Wednesday, December 31, 2008
Well, unfortunately, it's that time of the year again - time to look back at the first of the year to see how yours truly did with his Predictions for 2008 and be humbled as never before.
During the two prior years, things had gone largely as expected:
The self-grading system that has been in place here for the last few years (not to be confused with our self-regulating financial markets) has produced the following results:
- 2006: 6-As, 2-Bs, 1-C, 1-N/A
- 2007: 7-As, 2-Bs, 1-F
The year that completes later today was quite a different story than the last two as we all know, unprecedented in many ways, including the unprecedented number of times the word "unprecedented" has been used when describing the goings-on in the global economy and world financial markets.
Let's see how things turned out...
1. Lots More Pain for HousingGrade: B+
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.
Yesterday's report from Case-Shiller had the 20-city index down a whopping 18 percent. I'm not sure if anyone predicted that big of a drop, but, if they did, congratulations are in order.
Home prices in California have indeed fallen back to the levels of 2003 and, in some cases, they've reached 2002 levels as seen in the latest report from DataQuick. It's pretty amazing that home equity is vanishing more quickly than it appeared in the Golden State where your typical Southern California homeowner lost about $150K of their "housing wealth" in 2008.
2. The Dollar Will Continue to Go DownGrade: C
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.
It looks like the U.S. Dollar Index will end the year at about 81 after starting at about 76, falling as low as about 71, then rising to 88, and falling again. This is probably the first of many instances that my prediction would have been great at mid-year but not-so-good by year-end because of those little problems during September and October.
The yen gaining against the dollar was a good call by year-end as was the one for the British pound, hence the reason for the grade of C versus F.
Come to think of it, maybe the grading should be done on a curve this year since so few prognosticators are likely to have done well...
3. It Will Be a Bad Year for U.S. EquitiesGrade: D
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.
Well, the headline was right (the only reason for not getting an "F"), but the magnitude of the decline was a bit wide of the mark - off by about 35 percentage points or so (why the Nasdaq was expected to do better than the other U.S. indexes is a mystery).
Foreign stocks did much worse than U.S. stocks in 2008 and there were nothing but losses in China where equity markets ended the year down 65 percent with Japan not far behind at about minus 45 percent.
For my 2009 predictions, I promise not to let Peter Schiff's views affect my own.
4. Short-Term Interest Rates Will Go Much LowerGrade: A-
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.
Since the good grades are few and far between this year, I'm going to go ahead and give myself an "A-" on this one since no one could have possibly predicted ZIRP by year-end. Did anyone? Interest rates started out at 4.25 percent in 2008 and fell faster than ever before.
The prediction for 2009 is pretty easy - zero.
As for the inflation part of this prediction, it was spot on for late-summer as the price of oil was careening through the $100 a barrel mark, many of us thinking that it might be ready to stop careening when the careening was just getting warmed up.
5. Energy Prices Will Continue to RiseGrade C:
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.
Again, this would have been a good prediction for mid-year. The idea of $100 oil was still a twinkle in everyone's eyes a year ago but not so by summer time. Gasoline at $4 came and went as did the boom in natural gas prices which almost doubled before losing two-thirds.
If the year-end part of this had been omitted, the grade would have been an "A", as it is, it's a somewhat generous "C" due to the good calls for the peaks.
Predictions for energy prices in 2009 should be all over the map.
6. Gold and Silver Will Continue to RiseGrade: B-
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).
Thousand dollar gold came and went as did $21 silver, however, the year-end view of things was off by about 10 percent and 40 percent, respectively, which, in comparison to the predictions for energy is a stellar result.
Once again, omitting the year-end price would have boosted the grade a bit here, but a "B" seems to be warranted.
As for the "junior mining stocks like internet stocks" comment, I think that was a typo - it should have said, like internet stocks in "2001".
7. Economic Growth will Turn Negative, Consumption will DeclineGrade: A+
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.
Maybe I should have spent more time thinking about the impact that would result in the second half of the year if this eerily accurate prediction actually came true.
As it was, the year 2008 turned out to be the year that people stopped saying, "Never count out the American consumer".
8. Reported Inflation will Remain ContainedGrade: A
More people will realize that the government's inflation numbers are bogus. They won't be happy about it.
Again, good grades are hard to come by this year...
However, when reflecting back upon last summer (which now seems years away), it would have been very hard to disagree with this sentiment when gasoline was over $4 a gallon and the government's inflation rate peaked at an annual rate of about five percent.
9. Job Growth Will Turn Negative by Year-EndGrade: A
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.
Year-over-year job growth turned negative in July and hasn't looked back - almost two million jobs were lost in 2008 and, if the last labor report is any indication, it might be closer to three million after the December data is reported next week.
Given that there had not yet been a single month of declines in nonfarm payrolls when this prediction was made, a grade of "A" seems warranted (plus the fact that it's hard to get good grades this year).
10. Hillary or Barack will Win the ElectionGrade: B
It's too bad Ron Paul isn't ten or fifteen years younger - in another eight years the country will be ready for him.
I'm giving myself a grade of "B" on this one simply because I knew in my gut Obama was the right prediction, but I didn't want to look silly if he stumbled and made an early exit.
Remember that, at the time this call was made, no primary had yet been held and the tide had just begun to turn from the "Hillary is inevitable" thinking.
Overall, this wasn't as bad as first thought - a somewhat generous 4-As, 3-Bs, 2-Cs, and 1-D, though others might grade it differently - but the fact that the bad ones cost a lot more money than the good ones earned makes this something of a disappointment, money-wise.
Tomorrow's Predictions for 2009 are going to be quite a challenge.