Wikinvest Wire

Predictions for 2007

Monday, January 01, 2007

After yesterday's shameless victory dance regarding 2006 predictions, an effort will be made today to be a bit more humble when prognosticating on 2007.

We'll see how that works out.

There will be no qualifiers this year about predictions not being taken seriously or being "devoid of worth".

Now that there's an investment website associated with this blog, silliness would be entirely inappropriate when looking ahead into the new year - at least when it comes to investments.

In other areas, some fun will be had, but it is striking when reading the predictions from a year ago and other writing from around that time - things were much more light-hearted around here back then.

Since the website was launched in May, things have gotten sooo serious. That will be New Year's resolution number one for 2007 - to have a little more fun at this blog.

For resolution number two, you'll have to check back in tomorrow. That will be the start of having some fun, but it will also deal with investments.

We'll see how that works out.

Anyway, on to 2007.

1. The Housing Bubble Will Pop

When the word "pop" is used here it refers to a 10 percent decline in the year-over-year national OFHEO resale price data - not refinancings, just resales. Others may define the word "pop" differently, but that's how it will be defined here. All the other measures are so squishy that you really don't know what your getting - misleading medians, incentives for new and existing home purchases, and many other factors make it difficult to really assess what has happened using NAR or Commerce Department data.

The popping will not result from the lack of dumb buyers, but rather a dearth of willing lenders. At some point in time, making sub-prime, option-ARM, interest only, 50-year loans no longer makes business sense, and that time will be 2007. There are far too many headwinds going into the mother of all ARM-resets in the months ahead. Ditech.com will not be able to save everyone.

In some areas there will be hell to pay in 2007 - after rising 200 percent or more since the late 1990s you wouldn't think that a price decline of 20 or 30 percent would hurt, but it will.

2. The Dollar Will Not Tank

The trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) will continue its decline and be positioned firmly in the mid seventies by the end of the year. The Euro will gain prestige as never before, old-Europe will look pretty smart, and Asian currencies will finally unhinge from the greenback a little more, but not too much.

A dollar rout is in no one's interest, and if there's one thing that central bankers know how to do, it is manipulate exchange rates. But, the dollar will go down.

3. Stocks Will Soar

Amid plunging home prices in the U.S., equity markets will continue higher and people will ask each other, Is it Getting Weimar in Here? Where else are you going to put money? In the bank?

The Dow will make new all-time highs on about 75 trading days and the S&P500 will follow with new all-time highs on about 40 days. The Nasdaq will do OK and Google will finish the year where it started. There will be a couple of nasty sell-offs and short sellers will be confounded for yet another year.

4. Interest Rates Will Remain Unchanged

Absent any big external events, the Fed will leave short-term rates at 5.25 percent and long-term rates will hover around 4.5 to 4.7 percent. Nothing will change. The Fed will talk tough on inflation when it's appropriate and threaten to raise rates while at the same time gobs and gobs of money and credit will be created in an attempt to keep asset prices elevated.

This gambit will be successful for equities and commodities, but not for housing. The Fed would much prefer that equities and housing continue to rise in price rather than equities and commodities, but you don't always get what you want.

5. Energy Prices will Continue to Climb

Oil will average $70 per barrel in 2007 and will finish the year at about $75, after spiking to $90 sometime during the spring or summer. Russia will become increasingly important in global energy production and they will become increasingly difficult to work with.

It's payback time for the 1980s.

6. Gold and Silver Will Soar

Gold will spike to around $800 an ounce and will finish the year in the high $700 range. Silver will almost hit $20 an ounce and finish the year close to $18.

Junior mining companies will start to be talked about at cocktail parties - like internet stocks circa 1996 or 1997. It's still early. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from this sector, but they'll be back. The ones who were shaken out for the first or second time during the May 2006 sell off will be the first ones back in when gold approaches $700 again.

7. Economic Growth will Slow, Consumption will Continue

There are still trillions of dollars of home equity that haven't been spent yet and much of it will be spent in 2007. Unfortunately, much of this will be in the form of reverse mortgages for senior citizens in order to make ends meet.

As for the younger crowd and their home equity, eventually it will be like millions of alcoholics at closing time, "Sir, the bar is closed. We can not serve you any more drinks. Please go home." Homeowners will spend they're home equity until they can't anymore - that won't happen in 2007.

Economic growth will continue to slow coming in just below 2 percent for the year with a recession starting in the fourth quarter.

8. Reported Inflation will Remain Contained

More people will realize that the government's inflation numbers are bogus. They won't be happy about it.

9. Job Growth Will Slow, But Not By Much

Some teenagers will be forced to get jobs as their parents' housing ATM shuts down, but not too many. Help wanted signs at coffee shops and restaurants will continue to be ubiquitous and employment at amusement parks will soar.

The current crop of teenagers and twenty-somethings is getting set-up for a three generation wake-up call sometime in the next decade. They won't be happy about it.

10. Nothing Will Blow Up (except maybe the Middle East)

A few hedge funds will go belly up and sub-prime lenders will continue to drop, but nothing really bad will happen. There is a cure for every possible ill now that Hank Paulson is in charge at the Treasury Department. It's clear sailing for at least another year.

10 comments:

Anonymous said...

Derivatives? 370 Trillion and counting - we haven't seen the 2006 numbers yet.

And no shake-up from the Baby Boomers set to retire in '08?

Aaron Krowne said...

A nice set of predictions; of course I largely agree.

I think the wild card is whether financial system instability (either subprime lender or hedge-fund triggered) becomes a general meltdown. Anything like this will cause the stock market to swoon. The underlying situation seems to me to be potentially very chaotic.

But it certainly is possible, if not likely, that the market will just keep on soaring nominally.

At any rate, I'll be tracking the mortgage lender implosion here.

Maybe I should make of those pages for hedge funds, too.

Anonymous said...

What are your targets for the Dow , S&P500 , Nasdaq ?

Apocalyptic like the tin-hat crowd Ritholtz-Roubini ???

ECONOMISTA NON GRATA said...

Thanks for the predictions. I trust that you won't have hide your reportcard in the sock drawer.

Econolicious

My1ambition said...

Am I wrong or is everyone suddenly bullish on stocks? (Yes anonymous, even Ritholtz)

As a contrarian I'm inclined to say that we may have a correction first and then the rally, as appose to the other way around.

Anonymous said...

Stocks can go up but not more than the dollar goes down - in real terms, not necessarily against other paper. You can have Dow 100,000 and apocalypse at the same time, though probably not this year.

Tim said...

Hey, these are just predictions - no one really takes them seriously.

Targets - who knows?

As long as nothing explodes, we'll probably see DOW 14,000 and 1,600 on the S&P500 before the year is out - it will feel just like 1996 again when housing was in the tank and stocks rose 20 percent a year.

Yes, everyone is now bullish - we'll see how that works out.

TJ & The Bear said...

Wow, really stretching there... hope you didn't strain anything, Tim. ;-)

Anonymous said...

I agree that stocks could go up another 10-15% next year, but man are people speculating. This proves how much excess money is sloshing around in the world. Way too much money chasing too few investments. Now that housing is out, stocks, and commodities are back in. Everyone knows the shit is going to hit the fan, the only question is when, and people will continue to party on, investing recklessly chasing whats "in" not whats a good investment like oh I don't know a low P/E, and solid growth, because the Fed will save them from a major loss.

The Fed is going to be able to hold it together for a few more years, but like all bubbles the bigger they are the bigger they exploid. Most everything is skyrocketing in price, look at what Art pieces are selling for now 100 millon for a painting is not uncommon at all, its absolutly crazy. Way too much money out there, and the world's printing presses will continue to run at full speed. Untill everyone is so burried in debt they can't loan it to no one, no matter what the rate. When that happens in a few more years its going to get really ugly.

Anonymous said...

1. yes housing will pop.

2. I'm unsure of the dollar, how long before someone gets tired of taking a 10%/year loss on U.S. Debt and dollars? Someone will panic and crash the works, this year? who knows but with electronic trading and potential U.S. enemies holding a fiscal weapon I would suggest a pile of bullion in everyones basement, being wrong is not worth the risk

3. huge amounts of invented money can't help but bid up stocks.

4. interest rates stagnant, these guys can't claim to fight inflation without admitting they've lied about reporting, they can't lower without creating more inflation. A losers game

5-6 energy, gold/silver have real value and 2/3 of these have real shortages. Energy will keep up with the stock market, gold and especially silver will beat the market soundly.

Energy however is a wild card based on nothing bad happening in any oil state.
Nigeria, suadi, iran, etc.
Something in the middle east is bound to eventually blow up. I suspect a camel and 200kg of Semtex will take down a section of Saudi pipeline, or Iran will retaliate for a Israeli attack and close the gulf. The market was unstable this year with no serious hurricanes, what if next year is windy.

7. people are stupid. the spending will go on until the repo guy shows up to drag people's crap away.

8. The truth as shown on Shadowstats will start speading, woe to the lying scum.

9. yep.

10. Hedge funds and derivatives have a lit fuse we just don't know how long the fuse is. Amaranth was the first of many, and some will be much bigger. The naked shorts on Comex will get bent over a picnic table and roughed up real bad. It won't all come tumbling down this year but it will get a lot scarier.

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