Mid-year check on the 2007 predictions

It is almost mid-year and that means it must be time to check in on the 2007 predictions made here on New Years Day. The original post can be found here and it also popped up on a number of other websites, lest anyone think there might be any shenanigans.

Looking at it six months later, the first part of the post was rather bold - almost cocky - particularly after doing quite well with the 2006 predictions. Either that or a mild hangover had caused a foul mood.

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.

Wow, so serious!

There was even some discussion about things having become way too serious here at the blog and the need to lighten up a bit.

Well, finally moving out of Southern California has caused the mood to lift, at least a little bit, though it's hard to laugh too much given the precarious state of asset markets around the world.

There I go again - anyway on to the predictions:

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.

Impressive so far ... keep in mind that this came well in advance of the major subprime meltdown that began in late-January, early-February. Hopefully some of you readers who like to play the short side made some money off of this. My days of taking short positions are long over - it's tough to make money betting against the house (literally, in this case).

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.

Again, so far, so good.

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.

Note that there was no year-end prediction for equities - that was probably a smart thing to do. I don't know what I would have guessed and I'm glad I didn't.

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.

So, long-term rates just rose to 5.2 percent and now they look like they're headed back down - the first clear miss in the predictions - it will be interesting to see where they end the year.

Once again, the call on short-term rates looks like a winner - in 2006, when everyone else thought the Fed funds rate would settle in at around 4.5 percent, the call here was for 5.5 percent which was just a quarter-point off.

That call on the money printing, equities, housing, and commodities relationship looks like it makes up for the deficiency in the long-term rates call.

5. Energy Prices will Continue to Climb

Oil will average $70 per barrel in 2006 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.

I just got goosebumps on that one - anyone else? Do any BP employees read this blog?

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.

Hey, the year isn't even half over yet.

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 their 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.

The business of reverse mortgages for senior citizens is one of the hottest sectors in banking today (see this post earlier today). I hope all of them spend all of their home equity and get the best medical care they can buy, then leave nothing to their spendthrift children. Well, this comment only applies to those spendthrift children who have already spent all of their home equity and are banking on their parent's home equity to fund their retirement.

A recession starting in Q4? We'll see.

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.

This is happening very slowly, but it is happening. Watch USA Today - they seem to be ahead of the rest of the MSM on this one.

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.

The mild hangover must have been particularly bothersome when this one was written - hard predictions to verify to be sure. Amusement parks?

10. Nothing Will Blow Up (except 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.

So far, things are looking pretty indestructible now that Hank Paulson knows where all the knobs and levers are at the Treasury Department, but the Bear Stearns blow-up and its aftermath will be a real test. Sadly, the Middle East call wasn't a hard one to make.

I can't wait 'til the end of the year - this is fun!