A mid-year look at the 2008 predictions

Now half-way through the new year, today seems to be as good a time as any to have a look at the predictions for 2008 made back in January.

Just for fun...

Aside from oil and gold prices going up, about everything else was thought to be heading down in the new year, something that appears to be happening at a rate even faster than believed at the time.

As usual, most of the forecast seems about on-track however, the second half of 2008 is shaping up to be some kind of a blockbuster with the Olympics, the U.S. election, and soaring oil prices.

The oil price peak of $130, a bold call at the time, looks absolutely tame six months on. As for the other predictions, let's have a look.

1. Lots More Pain for Housing

There is a near consensus that housing is in for more trouble in 2008, but this is not one of those cases where it would be better to go against the crowd - that will happen in another couple years or so when your friends and neighbors tell you that real estate is a horrible investment. Just like back in 1995-1996, when no one wanted to go near an open house five years after that last peak - that's when you'll know we've hit bottom.

Housing prices will fall another 10 percent nationally, based on the year-over-year change to the 20-city S&P Case Shiller Home Price Index for October 2008 (this report gets released at the end of December and showed a 6.7 percent decline as of last week.)

In some areas home prices will reach 2003 levels, which, in California, would still be more than double the price at the 1995-1996 bottom but will be a painful 40 percent below the 2006 peak. Don't let talk of stabilizing sales for new or existing homes confuse the issue of home prices - home prices will continue to fall as long as inventory remains at historically high levels.

Predicting no rebound in housing was a no-brainer. The Case-Shiller index is now running at about minus 15 percent year-over-year and may moderate a bit by year-end - we'll see. Generally speaking, California home prices have reverted to at least 2004 levels - back to 2003 prices by year-end seems pretty likely.

2. The Dollar Will Continue to Go Down

The eight percent decline in 2007 on the trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) was such a success that there will be another, slightly smaller, decline in 2008. By year-end the index will be at 71 or 72 and economists will marvel at how the trade deficit is narrowing and how gross domestic product is receiving welcomed support due to more exports.

The Japanese yen will gain the most against the greenback and both the euro and the Canadian loonie will strengthen, but not as much as in 2007. The British pound will lose ground to the buck as credit and housing market problems accelerate in the U.K.

The U.S. Dollar Index hit 71 in March and has been oscillating around the 72-73 level for a few months now - remember that a collapse of the dollar is in no one's interest (except gold bugs).

So far the yen has strengthened by about five percent and the euro has gained about seven percent - both the Canadian dollar and the British pound are about flat.

3. It Will Be a Bad Year for U.S. Equities

The Dow and the S&P 500 Index will decline by 5 percent and the Nasdaq will gain 1 percent. Foreign stocks will continue to do better than U.S. stocks, but there will be fewer high-flyers than in 2007.

The Chinese stock market will gain more than 50 percent by summer and then lose most of the gains by year-end. The Japanese stock market will be one of the top performers in the world.

Perhaps a bit too optimistic here with double-digit declines so far nearly everywhere and lots of "low-fliers" overseas - perhaps a rebound by year-end. That must have been a typo with the Chinese stocks - "will lose 50 percent by summer" would have been a better guess and the Nikkei is looking quite sickly at the moment.

Aside from energy and big mining companies, it's been a horrible year for equities.

4. Short-Term Interest Rates Will Go Much Lower

The Fed will cut interest rates by a quarter-point at every meeting and at one meeting they will cut by a half-point putting the Fed Funds rates at an even two percent by year-end.

They'll continue to talk tough about inflation occasionally but no one will really care - inflation will be the least of the country's problems by summer.

Two percent by year-end looks like a pretty good bet though how we got there was quite a surprise. With round 3 (or is it round 4?) of the credit crisis about to get started, inflation concerns may get pushed off the front page for a while.

5. Energy Prices Will Continue to Rise

The price of crude oil will rise to over $130 per barrel before ending the year at $115 per barrel. Just like $3 gasoline wasn't a big deal, $4 gasoline won't be a big deal either - unless of course you use your car a lot and/or you don't make a lot of money. Then it will be a big deal.

Natural gas, a laggard over the last two years after a spectacular rise in 2005, will surprise to the upside in 2008.

At the time this prediction was made, crude oil was about $95 after having gained about 50 percent in 2007, so the $130 peak, which looks quite timid now, was actually rather bold.

Crude at $115 a barrel by year-end - that depends on how the hurricane season turns out and how much demand declines. Natural gas was something of a no-brainer as well - see the United States Natural Gas ETF (AMEX:UNG).

6. Gold and Silver Will Continue to Rise

Gold will spike to over $1,000 per ounce and finish the year just below that mark. Silver will hit $22 per ounce and end the year at $19. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from precious metals markets, but they'll be back.

People will start talking about junior mining stocks at cocktail parties - just like internet stocks in 1997. (I'm going to keep saying this until it's true).

Gold hit about $1,030 per ounce and silver reached about $21 per ounce back in March while the number of gut-wrenching corrections stands at one. The year-end guesses seem a little low at the moment and we'll see about the junior mining stocks - they've been all-but-dead for a year now.

7. Economic Growth will Turn Negative, Consumption will Decline

This is the year that the American consumer finally pulls back in a big way and real economic growth will be negative in two quarters. Home equity, the source for much of consumer spending in recent years, will vanish more quickly due to falling home prices than it did when people were spending their home equity like drunken sailors.

Well, the stimulus checks are kind of mucking up the prediction about consumer spending, but word came yesterday that the annual revisions to GDP may push one or more of the recent quarters into negative territory (not that inflation-adjusted GDP growth has any real meaning anymore, what with the accuracy of the inflation adjustment being so questionable).

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.

Hey, inflation's only four percent. What's everyone complaining about?

It was 15 percent back in 1980, so we've got a lot more pain coming before peoples' moaning and groaning should be taken seriously. Of course the inflation calculation really can't be taken seriously, so, maybe all the moaning and groaning is justified.

9. Job Growth Will Turn Negative by Year-End

State and local governments will cut back on hiring due to shrinking tax revenue and fewer people will eat out - two important props for the job market will be partially removed. Employment in health care will continue to boom and even fewer people will talk about the looming Medicare crisis.

By the end of 2008, year-over-year job growth will turn negative but it will be impossible to really know for sure until sometime in 2010 when the Bureau of Labor Statistics completes all its revisions for 2008.

Help wanted signs at coffee shops and restaurants will slowly disappear which will be unfortunate for those teenagers who finally have to start looking for low-paying jobs to buy their next iPod or cell phone because their parents have spent all their home equity.

There were no net declines in non-farm payrolls until January of this year, but since that time, payrolls have declined by over 300,000 with the ADP saying earlier today that another 80,000 went bye-bye (the monthly BLS labor report is tomorrow).

On a year-over-year basis, job growth is still positive (+0.2 percent) but that number turning negative by year-end is just about guranteed at this point.

10. Hillary or Barack will Win the Election

It's too bad Ron Paul isn't ten or fifteen years younger - in another eight years the country will be ready for him.

At the time, my gut told me to just say Barack but that felt like it was going too far out on a limb - shoulda just went with the gut.