A Mid-year look at the 2009 predictions

It's mid-year!

Time for a quick check on the many and varied "Predictions for 2009" made some six months ago before anyone began talking about "green shoots" and the price of oil was still around $35 a barrel.

My, how things have changed from the despair of last New Years Day...

Or maybe that was just a hangover...

In any event, now half-way through the year, it appears that Armageddon - Part I in 2008 may not necessarily be followed by Part II this year. It looked like Part II there for a while in February and March, but then the skies cleared and people started buying stocks again.

Off we go...

1. Another Bad Year for Housing

Once again, more pain in housing seems inevitable with liar loans and option ARM products reaching their critical years. If it already hasn't, that second home/investment property that seemed like such a good idea back in 2004 will turn into a nightmare in 2009.

As was the case last year, only real estate sales types will be predicting a rebound for home prices in 2009 though home sales will probably make a lasting bottom. Late-2009 and 2010 will be the time to start looking to buy property again, but there will be no need to hurry - contrary to what real estate sales types tell you, prices are not headed back up anytime soon. They may not go too much lower in 2010, but, except for places like Washington D.C. where the bailout business is booming, prices will be mostly flat through 2011 or 2012.

Next year, 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 2009 (this report gets released at the end of December and showed an 18 percent decline last week.) It seems that home price declines have to ease up. For example, based on their current trajectory, by the end of next year the median home price in Los Angeles would be below $200,000, down from a high of $550,000 in 2007.

As has been the case for a few years now, saying that home prices will go down is an easy call, however, we've just begun to see how more sales of high-end homes can make median prices rise while actual home prices continue to fall - look for more of that later this year.

The S&P Case Shiller Home Price Index (to be updated tomorrow) has yet to show any signs of slowing down, however, that will likely change by the end of the year. The most recent report had the 20-city index down 18.7 percent on a year-over-year basis.

2. The Dollar Will Go Down

The trade weighted U.S. dollar rose in 2008, but that was an anomaly. There are many bad currencies in the world (most of them are bad, actually, the pound now probably the worst) but the greenback will have a hard time looking good on a relative basis after big negative GDP numbers are reported along with even bigger job losses.

The source of most of the world's financial market troubles over the last year or so will finally be appreciated by those who've been buying U.S. Treasuries and, despite the best efforts of the big players at the Comex, many of these people will buy gold instead.

By year-end, the U.S. Dollar Index will be at 70, after dipping into the 60s briefly, and economists will again marvel at how the trade deficit is shrinking due to higher U.S. exports, helping the U.S. economy to recover.

They had some even bigger negative numbers for GDP in Europe recently but the dollar has still trended lower during the first half of the year and lots more people were buying gold in the first quarter, though demand has ebbed lately.

The U.S. Dollar Index approached the 90 level in December and then again in March before moving back down, spending the last few weeks at around 80. Tumbling to 70 by the end of the year is a distinct possibility as the greenback almost always falls in the fall.

3. Broad Equity Markets will Rise

The Dow and the S&P 500 Index will gain 10 percent and most investors will be happy about this, not realizing that it would have to repeat this performance for the next four or five years to make up for the losses seen in 2008. It won't.

Foreign stocks will do much better than U.S. stocks - up about 20 percent on average by year end - and stocks in China will rise 30 percent. Here too, most investors will fail to appreciate the cruel nature of large declines and advances expressed in percentage terms - this will leave Chinese stocks 55 percent below where they began 2008 (i.e., before last year's 65 percent decline).

Gold and silver mining stocks will outperform all other equities in 2009 (this process is already well underway) and many retail investors will add gold stocks to their portfolio for the first time only to sell in a panic during the first correction.

Predicting that stocks would rise this year was met with a few cat calls six months ago but equity markets are generally up at mid-year with emerging markets leading the rest of the world.

Gold and silver mining stocks are up about 15 to 20 percent so far this year, trailing the BRIC stocks (Brazil, Russia, India, and China) by a wide margin, but ahead of most other sectors.

4. Short-Term Interest Rates Will Stay at Zero

Short-term interest rates in the U.S. will end the year where they began - at zero.

Instead of the Fed funds rate, the new metric that will be used to gauge what the Federal Reserve is doing will be the Fed's balance sheet. Now at $2.2 trillion, this will grow to over $4 trillion by year-end, by which time the weekly H.4.1 report will become a major news event.

Ben Bernanke aged five years over the last twelve months - over the next twelve months he will only age two years.

Short-term interest rates were (and continues to be) quite an easy call. The fun will begin next year when there are real prospects for higher lending rates to combat rising inflation, an economy that is probably still weak, and an election cycle about to swing into high gear.

The Fed's balance sheet has become more important than interest rates, but the $4 trillion target now looks a bit difficult to reach based on the current trajectory. Of course, that could change quickly over the summer if credit markets have a relapse.

5. Energy Prices Will Rebound

After dipping below $30 a barrel in the spring, the price of crude oil will rise to $100 by the time Hurricane season is over (hey, there's no election in '09) and end the year at $85.

Just when people were getting used to $1.50 gasoline, taking advantage of dealer incentives to buy Suburbans and Escalades again, the price at the pump will be back up over $3 and they won't be happy about it.

This too was something of a bold call as oil was trading below $40 a barrel for a good portion of December, jumping inexplicably from $37 to $44 a barrel on December 31st. Crude oil went below $34 in February, largely due to a wicked contango, and then almost doubled from there.

Gasoline prices have risen substantially, now at $2.93 a gallon on the West Coast with a national average of $2.70. Prices at the pump of around $3 a gallon don't hurt nearly as much as $4 gas did a year ago but, of course, millions more Americans don't have to drive to work anymore.

6. Gold and Silver Will Soar

The price of silver will double before ending the year at around $20 an ounce and gold will again surpass the $1,000 mark, finishing the year at $1,150. Inventory at the SPDR Gold Shares ETF will increase to over 1,000 tonnes and there will be 10,000 tonnes of silver in the iShares Silver Trust ETF. We still won't be sure whether the ETFs really have the metal, but no one will care.

An increasing number of retail investors will buy gold and silver for the first time and they'll sell in a panic during the first correction they encounter. They'll look back and think, "Precious metals are no more volatile than that S&P500 Index fund I sold last year. Why did I sell in a panic again? Maybe I should just invest in Hummels."

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

The idea of a tousand tonnes in the GLD ETF was kind of a big deal back at the beginning of the year since it only had 780 tonnes at the time. It's now down slightly from its all-time high at 1125 tonnes and the silver ETF, at 8,730 tonnes, still has a ways to go reach 10,000.

Prices for gold and silver have been less impressive than the inventory levels, but the metals have finished up odd-numbered years very strongly in this decade, so $1,150 and $20 are do-able. Hedge funds and central banks around the world are on the gold-bandwagon - retail investors are still thinking about it.

7. The U.S. Economy and its Consumer Engine will Hit Rock Bottom

The personal saving rate will rise to four percent and both layaway programs and Christmas savings clubs will grow in popularity. This won't be good for the U.S. economy which will contract during the first two quarters and post anemic growth rates in the last two.

Much of the Christmas savings money will be raided late in the year as many consumers will think they've served their penance and, with money gushing out of the government and central bank, they will regain their spendthrift ways before year-end making for a spectacular Christmas shopping season as compared to the one that just concluded.

The personal savings rate hit 6.9 percent in last week's report for May, however, that was heavily influenced by the government handing out money, but the trend is definitely up. It's still too early to assess the rise in lay-away plans for this Christmas.

Negative growth in the second quarter is likely and, after such a terrible prior three quarters, the second half might produce some small GDP numbers without a minus sign in front of them. There will be lots of interesting year-over-year comparisons coming up this fall.

8. Reported Inflation will Dip into Negative Territory

We'll hear lots of talk about deflation as the overall Consumer Price Index dips into negative territory on a year-over-year basis by mid-year. At this point, we'll all be bathing in a virtual government money shower as policymakers desperately try to avoid the ignominious honor of being the first group to ever cause real deflation within a fiat money system (no, what Japan had was not real, hard-money style deflation - that was just baby-deflation).

The policymakers will succeed.

By the time the leaves start falling, we'll all be talking about inflation again as energy prices rise in what will look like an inverse, smaller magnitude version of what happened last year.

The Consumer Price Index showed prices falling at an annual rate of 1.3 percent last month and there's been lots of talk about deflation all through the first half of the year.

Unless we relapse into a late-2008 style crisis mode again later this year, in-flation will once again become a hot topic and you'll (thankfully) hear less and less about de-flation. Remember that, by the end of the year, we'll be comparing energy costs to the $35 oil and $1.50 gasoline from last December.

9. Four Million Jobs will be Lost

Nonfarm payrolls will decline by three million in 2009 and there will be downward revisions of about one million to prior years' payrolls data as the Labor Department grapples with its birth-death modeling once again, publicly confessing that it has utterly failed to provide any meaningful statistics about the labor market in real time.

Health care will be the only employment sector that adds jobs in 2009.

Teenagers all across the country will become disillusioned after having lived their formative years during the biggest financial bubble in the history of Mankind and then seeing it come to an abrupt end as home equity withdrawals are relegated to the history books. They will actually go out and seek work, though few will find any this year.

Almost three million jobs have been lost through the first five months of the year, so a total of four million by year-end may underestimate the net decline in payrolls and, yes, health care continues to be about the only sector that consistently creates jobs.

Teenagers are looking for work more these days, unfortunately, they're now competing with grownups, more than a few forty-something lifeguards expected to be applying sunscreen to their nose and twirling a whistle this summer.

10. Websites will not Wise-Up

A growing number of websites will continue to annoy readers by automatically playing video clips when the page is opened (didn't we already go through this process about four years ago?). They'll believe their marketing staff that this really is an effective advertising technique, but they will fail to understand just how many readers are leaving, never to return, after having to search so many times for that damn Pause button.

There's been some progress on this, but not nearly enough.

Overall, things are proceeding pretty much as envisioned six months ago, however, last year's predictions were spot-on up until about two weeks into the third quarter.

ooo