownership.
Sure, the speculators are going to squeal a little, and in some of the hottest areas, don't be surprised if by the end of 2006 you see year-over-year declines of maybe 10 percent or more, but nationally, prices should be about flat to up a little for the year.
Having observed the phenomenon that is the worldwide housing bubble for a few years now, it seems that the turning of the real estate market will be akin to turning an aircraft carrier - very slow, but near impossible to stop - a long, drawn out period of flat to gently falling nominal prices with falling real prices, after maybe a fairly large jolt to the price structure in 2007.
The Dollar Will Not Tank
The trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) will resume its decline and be positioned firmly in the low eighties by the end of the year. Against commodity based currencies found in countries such as Canada, Australia, and New Zealand, the U.S. dollar will fare worse, but not by much.
After a lackluster 2005 for U.S. investors, foreign currencies and bonds should once again be a good place to park money in 2006.
After closing out some of his previous positions in 2005, when you hear that Warren Buffet has once again placed more bets against the U.S. dollar by buying foreign currencies with some of Berkshire's huge pile of cash, it will have been too late - most of the gains will already have been made.
Stocks Will Not Tank
U.S. equity markets should be about flat for 2006, with growth limited mostly to energy and natural resource companies along with some big multi-nationals. Asian markets will fare better, particularly overseas natural resource companies supplying commodities and related services in support of Far Eastern growth. Google should hit $700.
There will be a couple of nasty sell-offs in U.S. equities and a couple of miraculous recoveries - short sellers will be confounded for yet another year as Plunge Protection Team conspiracy theories swirl once again.
These market gyrations will generate only a minor disturbance in the force that is the American investor continuing to dump retirement money into a stock market that they have been trained to believe will provide for them in their golden years.
Interest Rates Will Rise Further Than Most People Think
Absent any big external events, the Fed will raise rates to 5.5 percent by late 2006 and stop there. Getting to 4.75 percent is a given, as incoming Fed chair Ben Bernanke must show his mettle, but rising commodity prices and reasonable growth will have even Mr. Bernanke erring on the side of fighting inflation.
Our Asian trading partners will keep long rates fixed at 4.5 percent, so toward the end of 2006, there should be almost 100 basis points difference between the 30-year note and the Fed funds rate.
The 2006 inverted yield curve will accurately predict the recession of 2007.
Energy Prices will Continue to Climb
Though oil will average almost $70 per barrel in 2006, gasoline prices will remain under $3 gallon. The entire world learned a valuable lesson about the American consumer and gasoline prices - nobody wants to repeat that bout of lost confidence in the Fall of 2005, and one way or another, gasoline prices in the U.S. will stay under $3.
Natural gas and heating oil will remain uncomfortably high, gently squeezing the thirty percent of the populace that do not own their own homes. Most of the population will be able to borrow against their homes, if necessary, in order to continue to heat them.
Gold and Silver Will Soar
One of the best places to be invested in 2006 will be precious metals - gold and silver. Look for highs near $650 an ounce with a year-end price just below that figure for gold, while silver surpasses $11 an ounce.
Shares of mining companies in general, but junior exploration companies in particular, will see huge gains as the price of the underlying metal rises. Most U.S. investors will discover these smaller Canadian companies after they land at the AMEX or announce that they are now in the uranium business, so for maximum gains, be sure to get in before they make that move off of the pink sheets and before they make their uranium announcement.
There will be at least one gut-wrenching correction that will cause many new investors to make an early exit from this sector. But, when the gold dust settles on 2006, there will be a lot more precious metal investors and prices will be much higher.
Economic Growth will Slow, Consumption will Continue
The still-undaunted overly indebted American consumer will continue to provide support for the American economy, however GDP growth will slow noticeably into the 2 percent range. Consumption will remain fairly strong, with an increasing portion financed by home equity withdrawal, which will be a big story of 2006.
As more and more seniors use reverse mortgages, more and more younger people will rely on home equity as a source of income. There are many trillions of dollars still available via home equity extraction, and if you think those Ditech.com commercials were annoying in 2005, you ain't seen nuthin' yet.
Advertisements for home equity withdrawal will be ubiquitous in 2006, as millions and millions of homeowners are forced to tap their housing wealth to make ends meet for a lifestyle that they can no longer afford.
Unfortunately, for many seniors, the lifestyle that they can no longer afford consists primarily of paying for prescription drugs and heating their home.
Reported Inflation will Remain Contained
Reported inflation for 2006 will once again be benign. Three new measures of consumer prices will be developed and widely publicized in the new year - they will all measure inflation at around two percent.
Long-term inflation expectations will remain contained.
There will be a growing chorus within the mainstream financial media that question the continuing rate hikes by the Federal Reserve while reported inflation remains under control. A new commodity based inflation indicator will be developed, showing inflation near twenty percent, but most economists and the mainstream financial media will pay little attention.
Ben Bernanke will awkwardly refer to this commodity based inflation indicator during a Q&A session before a Congressional subcommittee, sparking a $25 rise in the price of gold the next day.
Job Growth Will Slow
As nationwide residential construction employment levels out and begins reversing, Gulf Coast re-construction employment will take up the slack. There will be a mass migration of sorts, from the Rust Belt to the Gulf Coast for those seeking steady employment and a better way of life.
More hurricanes will cause more destruction later in the year and more re-construction will be planned. This cycle will continue for many years, providing stable employment for hundreds of thousands of workers who otherwise would be unemployed.
Retail sales and food service jobs will continue to be available as homeowners continue to tap their home equity in support of the lifestyle to which they have become accustomed. Overall, employment will slow, but not by much.
There will be Major Unrest Somewhere in the U.S.
Somewhere within the continental U.S. there will be major unrest - likely in either the Gulf Coast or the Rust Belt. It will look a little like recent events in France or Australia, except that, with ready access to handguns, people will be shooting at each other.
In part, the unrest will be spurred by a growing realization by many people that their experience in the world is not matching what the government is telling them it is.
As the gap between rich and poor widens, and as the middle class and senior citizens are squeezed, more people will question the oft-repeated proclamations that our economy is strong and that inflation is not a problem.
More people will attend church and more people will buy handguns.