Tuesday, January 1, 2008

A Look Ahead to 2008

It is SNOWING AGAIN! I really hope the entire winter is not going to be like this. Perhaps it is an omen for the year ahead? Constant storms and dreary conditions?

I like year ahead forecasts posts, but this is the first time I have tried to write one! It is harder than I thought it would be. There is so much to cover and so much that can happen to mess up your forecasts. I will try my best to make this post helpful and informative.

A Look Ahead to 2008
The big story of 2007 was the somber realization that all kinds of debt across many spectrums simply will never be paid back. The enormous losses at the banks and the collapse of many mortgage outfits was really stunning in both the size and breadth of the implosion. With an eye on the rear view mirror of 2007, here is how I see things playing out in the coming year in select areas.
Residential Housing Market
Even though sales of both existing and new homes have fallen off a cliff relative to the 2005-2006 peaks, there are still an abnormally high number of homes being bought across the USA. I wonder at this point just who in the hell is buying all these homes when it is clearly a bad time to dive in? It is exactly because sentiment towards housing is nowhere near real bearishness that housing will fail to bottom in 2008. The still high sales numbers will begin to be a problem about mid year when price data is showing declines nationwide accelerating. Throw in the wave of ARM resets in the first quarter this year along with the most recent buyers being instantly underwater on their mortgage, and I think that the June-July time frame is going to be a real mess for housing. The serial bottom callers and regular people that think buying a home is a good idea will be faced with the worst spring/summer sales market in history. It is at this junction that finally the myth of home buying as a sure bet to riches will be cracked. It is only at that point that we will get a real reading on just how many homes are going to be foreclosed. Only at that point can banks start making even remotely believable loss estimates.

The June-July reality dose will set up housing for a real collapse into year end. I expect a summer "credit event" that will make this past August rout look tiny. The shock to the banks will basically stop new lending after the summer, and the process will feed on itself. As far as numbers go, I hate to predict exact figures, but that's why they pay me the bug bucks (HAHA). Keep in mind about 80% of my predicted numbers will be done before August, with very little activity throughout the fall:
  • New Home Sales 2008: at or under 3.5 Million
  • Existing Home Sales 2008: at or under 4 Million
I will note one caveat; if banks start really dumping homes by the bundle at cut rate prices (around 50% of loan value) these numbers will be WAY off.

General Economy
Are we already in a recession? Its hard to say. Surely a "growth recession" is on at the present time. What really is the difference of say GDP growth of 1% with inflation over 2% or actual negative growth? Semantics of course! I believe the numbers will continue to be massaged and favorable to low 1-2% growth until the previously mentioned summer credit event. After that, even the monthly payment gamers are going to have a hard time with new access to more debt, and then the fun begins. General Economy predictions are thus:
  • Real negative growth (ie recession) for the last 2 quarters of 2008 going into 2009.
  • Unemployment ends the year at or above 6%

It is my belief that the powers that be will goose the numbers and/or increase government spending to avoid a technical recession in an election year. It may or may not work, but 2009 will not be denied regardless.

The FED and the Dollar

The FED will be on a slash and burn policy with regards to interest rates. Expect rates to make it as far south as 2% by the summer, and down to 1% by 2008 year end. The FED will also unveil some new kind of "special market operations" to bail out a broken banking system.

Paradoxically, the dollar will catch a bid all year and I see the dollar climbing up to around 90-100 on the dollar index. This will cause problems as huge exports due to the weak dollar have propped up GDP until now, and thus the recession call for late year. Impossible with rates being cut you say? Maybe. The problem is the world cannot allow the dollar to be accurately priced because they cannot allow the fact that they are never, ever going to be paid back by the US to be "priced in". Its a shell game of fake confidence and phantom assumptions, but the game will go on.

The Stock Market and Gold

The DOW stands at 13,264. The Nasdaq is at 2,652. The S%P is at 1468. I predict that all will be within 5%, plus or minus, of those numbers at years end. How can that be? Two reasons. First off it is going to take a baseball bat smash to the head to get the stock market to come to grips with reality. The late year collapse will not be enough to make a market correction happen before years end. With the FED slashing rates, and funds coming from all over the world to buy huge stakes in the US banks, there will be too much positive spin for a serious market decline. It already happened this year, and I do not see any reason it will not happen again. Now looking farther ahead to 2009, things will be very different. The second reason that a stock market selloff will not occur is because it is very much in the interests of all involved to not have one. Housing will be cratering, unemployment growing, and GDP closing in on negative to years end. A stock market correction will simply not be allowed as it would break the consumer's fantasy land mentality. The big institutional holders of stocks know this. The Federal government knows this. Again, maybe not, but this is my thinking. Expect vicious volatility all year long as headlines and spin cause wild gyrations in the markets.

Gold will have a solid if not spectacular year. How so with the FED cutting rates so much? The dollar will be in rally mode, hurting gold. The forced sale of liquid assets like gold and all precious metals will cap any upside for the sector. Gold is at around $833 an ounce today, and by the end of 2008 I see it in the $750-$850 range. Again, expect some wild times as headlines and spin wrestle with reality.

Common Thread

2007 was a frustrating year for this financial blogger. Finally armed with the kinds of data (falling home prices, falling sales, record foreclosures, banks losing BILLIONS) I thought that perhaps the major overhaul that the US economic system needs was finally at hand. Nothing happened. A common thread running through all my predictions is that things are basically going to keep on keeping on for 2008. I find it hard to see it any other way. I think grand delusion and pure old fashioned denial will be in vogue for a large part of 2008. Never underestimate the ability of people to pretend. Never count on reality as your ally.

The tech stock bust did not occur while profits were dropping like rocks. The Nasdaq bubble did not implode because anything fundamentally changed. Bubbles collapse when reality finally cannot be argued with or spun. When there is simply acceptance that debt of all kinds (cars, homes, credit cards, commercial loans, municipal bonds, etc) will be able to recoup only about 50% of present value will the hammer fall. Only then.

Odds and Ends

In no particular order, here is an assortment of other predictions:

  • New England Patriots barely survive a rematch vs. the Colts and go on to win the super bowl.
  • Asteroid 2007 WD5 will strike the planet Mars, and the martians living below the surface will finally be revealed.
  • Hillary Clinton will win the presidency. (get used to it)
  • Economic Disconnect will get linked to by Mish and Calculated Risk
  • Countrywide Financial will go bust and be taken over by the FED. A full investigation will uncover just how silly loans made by this company where.
  • At least 2 major homebuilders will go bust (BZH and LEN probably)
  • States across the US will enact enormous tax increases to pay for shortfalls in all kinds of funding due to bond defaults and lower property fee/tax collections. California will face a credit default moment this year.
  • It will be clear that Russia and China are not really our buddies.
  • A new law will pass making walking away from a home both easy and with no long term financial burden.
  • Deflation vs. Hyperinflation will have to wait for 2009 for a final debate.
  • Britney Spears will make a pornographic film as she has no other career options.
  • Economic Disconnect will not have annoying ads nor a tip jar, its all free baby.

Thanks to all that read this blog regularly. I try my best to inform and entertain. Let's hope more and more people will read this blog and others like it so that things may actually change for the USA. Please leave comments, they really are my favorite things about the blog.

Have a good NEW YEAR!


Anonymous said...

Perhaps it is an omen for the year ahead? Constant storms and dreary conditions?

When I moved to Nebraska in 05 they had the first blizzard where I now live in 20 years, last year they had the first ice storm in 20 years, I'm just hoping that this year we don't have the first tornado in 20 years:-) It's been a really mild winter here this year for us compared to the last two.


Anonymous said...

Kudos for linking up with Mish and Calculated Risk. I think the quality of your blog deserves the recognition and increased exposure. Great job.

I give your predictions their due, but I don't agree with your dollar forecast.

When similar (in type, not extent) currency and trade imbalances occurred during the 1980's, the major industrial nations tried to bring the system back in balance with the Plaza Accord, to manage the dollar lower. It worked until it didn't, precipitating the 87 market crash.

Sadly, everyone knows the dollar needs to come down. This time, the powers to be are doing it in stealth fashion. I think the results will be the same. However, your position that it is a shell game, and it is in no ones best interest to see a dollar crash is correct. We might see strong counter trend rallies, or the possibly of a cyclical bull phase in a secular bear dollar market for the very reasons you point out. I, however, am betting the other way.

getyourselfconnected said...

You could be correct on the dollar call. I struggled with that prediction, but I will let my call stand and see how it goes. Thanks so much for reading this site, I appreciate also leaving a comment.

watchtower said...

This is one of those financial porn days, gold hits an all time high (not inflation corrected though) , spot oil hits $100, and at the current CST of 11:33 AM, the market is down 212 points, that being said, if there are any lurkers out there that would like to get a sense of were we are at in the current state of affairs, I urge you to check out Douglas Kanarowski`s article written back on 9/15/07 titled "U.S. Economic Report Card".
Mr. Kanarowski claims we are already in a depression, and gives a compelling argument to back up his statement. here is a link that you will have to cut and paste.


If you are a lurker out there, and are new to what is happening, my advice to you is to get out of debt, and batten down the hatches. If I`m (and many others) wrong, the worst thing my advice has done is to cause you to be in a better position for the future (you don`t need all that junk anyway), but if I`m right...

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