January 5, 2010

A Review of 2009 Predictions

It's that time of the year again. It's time to have a look back at the first of the year to see how yours truly did with his many Predictions for 2009 and see if there was any improvement over the previous year, a feat that shouldn't be too hard to accomplish given the year that 2008 was.

Crystal Ball Here's a recap of the last three years of annual prediction reviews:

Some of these are pretty interesting to look back at now, a few years later.

For example, a high of $650 an ounce for gold in 2006 and ending the year just below that mark would have sounded like bold calls at the time since the yellow metal had just broken through the $500 an ounce mark for the first time in 20 years. As it turned out, the high was about $75 short of the mark but the year-end price was spot on. But, today, those calls seem so ... 2006.

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
  • 2008: 4-As, 3-Bs, 2-C, 1-D
I think I took it a little easy on myself last year, for obvious reasons, but I'm looking to improve upon those results now.

Let's see how things turned out for the 2009 predictions...

As always, let's begin with housing.
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.
Grade: A

Last week's S&P Case Shiller Home 20-City Home Price Index showed a year-over-year decline of 7.3 percent, not far from the nice round number of minus 10 percent that was predicted. Also, while new home sales remain in a funk, the much larger existing home sales clearly made a bottom early in 2009 and, with a steady supply of low-priced foreclosed properties continuing to come on the market and housing incentive money gushing from Washington, that bottom should last.

For these reasons, an A is awarded, making this the latest in a series of very good predictions for housing, highlighted by 2006's The housing bubble will not pop and 2007's The housing bubble will pop.

Yes, this year is the year to start looking to buy property, but probably not until the second half of the year since the low interest rate/homebuyer tax credit programs seem to have pushed things back a bit. My wife and I plan to buy property in late-2010.
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.
Grade: C+

The big negative GDP numbers and the big job losses for the U.S. came in the first half of the year, but economies around the world saw even sharper declines. Nonetheless, the dollar did go down in 2009, the U.S. Dollar Index rising from 82 to 89 early-on and then tumbling all the way to 74 before rebounding to end the year at 78.

The overall direction was right, but the magnitude was off by enough that this will be considered a slightly above average forecast.

There certainly weren't a lack of buyers for Treasuries last year in one of the more interesting developments that the folks in Washington are probably figuring will extend indefinitely into the future. They're probably wrong about that.
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.
Grade: B

The broad U.S. stock indexes rose about double the predicted 10 percent and emerging market stocks were up even more, some of them shockingly so. It's a good thing none of them are bubbles, because we've had enough bubbles in the last decade that we don't want to go into the next decade with large bubbles already forming.

We'll see how that works out...

Once again, the direction was good, but the magnitude was off and mining stocks did quite well last year - up around 40 percent - but emerging market stocks did even better.
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.
Grade: B+

Predicting the Fed funds rate has become way too easy, at least for me. Looking back over the last few years, this has been one of the most accurate groups of predictions and that's not likely to change in the period ahead. In fact, I can tell you right now that a year from now, short-term rates will still be zero.

As for the Fed's balance sheet, despite many calls for a much higher total, it ended the year about where it began - at $2.2 trillion and that's why the grade is a 'B' instead of an 'A'. Maybe next year, I'll stick with just the Fed funds rate call to increase my chances of getting an 'A'.

What's interesting when looking back over the last year is that, while the Fed's balance sheet total has not really changed, the composition has changed dramatically - instead of short-term loans for distressed assets, the Fed has been gobbling up mortgage backed securities helping to make all the other distressed assets in the world look a lot less distressed.
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.
Grade: A-

The spot price of crude oil dipped well below $40 a barrel, but not below $30, and the rebound did come, though it never reached the century mark. Nonetheless, the year-end price of $79.36 a barrel was close enough to the predicted $85 price that this probably merits a grade of excellent.

Gasoline prices never made it back to $3 a gallon, but given that they were about a dollar higher at the end of the year than at the beginning (about $2.60 vs. $1.60), a lot of people are probably scratching their heads about how the oil bubble burst, yet they're still paying about 50 percent more at the pump than they did just a few years ago.
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).
Grade: A

The silver price almost doubled - from $11 an ounce to $19 an ounce late in the year - and it ended at about $17 while gold did again charge through the $1,000 an ounce mark in September to end at around $1,090 an ounce.

Both of these were deemed good enough that another 'A' is being awarded.

The inventory at the world's largest gold ETF rose from 780 tonnes at the beginning of the year to over 1,134 tonnes in June and ended the year at just a hair below that mark. However, the volatile silver ETF inventory fell short of the 10,000 tonne mark at about 9,500.

I don't think 2009 was the year that people started "talking about junior mining stocks at cocktail parties just like internet stocks in 1997", but 2010 might be.
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.
Grade: A

Savings rate - check. Layaway programs - check. GDP in Q1 and Q2 negative - check. Anemic growth in Q3 - check. Money gushing from Washington and the central bank - check.

As for a regaining their spendthrift ways before Christmas, that appeared to be limited to those items that were accompanied by a government stimulus check.

It looks like the 2009 holiday shopping season will be an improvement over the 2008 period, but not a spectacular one and an unexpected resurgence in the American consumers' spendthrift ways is one of the more frequently heard "outlier" predictions for 2010.
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.
Grade: A

Deflation arrived in the consumer price index but it didn't amount to much - about -2 percent on a year-over-year basis at its worst, almost completely due to the comparisons against mid-2008 gasoline prices of over $4 gasoline.

The latest reading on inflation from the Labor Department was +1.9 percent and this is likely to go higher in a couple weeks when today's $2.60 a gallon gasoline is compared to last year's $1.60 a gallon fuel and, of course, the economists will say to ignore the influence of volatile energy prices even though, technically, the real Fed funds rate will be about -2 percent.

Predicting inflation is going to get very interesting in the next few years...
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.
Grade: A+

Wow. Including the early-2009 benchmark revisions, the latest Labor Department data says that 4.1 million jobs were lost during the first 11 months of the year and Friday's monthly report is expected to be flat.

That looks like it deserves an 'A', particularly since the education and health care category was the only category to add jobs during the year.

That last paragraph about teenagers was pretty funny - just don't tell it to a teenager.
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.
Grade: C

There was some progress here, but not nearly enough.

Summary

Overall, this was quite an improvement over last year and ranks right up there with 2006 and 2007 - I gave myself a 'C' on that last one just so it wouldn't look like an 'A' grade was automatic, but that was quite a roll towards the end there.

For the record, it will go down as 6-As, 2-Bs, and 2-Cs, though others might not have been so lenient in some areas.

Predictions for 2010 are in progress...